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91–659 PDF 2004

S. HRG. 108–424

WHAT’S DRIVING HEALTH CARE COSTS AND

THE UNINSURED?

HEARING

OF THE

COMMITTEE ON HEALTH, EDUCATION,

LABOR, AND PENSIONS

UNITED STATES SENATE

ONE HUNDRED EIGHTH CONGRESS

SECOND SESSION

ON

EXAMINING HEALTH ISSUES RELATING TO HEALTH CARE COSTS AND

THE UNINSURED, FOCUSING ON INEFFICIENCIES IN AMERICA’S

HEALTH CARE DELIVERY SYSTEMS

JANUARY 28, 2004

Printed for the use of the Committee on Health, Education, Labor, and Pensions

(
COMMITTEE ON HEALTH, EDUCATION, LABOR, AND PENSIONS

JUDD GREGG, New Hampshire, Chairman

BILL FRIST, Tennessee

MICHAEL B. ENZI, Wyoming

LAMAR ALEXANDER, Tennessee

CHRISTOPHER S. BOND, Missouri

MIKE DEWINE, Ohio

PAT ROBERTS, Kansas

JEFF SESSIONS, Alabama

JOHN ENSIGN, Nevada

LINDSEY O. GRAHAM, South Carolina

JOHN W. WARNER, Virginia

EDWARD M. KENNEDY, Massachusetts

CHRISTOPHER J. DODD, Connecticut

TOM HARKIN, Iowa

BARBARA A. MIKULSKI, Maryland

JAMES M. JEFFORDS (I), Vermont

JEFF BINGAMAN, New Mexico

PATTY MURRAY, Washington

JACK REED, Rhode Island

JOHN EDWARDS, North Carolina

HILLARY RODHAM CLINTON, New York

SHARON R. SODERSTROM, Staff Director

J. MICHAEL MYERS, Minority Staff Director and Chief Counsel

(II)
CONTENTS

STATEMENTS

WEDNESDAY, JANUARY 28, 2004

Page

Gregg, Hon. Judd, a U.S. Senator from the State of New Hampshire ................ 1

Holtz-Eakin, Douglas, Director, Congressional Budget Office, Washington,

DC .......................................................................................................................... 2

Milstein, Arnold, M.D., Medical Director, Pacific Business Group on Health,

and Physician Consultant, Mercer Human Resource Consulting, San Francisco, CA ................................................................................................................ 5

Davis, Karen, President, The Commonwealth Fund, New York, N.Y. ................ 6

Conover, Christopher J., Assistant Research Professor of Public Policy Studies, Director, Health Policy Certificate Program, and Senior Research Fellow, Health Inequalities Program, Center For Health Policy, Law, and

Management, Terry Sanford Institute and Public Policy, Duke University,

Durham, NC ......................................................................................................... 8

Wilensky, Gail R., Senior Fellow, Project Hope, Bethesda, MD .......................... 10

ADDITIONAL MATERIAL

Statements, articles, publications, letters, etc.:

Douglas Holtz-Eakin ........................................................................................ 32

Response to questions of the HELP Committee from Arnold Milstein,

M.D. ................................................................................................................ 41

Karen Davis ...................................................................................................... 73

Response to questions of Senator Gregg from Christopher J. Conover ....... 107

Gail R. Wilensky ............................................................................................... 109

Response to questions of the HELP Committee from CBO .......................... 114

Associated Builders and Contractors .............................................................. 115

National Federation of Independent Business ............................................... 116

The Association Healthcare Coalition ............................................................. 117

(III)

(1)

WHAT’S DRIVING HEALTH CARE COSTS AND

THE UNINSURED?

WEDNESDAY, JANUARY 28, 2004

U.S. SENATE,

COMMITTEE ON HEALTH, EDUCATION, LABOR, AND PENSIONS,

Washington, DC.

The committee met, pursuant to notice, at 10:24 a.m., in room

SD–430, Dirksen Senate Office Building, Senator Gregg, chairman

of the committee, presiding.

Present: Senators Gregg, Enzi, Alexander, Sessions, Kennedy,

Dodd, Harkin, Murray, and Clinton.

OPENING STATEMENT OF CHAIRMAN GREGG

The CHAIRMAN. We are going to get started early because we

have got, unfortunately, three votes that have been stacked around

11:30. As a result, this hearing will be disrupted significantly. I

apologize to my fellow members for proceeding early, but I do think

we should get going here. I appreciate Senator Clinton’s being here.

I know Senator Kennedy is going to be participating also. I think

we will also pretty much forego opening statements because we

really want to hear from the panel.

This hearing, just briefly to outline its parameters, is about the

issue of health care and its costs, its affordability and the uninsured. It is part of a process that we are trying to go through to

get some sort of hard data on what the issues are that drive the

cost of health care and what the issues are that are creating our

uninsured pool, which is getting larger and larger, unfortunately.

I don’t think there is any issue that Americans face today from

a standpoint of cost that they have more concerns about than their

health care bills. Certainly, this committee has a very deep interest

in trying to address that issue.

Let me introduce the witnesses before we start taking testimony.

We are fortunate to be joined by the Director of the Congressional

Budget Office, Dr. Holtz-Eakin, who obviously has some very hard

and effective data that I know he intends to present to us on the

issue of health care. His expertise is well known.

We are also joined by Dr. Milstein, who serves as the Medical Director of the Pacific Business Group on Health, the largest health

care purchasing coalition in the United States. Dr. Milstein also

serves as a worldwide partner at Mercer Human Resource Consulting, and Dr. Milstein’s expertise focuses on, but is certainly not

limited to, health care purchasing strategies, clinical performance
2

measurements, and the psychology of clinical performance movements.

We are joined also by Karen Davis, who has served for the last

9 years as President of the Commonwealth Fund, the Nation’s

fourth oldest private philanthropy, engaged in independent research on health and social issues. Dr. Davis is a nationally recognized economist with a distinguished career in public policy and research. She has served as Deputy Assistant Secretary for Health

Policy for the Department of Health and Human Services.

We are also joined by Dr. Conover, who is currently the Assistant

Research Professor of Health Policy Studies at the Terry Sanford

Institute of Public Policy at Duke University, as well as a senior

fellow at the Center for Health Policy, Law, and Management at

Duke. He is also Director of the Health Policy Certificate Program

at Duke. Dr. Conover’s research focuses in the area of State health

policies, estimating the magnitude of social burden of illness and

health regulation.

Further, we are joined by Gail Wilensky, who is well known to

this committee, having testified many times in this committee. She

is a senior fellow at Project HOPE, the Health Opportunities for

People Everywhere, and the International Health Education Foundation. Dr. Wilensky is Co-Chair of the President’s Task Force to

Improve Health Care Delivery For Our Nation’s Veterans, which

covered health care for both veterans and military retirees. She

also served as Deputy Assistant for Policy Development for President Bush, advising the President on health and welfare issues.

Prior to that, she served as the Administrator of the Health Care

Financing Administration. Dr. Wilensky’s research endeavors include developing and evaluating policies relating to health reform

and to ongoing changes in the medical marketplace.

It now being 10:30, let us start the hearing. Senator Clinton, do

you wish to make a statement or anything?

Senator CLINTON. No, Senator Gregg. I am just very grateful that

you are holding this hearing and I want to thank all the witnesses.

Obviously, this is a critical issue, one that we have to address, and

I appreciate you taking the lead on doing it.

The CHAIRMAN. Thank you. Thank you very much. Obviously,

this is an issue on which your expertise is unique, also, so it is very

appropriate to get your input on this as we move forward.

Dr. Holtz-Eakin, if you could give us your thoughts, and then we

will move down the line.

STATEMENT OF DOUGLAS HOLTZ-EAKIN, DIRECTOR,

CONGRESSIONAL BUDGET OFFICE, WASHINGTON, DC.

Mr. HOLTZ-EAKIN. Mr. Chairman, Senator Clinton, thank you for

the chance to be here today and talk a little bit about some of the

work that CBO has done in this area. My written testimony, which

I submit for the record, covers three topics. I will cover the same

three topics briefly and we can turn to questions.

Topic one is characteristics of the uninsured. We will move from

that to some facts and features of the growth in health care costs

in the United States and then touch briefly on the connection between the two, although I will spend less time on that.
3

The first issue is just how many are there when you start counting the uninsured and there are really three different ways to

measure the uninsured. One approach is to count how many people

are uninsured over a particular period, say 1 year, and simply see

how many remain uninsured over the entire year. A second approach would be to take that same period and count the number

of people who have any spell of uninsurance during the year and,

as a result, would count in that way. And the third is a mixture

of the two, which is to look at any day during that year or week

during that year and go out and count the number of people who

happen to be uninsured at that point in time.

In work that the CBO did using data from 1998, we find that one

gets very different answers if one takes different measures. Using

those data, there are roughly 21 to 31 million uninsured for an entire year, in contrast to roughly 60 million individuals who would

be uninsured at some point during the year, and then lying in between is the number that is conventionally used to count the uninsured, which is the number who might be uninsured at any point

in time, and that is on the order of 40 million individuals in the

1998 data.

In work that has been done at the Agency for Health Quality and

Research, those studies suggest that the same basic patterns prevail using more recent data, so that depending on the kind of measure that one uses, you can get numbers that differ a great deal.

Now, the difference between 20 million and 60 million suggests

that there is a lot of dynamics under the surface of counting the

number of uninsured, and in the testimony, we show some evidence

from the Survey on Income and Program Participation of the duration of spells of uninsurance. In those data, one finds that 45 percent of the uninsured have spells that last for less than 4 months,

and so they are relatively short spells and they turn over.

In contrast, there are about 26 percent of individuals who have

spells that last between 5 months at a year. And then at the longer

duration, 13 percent of individuals have spells of one to 2 years in

length, and the remaining 16 percent have spells that exceed 2

years.

The characteristics of these individuals are, broadly speaking—

I will leave the details, which are described in Table 1 in the testimony for further discussion, but roughly, one finds that adults are

more likely to be uninsured and have longer durations than younger people and children especially, perhaps in part due to the provision of Medicaid as targeted toward the children, and that the vast

majority are in working families, that about 75 percent of those individuals are uninsured because employers do not offer employersponsored insurance. And finally, low education and low income are

associated with both a greater incidence of uninsurance and longer

durations, as well.

One fact that has captured some attention is the rise recently in

the number of unemployed or the fraction of uninsured, from 16

percent to 17 percent, roughly, over the past couple of years. That

has been associated with a decline in employer-sponsored insurance from 67 percent to 64 percent. We simply note in the testimony that this kind of a shift in the coverage from employer-spon-
4

sored insurance has occurred in the past, and indeed, this is smaller than a comparable movement that occurred in the early 1990s.

I would suggest that there is one large message in these data

and that message is that not all the uninsured are created equal.

In fact, there appear to be two broad groups, one of which suffers

short spells of uninsurance, perhaps driven by job market changes,

and another group that has long duration spells of uninsurance,

and that policies would be more effective if they were tailored to

recognize the different characteristics of the different kinds of uninsured.

Turning to the broad trends in health care costs and health care

spending in the United States, in 2002, U.S. expenditures on

health-related goods and services were $1.6 trillion, a number that

was reached by averaging real growth of over 4.5 percent between

1970 and 2002. Despite a slowdown in the mid-1990s, the most recent data are consistent with that long-run trend. We saw between

1997 and 2002 a growth that, in real terms, at 4.6 percent per

year.

The result is that health care spending has doubled as a fraction

of the national economy, rising from seven percent of GDP in 1970

to about 15 percent in the most recent data, and among the categories of health care spending, pharmaceuticals are rising most

rapidly, on the order of 14 percent in recent data, although they

still constitute only about ten percent of spending.

There are a lot of factors associated with this growth. We will return to them, I am sure. Some are technology, associated with technology and the incentives for innovation, deployment and utilization of those technologies, others associated with aging, higher incomes, and the nature of insurance. But one of the genuine results

that we have seen is that people are unhappy with the current

State of affairs, despite the increases in spending. We can come

back to the sources of that.

And finally, in the link between increasing costs and

uninsurance, there is very little hard evidence on this topic and I

would simply make the observation, in many ways, rising health

care costs should make insurance more valuable and the desire to

protect one’s self against the large costs of medical expenditures

would increase the demand for insurance, other things equal.

Nevertheless, we have seen some declines in insurance and there

is some intriguing evidence by David Cutler that, despite the fact

that the share that employees are asked to cover has not gone up,

the total amount that they cover is rising. As a result, although

firms are offering, the take-up rate by individuals has declined and

that may be part of the link between rising costs and uninsurance.

I would be happy to answer any questions. That is a brief summary of the written testimony that we submitted and I look forward to the discussion.

The CHAIRMAN. That is very good data and we appreciate it. We

especially appreciate the written testimony.

[The prepared statement of Mr. Holtz-Eakin may be found in additional material.]

The CHAIRMAN. Senator Kennedy has joined us. I apologize for

starting a little early, Senator, but we have got a series of votes
5

stacked and it is going to disrupt this hearing significantly, so I

thought we should get going.

Senator KENNEDY. I am in complete agreement.

The CHAIRMAN. You are certainly here right on time, but we

started a little early. Do you have any statement you want to

make?

Senator KENNEDY. No.

The CHAIRMAN. You are back from New Hampshire and you are

happy to be—— Senator KENNEDY. To be back.

The CHAIRMAN. Sad to have left New Hampshire—— Senator KENNEDY. Sad to leave New Hampshire— [Laughter.]

—but we have a good panel, Mr. Chairman, and I look forward

to their testimony.

The CHAIRMAN. Thank you. Thank you, Senator.

Dr. Milstein?

STATEMENT OF ARNOLD MILSTEIN, M.D., MEDICAL DIRECTOR,

PACIFIC BUSINESS GROUP ON HEALTH, AND PHYSICIAN

CONSULTANT, MERCER HUMAN RESOURCE CONSULTING,

SAN FRANCISCO, CALIFORNIA

Dr. MILSTEIN. I thank the committee for the opportunity to share

my perspective that inefficiencies in health care delivery comprise

a substantial fraction of current health spending, health insurance

premiums, and that much of this inefficiency can be eliminated by

facilitating the market’s ability to identify and reward efficient,

high quality physicians, hospitals, and treatment options.

There are two primary sources of inefficiency in the U.S. health

care system. First, the provision of many health care services that

offer no measurable gain in health or patient satisfaction. These

services are well described in the Dartmouth research results,

which I submitted with my testimony. This type of inefficiency occurs more in some communities than in others, but it occurs even

in our most medically efficient communities, such as Minneapolis

and Portland, Oregon.

Second is detailed in the Institute of Medicine’s ‘‘Crossing the

Quality Chasm’’ report, the provision of all health care services by

antiquated clinical work methods that rely on faulty human memory and paper medical records. Since these methods of clinical work

are severely mismatched to the challenges of delivering high-technology services to an American population with increasingly complex chronic illnesses, they offer a significant preventable waste of

resources and preventable human suffering.

These two types of inefficiency are invisible to health care providers and to consumers because we don’t routinely measure and report how physicians, hospitals, and treatment options compare on

the average total health care spending that they incur when used

to treat an episode of acute illness or a year’s worth of chronic illness and preventive care. I will refer to this total average level of

spending per illness as longitudinal efficiency.

We are also in the dark with respect to the level of quality

achieved by particular physicians, hospitals, and treatment options.

We do not lack methods by which to measure both longitudinal efficiency and quality of care, but most private sector health benefit
6

plans lack a sufficiently large database in any one community to

make valid comparisons among physicians or specific hospital service lines, such as cardiac surgery.

The invisible hand of the market could transform the majority of

these inefficiencies into significantly reduced rates of health insurance premium increase over a ten-year period with two catalytic ingredients from Congress. First, encouraging CMS to routinely and

continuously share with the private sector the patient privacy protected CMS claims database so that all health plans, all health

benefit plans, would be able to increase their precision in measuring the longitudinal efficiency and quality of physicians, hospitals,

and treatment options. The patient privacy protected CMS claims

database is a grossly underutilized national information asset with

unnecessarily restrictive access rules for private sector health benefit plan sponsors.

Second, encouraging CMS and other health plans to reward clinical performance improvement by either more favorable payment for

doctors, hospitals, and treatment options that offer superior quality

and longitudinal efficiency, and/or by lower cost sharing for patients who preferentially use such providers and treatment options.

For example, Congress could refine its specifications for the types

of health benefit plans to which tax-advantaged portable spending

accounts would apply to promote both of these health benefit plan

features.

Americans have access to standardized longitudinal efficiency

measurements for appliances and for automobiles, but not for the

industry that consumes a much greater share of their income and

benefits. Absence of such measurements keeps American hospitals,

doctors, and patients in the dark with respect to comparative performance and unable to identify opportunities to make American

health insurance much more affordable.

When paired up with standardized publicly reported quality of

care measurements, longitudinal efficiency measurements would

comprise a new navigational system by which all stakeholders

could improve America’s health and slow future increases in health

insurance premiums. It would also send a constructive signal to

new medical technology developers. The market will judge their innovations based not only on their unit prices and their health benefit, but also on their contribution to reducing total health care

spending.

Thank you for the opportunity to share my perspective on how

large, invisible, and substantially capturable inefficiencies in American health care delivery contribute to the unaffordability of health

insurance.

The CHAIRMAN. Thank you, Doctor. Those are very interesting

ideas which we will want to follow up on here.

[The prepared statement of Dr. Milstein may be found in additional material.]

The CHAIRMAN. Dr. Davis?

STATEMENT OF KAREN DAVIS, PRESIDENT, THE

COMMONWEALTH FUND, NEW YORK, NEW YORK

Ms. DAVIS. Thank you, Mr. Chairman and members of the committee, for this invitation to join you this morning.
7

Rising health care costs are a problem for all Americans, but

they weigh especially heavily on uninsured and underinsured individuals, who pay much of the cost of their health care directly out

of pocket. We can no longer afford or tolerate wasteful spending on

care that does not benefit patients. We can’t have duplication of expensive procedures, medical errors, or the high administrative costs

incurred by the Nation’s insurers and providers.

Real solutions should directly target these sources of unacceptably high cost, not simply shift costs from employers to workers or

from government to beneficiaries of public programs. Most fundamentally, we must act to achieve automatic and affordable

health insurance for all, to ensure that the benefits of modern medicine are widely accessible and to ensure that investment in health

care contributes to economic growth and a healthier, more productive society.

Health insurance premiums are going up 14 percent a year. That

is faster than the 8.5 percent increase in early 2003 in benefits per

enrollee, and that divergence between premiums and costs bears

watching.

The U.S. has the highest health care spending of any country,

and yet we are the only major industrialized Nation not to provide

health insurance for all. I am particularly disturbed by the rapid

increase in administrative costs. They went up 16 percent in 2002

and it made it the fastest rising component of national health expenditures.

Consumer-driven health care, which is the major private sector

cost containment strategy, is unlikely to address the fundamental

causes of rising health care cost. In fact, it is likely to have adverse

consequences for patients. Consumer-driven health care contributes

to excessive financial burdens on patients, particularly those with

lower income, but also those who are sicker, and patient costs are

already unacceptably high. Patient cost sharing is a blunt instrument for reducing utilization of services. It reduces the use of effective services that are already underutilized.

There are better alternatives for achieving economies in health

care than shifting cost to patients. Costs are higher in the U.S.

than in other countries because we pay higher prices for the same

services, we have higher administrative costs, and because physicians prescribe specialized services that are not clinically justified.

If we were to adopt fundamental reforms, such as an integrated

private-public strategy to purchase health services efficiently, demand quality performance, and streamline administrative costs,

substantial savings could be achieved.

Short of fundamental reforms, practical steps that could be taken

in the near term include reducing medical errors and improving

care coordination through a major public-private investment in

health information technology. Public reporting of cost and quality

data, as Dr. Milstein stressed, knowing what costs are over an episode of care in quality, and studies show that they vary enormously

from hospital to hospital, physician to physician, and area to area.

If we are serious about doing better, we really need to know where

we stand.

I also endorse Dr. Milstein’s call for provider performance on

quality and efficiency. Medicare needs to become a leader in paying
8

for performance. It needs to move quickly to reward those providers

who are both high quality and low cost over the course of a patient’s treatment.

We also need the development and promulgation of clinical

guidelines and quality standards. Public programs and private insurers would benefit from a Federal agency charged with establishing the scientific basis for effectiveness not just of new drugs, as

FDA does, but for specialty consultations, surgical procedures, and

tests.

Better management of high cost patients. Ten percent of patients

account for 70 percent of costs. If public programs and private insurers were willing to pay for services of nonphysician personnel

that are needed for high-cost care management, we could reduce

the cost. We also need to streamline administrative efficiency and

test models there.

Finally, we need automatic and affordable health insurance coverage for all. Employers, Federal and State governments, and individuals must all share responsibility for achieving automatic and

affordable health insurance for all. The most realistic strategy is a

combination of group insurance options, including employer coverage, a new Congressional health plan, expansion of SCHIP to all

low income below 150 percent of poverty, and the ability to get onto

Medicare earlier for the disabled in a two-year waiting period and

for older adults. But premium assistance based on income will be

required to make premiums affordable for all enrollees.

Together, these steps would take us a long way toward ensuring

that this country has a high performing health system worthy of

the 21st century. Thank you.

The CHAIRMAN. Thank you, Dr. Davis. Thank you for those ideas.

[The prepared statement of Ms. Davis may be found in additional

material.]

The CHAIRMAN. Dr. Conover?

STATEMENT OF CHRISTOPHER J. CONOVER, ASSISTANT RESEARCH PROFESSOR OF PUBLIC POLICY STUDIES, DIRECTOR, HEALTH POLICY CERTIFICATE PROGRAM, AND SENIOR

RESEARCH FELLOW, HEALTH INEQUALITIES PROGRAM,

CENTER FOR HEALTH POLICY, LAW, AND MANAGEMENT,

TERRY SANFORD INSTITUTE OF PUBLIC POLICY, DUKE UNIVERSITY, DURHAM, NORTH CAROLINA

Mr. CONOVER. Mr. Chairman and members of the committee, it

is a great pleasure to be here today.

How big a role does health services regulation play in explaining

the extraordinarily high level of health costs in the U.S., and how

many uninsured might be covered were we somehow to find a way

to reduce this regulatory burden? My brief remarks today will provide some tentative answers to both questions based on the preliminary results of more than 2 years of research, conducted in part

under contract to the Department of Health and Human Services.

There are two ways to answer the first question. First, we looked

at the costs of regulation in other industries, such as airlines, railroads, telecommunications, other industries that have been long

studied by economists, and we used their best estimates to calculate the percent of gross economic activity in those industries
9

that is attributable to regulatory costs. By applying these percentages to the health sector, we arrived at very rough, back of the envelope estimates of upper and lower bounds on the plausible magnitude of this regulatory burden.

As you can see on Figure 1, this so-called top-down approach suggests that in 2002 alone, health regulation may have imposed an

annual cost of at least $28 billion, but as you can see, it may have

been as high as $657 billion. Clearly, a 30-fold difference between

our minimum and maximum cost estimates is no more gratifying

to me as a researcher than it is to you as policy makers.

Moreover, it is easily possible that the regulatory burden in

health care is even higher than a simple extrapolation from other

industries might suggest. After all, according to University of Rochester health economist Chuck Phelps, the U.S. health care system,

while among the most market-oriented in the industrialized world,

remains the most intensively regulated sector of the U.S. economy.

So we also answered this question using a much more fine

grained bottom-up approach. We looked at the literature for nearly

50 different kinds of Federal and State health services regulations,

including regulation of health facilities, health professionals, health

insurance, pharmaceuticals and medical devices, and the medical

tort system. These various regulations covered the gamut from

mandated health benefits to State Certificate of Need requirements

for hospitals and nursing homes.

We systematically tallied both the benefits and the costs associated with these regulations, finding the expected costs of regulation

in health care amounted to $335 billion in 2002. As shown at the

bottom of Figure 2, our estimate of benefits for these regulations

was about $207 billion, leaving a net cost of $128 billion.

Three areas account for the lion’s share of this net burden. The

medical tort system, which includes litigation costs, court expenses,

and defensive medicine totals $81 billion. FDA regulation adds another $42 billion, and health facilities regulation adds yet another

$29 billion. Thus, the States and Federal Government both have

roles to play in finding ways to trim regulatory excess.

Now, how does this all relate to the uninsured? Our bottom-up

look allowed us to determine that the net cost of regulation borne

by the health industry itself is about 6.4 percent, meaning that

health expenditures and health insurance premiums are at least

that much higher than they would be absent regulation, or excess

regulation. Based on consensus estimates about the impact of higher premiums on how many would likely drop health insurance, this

increased cost implies a 2.2 percent reduction in the demand for

coverage, and this translates into nearly five million uninsured

whose plight might reasonably be attributed to excess regulatory

costs.

But, of course, there is a different way to look at this burden, as

well. In light of the $35 billion in subsidized care that is already

provided to uninsured patients every year, researchers have recently estimated it would only cost $34 to $69 billion in added

health spending to cover all of the Nation’s uninsured.

