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OVERCOMING OBSTACLES FACING THE UNINSURED: HOW THE USE OF MEDICAL SAVINGS

ACCOUNTS, FLEXIBLE SPENDING ACCOUNTS

AND TAX CREDIT CAN HELP

HEARING

BEFORE THE

SUBCOMMITTEE ON TAX, FINANCE AND EXPORTS

OF THE

COMMITTEE ON SMALL BUSINESS 

HOUSE OF REPRESENTATIVES

ONE HUNDRED EIGHTH CONGRESS

FIRST SESSION

WASHINGTON, DC, MAY 8, 2003

Serial No. 108–13

Printed for the use of the Committee on Small Business

(

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

COMMITTEE ON SMALL BUSINESS 

DONALD A. MANZULLO, Illinois, Chairman 

ROSCOE BARTLETT, Maryland, Vice 

Chairman 

SUE KELLY, New York 

STEVE CHABOT, Ohio 

PATRICK J. TOOMEY, Pennsylvania 

JIM DEMINT, South Carolina 

SAM GRAVES, Missouri 

EDWARD SCHROCK, Virginia 

TODD AKIN, Missouri 

SHELLEY MOORE CAPITO, West Virginia 

BILL SHUSTER, Pennsylvania 

MARILYN MUSGRAVE, Colorado 

TRENT FRANKS, Arizona 

JIM GERLACH, Pennsylvania 

JEB BRADLEY, New Hampshire 

BOB BEAUPREZ, Colorado 

CHRIS CHOCOLA, Indiana 

STEVE KING, Iowa 

THADDEUS MCCOTTER, Michigan 

NYDIA VELA ́ ZQUEZ, New York 

JUANITA MILLENDER-MCDONALD, 

California 

TOM UDALL, New Mexico 

FRANK BALLANCE, North Carolina 

DONNA CHRISTENSEN, Virgin Islands 

DANNY DAVIS, Illinois 

CHARLES GONZALEZ, Texas 

GRACE NAPOLITANO, California 

ANI ́BAL ACEVEDO-VILA ́ , Puerto Rico 

ED CASE, Hawaii 

MADELEINE BORDALLO, Guam 

DENISE MAJETTE, Georgia 

JIM MARSHALL, Georgia 

MICHAEL MICHAUD, Maine 

LINDA SA ́ NCHEZ, California 

ENI FALEOMAVAEGA, American Samoa 

BRAD MILLER, North Carolina 

J. MATTHEW SZYMANSKI, Chief of Staff and Chief Counsel 

PHIL ESKELAND, Policy Director 

MICHAEL DAY, Minority Staff Director 

SUBCOMMITTEE ON TAX, FINANCE, AND EXPORTS

PATRICK J. TOOMEY, Pennsylvania, Chairman 

STEVE CHABOT, Ohio 

MARILYN MUSGRAVE, Colorado 

JIM GERLACH, Pennsylvania 

BOB BEAUPREZ, Colorado 

TRENT FRANKS, Arizona 

JIM DEMINT, South Carolina 

CHRIS CHOCOLA, Indiana 

JUANITA MILLENDER-MCDONALD, 

California 

FRANK BALLANCE, North Carolina 

ENI FALEOMAVAEGA, American Samoa 

DANNY DAVIS, Illinois 

DENISE MAJETTE, Georgia 

JIM MARSHALL, Georgia 

MICHAEL MICHAUD, Maine 

JOE HARTZ, Professional Staff

(II) 

C O N T E N T S 

WITNESSES

Page 

Manzullo, Hon. Donald A., U.S. House of Representatives .................................. 3

Miller, Tom, CATO Institute .................................................................................. 6

Snyder, Kim, Lehigh Valley Chamber of Commerce ............................................ 8

Hall, Keith, National Association for the Self-Employed ..................................... 9

Park, Edwin, Center on Budget and Policy Priorities .......................................... 11

APPENDIX

Opening statements: 

Toomey, Hon. Patrick J. ................................................................................... 26

Prepared statements: 

Manzullo, Hon. Donald A. ................................................................................ 34

Miller, Tom ........................................................................................................ 37

Snyder, Kim ...................................................................................................... 60

Hall, Keith ......................................................................................................... 65

Park, Edwin ...................................................................................................... 69

(III) 

(1)

OVERCOMING OBSTACLES FACING THE UNINSURED: HOW THE USE OF MEDICAL SAVINGS ACCOUNTS,FLEXIBLE SPENDING ACCOUNTS AND TAX CREDITS CAN HELP 

THURSDAY, MAY 8, 2003

HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON TAX, FINANCE AND EXPORTS, 

COMMITTEE ON SMALL BUSINESS, 

Washington, D.C. 

The Subcommittee met, pursuant to call, at 2:05 p.m., in Room 

2360, Rayburn House Office Building, Hon. Patrick J. Toomey 

[chairman of the Subcommittee] presiding. 

Present: Representatives Toomey, Millender-McDonald, and 

Majette. 

Chairman TOOMEY. The hearing will come to order. Good afternoon. Thank you all for being here and welcome to this hearing 

today on the topic of ‘‘Overcoming Obstacles Facing the Uninsured: 

How the Use of Medical Savings Accounts, Flexible Spending Accounts and Tax Credits Can Help.’’ today we are going to take a 

look at various proposals, all of which are aimed are decreasing the 

distressingly high number of Americans who currently have no 

health insurance. As you are probably aware, total numbers approximately 43 million Americans of whom about 60 percent of 

Americans without health insurance are either small business owners or employees of small business owners. Clearly here in Congress, we ought to be looking at this pressing problem and looking 

to find solutions which will create an environment in which these 

people can find not only access to health insurance, but make sure 

it is affordable for them. 

The problem is certainly not limited to small businesses, but it 

does disproportionately affect small business. And part of it is a series of unfortunate features in the Tax Code that actually make it 

harder for individuals to obtain health insurance than it has to be. 

Our Tax Code systematically restricts individuals from exercising 

the freedom to purchase health care plans that would work best for 

themselves and their families if their employer doesn’t happen to 

offer such a plan. 

Employers, for instance, are able to deduct the full cost of purchasing a health care plan for their workers. However when an individual looks to either go outside of the company plan or if their 

company does not offer a plan, the individual simply cannot deduct 

the full premium that they pay unless a whole number of criteria 

are met, and even in those cases the individual workers bears a 

2

cost that the employer does not bear. This is one of the many inequities in our Tax Code that makes it hard for people who do not 

have health insurance to obtain it and we ought to look at ways 

to address this problem. This inequity in the Tax Code is itself an 

anachronism left over from World War II policies, in other words, 

it frankly is an accident of history and we need to be looking for 

ways to find health care delivery systems that work not just those 

that we have always had. 

One of the reasons this is so important, as the chairman is going 

to testify soon, knows so well is that health care costs are simply 

spiraling out of control. The NFIB has reported that health care 

costs are rising about 15 percent just this year alone for employers 

with fewer than 200 employees and nearly that much for those 

with 500 or more employees. And even before these increases for 

this year small businesses were already struggling to keep health 

care costs affordable for themselves and their employees. We need 

to keep in mind small businesses have a particularly difficult burden because the administrative overhead, the insurance company 

underwriting expenses, adverse selection problems, all of these 

make it harder for small businesses to obtain the health insurance 

that they would like to be able to provide for their workers. 

Now there may not be a single simple solution to this, but there 

are probably a number of ideas that we can promote which will together help to alleviate this problem. I think removing the current 

restrictions on medical savings accounts, in flexible spending accounts and increasing tax relief focused specifically towards the 

purchase of health insurance will certainly be very, very helpful in 

all of those respects. And today we will be focusing specifically on 

the expanded use of MSAs and FSAs as well as increasing tax relief for health care in general. 

We are very fortunate to have with us today the chairman of this 

Committee, Chairman Don Manzullo. And I want to first thank the 

chairman and recognize the enormous contribution he has made to 

bringing attention in this Congress and in previous congresses to 

the problems that face the small business employees, employers 

and all of the millions and millions—tens of millions of Americans 

whose livelihoods depend on the success of small business. 

In particular, Chairman Manzullo is going to be sharing his 

views on his bill H.R. 1873, the Self-Employed Health Care Affordability Act of 2003, legislation that he recently introduced and that 

would provide for the deduction of health insurance costs for selfemployed individuals when determining the self-employment tax. 