In light of these figures, the potential opportunity costs of this

regulatory burden become very clear. The average estimates from

both our top-down and bottom-up look at this problem suggests
10

that we could cover this cost several times over. Admittedly, our estimates are still preliminary, and we are now engaged in a process

of careful review of all of them. But it seems unlikely that the adjustments yet to come in our figures would alter this central conclusion. The net burden of health services regulation likely exceeds

the annual cost of covering all 44 million uninsured.

So a legitimate policy question is whether any unmeasured benefits of this apparent excess regulation outweigh the benefits of coverage for all Americans. For example, in the context of the IOM

finding, that 18,000 uninsured die every year due to lack of coverage, is maintaining the full extent of our current regime of health

regulation worth letting that continue? This is not a question for

me to answer, but I hope that you will seriously consider it as you

wrestle with one of the most challenging health policy issues now

on the national agenda. Thank you for your time.

The CHAIRMAN. Thank you, Doctor. Those are obviously fascinating findings that will have a significant impact on this debate, I

suspect.

[The prepared statement of Mr. Conover may be found in additional material.]

The CHAIRMAN. Dr. Wilensky?

STATEMENT OF GAIL R. WILENSKY, SENIOR FELLOW,

PROJECT HOPE, BETHESDA, MARYLAND

Ms. WILENSKY. Thank you, Mr. Chairman and members of the

committee. I am going to try to step back and again focus on the

larger issue of the relationship between increased health care

spending and the decline in the number of uninsured and the

major factors that are driving this increase and to put this back in

the context of the strategies available to you to try to lower the

number of uninsured. I am going to make about a half-a-dozen

major points during my five minutes.

The first is that it would be useful to think about the uninsured

as a chronic problem rather than an acute one, one that will require explicit policy decisions to change, but nonetheless a chronic

issue, worse during periods of economic decline, somewhat better

during periods with robust growth, but one that has seen secular

declines in coverage over the last 25 years. About 25 years ago,

12.5 percent of the population was uninsured. That number is

about 15 percent. The number that we have now, about 43 million,

is about the same as existed in 1997-1998, a period of very robust

economic growth.

There are two main reasons that have been cited in the literature about why we have seen this decline in coverage over time.

The first has to do with the changing economic structure, movement more toward the service sector, part-time and entrepreneurial

jobs, changes, frankly, that Members of Congress are not likely to

be able to change.

But the second has to do with increased health care spending relative to growth and income. What we have seen looking at the long

haul, the last 50 years, is that, on average, there has been a four

percent increase per year per person in real spending on health

care compared to an increase of about 1.5 percent growth in real

terms per person per year in the economy.
11

There was an interesting diversion from that trend in the 1990s,

when the growth in health care spending was closer to two percent

per year in real terms, per person per year, and there may be some

things for us to learn about some of the changes that allowed us

to get off that long-term growth spending period in the economy for

health care.

Now, in asking whether or not increased spending is really a

problem, you tend to get different answers over time depending on

who is being asked. At one level, you could say as long as people

feel they are getting increased value for their health care spending,

it may indeed be possible to continue spending parts or most of our

increased growth in the economy on health care. But clearly, when

it comes to matters regarding the uninsured, increased health care

spending is a problem.

It makes it more expensive to try to lower the numbers of uninsured and we know that increased health care spending is itself associated with increasing numbers of uninsured. So while in general

it may not be an issue if we actually feel we are getting increased

value for the spending, when it comes to reducing the number of

uninsured, it will make the problem much more difficult to resolve.

There are a number of issues in terms of why we have seen this

health care spending. You have heard many of them mentioned already. I am just going to summarize them briefly.

Advances in medical technology, something that we are all proud

of that this committee in particular has helped to promote. In

health care, technology tends not to be associated with lower

spending the way it is in other sectors of the economy, where new

technology usually provides services at a lower rate as well as

higher quality, or they are not adopted unless the payers are willing to pay more, and the question of why that doesn’t happen in

health care is an interesting and important one.

Medical liability, an issue that has been raised in Congress a

number of times, the direct costs and practice of defensive medicine

is an issue that drives health care spending. Lifestyle issues, particularly tobacco and now, as we know, obesity, has had a major

impact in terms of increasing health care spending.

Our system of reimbursement, as we have already heard, that

doesn’t pay for performance, that, in fact, pays for the correction

of defects as well as the provision of the defect in the first place,

is part of the driver of health care.

And the way most of us get health care in the United States, employer-sponsored insurance, encouraged in large part by the tax exclusion, has been a driver in its own right in terms of health care

and encouraging people to regard health care spending and the

purchase of insurance as their employer’s money rather than their

own money as an employee.

There are a number of steps, and you have heard many of them

already this morning. Trying pay for performance initiatives, something the government is doing to a small extent through the Centers for Medicare and Medicaid Services; providing better information on the cost-effectiveness of new technologies and therapeutics,

an issue that Dr. Davis talked about this morning; meshing patient

safety measures with tort changes as a way to try to bridge what
12

has been a very difficult impasse for the Congress; and exploring

alternatives to the tax exclusion for employer-sponsored insurance.

There are also a number of ways to try to reduce the number of

uninsured, and again, they have been mentioned this morning, trying to find ways to expand access to some of the public programs;

using the waiver process to expand Medicaid and expanding Medicaid itself; providing financial subsidies to individuals and access to

group insurance, either through fundable tax credits or through

other strategies; and providing mandates either on individuals or

on employers. And as we have seen in legislation that has been

raised, it is possible to mix and match some of these strategies.

It is important, though, as you go forward in talking about these

issues of reducing the number of uninsured to remember that any

strategies that you find to reduce the rate of spending in health

care will make it that much easier to provide coverage to the uninsured and will reduce the likelihood that you will have increases

in the uninsured in the future solely driven by the increased health

care spending. Thank you.

The CHAIRMAN. Thank you, Doctor, very much for that input.

[The prepared statement of Ms. Wilensky may be found in additional material.]

The CHAIRMAN. We have a large number of members participating in this hearing. That reflects the interest, obviously, and the

importance of the topic. Again, we do have votes that are going to

hit us here. So what I going to do is limit time to five minutes and

hope members can stick to that. Then we can get everybody in before we start voting.

I will pass on my opportunity to ask questions and wait until the

end here. If Senator Kennedy does return, he will obviously go to

the top of the list, but the list as I have it by arrival would be Senator Enzi, Senator Murray, Senator Harkin, Senator Sessions, Senator Alexander, and Senator Dodd, in that order, so we will start

with Senator Enzi.

Senator ENZI. Thank you, Mr. Chairman. I appreciate Dr. HoltzEakin coming 2 days in a row to the Hill. Yesterday it was banking, today a completely different subject. I appreciate the information that you provided both times.

In your testimony, I am a little confused between the three columns that are used, the uninsured at any time, the uninsured all

year, and then the distribution of population uninsured all year.

Are the first two columns the percentages of just the nonelderly

people and then the last one is of the population as a whole, whether they are elderly or not? I wasn’t sure what the third column represented.

Mr. HOLTZ-EAKIN. The first two columns are just for nonelderly.

So, for example, for uninsured at any time during the year, 26.8

percent of those less than 19 were uninsured at any time during

the year. Seven-point-three percent of those less than 19 were uninsured all year.

The final column tells you of all the ages. Out of all the people

who are uninsured all year, nearly 25 percent were less than 19.

Fourteen percent were between 19 and 24. And so all the ages will

add up to 100 percent of those uninsured during the entire year.
13

Senator ENZI. The accountant in me made me wonder sometimes

when it went over 100 percent in a category.

I found it very interesting that 25 percent of the uninsured make

more than 200 percent of the Federal poverty level. That was from

page five, and then on page six, there is a little different way of

evaluating it, which is based on their health and not by age. Of

those who consider themselves in excellent health, almost 29 percent don’t have insurance. Very good health, 33 percent don’t have

insurance. And good health, 24.5 percent have insurance. So it

looks to me like 86 percent of the people that are uninsured figure

that they are in good enough health that they don’t need insurance.

In the Medicare bill that we passed, we had a provision for

health savings accounts. I am of the belief that they will help to

take care of some of these people, so they put away a little money

while they are still in very good or excellent health. Is that a feeling that you have, that the change that we made might make that

kind of a difference? I noticed that there was an evaluation of how

much that would cost.

Mr. HOLTZ-EAKIN. Well, certainly part of the message in the testimony is that to the extent that the final consumer of medical

services is insulated from any cost consequences, it feeds into the

system of a set of economic incentives which can adopt expensive

technologies which may not be worth it, in some sense. We may decide to spend more on health care as a Nation, but you don’t want

to spend more than is worth it. Third-party payers, which insulate

people from the cost consequence of their decisions, are part of

that.

To the extent that health savings accounts put individuals in a

position where they evaluate and have the information to evaluate

the quality of what they are buying, so they get the benefits and

cost tradeoff exactly right, then that is a step toward that direction.

The flip side is you have to make sure that when people are young

and in excellent health and they are in that, they are looking forward to the possibility they may not be and you don’t just get a

selection issue where only those people in excellent health take advantage of that for the tax advantages and the folks who are not

in excellent health are in a different pool. So those are the issues

in those kinds of accounts.

Senator ENZI. I appreciated Dr. Conover’s statistics on the cost

of regulation and hope that we can find some data that also will

show how much of the costs are due to new technologies and medical liability insurance and those sorts of things.

Dr. Davis, you said that there was a major increase in the number of underinsured. That suggests that there might be some

agreed upon level of insurance. Would that also mean that there

are some that are overinsured? How is that level determined?

Ms. DAVIS. There was one major study in the Journal of the

American Medical Association that defined underinsurance as

being at risk of spending ten percent of your income directly out

of pocket on health care. If everyone in this country had a $1,000

deductible health insurance plan, about a third of people would pay

more than ten percent of their income if something serious happened like they were hospitalized. So that is kind of the rule of

thumb.
14

In terms of your point about overinsurance, certainly there is

some overuse of health care services. In our international surveys,

we found patients reporting getting the same test more than once

when they saw different doctors. A lot of that overuse is driven by

physicians or the health care system that don’t have electronic

records to find the old test results and our compensation system

that pays physicians more for doing more procedures. We don’t

really have clinical guidelines or standards to really indicate when

insurance shouldn’t pay for a service like an MRI because a cheaper test would have worked just as well.

Senator ENZI. I feel that there is a lot more information there,

but my time has expired. I would ask for permission to submit

some questions in writing and also to have a full statement in the

record.

The CHAIRMAN. Absolutely. That, of course, is always a member’s

opportunity.

[The prepared statement of Senator Enzi follows:]

PREPARED STATEMENT OF SENATOR ENZI

Mr. Chairman, the United States has the best healthcare system

in the world. Our main challenge is how to extend the blessings of

this system to as many Americans as possible.

We need to eliminate factors that contribute to the rise in

healthcare costs but don’t contribute to improving the quality or

availability of that healthcare. We can’t make health insurance

more affordable if we don’t make healthcare services more affordable.

But healthcare today is complex. Changes in law and regulation

often have unintended consequences, and we’ve seen this effect

time after time in healthcare policymaking.

That’s why I commend you for holding this hearing. We need to

understand why healthcare costs are increasing before we take any

major new steps aimed at reducing the number of people without

health insurance. As a member of this committee and of the Senate

Republican Task Force on Health Care Costs and the Uninsured,

I am ready and willing to work with you on this critical issue.

We’re going to hear testimony today about a number of the ‘‘cost

drivers’’ that influence the rate of growth in healthcare spending.

There are many factors which can be cited as cost drivers: patient

demand, new technologies, provider expenses, litigation, government regulation, labor shortages, quality deficiencies, and cost-control incentives or the lack thereof, to name several.

Take medical litigation, for instance. The continued rise in medical malpractice premiums contributes to the rise in healthcare

spending as physicians and hospitals pass those costs along to patients and their health insurers. Our medical litigation system also

encourages costly ‘‘defensive medicine’’—the ordering of unnecessary tests and procedures—as protection against lawsuits.

But the flaws with our current system of medical litigation go beyond rising premiums. Studies show that the likelihood and the

outcomes of lawsuits and settlements bear little relation to whether

the healthcare provider was at fault or whether the outcome of the

procedure was avoidable—or unavoidable.
15

The absence of a strong association between payouts and negligence means that medical litigation does not provide much of a

deterrent effect. Without this deterrent effect, providers won’t have

a true financial incentive to get to the bottom of our medical-error

problem. We need to revamp our medical litigation system to ensure that the truly injured get just and timely compensation, while

at the same time ensuring that the truly negligent providers are

the only ones who are punished.

The nature of our medical litigation system is one of the outright

problems with our system that must be fixed. The nature of some

of the other ‘‘cost drivers’’ is not so clear-cut, however.

Take technology, for instance. We can all agree that the inappropriate or inefficient use of drugs, medical devices, and other new

technologies contributes to some extent to the recent escalation in

healthcare costs.

But technology can save money as well, not to mention improve

the quality of our lives. Today, we can repair damaged hearts

through tiny incisions in the chest, instead of by cracking someone’s chest open. A lower risk of infections, a lessened need for

medications, a shorter hospital stay, and a quicker recovery time— all of these are benefits of the modern technologies that enables

these new heart procedures.

Technology is our best hope for new and cost-effective treatments

for some of the biggest medical challenges—not just heart disease,

but cancer, Alzheimer’s, and diabetes as well. In our haste to ensure that money is spent wisely on technology, we must take care

not to stifle the development of the next wave of medical miracles.

The list of cost drivers I cited earlier doesn’t include perhaps the

biggest cost driver of all—us. The decisions we make—and don’t

make—about our own health play a huge role in the cost of

healthcare today. Unfortunately, this factor doesn’t get the attention it should.

According to the Centers for Disease Control and Prevention,

more than 90 million Americans live with chronic diseases. Roughly 75 percent of our annual $1.4 trillion in healthcare expenditures

is attributable to chronic diseases.

The tragedy is that most chronic diseases can be prevented by

good eating habits, proper exercise, and other positive behavioral

changes. Obesity, for instance, is linked to diabetes, heart disease,

stroke, osteoarthritis, cancer and other chronic diseases. According

to a recent study, obese Americans accumulated $75 billion in

weight-related medical bills in 2003, and Medicare and Medicaid

directly paid for more than half of those costs.

I don’t raise this issue to single out or point fingers at obese people. I recognize that some people have a strong genetic predisposition to obesity and have a difficult time losing weight on their own.

My point is that if we all took greater personal responsibility for

modifying our unhealthy behaviors, we’d collectively do more to reduce our overall healthcare spending than any government intervention could do.

We also need to be more responsible for our own healthcare utilization. Those of us with private and public health insurance need

to recognize that a visit to the doctor or the pharmacy doesn’t cost

us 5 or 10 or 20 dollars—that’s just the co-payment. We pay the
16

rest of the bill in the form of higher insurance premiums and higher taxes.

Most forms of third-party insurance distort the impact of our lifestyle decisions and healthcare choices. We would pay more attention to our personal behavior if we weren’t insulated from the ramifications of our decisions.

That’s one reason I supported a significant step we took in last

year’s Medicare bill toward reducing the number of uninsured in

America. I’m referring to the expansion of health savings accounts

(HSAs) from a pilot program to a full-fledged health insurance option for all Americans.

HSAs combine a high-deductible insurance policy for catastrophic

expenses with a personal spending account that each HSA policyholder will control for his or her routine healthcare costs. Unlike

flexible spending accounts, people who own HSAs will be able to

roll over to the next year any unused funds in their personal accounts.

‘‘Consumer-directed’’ insurance options like HSAs will encourage

people to take greater ownership of their own healthcare decisions.

A person who owns an HSA will have a greater incentive to invest

in preventive care that will help him or her avoid unnecessary trips

to the doctor or hospital. HSAs also create an incentive for people

to make the types of lifestyle changes that will result in better

health and fewer expenditures from their personal HSA spending

account.

HSAs have already proven to be attractive to people without

health insurance—four of every ten people who participated in the

pilot program of medical savings accounts (MSAs) were previously

uninsured. HSAs should be particularly attractive to younger and

healthier people who don’t think it’s a good financial deal to purchase traditional third-party health insurance. This is a good thing,

by the way—if more young and healthy people purchase health insurance, the overall health insurance risk pool will improve, and

there will be fewer unpaid medical bills because of catastrophic injuries or illnesses among the uninsured.

The bottom line is that health savings accounts will allow people

to design their own personalized insurance plans. People will use

the money that they and their employers put in their own accounts

to pay for the benefits they want, knowing that they will be protected from financial ruin in the case of a catastrophic illness. People deserve to be able to choose a lower-cost plan that gives them

the freedom to balance value and cost, and HSAs will give them

that choice.

This brings me to the final point I’d like to make before we hear

from our witnesses. Everyone knows by now that there are approximately 43 million Americans without health insurance. What we

don’t often hear is that these 43 million Americans are uninsured

for a variety of reasons.

Some of the 43 million Americans without health insurance can’t

afford the insurance plans that are available to them. Some can afford to buy a policy, but decide not to pay for it.

Some of the 43 million Americans without health insurance can’t

afford even a low-cost plan. Some can’t find a low-cost plan because
17

the insurers in their state must offer a long list of mandated benefits, and therefore can’t offer them a less-expensive alternative.

Some of the 43 million Americans without health insurance have

been without it for a year or more. Some have only been without

it for a few months.

We can’t look at uninsured Americans as one big group in need

of one big solution. We need to identify those who really cannot afford to purchase health insurance, and identify some solutions that

would make health insurance more affordable for them, based on

their particular needs. And we need to do this in the context of reducing healthcare costs for everyone.

Mr. Chairman, I again commend you for holding this hearing so

that we can take a hard look at this issue before we leap into designing solutions. We need to keep in mind that uninsurance is a

chronic problem. It didn’t just suddenly appear. It’s been a problem

for decades. Eliminating the uninsured can’t realistically be done

in one bill or one session of Congress.

I believe we have already taken steps toward making health insurance more affordable. However, that doesn’t eliminate our responsibility to continue making progress here in 2004. We need to

keep moving to help extend the benefits of our healthcare system

to more Americans. I look forward to working with you, Mr. Chairman and the members of this Committee as we strive to make

healthcare and health insurance affordable for all Americans.

The CHAIRMAN. Senator Murray?

Senator MURRAY. Mr. Chairman, thank you very much for having this hearing. I think this is really important that we explore

some of the costs behind the rising health care costs and the growing rates of uninsured and the testimony was, I think, excellent

from everyone who is here. I think it is showing all of us that this

is not a one simple solution issue, that there are a lot of different

things to look at.

I think we have to recognize we are not just talking about the

unemployed. We are talking about a lot of working families who

simply don’t get affordable health insurance. The jobless recovery

that we are in is affecting a lot of people in my home State of

Washington. We have 650,000 people who are uninsured today and

we have one of the highest unemployment rates in the Nation. It

goes hand in hand. So any kind of solution we find has to deal with

a comprehensive approach and I think this is good to be able to explore some of this.

But let me ask a question because it is one that I think many

of us often get hit with, that the solution is a cap on noneconomic

damages in medical malpractice cases. I think we all agree frivolous lawsuits are a problem we need to deal with, but I fear that

if we have a narrow approach, that we don’t really address some

of the roots of the problem with medical safety and overuse of testing, whatever it is, insurance reforms that we are simply going to

put a band-aid on and not do anything.

Let me ask a direct question, Dr. Holtz-Eakin, because in your

testimony, you said that medical malpractice insurance accounts

for less than two percent of all health care related costs, and I

heard Dr. Conover say it costs more than $81 billion. What is the
18

real cost of medical malpractice and will caps on noneconomic damages get to the real problems that we face with rising costs?

Mr. HOLTZ-EAKIN. In terms of the setting, I think it is important

to distinguish between the level of any cost and any growth rates.

To the extent that there is built into the level some impact from

the tort system, there is less evidence that there is a rising trend

that would affect the growth rate of national health spending.

CBO has done some work in this area, and indeed, in some circumstances, you can find that tort reforms, caps on damages, do

have impacts on malpractice premiums. However, as you noted in

your statement and as we note in our report, even fairly large

changes in malpractice premiums constitute a very small fraction

of overall health insurance costs and a small fraction of health

spending in the United States as a whole. So that is not a dramatic

avenue to change the total spending path in the United States.

Senator MURRAY. Would anybody else care to comment on that?

Yes?

Ms. WILENSKY. I think you need to distinguish between two

types of costs related to liability. The first is the cost you have been

discussing, the cost of premiums and the total dollar of health care

spending and I think that is relatively small.

What may be a larger cost, but it is unfortunately very difficult

to measure, is the cost of what has been termed as defensive medicine, that is practices of tests and X-rays, imaging, etc, that are

done for fear of having a bad outcome and not having done all testing possible. This is potentially much greater. It is difficult to estimate because it is difficult to define and because it is confounded

by the reimbursement system. A lot of what we see reflects pressures to do more when doing less might be just as well, but you

put yourself at risk as a physician. If a bad outcome occurs, the reimbursement system also——

Senator MURRAY. Well, is the only reason a doctor asks for additional medical because they fear liability or are there other reasons? Perhaps they profit from it. Perhaps the patients demand,

and we see tons of advertisements on television, I know patients

go in and demand things based on what they have seen. Aren’t

there other causes, as well for that?

Ms. WILENSKY. There definitely are. There is some indication

that putting a cap in place will reduce somewhat the premiums.

There are some proposals that have come out that attempt to link

improvements in patient safety with ways to compensate for injuries that occur, avoidable injuries that occur, and it may provide

some way to get over the impasse of only looking at capping malpractice awards made.

There is some indication that capping the award will provide

some reduction in premium and therefore in spending, but it is far

more complicated than that, as you have indicated.

Senator MURRAY. And if you don’t deal with the fact of medical

errors and patient safety, then we have turned the system on its

head, as well, is that not correct?

Ms. WILENSKY. I agree.

Mr. CONOVER. I would like to make clear that in my figures, $25

billion of the medical malpractice is the insurance premiums and
19

another $70 billion is our estimate of defensive medicine costs. And

I agree with Dr. Wilensky, it is very difficult to measure that.

Senator MURRAY. Dr. Holtz-Eakin?

Mr. HOLTZ-EAKIN. I just wanted to point out that defensive medicine is an ongoing area of research at CBO. We have been able to

find some evidence of links between malpractice, defensive medicine, in areas associated with heart ailments. But in using the

same research methods in other areas, we find less evidence. The

most widely cited study finds that defensive medicine accounts for

about one percent of overall health spending, so the magnitudes

are useful to keep in mind.

Senator MURRAY. Thank you. I know my time has run out and

I do have other questions I will submit. Thank you.

The CHAIRMAN. Thank you, Senator Murray.

Senator Harkin?

Senator HARKIN. Thank you, Mr. Chairman.

Well, let me see, I think it has been about 15 years now that I

have been on this committee, 18 years maybe now, and we always

have these kind of hearings and this goes on year after year, year

after year, and we keep dancing around the issue. We talk about

different things but we don’t really get to the core of the problem.

What is driving health care costs and the uninsured? Well, the

uninsured, obviously it is the fact of lack of a national health care

system. But as Senator Murray said, this has many parts. But

first, we have to realize we don’t have a health care system in

America. We have a sick care system. If you are sick, you get care,

but there are absolutely no incentives, nothing in there to try to

keep you healthy in the first place.

Now, Dr. Wilensky was the only one that mentioned it, lifestyles.

The fact is, if we want to focus on what is driving health care costs,

it is the lack of preventative health care in America. That is what

is driving it, and we never get to it. Just take some examples.

Chronic diseases account for 75 percent of the Nation’s health

care costs each year and most are preventable. The annual costs

of cardiovascular disease, $352 billion; obesity, $117 billion and rising; diabetes, $132 billion; smoking, more than $75 billion; untreated mental illness, $79 billion. In fact, major depression right

now is the single leading cause of disability in the United States.

So clearly, keeping people healthy is more cost effective than treating diseases related to unhealthy behaviors.

Let us assume for a minute I bought a new car. What would you

think if I took that car and I drove it off the lot and I never

changed the oil, I never checked it, I never checked the water, I

never did anything to it and I just kept driving it and finally the

engine seized up. I took it to the garage and they said, put in a

new engine. Well, you would probably think I was a little crazy, not

to mention a little irresponsible.

The same principles apply in health care policy. You either pay

a little now or you pay a lot later. It is common sense. It is time

our national health priorities reflected that. Our health system is

in a downward spiral of paying a lot later. If we are going to bring

down health care costs, what is driving it, we must give people access to preventative health care. Give them the tools to stay

healthy and provide incentives.
20

I will mention a company in Des Moines, Iowa, Townsend Engineering. Ray Townsend a few years ago decided—a small manufacturing plant, not a stockholding plant. He owned it himself. He decided he was going to change his plan. He took all the people and

he put them on a health program. He built a gym right next to his

facility. He gave his employees benefits, bonuses, free vacations, if

they cut down on smoking. He hired a full-time physical trainer for

every one of his employees.

Guess what happened? Smoking went to zero. His sick days went

down precipitively. His production went up. The productivity rate

went sky high. But guess what didn’t go down—his health insurance costs because he was in a pool with everybody else, but he realized that he was better off and his plant was better off and he

was more productive and he was making more money because his

people were healthy. But he did that on his own dime. There were

zero incentives for Ray to do that.