This, if I could add my editorial comment, Mr. Chairman, I think 

is an excellent bill. Clearly what this does is it eliminates an inequity in the Tax Code, a disadvantage that the self-employed currently unfairly suffer with. And I commend you for your leadership 

on this issue for introducing this bill. And at this point, I would 

recognize the gentleman from Illinois, my chairman, Mr. Manzullo 

for his testimony. 

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

3

STATEMENT OF THE HON. DONALD MANZULLO, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF ILLINOIS, 

CHAIRMAN, U.S. HOUSE OF REPRESENTATIVES SMALL BUSINESS COMMITTEE 

Mr. MANZULLO. Thank you, Mr. Chairman. I appreciate the opportunity to be here. We held a hearing in the full Committee 

about a month ago, and Bob Hughes, who is the president of the 

National Association for the Self-Employed asked a rhetorical question. At that hearing, he said how would you like to lower the cost 

of health insurance for the self-employed immediately by 15 percent? And I said well, you know, how do you do that? And he said, 

well, a corporation does not pay FICA tax on the very dollars that 

it uses to buy health and accident insurance, but a self-employed 

person does. 

And that means that for the money that is used to purchase 

health and accident insurance by an unincorporated self-employed 

person, that individual, that proprietor, sole proprietor pays 15.3 

percent FICA tax on top of the very dollars that he is using to buy 

health and accident insurance. So we were—I was obviously intrigued with the idea of reducing health costs 15 percent across the 

board. My brother is a sole proprietor and runs a family restaurant. He is a modest man. He calls it Manzullo’s Famous Restaurant. But he is proud of the fact he has 13 tables and 13 bar 

tools and he offers no health and accident benefits to his employees. 

He is only opened on weekends, which is very interesting. And 

just to buy premiums or just to pay for the premiums on the health 

and accident insurance that he has to pay for him and his wife, it 

is $1,000 a month. And he has been shopping around trying to get 

different prices, but bottom line, if he is paying a $1,000 a month 

for health and accident insurance, he is paying an extra $150 more 

for that same policy than if he were an employee and the corporation were buying that policy and it was at the same price. 

Obviously, it would be cheaper by the corporation because more 

people would be involved in the pool. And so here is a guy who is 

not incorporated, penalized because he is not incorporated and we 

try to come up with a plan. First idea was well, maybe there is a 

bill out there, a vehicle, that you simply eliminate the payment of 

the FICA tax as with corporations. That would have a huge dent 

in the Social Security trust fund. So what this bill does, it allows 

our nation’s 16 million self-employed business owners to deduct 

their health insurance expenses when calculated on payroll taxes, 

which consists of payments to Social Security and Medicare. 

It is above the line as opposed to being below the line. It is almost revenue neutral. It comes up 1 to 2 billion short. And as with 

other legislation that involves the Social Security trust fund, that 

can be compensated for by transfers from the general revenue fund 

to the Social Security fund. And what this essentially does is anything that we can do to make health insurance more affordable for 

small business people, this could be the difference between somebody buying a policy of insurance or not. This could make the difference between somebody canceling a policy of insurance or keeping it going. 

4

And obviously, even if a relatively small percentage of the people 

that are uninsured now decided that they could afford insurance, 

this makes the overall insurance pool larger, less cost shifting and 

eventually brings down everybody’s premium. This is a very, very 

simple bill. And it is the type of thing where you draw the bill and 

you ask yourself, you know, why did it take so long to come up 

with a bill that is this simple. And I think it has a lot of traction. 

Farmers, self-employed, independent contractors, anybody who 

pays 15.3 self employment payroll tax will reap considerable savings from this legislation. We drafted the legislation. Gave it to 

Nydia Velazquez, the ranking Democrat member of the Committee. 

She embraced it immediately. And our goal is to take this. And 

when we get towards the conference between the House and the 

Senate, throw that into the mix and say, you know, when you are 

talking about the 350 billion or 550 billion, you know, 1 to 2 billion 

a year to get rid of this disparity between the self-employed 

incorporations, it would be a pretty good investment for our Nation’s small business people. 

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

Mr. TOOMEY. Thank you, Mr. Chairman. I would like to follow 

up on that point because another way to look at this would be the 

cost of this bill compared to the total amount of revenue that the 

Federal Government is expected to take in annually, which, as you 

know, is well over $2 trillion. 

Mr. MANZULLO. That is a lot of money, even if you are from 

Pennsylvania. 

Chairman TOOMEY. Yeah. Even if you work for the Federal Government, that is a lot of money. So if I understand you correctly, 

the total cost per year would be a maximum of $2 billion. In the 

context of a budget that exceeds 2 trillion, what you are saying is 

this would cost the Treasury less than 1/1,000th? 

Mr. MANZULLO. Whatever the percentage is, but you could also 

compare that to the tax cut that is before—I mean this, in effect, 

is a stimulus. 

Chairman TOOMEY. Another question. The individuals who would 

benefit from this, the self-employed individuals, am I correct in understanding that the Tax Code currently acknowledges that they 

ought not to have to pay income tax on the health insurance premiums that they purchase for themselves? That is a deductible expense. But yet, for some reason that is a mystery to me, it does 

force them to pay the equivalent of the payroll tax. 

Mr. MANZULLO. Depends at what point you deduct it. And here, 

it is—I guess the word often used is above the line as opposed to 

below the line on it. But it is deducted so that it works towards 

a situation where you are not really going to be paying tax on that. 

And then you have that 1 to 2 billion dollars a year that is in a 

revenue transfer that keeps the Social Security fund intact. 

Chairman TOOMEY. In other words, if your bill is enacted, passed 

and signed into law, the net effect would be that a self-employed 

individual would be finally on a level playing field paying the same 

kinds of taxes as the employer and worker at a corporation. 

Mr. MANZULLO. That is correct. 

Chairman TOOMEY. So all you are trying to do, you are not trying 

to create a special advantage or a tax subsidy or any incentives per 

5

se, you are just trying to level the playing field versus a corporate 

situation? 

Mr. MANZULLO. That is correct. 

Chairman TOOMEY. Could you just elaborate a little bit more on 

the issue of transferring revenues from the general fund to the Social Security trust fund. How would that work and what is the purpose of that? 

Mr. MANZULLO. Let me read the answer prepared by my very 

competent staff, because I want to make sure I get this correct. The 

deduction for health insurance premiums provided under the bill 

means that some slightly lower amount will be paid into the Social 

Security trust fund. To ensure that the Social Security trust fund 

is not adversely impacted, the bill provides for an annual payment 

from general revenue, one government account to the Social Security trust fund, another government account. This is a standard 

provision frequently used in tax bills that affect the Social Security 

trust fund. 

Chairman TOOMEY. So the net effect of your bill on the Social Security program, the Social Security system, the funding thereof is 

zero? 

Mr. MANZULLO. That is correct. That is correct. 

Chairman TOOMEY. I didn’t have any other questions, Mr. Chairman. Did you have any closing statement you would like to make? 

Mr. MANZULLO. The name of the bill, it is the Self-Employed 

Health Care Affordability Act of 2003, and it is H.R. 1873. And 

thank you for inviting me. Let me give you the names of the organizations that are behind this bill. National Association for the 

Self-Employed, the National Federation of Independent Businesses, 

American Farm Bureau Federation, National Small Business 

United, Small Business Legislative Council, Women Entrepreneurs 

Inc., Women Impact and Public Policy, Communicating for Agriculture and the Self-Employed, National Association of Women 

Business Owners, American Small Business Alliance and U.S. 

Chamber of Commerce. I think this is really exciting. I think it is 

something that has a lot of traction. And as I said, we will try to 

throw it into the mix during the conference. And this thing will be 

a real home run. 

Chairman TOOMEY. I am happy to be a co-sponsor of the bill. 

Thank you very much for your testimony today and for your leadership on this bill, and at this point, I will call up the second panel. 

Mr. MANZULLO. Thank you. 

Chairman TOOMEY. We have a little challenge with the voting 

schedule. A vote was just called. My understanding is that we have 

a 15-minute vote followed by 10 minutes of debate, then followed 

by two subsequent votes, one of which will probably be 15 minutes, 

the other of which will be 5. So I am afraid we are going to have 

a significant interruption during the course of this. What I would 

do is introduce the second panel. Ask the first witness to testify 

and at that point, we will have to break, certainly no later than 

that and we will come back and resume the testimony. 