Well, we could take a lesson from that and start providing those

kinds of incentives, not only just for businesses, but for schools and

everything else. In the coming months, again, I will be addressing

these. I am going to introduce a package of legislation to folks on

nutrition, physical activity in schools—kids don’t even have physical activity in schools anymore. Eighty percent of the elementary

school kids in America today have less than one hour of P.E. every

week. Tell me why they are getting fat and obese when they get

older. Focus on mental health, tobacco cessation, prevention and

treatment, consumer awareness, responsible marketing practices. I will tell you one other thing. We put $4 million in the last farm bill, $4 million. We took four States, 100 schools, elementary, middle, and high school, and we said, what would happen if you gave

free fruits and vegetables to kids? Free during the day, anytime

they want it. Pick up an orange. Pick up an apple. Pick up a banana, kiwi fruit, strawberries. Give them free fruits and vegetables,

broccoli, cauliflower, celery, whatever.

Guess what happened? Now, we have only had about a year of

this that it has been in effect, a little over a year. You check those

schools in Michigan. You check them in Ohio. You check them in

Iowa. You check them in Indiana. In every single one of those, kids

are eating healthier. Some schools have taken out vending machines because the kids aren’t putting money in the vending machines any longer. These are the kind of incentives we have got to

start putting in there.

Food stamps—food stamps—you can still on food stamps, you can

get Twinkies but you can’t get vitamins or folic acid for women on

food stamps. What sense does that make?

So again, we keep dancing around this all the time, and we can

talk about insurance, we can talk about tort reform, we can talk

about all the new equipment and stuff. I am telling you, until we

start focusing on preventative health care, and until all you doctors

and all you experts start telling us that we have got to build in incentives, we have got to start with kids early in life, and we can’t

keep going down this road any longer or we are going to be here

another 15 years talking about this.

You are the experts out there. What is driving health care costs?

It is the lack of preventative health care in America. It is chronic
21

illnesses. Seventy-five percent, as I mentioned, go to chronic illnesses and these are preventable.

My time has run out. I didn’t have a question, I just had a statement. Thank you. [Laughter.]

The CHAIRMAN. That was excellent testimony. [Laughter.]

Senator Alexander? You can direct questions at the other panel

members. [Laughter.]

Senator ALEXANDER. Thanks. Thanks, Mr. Chairman. I enjoyed

Senator Harkin’s statement. I have met Ray Townsend, and that

is an impressive operation in Des Moines, Iowa.

We are beginning to discuss the reauthorization of higher education, and as we talk about costs of health care, I think it is important to remember that we don’t have unlimited dollars in the

country and we must make choices. As Dr. Wilensky was talking

about the 1.5 percent increase in the economy but the four percent

increase in health care costs except for part of the 1990s, I was

thinking about what has been happening in my State. One of the

consequences of the increased cost of health care has been, I think,

to damage and underfund higher education.

For example, when I left the Governor’s office in Tennessee in

1987, we were spending 50 cents out of every dollar on education

and 15 cents on health care. Today, the State of Tennessee is

spending 40 cents of every tax dollar on education and 31 cents of

every tax dollar on health care. So it has gone from 15 cents to 31

cents on health care, and 50 cents to 40 cents in education, so you

can see where that has gone.

The question I have—Dr. Holtz-Eakin and Dr. Wilensky, you

may particularly have comments on this but others may as well— is if you have been thinking about solutions to the health care

costs. I have been intrigued by suggestions for dealing with the uninsured. One solution we have heard about for a long time is a single-payer system. Another suggestion is that we move—that we

disconnect the provision of health care from the employer, a practice we got into, I guess, in World War II, perhaps accidentally, and

that we move toward a system that would require individuals to

buy their own health care—basic insurance with the government

perhaps helping the poor and providing some sort of catastrophic

solution.

The reason I bring that up is I am thinking about the challenge

that we have as a country of keeping our jobs in worldwide competition over the next ten or 20 years as we compete with China

and Southeast Asia and other countries. Our businesses won’t be

able to provide those jobs if their costs are so much higher than

businesses that operate outside the United States. One of the

major costs they have is health care and they will have enormous

pressures to decrease providing health care. We will have less

health care, and we will have fewer jobs if the businesses continue

to provide the brunt of the health care costs.

So how practical would it be to disconnect the health care system, health care insurance, from employers, not by shifting it to a

single-payer government system but by shifting it to a system

where individuals would buy an individual insurance policy and

the private sector would still be involved? Dr. Holtz-Eakin, have

you given any thought to that?
22

Mr. HOLTZ-EAKIN. We have not analyzed any specific proposals,

but I think there are a couple of comments I can make in that

area.

The first is, let me just touch on the notion of international competition and costs for employment. Costs are best measured relative to productivity, and indeed, U.S. workers are highly productive. So it is not just a cost comparison. It is always cost relative

to what you get and our labor provides more than do comparable

laborers around that globe and for that reason we can afford higher

labor compensation in all forms, including health care.

It was interesting that in the example that the Senator cited his

workers were more productive. I think that is part of a lesson

there. It was not so much about health insurance but also about

raising productivity of workers.

But the example is typical of the centrality of employer-sponsored insurance in our system. The data we provided indicate that

a lot of short spells have to do with labor market transitions quite

likely, and so for better or for worse, we have gotten the labor market and the health insurance market intertwined. There is no question about that.

And then I think the final thing that really stands out is regardless of whether you do it at the individual level or the employer

level, the notion that individuals are insulated from the cost of

their decisions. Again, to use the same scenario, if one were to

treat their car in the way that Senator Harkin described, your auto

insurance would not pay off. It wouldn’t pay for that new engine

and you would be cognizant of the costs of mistreating the car.

Whether it is in preventive care or in sick care, after the fact,

an employer-sponsored insurance policy or an individual policy has

to provide incentives for efficient utilization of the care and adoption of the technologies that are worth it, not just every technology

that is invented. Those are less to do with being able to cover every

person in the United States but more about what would be the impact on the efficiency of the system and the growth in health care

costs.

Ms. WILENSKY. Let me respond more directly to the issue of

whether moving away from employer-sponsored insurance may

make people more sensitive. I think the answer is yes. There are

a number of issues relating to employer-sponsored insurance. One

of the most serious is that it tends to make people think they are

using somebody else’s money, their employer’s money, as opposed

to part of their own compensation package and that exacerbates

the various factors we have talked about, about why health care

spending is growing so rapidly.

But I think at a practical level, you need to decide what we are

going to do to augment insurance because we are seeing it decline

in the voluntary employer-sponsored market. Either you can try to

require employers to do this or you can try to provide financial assistance and access to group insurance and let individuals choose.

I think there is a lot of reason to go the second route, to make sure

people actually get the kind of insurance that they want as opposed

to what their employer might be choosing on their behalf, and to

make them clearly aware that this is their money that is being

spent and it ought to be used wisely.
23

You do have to be careful how you do this. The fact is, most of

us have employer-sponsored insurance and you want to be careful

about how you set up a system to live alongside this voluntary employer-sponsored insurance because it would be extremely disruptive if we just took away or pushed out all employer-sponsored insurance.

But the fact is, there has been a secular decline in insurance coverage. There is going to be continuing increases in the number of

uninsured even with robust economic growth. That is what the

1990s proved to us, is that even with a decade of robust economic

growth, the number of uninsured is likely to increase or only decline very slightly.

So what you do to help people without voluntary employer-sponsored insurance, because they are not offered it or they are in and

out of the labor market or they are part-time or full-time entrepreneurs, is very important and that is the opportunity, if you wish

to use it, where you could move away from employer-sponsored insurance, which, as you have indicated, is a vagary of history of

World War II and trying to get around wage and price controls.

Ms. DAVIS. If I could make a couple of quick points. I think if

we are really going to cover people, it is going to have to be a

shared responsibility with both employers and public programs providing group insurance. Employers contribute $500 billion toward

health insurance for workers. It covers 160 million people. So if you

do away with it, you are going to have to do a lot on the tax side

to substitute for that.

Our surveys show it is what people overwhelmingly prefer. They

think employers do a good job of selecting plans. And it is more efficient because you pool risk, you can deduct premiums from paychecks, and you get lower administrative costs than you do in the

individual market.

So I think you have to move very carefully to move it all the way

from employer coverage. It is what people prefer. It makes them

happy. And even low-wage workers want what high-wage workers

have, which is good benefits on the job.

Senator ALEXANDER. Thank you.

The CHAIRMAN. Senator Dodd?

Senator DODD. Thank you very much, Mr. Chairman. Thank you

for holding the hearing. Let me just make a couple of opening comments, if I can, and then try to get a couple of quick questions, if

I could.

First of all, I thank all of you for being here and thank you

again, Mr. Chairman. Let me first of all associate myself with the

remarks of Tom Harkin. I think the notion of doing a better job in

the area of preventive health is something we all would agree on.

There is less of an incentive, obviously, within the professions associated with health care to move in that direction, but clearly we all

understand the benefits of encouraging a better lifestyle for people

and reducing the problems.

According to the Institute of Medicine, we lose 18,000 people

every year, they die in this country prematurely because they are

uninsured. Let me give you some idea of the cost to us. If you are

not impressed by the financial implications, clearly losing 18,000

people in the United States prematurely because they are unin-
24

sured ought to startle everyone. I mean, to State this is a crisis is

like preaching to a choir here. I think everyone here agrees this is

growing in its magnitude. We have had a ten percent increase in

the uninsured in this country since the year 2000, now at 44 million people.

I think it is important to understand who we are talking about

here. Senator Enzi specifically talked about some aspects of this.

Two-thirds of the uninsured are poor. They are poor. They are people who are living below 200 percent of poverty.

Second, these are people who are working. The assumption here,

I think if you ask most Americans who are the uninsured, they

think they are a lot of unemployed people. Eighty percent of the

uninsured in this country hold jobs, in some families holding two

and three jobs to make ends meet.

Third, there are 8.5 million of this number who are children.

Twenty-one percent of the uninsured are kids in the United States

that we are dealing with here. So that is setting the table in terms

of the magnitude of the crisis and who, really, we are talking

about.

So when I see some of the suggestions being made, and I say this

with all due respect, but the idea that the answers to these issues

are going to be tax credits or free savings accounts, if you understand who are the uninsured and you begin to think about the suggestions that are being offered, they hardly touch on the problem

at all.

The idea of having sort of a tax credit approach, you are talking

about people who don’t have the disposable income here. The average premium for an employer-sponsored health insurance for a

family was more than $9,000 a year. Now, does anyone realistically

think that a tax credit approach is going to make much of a difference if you understand what the population is?

The same thing is true with these health savings accounts, with

all due respect here. Again, who is likely to go into this area, who

are the uninsured? And if you begin to match up who is going to

move into a health savings account and who the uninsured are, it

doesn’t line up very well.

So the only two real suggestions we have had in this area, the

tax credit approach and these health savings accounts, just don’t

really address the two-thirds of the uninsured being poor, being

children, and being people who are working in places that just

don’t provide that kind of coverage.

Now, there are some ideas out there that are being bandied

about and we need to take some of these ideas and work on them,

and Dr. Wilensky addressed some of them here in the brief comments I heard her address. Obviously, they include employer and

individual mandates, and this is always a painful area to get into,

but I think we are going to have to really look at this very carefully

because otherwise it is going to be very difficult to get this kind

of coverage, and with subsidies for low-income individuals.

Expansion of existing public programs, I think is obviously an alternative or establishment of State purchasing pools. I was stunned

that in this recent so-called prescription drug Medicare reform bill

that we actually have a prohibition, a prohibition in that legislation

of having purchasing pools when it comes to prescription drugs.
25

Not only is it a disincentive, we are prohibited from doing it—prohibited from doing it.

And here, we are talking about one of the major costs in rising

health care is the cost of prescription drugs. A national bill on prescription drugs and Medicare reform and we have just banned,

banned people from pooling together to try and reduce the cost of

prescription drugs. What is this administration thinking about? It

is incredible to me to move in that direction.

So the last couple of points I would just make here is, obviously,

there are some principles I think we ought to keep in mind as we

try to address this issue. First and perhaps most importantly is

any successful program should be comprehensive and affordable

coverage for low-income working Americans, since they are the

bulk of what we are talking about here. We should adopt an approach that prevents discrimination by providers based on preexisting conditions and current health status. We should expand existing public health programs, such as Medicaid and the SCHIP program for children.

And finally, we need to pursue a proposal to address the rising

cost of health care, including the use of inexpensive generic prescription drugs, better chronic disease management, preventive

medicine, improving health quality and efficiencies.

I would like to just quickly address—is that the red light? I had

a couple of questions on the information technology area. I want to

ask you, Dr. Milstein, you talked about IT being a reason for rising

costs. I wanted to get at the question of whether or not it is also

reducing costs in some areas. I know Dr. Davis addressed that, but

I wonder if you might address whether or not it could also be a cost

reducer to move into IT more effectively.

Dr. MILSTEIN. Thanks. I was referring to high-technology medicine as a cost increaser. I think information technology, on balance,

would substantially reduce health care costs.

Senator DODD. And Dr. Davis, do you——

Ms. DAVIS. We know that medical errors lead to longer hospital

stays, increase charges by about $10 billion, contribute to 33,000

deaths. So certainly information technology that would reduce errors, whether it is medication errors, device errors, other types of

medical errors, could be very beneficial in terms of reduced deaths,

lower costs, improved efficiency. So yes, moving very rapidly toward the modern age in information technology is something I

think all of us would agree with.

Senator DODD. Thank you, Mr. Chairman.

The CHAIRMAN. Thank you. There has been an awful lot of good

information put on the table here today and we very much appreciate the witnesses’ testimony.

On a couple of points, Dr. Davis, you said that, and I have heard

this figure quoted a number of times in a number of different avenues, that ten percent of the population accounts for 70 percent of

the cost of health care. Does anybody on the panel have a calculation that ties that ten percent as to what stage of life they are in?

Is that in the final 3 months of life? Is it in the final 6 months of

life that the majority of that ten percent of the population is in?

Obviously, it is during an acute illness period because otherwise
26

their health care wouldn’t be so expensive. But is there also a tiein into a stage of life that that ten percent is in?

Ms. DAVIS. There is some evidence from the Medicare program

that about six percent of beneficiaries die in a given year and account for 27 percent of costs. So that is a part of the story. But the

other part of the story are high-cost people who are costly year

after year. So it is not just end of life here. That is part of it, but

it is broader than that. It is why, again, targeting disease management, high care cost management, better dealing with asthma—

some children are in emergency rooms year after year, so managing

asthma better, managing congestive heart failure better, being able

to use nurses or even pharmacists sometimes can be monitoring

people’s compliance with medication, are effective strategies for

really getting at who it is that is generating the high costs.

The CHAIRMAN. It would seem logical that if we wanted to address the issue of savings in the delivery of health care, that we

would address this 70 percent of the cost, ten percent of the folks

that are generating it, which is the acute care issue, which brings

me back to Dr. Milstein’s point, which was that we could significantly reduce costs by making available the information which

HHS presently has in its databank. Can you go into a little more

depth as to how that would occur? Is there a legislative requirement there? Why would that generate savings?

Dr. MILSTEIN. There are, in some of the examples that I cited,

large private sponsors and union-sponsored heath benefit plans. In

the rare instances in which they have enough data in a given geography to precisely profile the longitudinal efficiency and quality of

doctors in different hospital departments, they have been able to

save a lot of money on their health insurance costs by beginning

to either incentivize physicians who perform well on quality and efficiency or incentivize their enrollees to begin using physicians and

hospitals that score better on longitudinal efficiency and quality.

But most insurance carriers and most private insurance plan

sponsors don’t have big enough claims databases to precisely profile and compare the longitudinal efficiency and quality of different

doctors and different hospital departments in their community. The

only way that they would have access easily to a big enough database to be able to do this would be to give them access to the patient privacy protected version of the CMS claims database. That

would allow every private sector health benefit plan sponsor to

have enough data to precisely identify which hospital departments

and which physicians were both more longitudinally cost effective

in terms of total cost, as well as delivering higher quality care, and

begin to either reward those providers with better payments and/

or incentivize their enrollees through reduced out-of-pocket costs to

preferentially use those providers.

The CHAIRMAN. We don’t have time right now, but if you could

give us that in a written presentation, but also the ethical implications of that when we get into this patient protection issue and how

we as a committee would be able to address something like that.

Dr. Conover, you said that you got projections of saving $300 billion-plus, it sounds like, if we addressed regulatory activity and improved it. Do you have specific recommendations for doing that?
27

Mr. CONOVER. Well, no. First of all, it is $128 billion is the excess

costs of regulation.

The CHAIRMAN. All right——

Mr. CONOVER. If you eliminated all regulation, you would save

$335.

The CHAIRMAN. The net cost is $128, then.

Mr. CONOVER. Right. The areas that seem most promising to look

into would be malpractice reform, FDA regulation, and facilities

regulation, but our study wasn’t designed to figure out what would

you do in those areas because we covered 50 different areas of regulation. I don’t have the expertise to tell you, okay, in area X, this

is what you do and you could save so many dollars. All we can do

is sort of highlight the areas where it looks like costs seem to be

well in excess of benefits and those would be the targets to sort of

shoot at.

Senator DODD. Mr. Chairman, did you find any cost savings as

a result of regulation? Did you look at that, as well?

Mr. CONOVER. Yes. When we looked at the benefits of regulation,

that is what the $207 billion in benefits, some of it, it relates to

cost savings. So yes, we did take that into account.

Senator DODD. You did.

The CHAIRMAN. Which brings me to Dr. Wilensky. You were talking about, in the issue of tort reform, about trying to get over the

hurdle of how we do tort reform, which has been a conundrum for

us as a Congress. You are suggesting some sort of merger of patient safety with recovery activity, I guess. Can you give us some

more definition of that concept?

Ms. WILENSKY. I do think capping awards is a component because I do think there is a reduction in the malpractice premiums,

but it is more than that. There are avoidable injuries that occur

and there needs to be compensation and there needs to be a tie

with improving patient safety, and that is really the way that it

may be possible to get the various parties together.

We have been talking today about costs associated with medical

errors and about deaths associated with medical errors and the distinction of moving away from the jury trial to expert decision making in terms of——

The CHAIRMAN. You are talking about some sort of no-fault system, much as we have with automobiles in some States?

Ms. WILENSKY. Right. That would be a component of it, but it is

mainly the tying together of improved patient safety with the

changes in tort to try to provide assurance both to the Congress as

well as to the public this is not just a question of protecting the

providers but of actually improving and rewarding patient safety.

There have been—there are some individuals around the country

who are doing some work. I would be glad to provide you with

names or with summaries of the work that they have been doing

if you would like to know more about this item.

The CHAIRMAN. What you really need to provide us with is 51

votes or 60 votes. [Laughter.]

Ms. WILENSKY. That may be somewhat beyond my capability.

The CHAIRMAN. Do people wish to ask a second round of questions? Is there anybody who has a second round?
28

Senator DODD. Just a couple. Could I follow up? You have obviously looked at California just on this medical malpractice issue,

and there, they did cap awards.

Ms. WILENSKY. Right.

Senator DODD. They also did something else in California. They

capped insurance premiums. Which of those two do you think had

the larger impact?

Ms. WILENSKY. Well, the capping, I haven’t looked at what has

happened and I don’t actually know the results of the insurance

capping. One of the questions that you have to watch with regard

to putting arbitrary caps in place is what else it does, and I don’t

know what it has done to the insurance system. I know that Kentucky, which had a number of active measures to change their insurance environment, has driven out most of the insurance in the

State. And so what you do needs to be looked at in terms of not

only the intended consequence, but the unintended consequences.

Senator DODD. I will just give you an idea. Just in my State, I

hope I remember these numbers pretty well, but I think we have

about 9,000 or 10,000 physicians, 31 hospitals, about 12,000

nurses. We have a screening process, a board that judges whether

or not, if proven true, the facts would result in a malpractice conclusion.

As a result of that, I think we are down to around just a handful

of malpractice suits being brought each year, and I am not exaggerating, just a handful. There is no premium reduction at all. So

here, despite the fact we are screening, reducing the number of

suits that are going as a result of the screening process, we see no

return, no benefit yet that has occurred even though we brought

the numbers way, way down in my State.

The CHAIRMAN. We may want to have a hearing on that, because

obviously that is because Connecticut is pooled with some other

States which maybe aren’t so disciplined as Connecticut.

Senator DODD. Maybe that, as well. I don’t know about that.

Let me ask one other question, just on these health savings accounts. I wanted to ask you, Dr. Davis. I made the point earlier

that I thought this was going to be adverse to the poor because of

who would qualify for health savings accounts. I wonder if you

would address that. Am I right or wrong about that or do you have

any other comments to make?

Ms. DAVIS. No, I think you are right to be concerned about that.

First of all, only about eight percent of Americans now have $1,000

high deductible health insurance plans and those plans really

aren’t good for people because it keeps them from getting the preventive care that you talked about earlier. We certainly know the

uninsured don’t get preventive care. If you have got a $1,000 deductible, people aren’t going to get preventive care.

So it is largely a tax break for higher-income people who can

both afford a $1,000 deductible out of pocket and can afford to put

away the $1,000, or even in the Medicare prescription drug bill as

much as $2,600 every year, both excluding it from income, letting

it grow tax free, and then taking it out to pay medical expenses tax

free.

The other thing it does is split the risk pool. The experience with employers that are starting to offer an option of a $1,000 deductible
29

with a health reimbursement account is largely healthier people

who had low expenditures to start with are the ones who go into

it. So you pull the healthy people out of that and it drives up the

premiums for other people who don’t have those kinds of policies.

So I think it is very troubling and very much a move in the

wrong direction.

Senator DODD. And it doesn’t address the notion of who are the

uninsured. Do any of you want to disagree with what Dr. Davis

just said?

Ms. WILENSKY. My understanding of who is attracted to the medical savings accounts, it is both the healthy and the very sick. It

is actually both extremes and not just the very healthy.

Senator DODD. On the tax credit ideas. Let me go back. You

argue——

The CHAIRMAN. Can I break in here? I also have some questions

and we are going to get a vote here, so let me ask a couple of questions and then we can come back to you.

Senator DODD. Oh, I am sorry.

The CHAIRMAN. Dr. Holtz-Eakin, you mentioned in describing the

parameters or the demographics of the uninsured that there is a

large percentage of people who are young and who have income

and who are uninsured. What percentage is that of the—and then

you broke the uninsured up into 20 million who are uninsured all

year, 40 million who are at any point in the year uninsured, and

so there is a group that is moving in and out of the uninsured pool.

Of that 20 million who are uninsured throughout the year, what

percentage are under age 40 and have incomes higher than, say,

200 percent of poverty or something in that range?

Mr. HOLTZ-EAKIN. I don’t have the number off the top of my

head. We have the two pieces independently but not the place

where they intersect.

The CHAIRMAN. Well, is it——

Mr. HOLTZ-EAKIN. We can certainly get that for you.

The CHAIRMAN. Is it a significant number that we are talking

about? Basically, what I am looking at is what percentage of the

people who are uninsured all year are people who basically are

healthy and are deciding they don’t want to buy insurance with

their discretionary money?

Mr. HOLTZ-EAKIN. We have got about 80 percent who are 44 or

younger, so there is a large number there.

The CHAIRMAN. Eighty percent.

Mr. HOLTZ-EAKIN. But those are——

Senator DODD. Eighty percent?

The CHAIRMAN. Are 44 or younger.

Mr. HOLTZ-EAKIN. Of those who are uninsured all year, ballpark

numbers doing the math quickly. And then for those who have, say,

400 percent or more of the poverty line, that is about five percent,

so it is going to be——

The CHAIRMAN. So 200 percent or more would be about how

many?

Mr. HOLTZ-EAKIN. Four hundred percent—— The CHAIRMAN. How about 200 percent?

Mr. HOLTZ-EAKIN. Two hundred percent, you would have about

25 percent.
30

Ms. DAVIS. Our surveys show that of the uninsured, only five

percent are uninsured because they don’t want coverage.

The CHAIRMAN. Well, it is not a question of wanting. It is a question of whether they choose to do it. I think there is a percentage

of our population that if they have a vehicle available to them

which covers the catastrophic event of falling off their motorcycle

or getting injured during bungee jumping, they might take that

policy.

Mr. HOLTZ-EAKIN. It certainly can be a rational choice to be uninsured.

The CHAIRMAN. You take that percentage out of the base. What?

Mr. HOLTZ-EAKIN. It certainly can be a rational choice to be uninsured, there is no question about that.

Senator DODD. Let me jump back to the issue. I wonder if any

of you would just debate with me if you disagree with me. In the

Medicare prescription drug bill, banning the pooling—why am I

wrong about that if you disagree with me?

Mr. HOLTZ-EAKIN. I am a bit curious. If you told me exactly

which provision you are referring to—there is some confusion, at

least in my mind.

The CHAIRMAN. The position you wrote a letter on a couple of

days ago.

Mr. HOLTZ-EAKIN. It is the Secretary noninterference language?

The CHAIRMAN. Yes.