To begin our second panel, we have Mr. Tom Miller, who is the 

Director of Health Policy Studies at CATO Institute. Mr. Miller has 

written and lectured extensively on the use of tax advantage mechanisms for health insurance. We are fortunate to have him with us 

6

here today. We have Mr. Kim Snyder, President of Eastern Industries, Incorporated, based in the Lehigh Valley of Pennsylvania. My 

constituent and my friend, welcome, Mr. Snyder. Mr. Snyder is also 

the Chairman of the Board of Governors at the Lehigh Valley 

Chamber of Commerce. 

Also sitting on our panel is Mr. Keith Hall. Mr. Hall is a selfemployed CPA based in Houston Texas. That is a true micro business. And I am pleased to hear your testimony. And rounding out 

our panel we have Mr. Edwin Park, senior health policy analyst at 

the Center on Budget and Policy Priorities. 

At this time, I would recognize Mr. Miller for five minutes. 

STATEMENT OF TOM MILLER, DIRECTOR, HEALTH POLICY 

STUDIES, CATO INSTITUTE 

Mr. MILLER. Good afternoon, Mr. Chairman and members of the 

Subcommittee, I am Tom Miller, director of Health Policy Studies 

at the CATO Institute. It is a pleasure to appear before you today. 

Removing or redesigning restrictions on the availability of medical 

savings accounts, flexible spending accounts and tax credits for 

health insurance would improve access to affordable health insurance and health care for millions of uninsured Americans. Even 

more progress could be achieved by providing broader parity in the 

tax treatment of health insurance financing for all purchasers—reducing artificial tax and regulatory barriers to market-based value 

maximizing choices and empowering all health care consumers to 

match their own needs and preferences to a wider variety of affordable options. 

The relatively higher cost of small group insurance coverage for 

comparable benefits is one of the primary reasons why many small 

employers don’t offer it and some of their employees don’t demand 

it. Market-based public policy can’t and shouldn’t overcome all of 

the natural cost differentials between large and small employers 

that may be due to the stability, size and composition of a given 

employer’s pool of insurable workers as well as any relative economies of scale and benefits administration. 

But tax and regulatory policy should, at a minimum, avoid making those cost differentials greater than they need to be. One of the 

primary factors driving health care costs higher in the past has 

been the increased share of medical bills paid by third-party payers, such as private health insurers, employers and government 

health program administrators. It insulates individual consumers 

from the real costs of their health care decisions and treatment. 

The centerpiece of market-oriented health care that can reverse 

this trend remains medical savings accounts. Less comprehensive 

insurance coverage under MSA plans would mean more affordable 

coverage for most Americans, including a larger fraction of people 

with low incomes. 

MSAs help control costs, improve access to health care, expand 

consumers’ choice in control of their care and increase savings. 

Moreover, MSAs’ improved health plan option is not just for affluent and healthy individuals, but for all Americans. However, the 

potential of MSAs has been hampered by eligibility limits and 

other design flaws mandated by HIPPA. Congress needs to allow 

an unlimited number of people to have MSAs and to expand Archer 

7

MSA eligibility to include employees and businesses of all sizes as 

well as employees without any employer sponsored insurance. 

Now, regarding flexible spending accounts, allowing unspent balances in FSAs to carry forward into the next year without being 

forfeited or subject to taxes would remove the most flawed incentives under their current rules, eligible workers who become more 

likely to participate in FSA options and to dedicate more funds to 

them. Enabling workers to invest their fund balances and providing full FSA portability as they change jobs also would encourage a further restructuring of private health insurance markets. 

FSAs could become the primary vehicle for financing medical 

procedures and health services that involve relatively predictable 

expenses and are easily foreseeable in the future. Regarding tax 

credits, more than 50 years of health policy, history should remind 

us of the costs as well as the benefits of the special tax treatment 

of employer sponsored insurance. The best way to remove tax policy distortions in health insurance markets would be to eliminate 

tax subsidies for employment-based health insurance altogether 

matched by equivalent reductions in marginal income tax rates. 