Mr. HOLTZ-EAKIN. The CBO’s view on that is that if you have

private at-risk prescription drug plans delivering this benefit, those

entities have both the—— Senator DODD. What about Medicare, under Medicare?

Mr. HOLTZ-EAKIN. That is what I was talking about. This is the

Part D benefit. Those firms have the incentives because they are

at risk for their losses, and they have the tools, the ability to control things so that they would have tremendous ability to—an incentive to pursue deals with pharmaceutical companies and as a

result don’t get the best deal they can and it is not clear why the

Secretary’s intervention would produce a better deal. They have got

all the tools and incentives that we can bring to bear. So we

guessed it would be a negligible impact on the cost of the program.

Senator DODD. There is no ban?

Mr. HOLTZ-EAKIN. The language prohibits the Secretary of HHS.

That is a ban. However, the fact is that we have the ability of the

private drug plans to pool large amounts—— Senator DODD. Why wouldn’t you at least try it? What is the

point?

Mr. HOLTZ-EAKIN. Removing the language, the formal letter says

removing the language would have a negligible impact on the cost

of the program.

Senator DODD. Dr. Davis, do you agree with that?

Ms. DAVIS. Anytime you are a small buyer, you have less clout

than if you are a big buyer. So if Medicare were to negotiate on

behalf of all 40 million beneficiaries drug prices, they would get

lower drug prices. If they were to negotiate on behalf of all 280 million Americans, they would get lower prices for all services. That

is the experience of other countries and that is why the U.S. costs

are a lot higher than they are in other countries. We pay higher
31

prices for drugs. We pay higher prices for medical services because

we do not use the purchasing power of the government to achieve

efficient care or good rates for services—— The CHAIRMAN. We are about to step into a debate on rationing

and nationalization of health care here, which really wasn’t the

purpose of this panel. [Laughter.]

The CHAIRMAN. But we appreciate CBO’s letter, which did clarify

the point to some degree.

I want to thank the panel for their excellent testimony. This is

a huge issue and I very much appreciate especially the attendance

of so many Senators and the members of the panel for participating. Thank you.

The committee is adjourned.

[Additional material follows.]
32

1 Congressional Budget Office, How Many People Lack Health Insurance and for How Long?

(May 2003). 2 Agency for Health Care Research and Quality, The Uninsured in America—1996–2002, Statistical Brief No. 24, available at www.ahrq.gov. 3 Congressional Budget Office, How Many People Lack Health Insurance Coverage and for How

Long?

ADDITIONAL MATERIAL

PREPARED STATEMENT OF DOUGLAS HOLTZ-EAKIN

Mr. Chairman and Members of the Committee, I appreciate the opportunity to be

here today to discuss the characteristics of people without health insurance and the

factors that contribute to the growth of health care expenditures. While more than

240 million people in the U.S. have health insurance today through a variety of private and public sources, millions of others do not have such coverage; and the percentage of Americans who are uninsured has risen in each of the last 2 years for

which information is available. At the same time, health care spending has continued to rise.

In my testimony today, I will discuss some important characteristics of the uninsured population that have received relatively little attention but that have important implications for Federal policies to expand insurance coverage. I will also discuss factors contributing to increases in health care spending and will describe the

relationship between health care costs and insurance coverage.

Characteristics of the Uninsured Population

In recent years, it has been frequently stated that about 40 million Americans

lack health insurance coverage. That estimate, by itself, presents an incomplete and

potentially misleading picture of the uninsured population. The uninsured population is constantly changing as people gain coverage and lose coverage. Furthermore, people vary greatly in the length of time that they remain uninsured. Some

people are uninsured for long periods of time, but more are uninsured for shorter

periods.

Policies aimed at increasing insurance coverage will be more effective if designed

in light of the dynamic nature of the uninsured population as well as the distinction

between the short-term and long-term uninsured. For people with short spells of

being uninsured, policies might have the goal of filling the temporary gap in coverage or of preventing such a gap from occurring. For people with longer periods

without insurance, policies might seek to provide or facilitate an ongoing source of

coverage.

There are several alternative measures of the number of people who lack insurance coverage. One describes those people who do not have coverage for a sustained

period (say, 1 year)—the long-term uninsured. Alternatively, another identifies how

many individuals have experienced any episode of uninsurance during a particular

period. Finally, the most commonly used measure (a mixture of those two others)

counts the number of individuals without insurance on any particular day or week.

Those different approaches yield different numbers because of the continual movement of people into and out of the uninsured population. The Congressional Budget

Office’s (CBO’s) recent analysis 1 found that in 1998:

• Between 21 million and 31 million people were uninsured all year;

• At any point in time during the year, about 40 million people were uninsured;

and

• Nearly 60 million people were uninsured at some point during the year (see Figure 1).

CBO conducted the analysis for 1998 because that was the most recent year for

which suitable data were available to construct all three measures. More recent

analyses by researchers at the Agency for Healthcare Research and Quality indicate

that those three measures of the uninsured remained fairly stable in the subsequent

period from 1998 to 2001.2

About 30 percent of Americans under age 65 who become uninsured in a given

year remain so for more than 12 months, while nearly half obtain coverage within

4 months (see Figure 2).3 Those estimates were obtained by CBO using data from

the Census Bureau’s Survey of Income and Program Participation for 1996 through

1999. They are very similar to the findings of previous studies that have examined

earlier time periods.

People with less education, those with low income, and Hispanics are more likely

than others to be uninsured (see Table 1). They are also somewhat more likely to

remain uninsured for long periods. For example, people in families in which no one
33

attended college account for 64 percent of uninsured spells of more than 12 months

but only 49 percent of uninsured spells that end within 4 months (see Table 2). That

difference probably reflects, at least in part, the fact that people who did not attend

college are less likely than others to have access to employment-based insurance.

Adults are somewhat more likely than children to remain uninsured for long periods. The availability of Medicaid coverage may explain some of that discrepancy:

coverage is available to many children in low-income families, but the majority of

low-income adults are not eligible for the program. In addition, evidence suggests

that single adults without children may be less inclined to seek insurance, on average, than other adults are, which may lead them to experience long spells without

insurance.

The vast majority of the uninsured are in working families. Some 43 percent of

the people who were uninsured all year in 1998 were in families in which at least

one person worked full time all year, and 47 percent were in families in which at

least one person worked part time or for a portion of the year (see Table 1, column

3). Studies have found that over three-quarters of uninsured workers are not offered

insurance by their employer. Low-wage workers are less likely to be offered insurance by their employer and less likely to accept it if it is offered.
34

4 Researchers disagree about how the CPS estimates of the uninsured should be interpreted.

Like many health care analysts, CBO believes that those estimates provide a close approximation of the number of people who are uninsured at a specific point in time. See Congressional

Budget Office, How Many People Lack Health Insurance and for How Long? 5Paul Fronstin, Sources of Health Insurance Coverage and Characteristics of the Uninsured:

Analysis of the March 2003 Current Population Survey, Issue Brief No. 264 (Washington, D.C.:

Employee Benefit Research Institute, December 2003). 6From 1989 to 1993, the share of the nonelderly population without health insurance rose by

1.5 percentage points, the share covered by employment-based insurance fell by 5.1 percentage

points, and the share covered by Medicaid rose by 4.0 percentage points. See Fronstin, Sources

of Health Insurance Coverage.

According to the Census Bureau’s Current Population Survey, the number and

percentage of Americans who are uninsured increased in 2001 and 2002, after falling the previous 2 years.4 From 2000 to 2002, the number of nonelderly people who

were uninsured increased from 39.4 million to 43.3 million, or from 16.1 percent of

the nonelderly population to 17.3 percent.5 That rise in uninsurance rates was associated with a drop in the percentage of nonelderly people covered by employmentbased insurance (from 67.1 percent to 64.2 percent), which was partially offset by

an increase in the percentage covered by Medicaid and the State Children’s Health

Insurance Program (from 10.4 percent to 11.9 percent). Those changes in coverage

rates, while significant, are smaller than those that occurred in the early 1990s,

when the share of the nonelderly population covered by employment-based insurance fell by more than 5 percentage points.6
35
36
37

Just how much of the recent increase in uninsurance rates results from rising

costs for premiums, rising unemployment, or other factors is unknown. Clearly,

though, losing a job may put a worker’s employment-based health insurance at risk.

In preliminary results from a recent analysis, CBO found that health insurance coverage rates declined significantly among people who received unemployment insur-
38

ance (UI) benefits for at least 4 consecutive months in 2001 or early 2002. Some

82 percent of such workers had health insurance coverage (from any source) before

they began receiving UI benefits, but only 58 percent had coverage by the final

month of those benefits. Federal legislation (the Consolidated Omnibus Budget Reconciliation Act of 1985, known as COBRA) requires firms with 20 or more employees

to continue offering health coverage to workers who separate from their firm. However, firms may charge former employees up to 102 percent of the full (group) premiums for that coverage. Therefore, unemployed workers may face a large increase

in their out-of-pocket premiums under COBRA. The reduction in coverage estimated

for recipients of unemployment insurance probably stems, in part, from many of

those people opting not to purchase coverage under that law.

Rising health insurance premiums resulting from the recent large increases in

health care spending overall offer a plausible explanation for at least some of the

reduction in coverage. To explore that issue, I will now discuss the magnitude and

causes of the spending increases and then turn to what is known about the relationship between health care spending and insurance coverage.

Historical and Recent Trends in Health Care Spending

Health care is a large and growing sector of the economy. The U.S. spent $1.6

trillion on health care in 2002, an amount more than five times as great in real (inflation-adjusted) terms as that spent in 1970. Per capita spending increased from

about $1,300 in 1970 (in 2002 dollars) to about $5,450 in 2002, for an average rate

of real growth of 4.5 percent per year (see Table 3). The economy as a whole has

grown over that period as well, but not as quickly, with the result that health

spending as a percentage of gross domestic product (GDP) has more than doubled,

from 7.0 percent in 1970 to 14.9 percent in 2002. The mid-1990s saw a brief slowdown in real spending growth per capita (the rate was 2.6 percent per year from

1992 to 1997), but higher rates of growth have since returned: from 1997 to 2002,

real per capita health care spending grew at an average annual rate of 4.6 percent—

which is similar to its approximate long-term rate of increase.

Recent growth in real spending on prescription drugs has been especially rapid—

at more than 14 percent per year on average from 1997 to 2002, making it the fastest growing category of health spending during the period. Despite the recent rapid

increase in spending for prescription drugs, they currently account for only about

10 percent of all national health expenditures. That relatively small (but growing)

share of expenditures should be kept in mind when evaluating whether drugs are

a major driver of increasing costs.

Federal spending on health care, principally Medicare and Medicaid, is subject to

the same cost pressures facing the system as a whole. Total Federal health spending

as a percentage of GDP was 1.7 in 1970 and 4.8 in 2002. If the recent rate of growth
39

7 Excess cost growth is the amount by which per capita growth in spending on health care

exceeds per capita growth in GDP, after accounting for changes in the age and sex composition

of the population. 8 Congressional Budget Office, The Long-Term Budget Outlook (December 2003). 9 Joseph P. Newhouse, ‘‘An Iconoclastic View of Health Cost Containment,’’ Health Affairs, vol.

12, supplement (1993), pp. 152–171.

in spending persists, Federal outlays on health care will continue to increase as a

proportion of GDP. Projections of future spending on Medicare and Medicaid depend

critically on the assumed rate of ‘‘excess cost growth.’’ 7 Under an assumed rate of

excess cost growth of 2.5 percent (a rate that is slightly lower than the long-term

historical average), Federal spending on Medicare and Medicaid would climb to 21.3

percent of GDP in 2050 (see Figure 3).8 Under a more optimistic assumption of 1

percent excess cost growth, Federal Medicare and Medicaid spending would reach

11.5 percent of GDP in 2050. To put those estimates in perspective, the entire Federal budget currently consumes 20 percent of GDP.

Factors Behind the Continuing Growth in Health Care Spending

Most analysts agree that the perennial increases in health care spending that

have occurred over recent decades are associated with the diffusion of new medical

technologies, or as one analyst has described it, ‘‘the enhanced capabilities of medicine.’’ 9 Recent advances, including pharmaceutical innovations, have made available

to patients and physicians a wealth of new medical therapies, many unheard of in

even the relatively recent past. The economic incentives for innovation and the development, deployment, and utilization of new technologies in the U.S. health care

system has led generally to higher levels of spending. Some medical advances per-
40

10 An important distinction must be drawn between the level of health spending and its rate

of growth. At any given moment, some amount of unneeded expenditure is likely, but regardless

of the magnitude of that amount, few analysts believe that such expenditures can account for

much of the large spending increases that have taken place. The elimination of unneeded expenditures, while certainly desirable, would offer only temporary relief from increasing expenditures, as the underlying source of spending growth can be expected to eventually reemerge.

mit the treatment of previously untreatable conditions, introducing new categories

of spending. Others, relative to older modes of treatment, improve medical outcomes

at added cost, expanding existing spending.

It is occasionally suggested that advances in technology can lead to reduced

spending, and that may be the case in some instances. Vaccinations, for example,

may sometimes offer the potential for savings, and certain types of preventive medical care may help some patients avoid costly acute care hospitalizations. But, overall, examples of new therapies for which long-term savings have been clearly demonstrated are few. Improvements in medical care that decrease mortality by helping

patients avoid or survive acute health problems paradoxically increase overall

spending on health care, as those (surviving) patients live to utilize health services

through old age.

Even when a particular service becomes cheaper to provide over time, higher aggregate spending can still result as practice patterns emerge and the service is used

with greater frequency. Comparing increased expenditures on computers and information technology with those on health care is instructive. As technological innovations permitted profitable computer processing at a fraction of the previous cost,

total spending on computers did not decrease—it skyrocketed, as more consumers

made more intensive use of what became available. Why do few people regard increasing spending on information technology as a problem requiring a remedy? Let

me suggest that the reason is that the market for information technology works the

way a market is intended to function: businesses and consumers weigh alternatives

and face the full costs of what they use. In health care, two factors combine to

produce a different result: payments made by third parties typically buffer patients

from the full cost of the medical services they use, and the inherent complexity of

medical practice forces patients to rely on the judgment of providers who, depending

on the reimbursement system, may have an incentive to provide more care (under

a fee-for-service arrangement) or less care (under capitation).

Other factors have also contributed to increases in health spending. One obvious

example is the aging of the population. Among adults, medical spending generally

increases with age. As the number of elderly people rises with the aging of the very

large baby-boom generation, health spending will naturally grow. However, over the

past half century, aging has played a relatively minor role in the very large increases in spending that have occurred.

Other contributing factors include the growth in personal income over time and

the spread of health plans over recent decades. Because medical care is a desired

service, people naturally purchase more of it as their income increases. And health

insurance, as economists are fond of pointing out, effectively drives down the cost

of care from the consumer’s perspective, resulting in a higher quantity demanded

than would otherwise be the case. But the best estimates of the effects of those two

factors suggest that they, too, fail to explain much of the surge in spending in recent

decades.

Claims are often heard about unwarranted expenditures. One example is so-called

defensive medicine, which refers to medical tests or procedures of little or no clinical

value that are ordered by physicians solely in the interest of avoiding lawsuits. Another example is what some people term physician-induced demand, which refers to

spending that is brought about at least in part by providers’ desire to augment their

own income. While the magnitude of spending associated with such practices has

been the subject of considerable debate, those factors do not appear to explain much

of the growth in spending.10

What I have presented here is a simple discussion of a complex issue, and I do

not intend for it to represent an exhaustive or definitive review of the subject. The

association between technological change and rising medical expenditures is the

manifestation of a complex system of economic incentives that need to be examined

in more detail. A greater understanding of the possible role of the third-party payment system in creating incentives for innovation and the diffusion of technologies,

for example, could inform public policy aimed at addressing the continuing increases

in spending. At the same time, policymakers could choose to spend more in light

of the quality enhancements resulting from the remarkable medical advances that

have been made in recent years. The point to emphasize (and about which there is

general consensus) is that the way new medical technologies have been adopted and
41

11Kaiser Family Foundation and Health Research Educational Trust, Employer Health Benefits 2003 Annual Survey (September 2003). 12David M. Cutler, Employee Costs and the Decline in Health Insurance Coverage, Working

Paper No. 9036 (Cambridge, Mass.: National Bureau of Economic Research, July 2002).

utilized has generally led to more health spending over time; that factor lies at the

heart of increasing expenditures for health care. In the absence of a change in overall incentives, those pressures can be expected to continue.

Rising Spending and Health Insurance Premiums

Health insurance premiums, like total spending, have undergone increased

growth in recent years following a brief slowdown. Estimates from one survey of private firms show that growth in employer-based premiums has risen every year since

1996, exceeding 10 percent in real terms from 2002 to 2003.11 According to that survey, the average annual premium for an employer-based policy for an individual is

now about $3,400, and for a family, more than $9,000. Recent declines in employerbased coverage may be related to increases in premiums, though the relationship

between premiums and the prevalence of coverage is not necessarily a simple one.

While it is natural to believe that the purchases of any good tend to decline when

its price goes up, the case of health insurance is complicated by the fact that a general upward trend in the cost of medical services can make insurance more appealing, because in the absence of insurance, covering potentially costly medical needs

is more difficult. Furthermore, changes in premiums can present an incomplete picture if plan characteristics change simultaneously (and there is evidence that average deductibles have recently increased in certain types of plans).

Employee contributions for employer-based health insurance have remained a constant proportion of total premium costs in recent years; because total premiums are

rising, however, the dollar value of employee contributions is rising as well. Perhaps

related to the growth in employee contributions is a reported decline in the rates

at which employees take up the offer of employer-based coverage. Three factors may

drive changes in the number of covered workers: the number of firms offering health

benefits, the proportion of workers eligible for health benefits among firms offering

coverage (part-time workers generally are not eligible), and the rate at which workers accept coverage (if it is offered by their employer). Recent analysis shows that

as much as three-fifths of the recent decrease in employer-based coverage is attributable to workers’ declining to enroll.12

Conclusions

In sum, I have stressed that the commonly cited estimates of the number of people who lack health insurance present an incomplete picture of the uninsured population. That population is dynamic, and individuals vary greatly in the length of

time that they remain uninsured. The varying characteristics of the uninsured

should be kept in mind when developing policies to expand insurance coverage. I

have also discussed the relationship between advancing medical technologies and increasing health care expenditures and noted that the correlation between technological change and expenditure growth needs to be better understood. Both Federal

spending and private spending on health care are likely to continue to increase in

the immediate future and to constitute a greater share of GDP.

PREPARED STATEMENT OF ARNOLD MILSTEIN M.D.

I am Dr. Arnold Milstein, Medical Director of the Pacific Business Group on

Health and a physician consultant at Mercer Human Resource Consulting. I also

head performance measurement activity at the Leapfrog Group. My comments this

morning are my own and not intended to represent the views of these organizations.

The problem of healthcare uninsurance has multiple root causes. I will focus my

remarks on one of these causes, large inefficiencies in America’s healthcare delivery

systems. Eliminating these inefficiencies would be feasible over a 10-year period, offset projected health insurance cost increases by as much as 40 percentage points,

and make healthcare insurance more affordable for private sector purchase or public

program sponsorship.

I will briefly outline what current science and expert clinical opinion tell us about

the nature and magnitude of capturable healthcare delivery system inefficiency and

link its persistence to our failure to collect, publicly report, and reward excellence

in nationally standardized measures of efficiency for hospitals, physicians, and

major treatment options. Throughout my remarks, I will use the term efficiency to

refer to the total cost of all healthcare services used in treating an episode of acute

illness or a year of chronic illness and preventive needs at a specified level of quality. This is a critical distinction, because some physicians, hospitals or treatment op-
42

tions may carry a higher unit price, but incur for health benefits plans and consumers a much lower total cost of all healthcare services over the duration of an illness.

I will refer to this form of efficiency as ‘‘longitudinal efficiency.’’

An inferable estimate of current waste in American healthcare spending is in excess of 40 percent. This estimate is rooted in two sources. First, analysis of Medicare

data published by Drs. Elliott Fisher, David Wennberg, and other Dartmouth researchers shows that hospitals and physicians in the 10 percent of U.S. communities

which spend the least per capita, (after adjusting for community differences in demographics, morbidity, and input price levels) achieve this result by providing much

lower frequencies of specialist physician visits, tests and minor procedures, non-surgical hospitalizations, and admissions to ICUs. More important, they show that

available indicators of quality of care, patient health status and patient satisfaction

with care, are the same or higher than in the other 90 percent of communities that

spend much more per capita. The researchers estimate that if hospitals and physicians in other communities adopted similarly efficient patterns of service use, U.S.

per capita Medicare spending would be 30 percent lower (see Attachment A). Their

unpublished work and estimates from other nationally respected researchers and actuaries suggests that similar inefficiencies exist for other American health benefit

programs. They also show that even small degrees of improvement in physician efficiency could transform this waste into lower per capita health insurance costs (see

Attachment B). This prediction has been confirmed by employer innovators such as

Pitney Bowes and Union Carbide that have either incentivized physicians to improve their efficiency or incentivized their health insurance beneficiaries to utilize

physicians with more efficient practice patterns, as identified through health insurance claims data analysis (see Attachment C).

The Dartmouth team estimates significant additional potential spending reduction

opportunities in all U.S. communities from (1) adoption of the patterns of service

use by the most efficient, high-quality providers within low-spending communities;

and (2) allowing patients to make better informed decisions about high-cost, discretionary surgeries. These include surgeries such as elective coronary bypass graft

that are on average no less frequent in low spending communities. Note that all of

these analyses are predicated on preserving or improving quality of care.

A second large source of wasted spending is in the inefficiency with which we

produce all treatments, however valuable. The Institute of Medicine’s (IOM) Crossing the Quality Chasm report on opportunities to improve the performance of U.S.

healthcare delivery systems details the types of inefficiencies that could be eliminated if best operational practices were consistently assured in producing all current

treatments. These opportunities are embedded in six ‘‘care redesign imperatives,’’

described in the IOM report. They include mainstreaming the use of interoperable

electronic clinical information systems and other applications of operations engineering in assuring the reliable selection of evidence based treatments and error-free

treatment administration.

The IOM report and many other scientific publications describe hospital and physician leaders who have begun to capture these operational efficiencies and achieve

accompanying reductions in medical errors (see Attachment D). These leaders have

persisted in the face of a market environment that does not distinguish or reward

providers who capture efficiencies for CMS and health insurers, and often penalizes

them. America’s foremost experts on operations engineering in healthcare, such as

Dr. Brent James of Intermountain Health Care, estimate such operational waste at

30 percent of current healthcare spending.

In essence, two largely separate 30 percent pools of waste are available for capture and redirection into funding wider American health insurance coverage. Since

transforming these inefficiencies into reduced rates of spending will require offsetting investments such as improved electronic clinical information systems, I have

estimated a net savings opportunity approaching 40 percent. Precise estimation is

not possible for interventions in complex, adaptive systems such as U.S. healthcare.

I realize that these hearings focus on the problem of uninsurance, rather than its

solutions. Suffice it to say that America’s innovators in healthcare efficiency capture

have generated savings far in excess of their costs and that a few strategic public

policy changes would enable the market to encourage many more to follow their example. The most important of these changes are: (1) routinizing and publicly releasing longitudinal efficiency and quality ratings of doctors, hospitals, and major treatment options; and (2) encouraging CMS to share with private sector health benefits

plans its patient privacy-protected claims data base, so that all health plans would

be able to improve their precision in identifying the best performing providers and

treatments options; (3) encouraging CMS and other health plans to reward clinical

performance improvements either by more favorable payment for providers and
43

treatment options offering superior quality and longitudinal efficiency, and/or by

lowering out-of-pocket costs for patients who preferentially use them.

Americans have standardized longitudinal efficiency measures for appliances and

for automobiles, but not for the industry that consumes a much greater share of

their income and benefits. Methods of quantifying longitudinal efficiency and quality

for hospitals, physicians, and major treatment options are already developed and

easily within the capability of American health services researchers to further refine. The National Committee for Quality Assurance (NCQA) plans to release standardized efficiency measures for physicians and hospitals during this calendar year.

Absence of such measurements keeps American hospitals, doctors, and patients in

the dark with respect to comparative healthcare efficiency and unable to identify opportunities to make their health insurance much more affordable. When paired with

standardized, publicly reported quality measurements, longitudinal efficiency measurements would comprise a new navigational system for patients, providers, and insurers to improve America’s health and substantially reduce future increases in

health insurance premiums. It would also send an important signal to new medical

technology developers that market receptivity to new products and services will become more sensitive to their effect on the affordability of health insurance, in addition to their effect on health.

Thank you for the opportunity to share my thoughts on how large, invisible, and

substantially capturable inefficiencies in American healthcare delivery contribute to

the unaffordability of health insurance.
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RESPONSE TO QUESTIONS BY THE SENATE HELP COMMITTEE FROM ARNOLD

MILSTEIN, M.D.

Question 1. Dr. Davis asserts that consumer-directed health care is just a way to

shift more costs to consumers, creates more ‘‘under-insured,’’ and harms consumers

by leading them to skip necessary care. Can you please comment on this? Is consumer-directed health care just a fancy term for cost-shifting?