But the next best policy would be to offer a new Federal tax credit option, most likely amounting to 30 percent of the cost of qualified insurance coverage. This new option would not eliminate the 

current tax exclusion, it would provide a competitive alternative for 

workers to opt for in place of the tax exclusion. It would encourage 

a more gradual transition toward other forms of private insurance 

coverage. The tax credit option also would be made available to 

other individuals and families that currently don’t qualify for the 

tax exclusion because they lack access to employer sponsored insurance coverage. 

Now if Congress feels compelled to provide refundable tax credits 

to lower income Americans for reasons that tend to blur universal 

coverage goals with income redistribution objectives, why not simply provide equivalent income support through more targeted delivery of fungible cash vouchers and then concentrate on implementing broader health policy reforms and improving the availability of more affordable health insurance options in private markets. 

In any case, new tax subsidies for health insurance purchasing 

should pass through directly to individual consumers rather than 

be used as initial sweeteners to induce employers to maintain or 

establish job-based coverage. Thank you. 

Chairman TOOMEY. Thank you, Mr. Miller, for your testimony. 

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

Chairman TOOMEY. We are now down to about 5 minutes before 

our vote. At this time, the Committee will recess until the end of 

the series of votes. And then we will resume our work immediately 

following the last in the series. 

[Recess.] 

Chairman TOOMEY. The Committee will come to order. I would 

like to thank the witnesses for their patience. It was quite a long 

delay and interruption. But as you know, we have no control over 

the voting schedule here, so I appreciate you bearing with us. And 

at this point, I would like to recognize my friend and the gentleman from the Lehigh Valley of Pennsylvania, who has provided 

8

some great leadership on the Board of Governors of the Chamber 

of Commerce, if I might observe. Welcome, Mr. Snyder, and we welcome your testimony. 

STATEMENT OF KIM SNYDER, BOARD OF DIRECTORS, LEHIGH 

VALLEY CHAMBER OF COMMERCE, PRESIDENT OF EASTERN 

INDUSTRIES INCORPORATED 

Mr. SNYDER. Thank you, Congressman. As you have alluded to, 

my name is Kim Snyder and I am chair of the Lehigh Valley 

Chamber of Commerce. And I am here to testify on behalf of our 

4,000 members. As you know, the Lehigh Valley Chamber of Commerce is the second largest, fastest growing Chamber of Commerce 

in the State of Pennsylvania. We pride ourselves on that. And we 

also pride ourselves on the fact of the 4,000 members, 3600 are actually small businesses. And as you can imagine, insurance is a 

major issue. One of the reasons why we are not only the largest 

and fastest growing, but have one of the highest retention rate in 

the Nation is because we work hard at serving our members, and 

we have been working hard with regards to health insurance for 

our members. 

As I mentioned, 3600 of our members are small businesses and 

it is a real struggle for them. We have a team of volunteers and 

staff that work year end and year out to try to secure a health plan 

which is affordable. It is a struggle. Of those 3600, 700 find the insurance we are able to procure for them affordable. We estimate 

that another thousand have insurance through other means or 

other carriers. But what that means is that there are 1900 members of our Chamber we are estimating that do not have health 

care. Now it is a growing problem. There has been a lot of discussion and debate not only nationally, but on a statewide basis, as 

you know, with regards to how do you tackle this health care cost 

issue, and it is a big problem. 

And I don’t think there is any one big quick fix that can take 

place in a very short period of time. Having said that, there are a 

couple of instruments that are available now that would go a long 

way to helping small business if there were some small, in my 

opinion, small modifications made to them, and of course, I am 

talking specifically about MSAs, FSAs and some tax credits for 

small business. 

First let me talk about MSAs. They are a great vehicle. They 

could be much better. The fact of life is that a lot of our members 

do not participate. They perceive there are barriers to entry. One 

is, it is not permanent, it is temporary. And they want to know 

that there is something there that they can count on for years to 

come. And we need to take this program and get it out of the pilot 

phase and make it permanent. Once that is done however, there 

are a couple of things. 