Answer 1. There are several forms of consumer-directed health care. ‘‘Blunt’’

forms that incentivize consumers to avoid health care of all types are likely to create
72

the problems that Dr. Davis described. ‘‘Precision-tailored’’ forms that incentivize

consumers to use the most cost efficient, high quality physicians, hospitals, and/or

treatment options are unlikely to create such problems.

Question 2. You mention innovative projects by Pitney Bowes and Union Carbide,

which incentivize physicians to improve their efficiency and/or encourage beneficiaries to utilize physicians with more efficient practice patterns. Could you discuss

cost reductions and improved patient satisfaction that result from such initiatives?

If those benefits are realized, why has this practice not been incorporated into other

privately sponsored insurance programs? Do you see any impediments in generalizing such practices?

Answer 2. These two employers captured a reduction in total per capita health

care costs of roughly 17 and 9 percentage points, respectively. Employee satisfaction

was not measured, but both employers described the impact on employee relations

as low to zero. This practice has not spread because very few employers or insurers

have enough claims experience with an individual physician to quantify and compare his/her total longitudinal cost efficiency and quality of care with other physicians in the same specialty and location. Giving self-insured employers, unions, and

insurers access to the beneficiary—deidentified full CMS claims data base would remove this barrier and allow all health plans to recognize and reward better performing physicians and specific hospital service lines.

Question 3. Your mention methods for quantifying efficiency and quality for hospitals, physicians and major treatment options as ‘‘already developed’’ or within capability of American health services researchers to further define. Is there a consensus on these measures within the health care community? What, if any, is the role

of the federal government in this regard?

Answer 3. There is not yet national consensus on how to quantify all of these parameters, although much progress has been made by the National Quality Forum

(NQF) and others in quantifying hospital quality and hospital patient safety. The

Federal Government should contract with (a) one or more of AHRQ’s Evidence-based

Practice Centers (EPCs) to develop standardized performance measures (cost-efficiency and quality) for treatment options; (b) JCAHO in partnership with one or

more AHRQ EPCs to develop a full set of hospital quality measures; (c) NCQA to

accelerate its effort to develop cost-efficiency and efficiency measures for hospital

service lines, individual physicians, and physician groups; and (d) with the NQF to

endorse current measures and others after they are developed via activities (a)–(c).

Completion deadlines should not exceed 2 years for (a)–(c) and 1 subsequent year

for (d).

Question 4. Among the changes required to capture efficiency, you describe sharing of efficiency and quality ratings of physicians, hospitals and major treatment options among private and public health plans. What, if any, are the impediments in

sharing of data among health plans? Are there privacy and patient confidentiality

concerns?

Answer 4. I recommend sharing the full Medicare claims database with private

sector health benefit plan sponsors and letting them combine it with their own databases in order to compute such ratings. There are no patient confidentiality concerns as long as individual beneficiary identifiers in CMS databases are encrypted

and all other beneficiary privacy protections provided for under HIPAA and the Privacy Act are strictly applied to the CMS database before CMS shares it with private

sector health plans. Subject to these same protections, private sector plans could

share their claims data with each other. However, they are understandably reluctant to do so because they fear that it would reveal, and thereby cause them to lose,

their advantaged pricing with some providers. In a few communities, trusted intermediaries are serving the data aggregation and analysis roles.

Question 5. You suggest that CMS should share Medicare data about performance

of providers, i.e. efficiency and quality ratings, of physicians and hospitals with

health plans and insurance companies. Do you have concerns about accuracy and

validity of data based on billing codes and captured by personnel not trained for the

purpose of quality related data? How sensitive and specific are such data in distinguishing providers of varying quality? Is there a potential for abuse of such data?

Answer 5. I suggested that CMS share its claims data rather than rate and share

provider performance. Claims data provided to CMS and insurers are too inaccurate

and incomplete to support highly precise comparisons among hospitals and physicians. CMS could fix this problem by adopting more full and exacting billing data

requirements as exemplified by recent recommendations of the Quality Work Group

of the National Committee on Vital and Health Statistics. In the meantime, existing
73

1Katherine Levit et al., ‘‘Health Spending Rebound Continues in 2002,’’ Health Affairs,

23(1):147–159, January/February 2004. 2 U.S. Census Bureau, Health Insurance Coverage in the United States: 2002, September 2003. 3Washington HealthBeat, Affordable Care Second Behind Economy as Voter Concern, January

14, 2004.

billing data will support less precise performance comparisons that are far superior

to assessing doctors and hospitals based on their unit prices and publicly advertised

quality of care assertions.

Question 6. Dr. Milstein, should insurance companies have greater flexibility to

offer incentives and disincentives for people to modify their behavior—for instance,

to encourage people to take better care of themselves and control over their own

health?

Answer 6. Yes, I believe that insurers should be given substantial flexibility to

incentivize enrollees’ participation in behavioral health risk reduction programs.

Based on considerations of equity, insurers should be encouraged to gear the size

of any negative incentives to the enrollee’s income level, as is already done by several large self-insured employers in order to avoid economic coercion of low-income

enrollees.

Question 7. One of the off-cited concerns with consumer-driven healthcare is that

high-deductible insurance plans ‘‘would lead to a major increase in the number of

underinsured individuals.’’ This idea of uunderinsurance suggests that there is some

broadly agreed-upon level of insurance to which everyone should aspire. However,

if someone wants to buy a high-deductible policy to protect themselves against catastrophic injuries or illnesses, and then save the difference between the cost of a

high-deductible policy versus the cost of ‘‘Cadillac coverage,’’ why shouldn’t they

have that choice?

Answer 7. Like car insurance, consumers should have freedom to select varying

levels of insurance. Since sicker consumers tend to select plans with better coverage,

such freedom should be linked with rules for transferring income between insurance

pools based on differences between pools in the health risk of their enrollees. Otherwise, this freedom would lead to concentrating the sickest consumers in insurance

pools with unaffordable premiums.

PREPARED STATEMENT OF KAREN DAVIS

Thank you, Mr. Chairman, for this invitation to testify today on what’s driving

up health care costs and the rising numbers of uninsured. The recent announcement

that national health expenditures jumped 9.3 percent in 2002, the fastest increase

in a decade, is indeed troubling.1 Even more so is the 9.5 percent jump in the number of uninsured Americans between 2000 and 2002, from 39.8 million to 43.6 million.2

Rising health care costs are a problem for all Americans, but they weigh especially heavily on uninsured and ‘‘underinsured’’ individuals, who pay much of the

cost of health care directly out-of-pocket. Insured workers also feel the brunt, as employers are increasingly passing costs onto them in the form of higher deductibles,

greater cost-sharing, and larger shares of employee premiums. Strife over health insurance is once again provoking employer-employee confrontations and eroding business and worker productivity.

Increased costs to patients also lead to underuse of appropriate care and greater

financial burdens on the sickest. The direct financial impact on working Americans

is undoubtedly one of the contributors to recent poll results showing that the affordability of health care is second among the public’s concerns, after the economy and

jobs.3 And, of course, since 46 percent of all health expenditures come from government health programs such as Medicare and Medicaid, as well as those run by the

Veterans Administration, the Department of Defense, and others, rising costs also

mean increased government budgetary outlays. State fiscal pressures that are leading to cutbacks in Medicaid and the State Children’s Health Insurance Program

(SCHIP) are particularly troubling.

What we all want from our health care system is not necessarily cheaper care,

but the efficient use of resources to provide high-quality care to all Americans. We

can no longer afford or tolerate wasteful spending on care that does not benefit patients, the duplication of expensive procedures, medical errors, or the high administrative costs incurred by the Nation’s insurers and providers. Real solutions should

directly target these sources of unacceptably high costs, not simply shift costs from

employers to workers or from government to beneficiaries of public programs. Promising long-run solutions include: rewarding health care providers that achieve de-
74

4The Kaiser Family Foundation and Health Research and Educational Trust, Employer

Health Benefits, 2003, 2003. 5 U.S. Census Bureau, Income in the United States: 2002, September 2003. 6 Jon Gabel et al., ‘‘Health Benefits in 2003: Premiums Reach Thirteen-Year High as Employers Adopt New Forms of Cost Sharing,’’ Health Affairs, 22(5):117–126, September/October 2003. 7 Bradley C. Strunk and Paul B. Ginsburg, Tracking Health Care Costs: Trends Slow in First

Half of 2003, Data Bulletin No. 26, Center on Health System Change, December 2003. 8Dinah Wisenberg Brin, ‘‘U.S. Health Insurers Seen Posting Solid Earnings as Costs Moderate, Wall Street Journal Online, January 15, 2004 6:59 pm EST; Paula L. Stepankowsky, ‘‘Aetna Pres Reiterates At Least 15% ‘04 Profit Growth View,’’ Wall Street Journal Online, January 14, 2004, 7:57 am. EST; Business Wire, Inc., ‘‘HMO Profits Jump 60% in First Quarter 2003,

According to Weiss; More than 80% of Companies Profitable,’’ January 20, 2004; Associated

Press State and Local Wire, ‘‘Blue Cross Profits among Country’s Fastest Rising in Early 2003,’’

January 22, 2004; Glenn Singer, ‘‘HMO Profits Get Healthy Bounce in ’03; Medical Costs Didn’t

Rise as High as Projected, Which Has Helped Boost Bottom Lines,’’ South Florida Sun-Sentinel,

December 30, 2003. 9Katherine Levit et al., ‘‘Health Spending Rebound Continues in 2002,’’ Health Affairs,

23(1):147–159, January/February 2004. 10The Commonwealth Fund 2001 Health Insurance Survey.

monstrably better quality and efficiency, improving high-cost patient care management, reducing medical errors, improving care coordination, and simplifying unnecessarily complex or duplicative insurance practices.

Most fundamentally, we must act as a Nation to achieve automatic and affordable

health insurance for all, to ensure that the benefits of modern medicine are accessible, and to ensure that investment in health care contributes to economic growth

and a healthier, more productive society.

Rising Health Insurance Premiums: Out of Reach for Many Americans

After 3 years of double-digit increases, health insurance premiums for employersponsored coverage have reached truly staggering levels. In 2003, the average premium was $9,068 for a family policy and $3,383 for an individual worker.4 Employees paid $2,412 directly for family coverage annually—more than $200 per month—

and $508 annually for single coverage. Some economists argue, furthermore, that

the employer share is shifted backward onto workers in the form of lower wages;

even if this is only partially the case, the cost to workers is considerably greater.

When employers do not sponsor coverage, insurance premiums in the individual

market for comparable coverage is even more expensive—when it is available at all.

Half of American families make less than $50,000 per year; 5 few of them could afford more than $10,000 a year in health insurance premiums on their own.

The 13.9 percent increase in health insurance premiums in 2003 attracted particular attention.6 Premiums would have been even higher if employee deductibles

and other forms of cost-sharing had not increased, effectively reducing the comprehensiveness of coverage for the insured. At the same time, insurance spending

for medical services—benefits—per enrollee are not increasing at double-digit rates.

In fact, health spending per enrollee in the first half of 2003 increased 8.5 percent.7

Although many insurance companies are reporting record profits,8 the divergence

between premiums and underlying cost trends is probably a temporary phenomenon. In the underwriting cycle, premiums typically rise more slowly than costs when

costs are accelerating and faster than costs when costs start decelerating. Market

forces are likely to bring premiums more in line with costs in future years, but the

issue warrants watching, especially given the consolidation within the insurance industry in recent years and the accompanying increase in insurers’ market power.

Certainly, expenditures under the Medicare program, while also accelerating, are

not matching the rise in private insurance premiums. Medicare outlays per enrollee

for comparable benefits increased 6.2 percent over the 1999–2002 period, compared

with 8.7 percent in private health insurance and 10.7 percent in the Federal Employees Health Benefits Program (excluding benefits not covered by Medicare or private insurance, such as prescription drugs, home health, and skilled nursing facility

services).9 It will be important, however, to monitor the effect of additional funds

provided to Medicare managed care plans in recent legislation on future insurance

company profits and total Medicare outlays.

The most serious consequences of rising health care premiums, particularly the

rise in premiums paid directly by employees, is that some low-wage workers decline

health insurance coverage even when it is offered by employers, while those with

insurance are forced to forgo needed care because of high deductibles. Over one-fifth

of uninsured workers—3.5 million people—are eligible for employer health insurance coverage but fail to take it up, largely because of the high cost of their share

of the premium.10 Low-wage workers are particularly apt to decline coverage when
75

11 Analysis of 2000 Medical Expenditure Panel Survey by Sherry Glied and Douglas Gould of

Columbia University for The Commonwealth Fund. 12The Commonwealth Fund 2001 Health Insurance Survey. 13The Commonwealth Fund 2001 Health Insurance Survey. 14Stephen Heffler et al., ‘‘Health Spending Projections for 2002–2012,’’ Health Affairs web exclusive, February 7, 2003. 15Medicare Payment Advisory Commission, Report to the Congress: Medicare Payment Policy,

March 2003. 16Marie C. Reed and Paul B. Ginsburg, Behind the Times: Physician Income, 1995–1998, Center for Studying Health System Change, Data Bulletin No. 24, March 2003.

eligible. Seventeen percent of workers making less than $10 an hour declined coverage, compared with 8 percent of those making $15 an hour or more.11

Higher deductibles also contribute to underinsurance. They cause the low-income

insured to forgo needed medical care or create crippling medical bill problems. Over

half of the uninsured and nearly one-third of low-income insured individuals reported problems paying medical bills in 2001.12 In addition, more than half of the

uninsured and over one-fourth of low-income insured individuals reported problems

obtaining needed care.13 With the marked rise in patient cost-sharing in the last

3 years, these problems are undoubtedly more severe today.

Trends in Health Care Costs

The important question is why health care expenditures are rising at such a rapid

rate. In 2002, the Nation spent $1.6 trillion for health care, or 14.9 percent of gross

domestic product (GDP). This is a major jump from 13.3 percent of GDP in 2000,

due to accelerating health care costs as well as relatively weak nominal GDP

growth. By 2012, health spending is projected to more than double.14

Health spending is a combination of increases in prices of individual services, increased numbers of services, or a shift in the composition of services toward more

specialized, higher-cost services. In the mid-1990s, prices went up at a slower rate,

reflecting to some extent moderation in economy-wide inflation but also reflecting

discounted prices under managed care and budget cuts in Medicare and Medicaid.

But since 1998, prices of services have been accelerating somewhat as providers decline to take sharply discounted managed care provider payment fees.

But most importantly, since the mid-1990s the quantity of services consumed has

been increasing. This may reflect new technology and, to some degree, an aging population. However, it could also reflect some ‘‘provider-induced’’ demand—for example, as physicians attempt to generate additional income by providing more services,

working longer hours, or ordering more tests. Some recent data for the Medicare

program point to sharp increases in the provision of specialized services, such as

pacemaker insertion.15 This may be an attempt by physicians to gain back some of

the reduction in physicians’ real income that occurred in the late 1990s.16

Hospital spending is now the leading source of overall health services expenditure

growth. In 2002, hospital costs accounted for more than one-third of overall spending growth, physician expenditures for one-fifth, and prescription drugs for onesixth. As a result of rapid increases, the hospital share of total national expenditures has grown. Again, this may be an attempt by hospitals to recover from sharply

discounted managed care fees and Medicare hospital savings in the mid- to late

1990s. For example, hospital costs grew annually at 8.8 percent in the late 1980s

and early 1990s, and slowed to 3.5 to 4 percent from 1993 to 2000. But during 2000

to 2002, hospital costs again grew 8 to 10 percent annually, suggesting that the

slowdown in the mid-1990s was not sustainable given the rising wages of hospital

employees and the costs of supplies, including prescription drugs, purchased by hospitals. Some of the increase is clearly attributable to technological advances that improve health or maintain functioning and are highly valued by society.

Prescription drug spending has ‘‘moderated’’ somewhat, climbing at a 15.3 percent

rate in 2002, down from 17.1 percent between 1997 and 2000. Drug prices are increasing at about 5 percent a year, with the remainder of the spending growth reflecting either a rise in the number of prescriptions or a shift toward more costly

medications. While forecasts by the Centers for Medicare and Medicaid Services

(CMS) suggest that prescription drug spending will slow to 10 percent between 2003

and 2011, much will depend on industry’s response to the new prescription drug legislation. This is an area that merits close monitoring.

Finally, it is shocking that administrative expenses are now the fastest-growing

component of national health expenditures. In 2002, the Nation spent $105 billion

on private insurance and public administrative expenses, up 16.2 percent from
76

17Katherine Levit et al., ‘‘Health Spending Rebound Continues in 2002,’’ Health Affairs, 23(1):147159, January/February 2004. 18 ‘‘David E. Rosenbaum, ‘‘The Nation: Do Some Pay Too Little for Health Care?’’ The New

York Times, October 26, 2003. ‘‘As we’ve moved away from managed care as a cost-control device, we have no choice but to move to higher deductibles and co-pays,’’ [quoting John F.

Holahan, Urban Institute]; ‘‘Jonathan Gruber [MIT] . . . argues that to limit overuse of health

care, people should have to pay enough of the cost out-of-pocket that it pinches.’’ 19Katherine Levit et al., ‘‘Health Spending Rebound Continues in 2002,’’ Health Affairs, 23(1):147–159, January/February 2004. 20Sally Trude, Patient Cost Sharing: How Much is Too Much? Center for Studying Health

System Change, December 2003. 21S. Maxwell et al., Growth in Medicare and Out-of-Pocket Spending: Impact on Vulnerable

Beneficiaries, The Commonwealth Fund, December 2000. 22 New York Times, ‘‘Patches for the Drug Program,’’ p. 14, January 25, 2004. 23K. N. Lohr et al., ‘‘Use of Medical Care in the RAND HIE,’’ Medical Care 24, supplement

9 (1986):81–87.

2001.17 Over the last 5 years, increases in administrative costs have consistently

outpaced increases in total health expenditures. Private insurance administrative

costs are particularly high—12.8 percent of total private insurance outlays, compared with 4.9 percent for public programs and only 3.0 percent for Medicare. This

does not include administrative costs within physician offices, clinics, or hospitals,

where administrative costs have been rising due to ever more complex and fragmented insurance arrangements.

Is Consumer-Driven Health Care the Answer?

Given the public backlash against managed care, it has become fashionable to

suggest that increasing patient cost-sharing is the best, or even the ‘‘only,’’ private

sector strategy remaining to slow health care costs.18 But Americans spend far more

out-of-pocket for health care than the citizens of any other industrialized nation,

and all of these nations have lower health care spending per capita. In 2002, Americans spent $213 billion out-of-pocket, up from $147 billion in 1993 and $25 billion

in 1970.19 Despite improvements in benefits covered over time, rising health care

costs and growing numbers of uninsured have kept patient out-of-pocket costs relatively constant as a percent of GDP, from 2.4 percent in 1970, to 2.2 percent in

1993, to 2.0 percent in 2002.

Increasing patient cost-sharing has well-known adverse consequences. First of all,

it contributes to excessive financial burdens, particularly on lower-income and sicker

patients. A recent study found that a $1,000 deductible, for example, would cause

one third of all Americans to spend more than 10 percent of their income on health

care if they were hospitalized.20 A $2,500 deductible would cause two-thirds of all

Americans to spend more than 10 percent of their income if hospitalized. Rates are

far higher, of course, for those at the lowest end of the income scale. People with

the potential for such high out-of-pocket costs in the event of serious illness are considered to be underinsured. No one could seriously advocate making one-third or

two-thirds of Americans underinsured in the name of creating ‘‘cost-conscious con- sumers.’’ Even Medicare leaves many beneficiaries facing high out-of-pocket costs. The elderly as a whole spent 22 percent of their income on health care in 2000 from a

combination of Part B premiums, Medigap premiums, cost-sharing for covered services, and uncovered services (including prescription drugs).21 That proportion is projected to rise to 30 percent by 2025. While the new Medicare prescription drug legislation will assist many Medicare beneficiaries, there are gaps in benefits and beneficiary premiums that rise markedly over time.22 For low-income Medicare beneficiaries or for those with serious health problems, the risk of severe financial hardship remains considerable.

An extensive literature documents that cost-sharing is a blunt instrument for reducing utilization of services. It reduces both those effective services that are already underutilized as well as services that are ‘‘supply-sensitive.’’ The RAND

Health Insurance Experiment, for example, found that low-income children facing

cost-sharing had half the probability of receiving highly effective care for acute conditions that are appropriate and necessary compared with low-income children not

facing cost-sharing. For low-income adults, these rates were similar. But even higher-income children and adults with cost-sharing had a lower probability of receiving

effective medical care than comparable children and adults not faced with no costsharing.23

While the RAND study took place in the late 1970s, more recent studies confirm

the effect of cost-sharing on receipt of essential care. A Canadian study found that

cost-sharing for prescription drugs reduced use of both essential and less essential

drugs, increased the risk of adverse events, and increased visits to the emergency
77

24 R. Tamblyn et al., ‘‘Adverse Events Associated with Prescription Drug Cost-Sharing Among

Poor and Elderly Persons,’’ Journal of the American Medical Association 285:421–429, 2001. 25 Haiden A. Huskamp et al., ‘‘The Effect of Incentive-Based Formularies on Prescription-Drug

Utilization and Spending,’’ The New England Journal of Medicine 349(23):2224–2232, December

4, 2003. 26Karen Davis and Barbara Cooper, American Health Care: Why So Costly? The Commonwealth Fund, June 2003. 27Gerard Anderson et al., ‘‘It’s the Prices, Stupid: Why the United States is So Different from

Other Countries,’’ Health Affairs, 89–105, May/June 2003. 28 Anderson et al., Multinational Comparisons of Health Systems Data, 2002, The Commonwealth Fund, October 2002. 29 Cathy Schoen et al., ‘‘Health Insurance Markets and Income Inequality: Findings from an

International Health Policy Survey,’’ Health Policy 52(2):67–85, March 2000.

department.24 A recent U.S. study found much the same effect in an employer plan

switching from a one-tier formulary to a three-tier formulary with increased enrollee

copayments for medications.25 Those facing increased copayments under all three

tiers had a 16 percent decline in filling prescriptions for ACE inhibitors and a 21

percent decline in filling prescriptions for statins, compared with 6 percent and 11

percent for those experiencing no change in copayments.

What Alternatives Exist for Achieving Economies in Health Care?

Looking at the experience of other countries suggests that it is certainly possible

to spend less on health care while achieving comparable or better health outcomes.

The major reason U.S. health care costs are higher is not that other countries ration

care; in fact, the U.S. has fewer hospital days per capita than other countries and

about the same number of physician visits.26 Rather, the reason is that costs are

higher in this country because we pay higher prices for the same services, our administrative costs are higher, and Americans receive far more specialized services,

such as MRls and invasive heart procedures.27

While the U.S. health system is the most costly, it is striking how similar the rate

of increase in real health spending has been across countries in the last decade.

Real spending per capita in the U.S. rose by 3.2 percent per year in the 1990s, compared with 3.1 percent for all OECD industrialized countries.28 This finding suggests that trends may be more a reflection of technological change, or rising labor

and other supply costs, than specific government policies.

Despite the U.S. reliance on managed care—which most view as successful in

achieving at least ‘‘one-time’’ savings—other countries using alternative strategies

had much the same experience. Spending growth per capita in New Zealand, for example, was 2.9 percent, perhaps owing to such policies as aggressive negotiation for

lower drug prices and a long-standing system of no-fault medical malpractice. In response to general economic difficulties, Canada curbed Federal health spending

markedly in the mid-1990s and experienced 1.8 percent annual increases in real

health spending per capita. However, public backlash at the closure of hospital beds

and reduced accessibility of services led to investment of new resources in Canadian

health care in recent years. The United Kingdom had higher spending growth (3.7

percent annually in the 1990s), as a result of policy commitments to increasing the

resources devoted to health care.

One of the lessons from the international experience is that health care is highly

valued by the public, and government efforts to restrain spending often meet with

opposition from the public as well as providers. In each country, public dissatisfaction with the health system seems to be particularly sensitive to policies that increase patient out-of-pocket costs or visibly reduce accessibility to health care services.29 This suggests that greater success may be achieved over the long run by designing targeted policies that focus on administrative costs, duplication and waste,

medical errors, or care that is both better for patients and lowers cost.

If the U.S. were more willing to use the power of government to negotiate prices

for medical services and prescription drugs, it could probably achieve considerably

lower prices. However, we seem committed to a pluralistic system of many different

private insurers and public programs, each attempting to get the best deal it can

on its own, rather than a concerted effort to purchase services collectively or allpayer rate-setting. Other countries also are more willing to use supply constraints—

for example, limiting the number of physicians of different types who are permitted

to practice—and to use salaried payment systems for specialists, which eliminate incentives to provide unnecessary services to generate income.

An alternative that may be feasible for the U.S. is to be more proactive about assessing when individual services are necessary and rewarding health care providers

that provide the ‘‘right care’’ efficiently. For example, clinical criteria for the use of

imaging tests such as MRIs and specialized procedures or specialist referrals could
78

30L. T. Kohn, J. M. Corrigan, and M.S. Donaldson, eds., To Err is Human: Building a Safer

Health System, Washington, DC: National Academies Press, 1999. 31 C. Zhan and M. R. Miller, ‘‘Excess Length of Stay, Charges, and Mortality Attributable to

Medical Injuries During Hospitalization,’’ Journal of the American Medical Association, October

8, 2003:18681874. 32 A. A. Gwande et al., ‘‘Risk Factors in Retained Instruments and Sponges After Surgery,’’ New England Journal of Medicine 348: 229–235, 2003. 33David W. Bates et al., ‘‘Effect of Computerized Physician Order Entry and a Team Intervention on Prevention of Serious Medication Errors,’’ Journal of the American Medical Association

280 (15):1311–1316, October 21, 1998. 34Matthew H. Samore, ‘‘Surveillance of Medical Device-related Hazards and Adverse Events

in Hospitalized Patients,’’ Journal of the American Medical Association, 292(3):325–334, January

21, 2004. 35 Robert Blendon et al., ‘‘Common Concerns Amid Diverse Systems: Health Care Experiences

in Five Countries,’’ Health Affairs (May/June 2003):106–121.

be developed and payment restricted to those instances in which the best available

scientific evidence suggests the care will be effective.

Modern information technology also shows promise, in cutting administrative expenses, reducing medical errors, prompting physicians to order tests or services only

when clinically warranted, and making it easier to retrieve clinical information so

that tests do not have to be repeated. Better information systems would also make

it possible to assess provider performance in order to identify physicians, hospitals,

and other providers that provide either superior quality care or greater efficiency,

or preferably both. Best practices could then be disseminated widely, encouraging

others to achieve the same levels of performance or tailoring financing incentives

to reward best practices.

Reducing Medical Errors and Improving Care Coordination

It has been almost 5 years since the Institute of Medicine released its study To

Err Is Human and sounded the alarm about the seriousness of medical errors.30

Yet, our Nation is far from broadly instituting procedures that are known to protect

patients, reduce deaths, eliminate complications and costly hospital stays, and, in

so doing, reduce health care costs.

A recent study of 18 patient safety indicators identified by the Agency for

Healthcare Research and Quality (AHRQ) found that these medical errors account

for 2.4 million extra hospital days, $9.3 billion of excess charges, and nearly 33,000

deaths.31 When foreign objects are left in the patient after surgery, patients need

repeat surgery, recover less quickly, and spend more time in the hospital.32

Information technology (IT) shows particular promise for reducing medical errors.

One study found that the rate of nonintercepted, serious medication errors at one

hospital fell by 55 percent with a physician computer order entry system.33 The net

savings for the hospital were estimated at between $5 to $10 million a year. And,

of course, this does not measure the ‘‘savings’’ for the patients, which are not only

desired but also yield economic benefits through increased productivity (e.g., fewer

missed work days). Computer-based surveillance of adverse medical device events

also shows promise.34

All providers should be encouraged to establish systems that reduce errors,

whether they are computer-based or techniques such as bar coding. Government can

facilitate these efforts through sharing in the costs of IT systems, promulgating IT

standards, and requiring error reporting.

Private-sector efforts can also assist. For example, The Commonwealth Fund has

provided support for the development, dissemination, and use of tools to help hospitals self-assess whether safe medication practices are in place. The Institute for

Healthcare Improvement runs a Breakthrough Series that has demonstrated success, through a technique known as medication reconciliation, in reducing adverse

drug events occurring when patients are discharged from the hospital and resume

taking prior medications along with those given to them at the hospital. Yet, only

a limited number of U.S. institutions have been trained in these techniques.

The U.S. is particularly at risk because of our more complex health system. U.S.

patients take more medications and see more physicians, thus creating more opportunities for mistakes to occur. The 2002 Commonwealth Fund International Health

Policy Survey of Sicker Adults found that 18 percent of U.S. adults with health

problems reported experiencing a medical error that caused serious problems in the

past 2 years, compared with 9 percent of U.K. patients and 15 percent of Canadians.35

The complexity of our health system not only leads to medical errors but leads

to problems with coordinating care across health care providers. According to the

survey, one-fifth of sick adults in the U.S. had a time in the past 2 years when they
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36 Robert Blendon et al., ‘‘Common Concerns Amid Diverse Systems: Health Care Experiences

in Five Countries,’’ Health Affairs (May/June 2003):106–121. 37 Elizabeth McGlynn et al., ‘‘The Quality of Health Care Delivered to Adults in the United

States,’’ The New England Journal of Medicine (June 26, 2003):2635–2645. 38Stephen F. Jencks, Edwin D. Huff, and Timothy Cuerdon, ‘‘Change in the Quality of Care

Delivered to Medicare Beneficiaries, 1998–1999 to 2000–2001,’’ Journal of the American Medical

Association (January 2003) 289: 305–312. 39 Elliott S. Fisher et al., ‘‘The Implications of Regional Variations in Medicare Spending. Part

1: The Content, Quality, and Accessibility of Care,’’ Annals of Internal Medicine (February 2003)

138: 273–287. 40Srephen Grossbart, Ph.D., Director, Healthcare Informatics, Premier, Inc., ‘‘The Business

Case for Safety and Quality: What Can Our Databases Tell Us,’’ 5th Annual NPSF Patient Safety Congress, March 15, 2003. 41 A. C. Monheit, ‘‘Persistence in Health Expenditures in the Short Run: Prevalence and Consequences,’’ Medical Care 41, supplement 7:1153–1164, 2003.

were sent for duplicate tests by different health professionals.36 One of four sicker

adults reported that medical records or test results did not reach their doctor’s office

in time for appointments. When records are not available, patients may need to

come back another time, wasting both patient and physician time. Information technology could improve efficiency by making records easily accessible when they are

needed, reducing the need to repeat tests, and making sure that information is in

the hands of providers at the time it is needed.

Paying for Performance: Quality and Efficiency

Poor quality extends beyond medical errors to include failing to provide patients

with care that could benefit them or overuse of services without therapeutic benefit.

A study by the RAND Corporation this year underscored concerns that clinicians

are failing to provide many patients with the most clinically appropriate care.37

Only 55 percent of Americans received recommended care. The results held for preventive care, care for acute conditions, and care for chronic conditions. For example,

pneumonia patients received recommended care only 39 percent of the time, and hip

fracture patients only 23 percent of the time.

Overuse of services is clearly an area where quality could be improved and costs

reduced. But rarely is a specific procedure never appropriate; rather, procedures are

appropriate under some circumstances and not others. Unlike several other countries, the U.S. does not have a Federal agency charged with developing and approving clinical guidelines based on the latest scientific evidence that govern when a

particular procedure should be used. AHRQ has a National Guidelines Clearinghouse with professionally developed guidelines, but the agency no longer develops

or recommends guidelines. Without such an effort, progress in reducing overuse is

likely to be slow.

Just how variable current practice is has been underscored by several recent studies. An analysis of Medicare quality-of-care indicators by State shows widespread

differences.38 A team of investigators at Dartmouth College has found wide variations in Medicare costs per beneficiary and in the use of ‘‘supply-sensitive’’ services

across hospital service areas.39 But particularly interesting are new analyses that

show wide variation in both quality and efficiency. For example, within the Premier

network of hospitals, outcomes for coronary artery bypass graft vary five-fold and

costs vary by three-fold. There is no systematic relationship between cost and quality.40 Rewarding those hospitals that achieve high quality and low cost would be a

spur to others to emulate best practices and would lead to improved care for all.

Better Management of High-Cost Patients

Health care costs are heavily concentrated in the sickest patients. Ten percent of

people account for 69 percent of health care outlays.41 In recognition of this fact,

private managed care plans are beginning to concentrate their care management efforts on either those patients who are most costly or those who are predicted to be

most costly in the future. Through predictive modeling techniques, plans can identify which patients are most likely to be on a trajectory toward high costs. For example, Partners HealthCare System in Boston identifies patients who make increasing use of emergency rooms and uses call banks of nurses to find out if patients

are adhering to their medications and to screen for such problems as depression.

Kaiser-Permanente health system goes beyond simple disease management; it tailors its monitoring practices differently for those patients who are at a stage where

they can manage their condition on their own than for those requiring substantial

assistance.

Many of these techniques require services and personnel not typically reimbursed

by public programs such as Medicare or private insurers. Researchers at the University of Pennsylvania, for example, have documented that using advanced practice
80

42M. D. Naylor, ‘‘Making the Business Case for the APN Care Model,’’ report to The Commonwealth Fund, October 2003; estimated charges by Mark Pauly. 43 Institute of Medicine, Fostering Rapid Advances in Health Care. The National Academies

Press, November 2002. 44Pamela Farley Short et al., Churn, Churn, Churn: How Instability of Health Insurance

Shapes America’s Uninsured, The Commonwealth Fund, November 2003. 45Pamela Farley Short et al., Churn, Churn, Churn: How Instability of Health Insurance

Shapes America’s Uninsured, The Commonwealth Fund, November 2003. 46Karen Davis et al., Room for Improvement: Patients Report on the Quality of Their Health

Care. The Commonwealth Fund, April 2002, and Karen Davis, et al. Mirror, Mirror on the Wall:

The Quality of American Health Care. The Commonwealth Fund, forthcoming. 47K. Davis, C. Schoen, and S. Schoenbaum, ‘‘A 2020 Vision for American Health Care.’’ Archives of Internal Medicine, Vol. 160, No. 22: 3357–62.

nurses to follow patients with congestive heart failure home from the hospital can

be effective in reducing re-hospitalization and in lowering annual per capita expenditures—in this case, from $9,600 to $6,200 per patient.42 The Commonwealth Fund

is supporting an evaluation of an Aetna demonstration in the Philadelphia area to

test this concept more broadly.

Another approach is ‘‘telemonitoring’’ patients who make intensive use of emergency rooms or hospital care. A pilot test of a handheld computer called the Asthma

Buddy at New York City’s Coney Island Hospital found that having children who

are heavy users of emergency room services key their peak flow rate into the device

and answer questions about their condition daily is successful in markedly reducing

ER use and inpatient hospitalization. Again, The Commonwealth Fund is supporting an evaluation of a randomized controlled trial of this approach in five New York

City public hospitals.

These strategies show great promise in markedly reducing costs for the most costly patients. However, to become widespread, public programs such as Medicare and

Medicaid, as well as private insurers, will need to be more willing to cover the costs

of non-physician personnel and supplies required for these high-cost care management programs.

Improving Administrative Efficiency

In addition to improving care management, using modern information technology

to reduce the cost of administrative expenses should be a high priority for the future. When medical records are available electronically, fewer clerks are needed to

file and retrieve medical records. Pharmacists need to make fewer calls to physicians to clarify prescriptions.

The Institute of Medicine committee on which I served recommended an electronic

insurance clearinghouse be established at the State level.43 If all insurance companies and public programs such as Medicare and Medicaid were to pool enrollee information in a single database, providers could easily verify insurance coverage

through one system. Doing so could eliminate much of the cost incurred when people

change insurance coverage.44 It could eliminate much of the difficulty of conducting

outreach to enroll eligible people in public programs by making it possible, for example, to cross-check lists from tax records against insurance coverage. It would also

be an effective mechanism for electronic claims submission. Other ideas that would

eliminate wasteful duplication of effort include a single database for provider certification and verification of physician licenses.

We have a very fragmented health insurance system that produces enormous

churning in health insurance coverage. Over a 4-year period, 85 million people are

uninsured. Two million people lose or change coverage every month.45 The cost of

enrolling and disenrolling and re-enrolling people contributes to the high administrative cost of the U.S. health system. Each insurer has its own approach to handling enrollment and claims payment. It also has its own rules for payment of providers, adding to the administrative costs of physician practices and hospitals. Reducing wasted resources on these administrative costs could be accomplished

through statewide efforts to coordinate and pool administrative information.

Conclusion

If we have the world’s costliest health system yet still fail to provide everyone

with access to care—and fall far short of providing the safe, high-quality care that

it is possible to provide—the conclusion that there is room for improvement is inescapable.46 Only by facing this fact squarely and putting into action the best ideas

and experiences across the U.S. and around world can we achieve a vision of American health care that includes: automatic and affordable health insurance for all, accessible health care, patient-responsive care, information- and science-based care,

and commitment to quality improvement.47
81

48Gautam Naik, ‘‘England Plans Major Revamp of Health Care,’’ The Wall Street Journal, December 3, 2003. 49Stephen C. Schoenbaum, Anne-Marie Audet, and Karen Davis, ‘‘Obtaining Greater Value

from Health Care: The Roles of the U.S. Government,’’ Health Affairs, November/December

2003. 50 Vittorio Maio, Neil Goldfarb, Chureen Carter, and David Nash, Value-Based Purchasing: A

Review of the Literature. The Commonwealth Fund, May 2003 and Neil Goldfarb, Vittorio Mario,

Chureen Carter, Laura Pizzi and David Nash, How Does Quality Enter Into Health Care Purchasing Decisions? The Commonwealth Fund, May 2003.

If we are to achieve a truly high-performance health system, bold action is required. The following steps would start us on this course:

• Public reporting of cost and quality data on physicians, hospitals, nursing homes, other health care providers, and health plans. The CMS has been

a leader in posting nursing home quality data on its website, but this is just a modest beginning. The new Medicare prescription drug legislation also spurs reporting

by hospitals of a limited set of quality-of-care indicators. If we are serious about

doing better, we need to know where we stand, routinely collecting comprehensive

quality measures across a broad range of providers.

• Investment in health information technology. Other countries are quickly

surpassing the U.S. in the adoption of electronic medical records and electronic prescribing.48 They are doing so because the government has been willing to invest in

the infrastructure and establish the standards required to make this potential a reality.

• Development and promulgation of clinical guidelines and quality standards. It is long past time to simply pay for services rendered without establishing

a scientific basis for effectiveness, not just for new drugs but for consultations, procedures, and tests. This could be accomplished through establishment of a new National Institute on Clinical Excellence and Effectiveness.49

• Paying for performance. Medicare and private insurers tend not to vary payment rates with quality. They pay for defects, whether those defects are surgeries

that need to be repeated; infections that arise from failing to use state-of-the-art

technology, such as catheters impregnated with antibiotics for heart valve patients;

or medication errors. CMS has embarked on some modest initiatives to begin testing

pay-for-performance rewards. Medicare can and should be a leader in promoting

quality. These efforts need to be substantially expanded and best practices documented and disseminated. Medicare’s leadership can be instrumental in moving private payers as well; to date, very few private insurers have instituted ‘‘value-based

purchasing’’ strategies.50

• Investment in research. We urgently need to gather evidence on what works

to improve care, eliminate waste and ineffective care, and promote greater efficiency, including use of modern information technology, team work, and improved

care processes. Any industry that fails to invest in research to improve quality and

efficiency is going to be a backward industry. The Federal Government pays $505

billion for health care but devotes only $300 million to the AHRQ budget to learning

effective ways to improve performance of the U.S. health system. The report on U.S.

health care quality recently issued by AHRQ is an important starting point. But it

needs to be followed with an investment in research up to the task of ensuring that

this Nation has a high-performing health system worthy of the 21st century.

• Statewide electronic insurance clearinghouses. It is important to move toward greater efficiency in the administration of our fragmented, complex system of

health insurance coverage. Ultimately, solutions that would simplify eligibility for

public programs and improve the stability of health insurance coverage are needed

to cut the administrative cost in our system. Movement toward electronic administration of insurance can also achieve important savings. One particularly promising

initiative would be testing statewide electronic insurance clearinghouses to pool together information on insurance eligibility.

• Automatic and affordable health insurance for all. Employers, Federal

and State governments, and individuals must all share responsibility for achieving

automatic and affordable health insurance for all. The most realistic strategy is a

combination of group insurance options including: employer coverage for those who

are working; a Congressional Health Plan, modeled on the Federal Employees

Health Benefits Program, for small businesses and individuals; an expansion of

SCHIP to low-income families and individuals with incomes below 150 percent of

poverty; and an option for uninsured, older adults and disabled adults to obtain

early Medicare coverage (e.g., by eliminating the 2-year waiting period for the disabled, covering spouses of Medicare beneficiaries, and permitting uninsured older
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51Karen Davis and Cathy Schoen, ‘‘Creating Consensus on Coverage Choices,’’ Health Affairs

(April 23, 2003); Sara Collins, Karen Davis, and Jeanne Lambrew, Health Care Reform Returns

to the National Agenda, The Commonwealth Fund, January 2004. 52 Institute of Medicine, Insuring America’s Health: Principles and Recommendations, The National Academies Press, January 2004.

adults to ‘‘buy in’’ to the program).51 Premium assistance based on income is required to make premiums affordable for all enrollees. Mechanisms to ensure that

everyone is automatically enrolled in one of these four group options would help millions of Americans who currently fall through the cracks of coverage. Action is imperative; continued paralysis is exacting an unacceptable toll. The Institute of Medicine has estimated that 18,000 deaths of adults ages 25 to 64 occur each year as

a direct result of being uninsured. Moreover, the Institute of Medicine estimates the

lost economic benefit at $65 billion to $130 billion a year.52

Thank you very much for the opportunity to join this panel. I look forward to

learning from my fellow panelists and answering any questions.

EXECUTIVE SUMMARY

National health expenditures rose 9.3 percent in 2002, the fastest increase in a

decade. Even more troubling was the 9.5 percent jump in the numbers of uninsured

between 2000 and 2002, from 39.8 million to 43.6 million. Rising health care costs

are a problem for all Americans, but they weigh especially heavily on uninsured and

‘‘underinsured’’ individuals, who pay much of the cost of their health care directly

out-of-pocket. Higher costs to patients lead to underuse of appropriate care and

greater financial burdens on the sickest.

We can no longer afford or tolerate wasteful spending on care that does not benefit patients, the duplication of expensive procedures, medical errors, or the high administrative costs incurred by the Nation’s insurers and providers. Real solutions

should directly target these sources of unacceptably high costs, not simply shift costs

from employers to workers or from government to the beneficiaries of public programs. Promising long-run solutions include: rewarding health care providers that

achieve demonstrably better quality and efficiency, improving high-cost patient care

management, reducing medical errors, improving care coordination, and simplifying

unnecessarily complex or duplicative insurance practices. Most fundamentally, we

must act to achieve automatic and affordable health insurance for all, to ensure that

the benefits of modern medicine are widely accessible, and to ensure that investment in health care contributes to economic growth and a healthier, more productive society.

• Health insurance premiums increased 13.9 percent in 2003, faster than the 8.5

percent growth in health care costs. Market forces are likely to bring premiums

more in line with costs in future years, but the issue warrants watching.

• Health care expenditures in 2002 were $1.6 trillion, or 14.9 percent of the gross

domestic product. The U.S. has the highest health care spending of any country, yet

we are the only major industrialized Nation not to provide health insurance coverage for all.

• Medicare outlays per enrollee continue to grow more slowly than private insurance, averaging 6.2 percent over the 1999–2002 period, compared with 8.7 percent

in private health insurance.

• Hospital spending is now the leading source of health care services expenditure

growth. While some of the increase is undoubtedly attributable to technological advances that improve health, some is a catch-up from the unsustainably low rates

of increase in the mid-1990s.

• Administrative expenses are now the fastest-rising component of national

health expenditures. In 2002, the Nation spent $105 billion on private insurance

and public administrative expenses, up 16.2 percent from 2001. Private insurance

administrative costs are particularly high–12.8 percent of total private insurance

outlays, compared with 3.0 percent for Medicare.

Consumer-driven health care, the major private-sector strategy for addressing rising costs, is unlikely to address the fundamental causes of rising health care costs.

In fact, it is likely to have adverse consequences for patients.

• Consumer-driven health care contributes to excessive financial burdens on patients, particularly lower-income and sicker patients. If all Americans had a $1,000

deductible plan, one-third would spend more than 10 percent of their income on

health care if they were hospitalized, with even higher rates at the lowest end of

the income scale. High deductibles would lead to a major increase in the number

of underinsured individuals.
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• Patient costs are already unacceptably high. Indeed, they are a major reason

why public opinion polls show that the affordability of health care is Americans’ second-leading concern.

• Patient cost-sharing is a blunt instrument for reducing utilization of services.

It reduces use of effective services that are already underutilized. Studies have documented that drug-tiering and higher copayments are leading patients to skip filling

essential prescriptions, increasing adverse medical events, and raising emergency

room use.

There are better alternatives for achieving economies in health care than shifting

costs to patients. Costs are higher in the U.S. than in other countries because we

pay higher prices for the same services; our administrative costs are higher; and

physicians prescribe specialized services that are not clinically justified. If we as a

Nation were to adopt fundamental reforms—such as an integrated public-private

strategy to purchase health services efficiently, demand quality performance, and

streamline administrative costs—substantial savings could be achieved.

Short of fundamental reforms, practical steps that could be taken in the near

term include:

• Reducing medical errors and improving care coordination. A major investment in health information technology, with shared public-private funding, is

needed to accelerate the adoption of life-saving and efficiency-enhancing technology.

• Public reporting of cost and quality data. Costs incurred over an episode

of care and quality vary enormously from hospital to hospital, physician to physician, and area to area. If we are serious about doing better, we need to know where

we stand. Much more extensive efforts are required to achieve comprehensive public

reporting of cost and quality data on physicians, hospitals, nursing homes, other

health care providers, and health plans.

• Paying for provider performance on quality and efficiency. Medicare

needs to become a leader in ‘‘pay for performance’’ payment methods. While the

demonstrations under way are important, Medicare needs to move much more

quickly to reward those providers who are both high-quality and low-cost over the

course of a patient’s treatment. Doing so would spur the development of information

about best practices and provide guidance to private insurers looking for effective

ways to promote high-performance care.

• Development and promulgation of clinical guidelines and quality standards. Public programs and private insurers would benefit from a Federal agency

charged with establishing the scientific basis for effectiveness not just of new drugs

but of specialty consultations, procedures, and tests. A national institute on clinical

excellence and effectiveness has shown results in other countries and is a model we

should adopt. We also need a substantial investment in research and demonstrations, far in excess of resources currently devoted to the Agency for Healthcare Research and Quality.

• Better management of high-cost patients. Public programs and private insurance need to be willing to pay for services of non-physician personnel that are

needed for high-cost care management, such as advanced practice nurses, pharmacist medication monitoring, and home ‘‘telemonitoring’’ of conditions such as

asthma and congestive heart failure.

• Improved administrative efficiency. The U.S. has an extraordinarily complex and fragmented system of health insurance. Ultimately, solutions that would

simplify eligibility for insurance and improve the stability of health insurance coverage are needed to cut the administrative costs in our system. Testing statewide

electronic insurance clearinghouses to pool insurance eligibility and, potentially,

claims payment in a single place should be a priority.

• Automatic and affordable health insurance for all. Employers, Federal

and State governments, and individuals must all share responsibility for achieving

automatic and affordable health insurance for all. The most realistic strategy is a

combination of group insurance options including: employer coverage for those who

are working; a new Congressional Health Plan, modeled on the Federal Employees

Health Benefits Program, for small businesses and individuals; an expansion of the

State Children’s Health Insurance Program to low-income families and individuals

with incomes below 150 percent of poverty; and an option for uninsured older adults

and disabled adults to obtain early coverage under Medicare (e.g., by eliminating

the 2-year waiting period for the disabled, covering spouses of Medicare beneficiaries, and permitting older adults to ‘‘buy in’’ to Medicare). Premium assistance

based on income is required to make premiums affordable for all enrollees.

Together, these steps would take us a long way toward ensuring that this country

has a high-performing health system worthy of the 21st century.
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PREPARED STATEMENT OF CHRISTOPHER J. CONOVER, PH.D.

Mr. Chairman and Members of the Committee: How big a role does health services regulation play in explaining the extraordinarily high level of health costs in

the U.S.? And how many uninsured might be covered were we to somehow find a

way to reduce this regulatory burden? My brief remarks will provide some tentative
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1See Figure 1 Supporting Documentation for details of these calculations.

2 Charles E. Phelps. Health Economics, 2nd edition. Addison-Wesley Publishing Co. 1997: 539. 3Tables 1, 2 and 3 summarize all the topics that were included in our literature syntheses

for health facilities, health professionals and health insurance respectively. An advisory panel

of 20 national experts has provided guidance on the scope and content of this literature synthesis. We are confident that no major domain of health services regulation has been excluded.

However, it might also be noted that our cost estimates do not include the costs imposed on

health providers from continual changes in public payment policies. 4 In many cases, the national dollar impact of a particular form of regulation never has been

estimated per se, e.g., State certificate of need regulation of hospitals and nursing homes. In

these cases, we synthesized the literature on the percent change in health costs associated with

that form of regulated and then calculated the aggregate national impact by applying these estimated effects to aggregate health expenditure estimates for the States that still maintain such

regulations. In some cases, our estimates also included mortality gains and losses reported in

the literature. In these cases, we monetized such losses using conventional assumptions about

the willingness-to-pay value of a human life. We used a standard value of a statistical life that

amounted to $4.4 million for our average estimates, with $1.6 million and $6.6 million as lower

and upper bounds. See Mrozek, James R. and Laura O. Taylor. ‘‘What Determines the Value

of Life? A Meta-Analysis.’’ Journal of Policy Analysis and Management 21, No. 2 (Spring 2002):

253-270 for a detailed justification of these values. 5Most recent estimates of the price elasticity of demand for health insurance lie in the ¥.4

to ¥.6 range (Sherry Glied, Dahlia K. Remler and Joshua Zivin, ‘‘Inside the Sausage Factory:

Improving Estimates of the Effects of Health Insurance Expansion Proposals.’’ Milbank Quarterly 80, No. 4 (2002): 611). Assuming an average overhead cost no higher than 15 percent, a

6.4 percent increase in health spending attributable to health industry compliance costs would

be associated with a 5.4 percent increase in health insurance premiums, so applying the lower

bound elasticity estimate yields a 2.2 percent reduction in demand for coverage. Leaving aside

the non-elderly now covered by Medicare, Medicaid and military benefits, there are more than

answers to both questions based on the preliminary results of more than 2 years

of research conducted in part under contract to the Department of Health and

Human Services.