First of all, what we need to do is lower the deductibles. The fact 

of life is that statistics show that a majority of the folks that do 

have MSAs never get to the point where they exceed their 

deductibles and therefore they see, you know, most people know 

that and they don’t see any need to join. We would recommend that 

you reduce the deductibles for individuals down to $1,000 annually 

and for families, $2,000. Now keep in mind that those who have 

9

tried the MSAs, over 70 percent of those that are now in the program were not insured before. And of that 70 percent are not only 

individual employees but families. So you are talking about spouses 

and children also. So obviously, there is some real value there, but 

because of these roadblocks, not everybody is taking advantage of 

them. The other thing is there is a restriction, as you know, that 

either the employer or the employee contribute and not both. If you 

remove that restriction, it would go a long way in promoting this 

good plan. 

The flexible spending account, it needs to be flexible. As you 

know, you have to estimate how much to put in and if you don’t 

spend the money by the end of the year, you quote, unquote, ‘‘lose 

it.’’ people think we are gambling with their money. In essence, 

they are. At the very worst, what happens is that at year end what 

they do is go out and try to get products and services to spend the 

money rather than—because they don’t want to lose it and that is 

not smart health care purchasing either. What we believe should 

happen is allow for rollover, so any unused portion of FSA that is 

still in the account can be rolled over in following years. That is 

also important because health care costs have gone up and we believe will continue to go up and they will need more resources to 

take care of those additional costs in the future. This will help offset that. 

We also need to have a provision where they can take it with 

them. If somebody goes from one job to another, they can carry any 

unused balance with them as an individual. 

And finally tax credits. There are people on the panel that are 

much more qualified than I am to talk about those particular 

issues as far as tax credits for small business, but I can tell you 

there are members saying that they follow what the national trend 

is and studies that have been carried on with small business folks 

and a vast majority of them would be much more open and much 

more willing and would pursue actually buying or procuring health 

care benefits for their employees if there was a tax credit associated with getting that health care. 

So I think in the short-term, until the larger problem of the 

whole health care costs and issues facing us in the next couple of 

years is taken care of, I think these fixes taken care of right away 

will go a long way of not only keeping the uninsured ranks from 

growing, but actually shrinking them when you are talking about 

our small business owners. 

Chairman TOOMEY. Thank you very much Mr. Snyder. 

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

Chairman TOOMEY. At this time, I would be happy to welcome 

and to recognize Mr. Hall for his testimony. 

STATEMENT OF KEITH HALL, NATIONAL ASSOCIATION FOR 

THE SELF-EMPLOYED 

Mr. HALL. Thank you, Mr. Chairman. I appreciate the opportunity to be here. Again, my name is Keith Hall. I am a CPA and 

a small business owner. And I am here representing the National 

Association for the Self-Employed, an organization that I have been 

a member of for over 10 years. One of the main goals of the NASE 

is to combine the influence of the over 250,000 self-employed and 

10

micro business owners that they represent with the voice of those 

micro business owners can be heard. Now this is a voice that 

doesn’t ask for special favors or special tax incentives. It is a voice 

that only asks for the same opportunity for success that is afforded 

to big business. 

The voice of the self-employed is not always loud, but it is always 

big. There are currently over 18 million self-employed and micro 

business owners. And these people create over one-third of all the 

new jobs in this country. This group also employs over 12 million 

other workers which comprise over $309 billion of annual payroll. 

This is a big voice. A major issue faced by these micro businesses 

is the ever increasing cost of health coverage, which is what we are 

here to talk about. The situation for the small business is critical. 

According to a June 2002 survey released by the NASE, 7 out of 

10 micro businesses don’t provide health coverage for their employees and don’t have coverage for themselves. The main reason for 

this decision is the cost of the coverage. Participants in the survey 

say the situation is getting worse because not only do they continue 

to see double digit increases in the premiums, but the coverages 

are decreasing and their options are decreasing. 

I am here today on behalf of the NASE to voice its strong support 

for health care tax credits and also H.R. 1873, the Self-Employed 

Health Care Affordability Act of 2003. This is a bill that has as its 

sole goal providing small business with the same opportunity for 

success as big business has in affording quality health care coverage. As with most of us here, I wear a lot of different hats. I am 

a father and a husband. I run a small business. I am the treasurer 

of my Sunday school class. I serve on two corporate boards of directors and I am in office of my kid’s high school booster club. But 

today, I am concerned about the cost of health coverage for my 

family. I pay about $600 a month for health coverage, which is a 

little over a 7 grand a year, which is pretty reasonable because a 

lot of self-employed pay as much as $13,000 a year. Now it is time 

for me to prepare my tax return. 