There are two ways to answer the first question. First, we looked at the costs of

regulation in other industries such as airlines, railroads, telecommunications and

other sectors that have long been studied and calculate the percent of gross economic activity in those industries that is attributable to regulatory costs. By applying these percentages to the health sector, we arrive at very rough back-of-the-envelope estimates of upper and lower bounds on the plausible magnitude of the burden.

As shown in Fig. 1, this so-called ‘‘top down’’ approach suggests that in 2002, health regulation could have imposed an annual cost of at least $28 billion to as much as

$657 billion. (See Figure 1).1

A 30-fold difference between the minimum and maximum cost estimate is no more

gratifying to me as a researcher than it is to you as policymakers. Moreover, it is

easily possible that the regulatory burden in healthcare is even higher than a simple extrapolation from other industries might suggest. According to University of

Rochester health economist Charles Phelps, ‘‘the U.S. healthcare system, while

among the most ‘‘market oriented’’ in the industrialized world, remains the most intensively regulated sector of the U.S. economy.’’ 2

So we also answered this question using a much more fine-grained ‘‘bottoms up’’ approach. We examined the literature for nearly 50 different kinds of Federal and

State health services regulations, including regulation of health facilities, health

professionals, health insurance, pharmaceuticals and medical devices and the medical tort system. These various regulations covered the gamut from mandated health

benefits to State certificate of need requirements for hospitals and nursing homes.3

We systematically tallied both the benefits and costs associated with such regulations 4 and found that the expected costs of regulation in health care amounted to nearly $335 billion in 2002. As shown at the bottom of Fig. 2, our estimate of benefits was about $207 billion, leaving a net cost of $128 billion. Three areas account

for the lion’s share of this net burden: the medical tort system, including litigation costs, court expenses and defensive medicine, totals $81 billion, FDA regulation

adds another $42 billion, and health facilities regulation adds $29 billion. Thus, the

States and Federal Government both have roles to play in finding ways to trim regulatory excess.

How does this relate to the uninsured? Our ‘‘bottoms up’’ look allowed us to determine that the net cost of regulation borne by the health industry itself is 6.4 percent, meaning that health expenditures (and health insurance premiums) are at

least that much higher than they would be absent regulation. Based on consensus

estimates about the impact of higher prices on how many would likely drop health

insurance, this increased cost implies a 2.2 percent reduction in the demand for coverage. This translates into nearly 5 million uninsured whose plight might be attributed to excess regulatory costs.5
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215 million adults and children in the private market for private health insurance: a 2.2 percent

reduction in demand translates into 4.8 million uninsured. Using upper bound estimates of the

net impact of health regulation (9.8 percent) and price elasticity (¥.6) would imply that 10.7

million could be uninsured due to health regulation. 6 Jack Hadley and John Holahan. ‘‘How Much Medical Care Do the Uninsured Use and Who

Pays for It?’’ Health Affairs Web Exclusives, January–June 2003. February 12, 2003: W3-66. 7 Jack Hadley and John Holahan. ‘‘Covering the Uninsured: How Much Would it Cost?’’ Health

Affairs Web Exclusives, January–June 2003. June 4, 2003: W3-250-265.

But of course, there’s a different way to look at this burden as well. In light of

the $35 billion in subsidized care already being provided to uninsured patients, 6 researchers have recently estimated that it would cost only $34 to $69 billion in added

health spending to cover the all of the Nation’s uninsured.7 In light of these figures,

the potential opportunity costs of this regulatory burden become very clear: the average estimates from both our ‘‘top down’’ and ‘‘bottoms up’’ look at this problem

suggests we could cover this cost several times over. Admittedly, our estimates are

still preliminary and we now are engaged in a process of careful review of them.

But it seems unlikely that the adjustments yet to come would alter this central conclusion: the net burden of health services regulation likely exceeds the annual cost

of covering all 44 million uninsured. So a legitimate policy question is whether the

benefits of regulation outweigh the benefits of coverage for all Americans. For example, in the context of the IOM finding that 18,000 uninsured die every year due to

lack of coverage, is maintaining our current regime of health regulation worth letting that continue?

This is not a question for me to answer, but I hope you will consider it seriously

as you wrestle with one of the most challenging health policy issues now on the national agenda. Thank you for your time.
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CENTER FOR HEALTH POLICY, LAW AND MANAGEMENT,

DURHAM, NC 27708–0253,

March 8, 2004.

Hon. JUDD GREGG,

Chairman,

Committee on Health, Education, Labor and Pensions,

U.S. Senate,

Washington, DC 20510–6300.

DEAR SENATOR GREGG: I am writing in response to your letter of February 10 regarding my testimony on January 28.

Question 1. We have a recurring debate in the Senate about the cost impact of

various legislative proposals on health care premiums, and the degree to which such

increases drive up the number of uninsured. Often times, we get estimates from 1

percent (mental health parity) to 5 percent (PBOR). Some assert that such increases

are ‘‘modest’’—adding up to the cost of only a few extra big Macs per person per

month—and that such a cost can easily be borne by the system. However, you conclude that excess regulatory costs can account for nearly 5 million uninsured. In

your research, did you develop an assumption for how many people become uninsured for each 1 percent increase in premiums?

Answer 1. We sought to explain this in footnote 5 of my testimony, but I would

like to correct an inadvertent error regarding the number of non-elderly with private coverage. The corrected footnote should read as follows: Most recent estimates

of the price elasticity of demand for health insurance lie in the ¥.4 to ¥.6 range

(Sherry Glied, Dahlia K. Remler and Joshua Zivin, ‘‘Inside the Sausage Factory: Improving Estimates of the Effects of Health Insurance Expansion Proposals.’’ Milbank

Quarterly 80, No. 4 (2002): 611). Assuming an average overhead cost no higher than

15 percent, a 6.4 percent increase in health spending attributable to health industry

compliance costs would be associated with a 5.4 percent increase in health insurance

premiums, so applying the lower bound elasticity estimate yields a 2.2 percent reduction in demand for coverage. There are 185 million adults and children currently

covered by private health insurance (Mills, Robert, and Shailesh Bhandari. 2003.

Health Insurance Coverage in the United States: 2002, U.S. Census Bureau. U.S.

Government Printing Office, Washington, DC). A 2.2 percent reduction in demand

translates into 4.0 million uninsured. Using upper bound estimates of the net impact of health regulation (9.8 percent) and price elasticity (¥.6) would imply that

9.2 million could be uninsured due to health regulation.

Our figures imply that for each 1 percent increase in private health insurance

premiums, there would be a 0.4 percent reduction in demand for private coverage,

which at current levels of private coverage implies 740,000 newly uninsured.

There are several differences between our estimates and those used by CBO that

are worth noting: • Our estimates affect medical expenditures (and hence health insurance premiums) across the board; in contrast, Federal mental health parity and PBOR proposals would apply only to group health plans (leaving out 16 million non-elderly

with individual coverage) and in some cases exempt small employers (20 or fewer

in some bills, 50 or fewer in others), exclusions that may leave out as much as 30

percent of private sector employer-based coverage; see Jennifer Bowen, Jeanne De

Sa and Stuart Hagen memorandum ‘‘Estimate of S. 543, the Mental Health Equitable Treatment Act’’ July 12, 2002). Moreover, CBO always takes into account

States that may have already enacted similar mandates or protections as their purpose is to calculate the net effect of a change in Federal law. For all these reasons,

the base of persons having coverage from which demand reductions are calculated

is generally smaller in the CBO estimates than in ours.

• CBO assumes that 40 percent of premium increases would be effectively absorbed by employers and passed back to employees in the form of lower compensation; they assume the remaining 60 percent would be offset by changes in profits,

by purchasers switching to less expensive plans, by cutting back on benefits or dropping coverage (see CBO, Congressional Budget Office Cost Estimate: S. 1052 Bipartisan Patients’ Bill of Rights Act (as passed by the Senate on June 29, 2001), July

20, 2001). For all these reasons, the net amount of each 1 percent premium increase

that is actually left over to influence demand for coverage is much smaller than ours

(i.e., we take into account the full 1 percent).

The CBO approach makes sense when analyzing mandates that provide some sort

of benefit at an additional cost since employees (and their employers who are presumed to reflect their preferences) presumably are willing to pay something for an

additional benefit even if it is not the full cost. However, in our case, we had already

netted out any benefits from regulation, so the residual $128 billion in costs should
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more appropriately be viewed as the equivalent of an excise tax. As Dr. Holtz-Eakin

has testified recently: ‘‘Clearly, an increase in premiums having nothing to do with

the quality of the insurance benefit (a tax on premiums, for example) would lead

to a reduction in the number of people with health insurance since the price increase would lead some people to drop their coverage’’ (Statement of Douglas HoltzEakin, Director of Congressional Budget Office, The Uninsured and Rising Health

Insurance Premiums before the Subcommittee on Health Committee on Ways and

Means U.S. House of Representatives March 9, 2004). In short, any differences between CBO estimates and ours I believe are more apparent than real.

Question 2. You conclude that some regulation and litigation are beneficial. What

proportion of regulation is beneficial and how does this compare to the proportion

of litigation that is beneficial?

Answer 2. This is an excellent question, but difficult to answer, in part because

litigation permeates much of regulation of health facilities, health professionals and

health insurance. For example, enforcement of fraud and abuse statutes relies in

part on qui tam provisions that allow private parties to bring claims on behalf of

the government. What is labeled ‘‘Tort System’’ in Fig. 2 applies only to the medical

tort system, i.e., professional liability insurance for medical malpractice, associated

court costs and the companion costs of defensive medicine. It would be very difficult

to extract the equivalent legal costs from the other areas of health regulation shown

on that chart.

That said, one can observe that the ratio of benefits to costs for the medical tort

system is 28.6 percent whereas for all other health regulations, this ratio is 78.7

percent, but that might be viewed as an unfair comparison since defensive medicine

makes up roughly 60 percent of the overall costs of the medical tort system. So if

defensive medicine costs were ignored, the ratios would be much more similar. However, in our view, the behavioral response to the medical tort system is just as important a consideration in accurately assessing the effects of regulation as the behavioral response of taxpayers to changes in tax rates is to accurately assessing the

effects of tax policy. We believe it would be misleading to ignore these costs. That

said, our figures should not be viewed as implying that only 28.6 percent of litigation is beneficial, as some might misconstrue this to mean that only 1 in 4 medical

malpractice cases meets some benefit-cost threshold. It might be that 90 percent of

such cases have benefits exceeding their costs, but that in the remaining cases that

fail a simple benefit-cost test, the excess of costs over benefits is so enormous as

to produce a gross ratio (across all cases) of only $28.60 in benefits for each $100

of costs borne by society. The way in which we have compiled our estimates does

not allow us to answer the question of what fraction of malpractice cases have benefits exceeding their costs.

Question 3. In your research you clearly make some judgments about whether regulations are beneficial or not. How did you conduct this analysis? What criteria did

you use in making these judgments?

This too is an excellent question that is challenging to answer. With the caveat

that our findings are still preliminary, to date we have found that in the domain

of health facilities regulation, of the 16 types of regulation we studied, only 2 produced benefits that exceeded costs. Similarly, benefits exceeded costs for only 3 of

8 health professional regulations we studied and 7 of 19 areas of health insurance

regulation. This is not equivalent to saying that we believe 31 areas of health regulation should be discarded entirely since in at least some cases, it is possible that

regulatory reform could produce a better alignment of benefits with costs. The medical tort system is a good example of this. This system clearly produces some benefits, including compensation to patients and deterrence of medical errors. However,

if there were a way to achieve the same or greater benefits less expensively—whether this be through caps on damages, alternative dispute resolution—this would be

an improvement over the status quo.

It was not the purpose of our study to make recommendations on specific regulatory reforms to be pursued, either in medical torts or any other domain of health

regulation. Instead, we were trying to provide something that has never been

achieved previously: a ‘‘big picture’’ view of the overall impact of health services regulation with the intent of identifying areas where regulation might be excessive. For

each of the areas so identified, one would have to rely on further study or experts

in that domain to sort through the best approach to reform. My guess is that only

in some of these cases would experts judge that we should dispense entirely with

regulation.

I would like to take the opportunity of addressing two other points that came up

in the January 28 hearing.
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Question 4. What is the cost of care at the end of life?

Answer 4. The best estimates of this come from a 10 year old study by Emanuel

and Emanuel implying that roughly 12.2 percent of all health expenditures occur

in the last year of life (see Emanuel, Ezekiel., and Linda L. Emanuel. 1994. The

economics of dying: the illusion of cost savings at the end of life. New England Journal of Medicine 330, no. 540). The authors estimate that if all Americans who died

executed an advance directive, chose hospice care, and refused aggressive, in-hospital interventions at the end of life, their end of life expenditures would drop by

27 percent, producing maximum potential savings equal to 3.3 percent of health

spending. The authors made clear this was a best possible case estimate and they

themselves were not claiming it was achievable, both because it would cost something to educate/persuade all Americans to execute advance directives, because for

a variety of reasons these advanced directives are not always followed and because

not every American would opt for either hospice care or refuse aggressive interventions in any case. So while a promising area of savings, it seems unlikely this alone

could be relied upon to finance universal coverage.

Question 5. Does prevention save money?

Answer 5. I enjoyed Senator Harkin’s eloquent brief on the merits of preventive

care and healthier lifestyles. There is no question that if Americans were healthier

we could save a lot of money, but conversely, if they lived longer, we would spend

more, so determining whether prevention actually saves money on balance is

trickier than it may seem. In a superlative book written by nearly 20 years ago, a

Brookings Institution researcher, Louise Russell showed that ‘‘preventive measures

are not as simple as often depicted—while many do improve health, they are not

without risk or cost, and in fact rarely reduce medical expenditures’’ (Is Prevention

Better Than Cure? Washington, DC: Brookings Institution 1986). She reviewed a

variety of preventive health services, ranging from vaccinations (who often do save

medical costs), to screening for various diseases, to changes in lifestyle. While nearly

2 decades old, I believe her results instructive and would not change appreciably

were she to replicate the analysis today. The bottom line is that prevention generally offers the prospect of achieving gains in life expectancy or other improvements in health at a very low cost per added year of life and typically prevention

can be justified on grounds that it represents good value for the money. But to expect prevention to be self-financing through medical cost savings may be unrealistic

and I would hope that the fate of the uninsured does not rest on such savings having to materialize.

I would like to thank you again for the opportunity to testify and the chance to

provide this further information for the record. Your committee faces a daunting

task and I look forward to seeing how things develop. If you have any further questions, please feel free to contact me (919) 684–8026 or e-mail

conoverc@hpolicy.duke.edu.

Best wishes,

CHRISTOPHER J. CONOVER, PH.D.,

Assistant Research Professor of Public Policy Studies,

Terry Sanford Institute of Public Policy,

Director, Health Policy Certificate Program,

Senior Fellow, Health Inequalities Program.

PREPARED STATEMENT OF GAIL R. WILENSKY, PH.D.

Mr. Chairman and Members of the Committee: Thank you for inviting me to appear before you. My name is Gail Wilensky. I am a senior fellow at Project HOPE,

an international health education foundation. I am also a former Administrator of

the Health Care Financing Administration, now called CMS and a former chair of

the Medicare Payment Advisory Commission, MedPAC. My testimony today reflects

my personal views as an economist and a health policy analyst and should not be

regarded as representing the views of Project HOPE.

My testimony focuses on the uninsured, the relationship between increased

healthcare spending and the decline in the number of the insured and the major

factors that are driving increases in healthcare spending. These are large and complex issues and my coverage of them will be in the nature of an overview of what

is known about them rather than in depth treatment of any one of them.

The Problem

The numbers of the uninsured, the characteristics of the uninsured and the duration without insurance coverage has been well documented by the Census Bureau
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and the Congressional Budget Office, as well as in other government reports. The

number of uninsured has increased in the Census reports of each of the last 2 years,

and according to the Census CPS report now stands at 43 million or approximately

15 percent of the population. While the precise number of uninsured depends on the

particular survey being referenced and the duration of time being considered, it is

important to note that the number of uninsured reported for 2002 is very similar

to the number and percent of the population reported uninsured in 1997, a period

of robust economic growth. This suggests that the uninsured should be considered

a chronic problem rather than an acute issue, one that will become somewhat worse

in periods of slow economic growth and slightly better following periods of robust

economic growth. What should be equally clear is that to substantially reduce the

number of uninsured will require an explicit change in policy. Several of the major

policy choices will be summarized at the end of my testimony.

However, before considering the policy options available to reduce the number of

uninsured, it is important to understand what has been behind the decline in insurance coverage. Even though, the persistence of a substantial uninsured population

should be regarded as a chronic problem, it is a chronic problem that has grown

somewhat worse over the last quarter century. In 1977, when the first of the National Medical Care Expenditure Surveys (now called the Medical Expenditure

Panel Survey or MEPS) was conducted, the number of uninsured was under 13 percent of the population and it is now slightly greater than 15 percent of the population. Had the State Children’s Health Insurance Program (SCHIP) not been enacted in 1997, the percentage increase would have been greater since it has been

able to compensate for some of the loss in private coverage.

This leads to the question as to why the percentage of people covered by private

health insurance has been declining and what, if anything can, can be done to try

and mitigate the decline. Two factors are cited most frequently. The first is the

change in the structure of the economy and the move towards jobs that are part

time, in small firms and/or are part of the service sector. These structural changes

in the economy are all known to be associated with a lower likelihood of employersponsored insurance. The second reason is the increasing cost of healthcare and

more specifically, the fact that healthcare spending has been increasing faster than

personal income. While both reasons contribute to the decline in insurance coverage,

several studies including those by Lewin and Associates and by Kronick and Gilmer,

find the largest factor is the increase in healthcare spending.

Is Increased Health Care Spending A Problem?

It has long been observed that the United States spends more on healthcare than

any other developed country, both in absolute terms and as a share of our Gross

Domestic Product. Over the last 50 years, healthcare spending in the U.S. has

grown in real terms per person at a rate of about 4 percent per year while the GDP

has grown at a real rate of about 1.5 percent per person. A notable exception to that

trend occurred in the middle 1990’s, when healthcare spending grew at a rate of

about 2 percent per year, half of the historical rate. Whether there is more to be

learned about how to sustain periods of lower growth without inciting the type of

public backlash that occurred against the managed care industry in the late 1990’s

will be an important exercise for future health policy analysts.

This country seems to have had mixed views about whether the long term spending growth should be regarded as a problem. During some periods of our history,

substantial time has been spent bemoaning the increased rates of spending, particularly when compared to other countries but as of late, this attitude in at least some

quarters seems to have changed. Some are now saying that we can afford to spend

a significant portion of the increased growth in the economy on healthcare if we

choose to do so. Technically this is obviously true but it will also mean that we will

have less of our economic growth to spend on other things. Rather than focus on

the literal sustainability of our healthcare spending rate, the more important question is whether people feel that they are getting increased value for their spendingin either the quantity or quality of their life—or whether more is being spent because of unintended cost drivers in the way healthcare is financed or delivered.

Even if we conclude that we are truly getting value for the increase spending on

healthcare, as some analysts have done and therefore should be less concerned

about increased spending, it is clear that the increased spending will make it more

difficult to reduce the number of the uninsured. It also means that if we can find

ways to slow the rate of growth in spending, it will be less costly to cover the uninsured and that the rate of increase in the uninsured should decline.
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Drivers of Increased Health Care Spending

There are a variety of drivers of healthcare costs, each of which is briefly described in the section that follows plus one over-arching factor that exacerbates the

problems associated with the other factors. The most important specific drivers of

healthcare are advances in medical technology, medical liability, medical errors and

patient safety, life styles that drive up healthcare spending and a reimbursement

system that encourages inefficiency and fails to reward quality.

The over-arching factor that exacerbates all of these specific factors is the dominance of employer-sponsored insurance, a dominance that has occurred because of

the vagaries of history concerning the tax treatment of employer-paid premiums. As

is well known by all of you, the rise of employer-sponsored insurance can be traced

to the decisions of employers during WWII to provide their employees with insurance as a way to circumvent the then existing wage and price controls. A ruling by

the IRS a decade later that such fringe benefits did not constitute taxable income

has led to the present dominance of employer-sponsored insurance. As a result of

the IRS ruling, payments of health insurance premiums by employers do not count

as taxable income for their employees and are not subject to Federal or State income

tax or to Federal payroll taxes. This treatment of income is referred to as the ‘‘tax

exclusion’’ of employer-paid health insurance and its implications are also discussed

below.

Medical Technology

New medical technologies and other medical advances have long been considered

as a major driver of increased healthcare spending, particularly when viewed over

the long-term. While some estimates have placed the increase due to technology as

high as 50 percent, it is important to note that the effect of technology is frequently

measured as a residual, after accounting for population and population aging, general inflation and medical specific inflation, changes in insurance coverage and other

factors rather than measuring its effects directly. Nonetheless, it is clear that increasing medical capability has been a major factor in explaining the increase in

healthcare spending.

An important question to consider, however, is why medical technologies rarely

decline in price over time the way they do in other industries and also whether the

adoption of new technologies in healthcare is subject to the same types of economic

calculus that occurs elsewhere in the economy. In other sectors, new technology is

adopted if it can provide a service better and cheaper or better but more expensive

and with the payer willing to pay for the improved service. In healthcare, new technologies are frequently adopted as long as there is any improvement in the service

provided or the quality of life produced. Why that is the case is rather complicated

but reflects the financial incentives of the purchaser who is frequently not the end

payer, lack of good information about either the benefits or the costs of the technology, financial incentives to the provider of the service and the medical liability

system. It is not clear that advances in medical technology would have quite as

much an effect on healthcare spending if these other factors weren’t also present.

Medical Liability

Medical liability, which includes both medical malpractice and medical product liability, is another area that has long been thought to be associated with increased

healthcare spending although there is a lot of debate about how much of an increase

it causes. There are two types of increased spending that can occur because of medical liability. The first, which is easier to measure and probably the smaller of the

two, is the increases in healthcare spending associated with increases in medical

malpractice premiums. The second, which is likely to be both larger and more pervasive but very hard to measure, is the change in the practice of medicine driven by

malpractice concerns. Because physicians claim they feel more at risk for errors of

omission rather than errors of commission, assuming no adverse event associated

with the committed act, the liability system is believed to exacerbate the increases

in healthcare spending, particularly when combined with the current reimbursement system which pays more the more services the physician provides.

The debate about how to limit the increased spending associated with rising costs

of malpractice premiums as well as the practice of defensive medicine and yet compensate patients who have experienced avoidable medical errors is continuing at

both the Federal and State level. While there is some evidence that capping noneconomic awards is associated with smaller increases in malpractice premium increases, the strategy does not directly address the problems associated with the

practice of defensive medicine. There is some thought that the increased focus of institutional and individual providers on patient safety and medical error reduction

may not only provide direct benefits to patients in terms of improved care but also
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may help break the impasse in resolving issues of medical liability. Since the release

of the various volumes on patient safety and medical errors by the Institute of Medicine, increased attention has been focused on the costs of medical errors and the

need for system changes to improve both the quality of medical care and the quality

of patient safety. Experts in this area have also looked for ways to link effective patient mechanisms to strategies that would provide for timely and fair compensation

of avoidable error that results in injury. If such a way can be found, it would help

reduce the pressure on healthcare spending increases associated with both malpractice concerns and with the costs of correcting medical errors.

Lifestyle Issues

The lifestyle followed by many Americans is another driver of healthcare costs.

A significant amount of attention has been devoted to the costs of smoking on the

healthcare system as well as the costs to the economy from the increased absenteeism and decreased productivity associated with smoking. Only recently has it become clear that the increased costs from obesity may be even greater than those

from smoking. This is particularly problematic because of the increased incidence

of obesity across the entire age distribution, including the very young.

Reimbursement System

Finally, the reimbursement system used by most of the public and private payers

is a driver of healthcare costs in its own right and reinforces the effects of some

of the other cost-drivers described above. The primary type of reimbursement for

physicians as well as for many other providers in the healthcare system is fee-forservice. As has been well documented, fee for service reimbursement rewards physicians or other providers of care for providing more services, whether or not providing more services results in better care. Fee for service reimbursement coupled with

concerns about potential medical liability can be a powerful driver for providing

more services, whether or not better care is being provided.

Neither fee for service reimbursement nor the bundled payments used by Medicare for hospitals, home care or nursing homes pay differentially for quality or performance. Medicare has spent most of the last 2 decades focused on modifying the

DRG rate used for hospital reimbursement, the relative weights of the RBRVS system used for physician reimbursement, the calculations of home care episodes or on

redesigning the RUGS classification used for nursing home payment. However, none

of these systems reward better quality or performance, paying exactly the same for

‘‘best in class’’ and ‘‘worst in class’’. In fact, the current reimbursement system not

only doesn’t pay for quality, it pays more for defects since it pays for the initial service and then again for correcting any defect associated with the initial service.

Employer-Sponsored Health Insurance

Considering each of these various cost drivers, it is hardly surprising that

healthcare has been experiencing the increases in spending that it has. While attempting to deal with the causes or effects of any one of them would clearly be helpful, most of these problems are exacerbated by the current reliance on employersponsored health insurance, which as previously indicated is tied to the current tax

treatment of employer paid premiums.

There are several features associated with employer-sponsored insurance that

cause it to exacerbate the other health cost drivers in the system. First, the tax exclusion increases the share of an employee’s income that goes towards the purchase

of insurance since it allows employees to use pretax dollars for health insurance but

not for most other purchases including healthcare not covered by insurance. Second,

it encourages the myth that insurance premiums paid by employers comes out of

the employer’s profits rather than being part of the employees compensation package, at least on average. Both of these features result in the purchase of more insurance than is likely to occur if the individual believes he is spending his own money

and the expansion of insurance is, in turn, associated with increased spending on

healthcare. In addition to being a cost driver, employer-sponsored insurance may

not provide the employee with the type of insurance he would choose if the choice

were the employee’s rather than the employers.

In addition, the tax exclusion is an inequitable and costly way to subsidize the

purchase of insurance. It is inequitable way since the value of the exclusion is worth

more the higher the employee’s income and it is also very costly to the Federal Government. Current estimates are that the revenue losses for Federal tax exclusion

benefits in 2002 were almost $128 billion.

Most economists have advocated either eliminating the tax exclusion and substituting a refundable credit in its place or at least limiting the value of the tax

exclusion. This action has proven to be very unpopular politically, in large part because so much of the current insurance provided to the under-65 population is de-
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rived from tax-subsidized employed-sponsored insurance. However, the decline that

is occurring in voluntary, employer-sponsored insurance provides an opportunity to

develop an alternative source of subsidized insurance for the under-65 population.

Next Steps

There are a variety of actions that the Federal Government can take to help reduce some of the pressures on healthcare spending. Some of these actions may be

most effective if undertaken along with similar actions in the private sectors. Other

actions may require new legislation and can only be carried out by government.

Changing reimbursement so that performance and quality are rewarded is an activity that needs to occur in both the public and the private sector. The Federal Government can be helpful in jump-starting the use of innovative strategies through its

Research and Demonstration authority and ultimately will need to change its reimbursement strategies to reward quality and performance but the private sector is

likely to be much more nimble in terms of trying alternative strategies, discarding

those that don’t work and experimenting with those that work imperfectly. Assistance in providing better information on clinical and cost effectiveness of new medical procedures and therapeutics is an important role for government but this is another area that might be even more effective if done as part of a public/private partnership. State government and/or the Federal Government will need to take actions

that change the nature of the tort system. Finally, any changes in the tax treatment

of employer-sponsored insurance and any additional mechanisms that subsidize the

purchase of insurance out of the employer setting will require governmental action.

Strategies to Reduce the Number of Uninsured

A variety of proposals have been introduced over the past several years that either open up public programs to populations that have previously not been served

by a public program or that provides individuals with financial subsidies, outside

of the employer-sponsored arena.

The SCHIP program, itself an extension of Medicaid or Medicaid-like programs

to children above the income level covered by Medicaid, has been proposed for children above the current SCHIP income level and also for their families. Medicaid

buy-in programs have been proposed for working populations just above the Medicaid cut-off and proposals have also been made to allow a Medicare buy-in for uninsured individuals who are less than 65.

Refundable tax credits of various amounts and structures have been included in

legislative proposals in both Houses and in the Administration’s budget proposals.

The most recent State of the Union speech also included ‘‘above-the-line’’ deductibility of catastrophic health plans by individuals who don’t have employer-sponsored

insurance.

Periodically, proposals have also been made to use different types of mandates.

Some mandates have been on individuals, with subsidies for the low-income, and

some on employers, with subsidies for firms with few employees or low wage employees. A spin on the employer mandates has also been proposed periodically,

called ‘‘pay or play’’ where employers who don’t provide health insurance have to

pay into a fund.

Given the variety of problems associated with employer-sponsored insurance described earlier, particularly in a mobile society where most households have two

workers, adding on to employer-sponsored insurance seems to me to be a less desirable strategy. However, even those who would like to move away from employersponsored insurance need to do so carefully. Most workers and dependent of workers

under 65 are insured through employer-sponsored plan, and it will be important

how alternative policies are put in place so as to minimize the disruption to existing

coverage.

Some proposals are now being developed that attempt to tie together pieces of

these various strategies. In particular, proposals are combining expansions in public

programs with refundable tax credits and access to group insurance. These strategies may hold the basis for future political compromises. The debate will be about

who qualifies for which program, how much subsidy should they receive and how

should the subsidy be funded. Actions that can also help slow the cost of healthcare

will increase the likelihood that the numbers of uninsured will decline or at least

increase at a slower pace while these strategies to expand access to insurance are

being put in place.

Summary of Testimony

I. The uninsured is a chronic issue (not an acute one)

• Worse during economic decline; better with robust growth

• Secular decline in coverage over time

II. Two main reasons for decline in coverage
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• Changing economic structure

• Increased healthcare spending relative to growth in income

III. Increased spending—a problem?

• Not for economy, as long as increased spending has value

• Problem for the uninsured

IV. Drivers of healthcare spending

• Advances in medical technology

• Medical liability

• Lifestyle issues

• Current reimbursement system

• Employer-sponsored insurance and tax exclusion—In its own right and exacerbates other drivers

V. Next steps

• Pay for performance initiatives

• Better information on C/E of new technologies and therapeutics

• Meshing patient safety measures with tort changes

• Exploring alternative subsidies to the tax exclusion

VI. Strategies to reduce number of uninsured

• Expanding access to public programs

• Providing financing subsidies to individuals and access to group insurance

• Mandates, on individuals or employers

CBO RESPONSES TO QUESTIONS FROM THE SENATE HELP COMMITTEE

Question 1.You said that third-party insurance ‘‘drives a wedge between what the

consumer pays and the cost of what he uses’’ and this is one of the major factors

contributing to the growth in health care spending. Can you please elaborate on

this . . . and do you have any ideas for reforms that would eliminate this so-called

wedge? Is it possible to remove this wedge and still maintain a role for third-party

insurance?

Answer 1. Health insurance protects the individual from uncertain and potentially

high medical costs by spreading the risk of these costs across a large pool of people.

In offering this protection, however, health insurance gives rise to the possibility

that the total level of health spending is higher than it would be if the consumers

faced the full cost of theircare.

In most purchasing decisions, individuals bear the full cost of what they consume.

Enjoying more goods or higher-quality goods means paying more for them, and a

consumer will decide not to buy an item if the perceived value is less than the cost.

The market for medical care services differs in that consumers (those with health

insurance, at least) sometimes face no added cost for additional services or more intensive services. From the patient’s perspective—as well as the physician’s—there

may be little reason to economize, and as a result, resource-intensive services may

be provided even if their benefits are very small.

An expensive diagnostic test, for example, might be ordered even if there is a low

probability that it will furnish useful clinical information. Faced with having to pay,

an individual might choose to forego such a low-value service; facing no cost at all,

he would likely opt for it. The cost of such services is borne collectively by all those

who contribute premiums to the risk pool.

Two broad approaches are used to address overuse of medical care services. In

traditional fee-for-service plans, deductibles and copayments help avoid overuse by

making patients responsible for a portion of costs, creating some incentive to limit

low-value spending. High-deductible policies offer protection from large losses—a

principal motivation for purchasing insurance—while maintaining the consumer’s

incentive to economize on non-catastrophic expenditures. But while greater costsharing offers stronger cost-saving incentives, it also reduces the risk spreading advantage to the individual. An alternative approach focuses on the behavior of medical care providers rather than consumers. ‘‘Managed care’’ combines the functions

of insurance services with those of medical care delivery, encouraging providers to

direct resources away from services whose value is likely to be low relative to cost.

Approaches like disease management or case management, when taking into account the cost of services, can provide better information and compliance with appropriate treatments.

Question 2. You stated that the relationship between premiums and coverage is

‘‘not necessarily a simple one.’’ Is it fair to say there is a relationship and that, although we may not know the magnitude, there is a cause and effect relationship

between increased premiums and decreased coverage?
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Answer 2. In discussing the effect of premium increases on coverage, it is important to distinguish among different causes of such increases. While it is clear that

an increase in premiums having nothing to do with the quality of the plan (a premium tax, for example) would lead to a reduction in the number of insured, the continuing increase in premiums over recent decades has been largely due to the advancing capabilities of modern medicine. Premium increases therefore have reflected, at least in part, changes in the product itself, leaving the effect of premiums

on decisions to purchase coverage less clearcut. Other factors such as increased costsharing, expansions in public coverage, and demographic changes further complicate

interpretation of the drop in coverage.

CBO has not performed an analysis specifically designed to identify root causes

of the drop in health insurance coverage. On balance, however, simple evidence appears to suggest that increases in premiums have led to reductions in insurance coverage. From 1988 to 2001, the proportion of insured nonelderly Americans fell by

more than 2 percentage points. A larger drop—more than 4 percentage points—was

seen in the proportion covered by employer-based insurance. The bulk of the decrease occurred in the earlier years of this period, coinciding with a period of steep

increases in real (inflation-adjusted) premiums. As annual growth in premiums

slowed in the mid 1990s, so too did the drop in percentage of covered workers.

Question 3. You stated that ‘‘defensive medicine’’ and ‘‘physician-induced demand’’

don’t explain much of the recent growth in spending. One can infer from this that

these practices do, in fact, make up some proportion of national health care spending. Do you know what proportion of the 1.6 trillion spent on health care in 2002

can be attributed to defensive medicine?

Answer 3. CBO currently has no estimate of the proportion of total healthcare expenditures attributable to defensive medicine. Existing estimates rely on conjectural

surveys of medical providers, and what is considered defensive medicine by one may

be deemed prudent medicine by another.

In the absence of a reliable estimate on the level of spending attributable to defensive medicine, however, it may be possible to estimate changes in medical spending resulting from new State laws affecting malpractice litigation (e.g., caps on noneconomic and punitive damages), which might be interpreted as changes in the

amount of defensive medicine being practiced. For selected disease categories, analysts have estimated reductions in spending possibly attributable to various reforms

in State malpractice laws. In these analyses, reductions in spending that did not

measurably affect health outcomes are considered to represent reductions in defensive medicine. One study estimated that for patients hospitalized for acute myocardial infarction (heart attack), tort reforms reduced Medicare inpatient spending by

5 percent; for those hospitalized for ischemic heart disease, the estimated reduction

was 9 percent. Another study estimated a spending reduction of 0.27 percent for maternity patients. These results are specific to these clinical areas, and do not represent potential reductions in overall health spending from tort reforms. CBO continues to explore this issue.

PREPARED STATEMENT OF THE ASSOCIATED BUILDERS AND CONTRACTORS (ABC)

Associated Builders and Contractors (ABC) appreciates the opportunity to submit

the following statement for the official record. We thank Chairman Judd Gregg (RNH), Ranking Member Edward Kennedy (D-MA) and members of the Senate

Health, Education, Labor and Pensions Committee for addressing the crisis of the

uninsured in America. ABC urges the committee to follow up on this important

hearing with an additional hearing to examine possible solutions to this growing

epidemic.

ABC is a national trade association representing over 23,000 general contractors,

subcontractors, material suppliers, and construction-related firms from across the

country within a network of 81 State chapters. Our member companies represent

over one million craft professionals and administrative employees. As the nation’s

second-largest employer, with over 6 million workers, the construction industry continues to create new and beneficial jobs each year. Construction spending has a

stimulative effect on the economy. For every $1 million spent in construction, $3

million in economic activity is generated and 13 new permanent jobs are created.

To remain at the present level of activity, the construction industry needs an additional quarter of a million (250,000) workers per year to replace an aging and retiring workforce. One of the key elements to attracting and retaining workers and

remaining competitive in any industry is to provide high quality, flexible health benefit plans. Providing quality health care benefits is a top priority for ABC and its
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members, and maintaining cost effective health insurance plans is a key ingredient

in achieving this objective.

Currently, there are more than 43 million uninsured Americans, and 60 percent

of them are employed by (or family members are employed by) small businesses.

Therefore, the problem of the uninsured does not solely lie with the unemployed,

but also with the small businesses across the country who are unable to provide

quality health care coverage due to skyrocketing costs. In fact, a new study by the

Robert Wood Johnson Foundation found that more than one in three Americans

under 65 was uninsured at some point over the past 2 years.

The 2002 Census Bureau statistics show that the share of the population covered

by employer-sponsored health care coverage declined from 63 to 61 percent. The rising cost of health insurance premiums is the biggest factor in this decline and number one problem facing small business in this country. Faced with 15, 20 and even

50 percent premium increases annually for the past several years, many small businesses have been forced to reduce or even drop coverage.

Many factors have contributed to the cost increase of health insurance. Hospital

costs, frivolous medical malpractice lawsuits, lack of competition and increased state

regulation have all led to increased premiums. However, it is important to note that

while health insurance costs have gone up at twice the rate of inflation, a vast majority of small businesses’s productivity and profits have failed to grow at the same

rate. One sector though, has enjoyed its greatest profit margins ever. The insurance

industry, namely large health insurance companies, have experienced record-setting

profits over the past few years.

A number of state reforms have actually led to increased rates, thus forcing employers to reduce benefits through higher deductibles and co-pays or eventually to

drop coverage in order to comply with the law. State health insurance reforms and

community rating laws have forced some insurance carriers to completely withdraw

from the small group market for employers with less than 50 employees. When

these and other state reforms occur, small employers are left with fewer alternatives

for health insurance coverage for themselves and their employees.

Recent mergers of health insurance companies have also reduced competition and

alternatives for employers who seek access to quality and affordable health insurance. Today, there is a great need to bring more competition back into the system

rather than continually reducing it.

While there is no single solution to the problem of the uninsured, ABC feels that

it is vital for Congress to examine the current market and to consider proposals that

will provide market-based reforms. We believe that our current health insurance

system, while flawed, is still the best in the world. Any solutions should help provide working families the best opportunity to obtain the quality, affordable health

coverage they both need and deserve. Increasing competition within the small group

market will help lower costs to employers struggling to continue to offer health insurance to their employees today.

ABC appreciates this opportunity to submit comments on such a vital issue. We

look forward to continuing a constructive dialogue on how to increase access to affordable and competitive health insurance for small businesses and thus reducing

the number of uninsured Americans.

PREPARED STATEMENT OF THE NATIONAL FEDERATION OF INDEPENDENT BUSINESS

On behalf of the 600,000 members of NFIB, we want to thank you for allowing

us to submit testimony today about the worsening health care crisis that faces our

country. The small business community is feeling hit the hardest. Since 1986, the

members of NFIB rank the cost of health insurance as one their top concerns.

America’s small-business owners, whose businesses create two out of every three

new jobs in this country, continue to struggle with high cost of offering health insurance to their employees. Because of the current structure of the health care industry, too many small business owners and their employees do not have access to affordable health insurance.

A recent Census Bureau report shows that over 43 million Americans now lack

health coverage. That is an increase of almost two and a half million people over

the previous year and the largest annual increase in more than a decade. In 2002,

over 8 in 10 uninsured came from working families with nearly 70 percent from

families with one or more full-time workers. It’s no coincidence that these events

are taking place as the cost of insurance continues to skyrocket—double-digit increases year after year, pricing more and more small firms out of the market.

Many factors contribute to the overall cost of healthcare. Lack of competition in

the small group market, litigation, and mandates are just some of the many cost

drivers that have led us to where we are today.
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Small employers are forced to purchase in the over-regulated small group market,

and consequently workers in the smallest businesses that do provide health insurance pay 17 percent more on average for health benefits than workers at large companies. There is inadequate competition among insurance carriers. A GAO survey

found dangerously high levels of market concentration among large insurance companies in the State small group markets. This concentration reduces competition

and enhances insurers’ underwriting gains; as competition decreases, prices in- crease. We must also address the growing cost of benefit mandates. The idea that insurance should pay for the wide range of medical treatments and services covered by

State mandates while laudatory, is unaffordable and therefore unrealistic. The

Council for Affordable Health Insurance says that since January 1970, mandates

have increased 25-fold.

Something must be done on the front of medical malpractice litigation. The cost

of malpractice lawsuits has soared in recent years, pushing up insurance premiums

and forcing physicians out of business.

A government-run healthcare system is not the solution, however it is still very

much on the minds of some in Congress. The devil is in the details, whether it

comes in the form of government-run health care, mandates on employers to provide

it in the workplace, or individual responsibility with subsidies for the poor.

The problems facing small business owners, their employees, and families must

be addressed as part of that debate. We understand that no one solution will help

all of the 43 million uninsured. Therefore, we propose a multi-faceted approach that

will help move countless numbers of Americans off the rolls of those without health

care. We are aggressively urging enactment of legislation to permit Association

Health Plans—AHPs—to operate nationwide. We support tax credits for the purchase of health insurance.

Association Health Plans will allow small business owners to band together across

State lines through their membership in recognized trade and professional associations to purchase health care for their families and employees. Organizations such

as NFIB, the U.S. Chamber of Commerce, Associated Builders and Contractors, and

the National Restaurant Association would be able to offer insurance to their members.

AHPs would help rural States by giving employers who are members of associations or trade groups another option—particularly important in less populated areas

where only one or two choices are available today.

Association Health Plans will make health insurance more affordable for small

businesses. The Congressional Budget Office has estimated that small firms obtaining health insurance through AHPs will realize premium reductions of 13 percent

on average. In fact, reductions range from 9 percent to 25 percent. It is estimated

that more than 300,000, up to as many as two new million employers, employees

and their families would be able to obtain health care coverage if given access to

Association Health Plans.

Ours is by no means a complete solution to this most vital national challenge. Our

goal as a nation must be to make certain that no person in need will ever be left

unattended. We cannot afford to wait for the ‘‘perfect’’ solution. There is none. The

longer we delay, the more we will hear the calls for government-provided health

care, and certainly, that is not the perfect solution.

Thank you for holding this hearing today and we appreciate you allowing our testimony to be submitted on behalf of NFIB members.

PREPARED STATEMENT OF THE ASSOCIATION HEALTHCARE COALITION

The Association Healthcare Coalition (TAHC) commends Chairman Judd Gregg

(R–NH) for holding this hearing to examine rapidly rising health care costs and the

problem of the uninsured in America. TAHC believes that Congress must take action to address this issue during the 108th Congress.

Since TAHC represents trade and professional associations that exist to serve

small and medium-sized employers, this statement will focus on examining factors

in today’s small group health insurance markets that serve to drive up health insurance premiums for small employers. This is directly related to the problem of the

uninsured, since approximately 60 percent of all uninsured Americans are workers

employed by a small business or the dependents of such workers. TAHC recognizes

that there are many factors driving overall healthcare costs today, but also wishes

to emphasize that the problem of extremely inefficient regulation in the State small

group markets is a significant source of the dramatic, double-digit health insurance

premium increases that continue to jeopardize coverage for millions of small business workers across the Nation.
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The Role of Associations in Health Care

Bona fide trade and professional associations are a vital source of health care coverage for millions of American workers employed in small businesses. Some associations have been sponsoring health plans for over 50 years. TAHC’s membership is

composed of trade and professional associations organized for purposes other than

selling health insurance, a critical distinction in the debate over the proper role of

associations in providing health care benefits to small and medium-sized employers.

Our members are not affinity groups or businesses that simply come together to

purchase insurance. Rather, bona fide associations, established and run by their employer-members, exist to serve the needs of their members and workers. Bona fide

associations have an outstanding track record in providing high quality health coverage to small businesses and their workers.

Associations are vital to enabling small businesses to provide affordable health

coverage to their workers. Associations are able to purchase affordable health coverage for pools of small employers because they offer health plans that are specifically designed to meet the health care needs of their membership. Associations offer

a wide variety of approved health plans and managed care arrangements, both fully

insured and self-insured. AHPs have already demonstrated that they can reduce

health insurance premiums for small employers, compared with the cost of small

employers purchasing coverage directly from an insurance company without the

benefit of an AHP. For example, the AHP sponsored by the American Council of Engineering Companies has administrative costs of about 9.5 percent of premium. In

contrast, a small employer on its own is likely to pay administrative costs of anywhere from 20 percent to 35 percent of premium when purchasing coverage in the

existing small group marketplace.

Associations are uniquely structured to be part of the employer-based healthcare

delivery system. Because they are already structured to represent their members in

other areas, they possess the infrastructure, administrative mechanisms, and experience needed to unify employers and employees into effective consumers of health

services. By serving this need for small employers, associations add value to the

health care system as a whole, as well as to their members individually.

Inefficient Regulation in Small Group Markets Raising Premiums

While associations have been serving small businesses and their workers with affordable health benefits for over 50 years, their ability to continue doing so is severely threatened in the current environment. As inconsistent government mandates and regulations continue to proliferate in many States, the increasing cost of

compliance often outweighs the benefits that small employers can receive by joining

together in an AHP to purchase health care benefits. The regulation of AHPs on

an inefficient, state-by-state basis thus jeopardizes the ability of associations to continue providing dependable and affordable health coverage to small employers and

their workers.

Another critical point is that excessive benefit mandates enacted by many States

have driven insurance carriers out of many of the State small group markets. This

has allowed a small number of remaining insurance companies to develop virtual

monopolies in some markets. Given this unhealthy level of concentration in many

health insurance markets, in addition to the overall level of rising health care inflation, it is not surprising that small employers are experiencing dramatic premium

increases year after year.

In fact, many associations have had to close down their health plans, many of

which have been in existence for decades, because health insurance companies do

not wish to deal with the cost of compliance involved in providing coverage to AHPs

in multiple States. Because of this, both multi-state and single-state AHPs have

very few options due to a severe lack of competition among insurance carriers in

the association market, and many AHPs have been hit with large premium increases for their small employer members. The current difficult regulatory environment also prevents associations that have not previously offered a health plan, but

now wish to do so because of the difficulties their members face in obtaining coverage in the small group markets, from establishing an AHP, thus further limiting

options for small employers. Excessive regulation and mandates in the State small

group insurance markets has greatly hindered the ability of associations to serve

small business members.

Large health insurance premium increases inevitably lead to some small employers simply discontinuing offering health benefits to their employees, or reducing the

employer subsidy, due to the rising cost. This disturbing trend will continue to increase the ranks of the uninsured, and will exacerbate adverse selection problems

as younger, healthier individuals are more likely to choose to be uninsured due to

high costs. Congress must take steps to address this problem in order to avoid con-
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tinued growth in the uninsured population and the adverse health care consequences that this entails.

Association Health Plan Legislation

In contrast to the regulation of AHPs on an inefficient state-by-state basis, large

corporate and union health plans are exempt from State insurance regulations and

mandates. It is time that Congress provided workers in small businesses with the

same opportunities it has provided to their counterparts in large corporations and

labor unions—affordable health care through economies of scale, greater bargaining

power with large insurance companies, regulatory uniformity, and the freedom to

design health plan options that meet working families’ needs. This objective can be

achieved by the enactment of the Small Business Health Fairness Act of 2003 (S.

545), introduced by Senators Olympia Snowe (R–ME), Jim Talent (R–MO) and Kit

Bond (R–MO).

S. 545 will put small employers on an equal basis with workers covered by large

employer and labor union health plans by providing similar uniform regulatory status to health plans sponsored by bona fide associations. The bill will greatly improve

the ability of AHPs to design health plan options that meet the needs of their members and control the escalating cost of health coverage. The AHP legislation is the

only policy option that levels the playing field between small business on one hand

and large companies and union firms on the other.

If small and medium-sized employers are to compete in the marketplace against

large corporations for high quality workers, it is vital that they have access to the

same health benefit options as large corporations. As such, S. 545 is critical to the

ability of small and medium-sized businesses across the Nation to obtain access to

affordable health insurance.

Conclusion

An expansion of AHPs via S. 545 is a market-oriented solution that will foster

growth and greater competition within the small group health insurance marketplace. This will ultimately bring about greater long-term price stability and help to

reverse, or at least slow, the trend of skyrocketing health insurance premiums for

small employers. Thus, AHP legislation is essential to efforts to expand access to

affordable health benefits for small employers and their workers.

TAHC urges the Senate to expand access to affordable health insurance for working families by enacting S. 545. This legislation has already been approved by the

House during the 108th Congress, and has the strong support of President George

W. Bush, who urged Congress to enact the bill during his State of the Union message on January 20, 2004.

The time for elimination of the health insurance ‘‘double standard’’ for small business workers is long past due. TAHC looks forward to working with Chairman

Gregg and members of the Senate HELP Committee to accomplish this goal.

[Whereupon, at 11:50 a.m., the committee was adjourned.]

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