Those premiums are deductible, but they are only included on 

the face of my tax return. They don’t get deducted on the self employment tax side of my tax return. Big businesses get to deduct 

the health insurance premiums for their officers and employees before any tax is taken into consideration. So what does that really 

mean? The bottom line is before anything else is considered, my 

health insurance costs 15.3 percent higher than the guy next to me 

just because I am self-employed. Everything else may be exactly 

the same. He may have the same family size, the same medical history, the same health concerns, even the same weight problem that 

I have, but just because I am self-employed, I have to pay 15.3 percent higher. That is a little over $1,200 a year just for me and my 

family. 

And small business, the self-employed is the only group that has 

to pay the extra tax on the health insurance. Imagine going to a 

movie and the guy in front of you pays $14 for 2 tickets for he and 

his wife. When you get to the window, the clerk says that will be 

16 bucks just because you are self-employed. Same person, same 

movie, same seat, same popcorn, everything is the same, but it 

costs you 15 percent more. It doesn’t make sense. The cost differenVerDate 0ct 09 2002 17:02 Mar 24, 2004 Jkt 000000 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 G:\HEARINGS\92595.TXT NANCY
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tial is not designed to influence the buying habits of the consumer 

like a cigarette tax or an alcohol tax. The difference is not designed 

to provide assistance like with the earned income credit or the 

child tax credit. It is just a differential that is in the Tax Code that 

I think has been overlooked until now. 

I am certainly not a health care expert, and I am not an insurance expert, but it is my bias that affordable health care in the 

United States in 2003 is a tough issue. The members of this Committee, and on a larger scale the members of the House and the 

Senate as a whole, are asked to make tough decisions everyday. As 

an average American, I greatly appreciate the efforts you guys go 

to to make those tough decisions. I can only guess how refreshing 

it must be when an easy decision comes along. From where I stand 

H.R. 1873 is an easy decision that just happens to be wrapped up 

in a very tough issue. 

Providing the small business guy with the same benefits big 

business has is the right thing to do. And it immediately will provide a 15 percent cost savings to millions of small business owners. 

There is no reason why my movie ticket should cost more than the 

guy next to me and the same goes for my health coverage. The 

NASE strongly supports the bill. They know that there is no silver 

bullet that can fix everything. The NASE also supports health tax 

credits which can be the beginning to addressing the bigger issue 

of health care affordability. We also support SAVE, the Act sponsored by Kay Granger and Albert Wynn. 

And we most importantly support proactive efforts in finding solutions to this problem. I really appreciate the opportunity to be 

here. Thanks again for all that you guys do at the bigger level for 

working so hard to keep this country strong and healthy and helping people like me to afford it. 

Chairman TOOMEY. Thank you, Mr. Hall, for your testimony. 

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

Chairman TOOMEY. At this time I would welcome and invite the 

testimony of Mr. Park. 

STATEMENT OF EDWIN PARK, SENIOR HEALTH POLICY 

ANALYST, CENTER ON BUDGET AND POLICY PRIORITIES 

Mr. PARK. Thank you, Mr. Chairman. I would like to thank the 

chairman and ranking member for the opportunity to testify today. 

My name is Edwin Park and I am a senior health policy analyst 

at the Center on Budget and Policy Priorities. The Center is a nonprofit policy institute here in Washington that specializes in fiscal 

policy and in programs and policies affecting low and moderate income families. My testimony focuses on two tax proposals that are 

the subject of today’s hearing, medical savings accounts, MSAs, and 

refundable tax credits for the purchase of health insurance in the 

individual market. 

Both were part of the administration’s fiscal year 2004 budget. 

While both proposals are intended to expand coverage to the uninsured, any gains in coverage are likely to be outweighed by the adverse effects these proposals impose on the traditional employerbased health insurance system. Let us first look at proposals to 

make the use of MSAs more widespread. MSAs can make the premiums that employers pay for traditional health insurance plans 

12

rise substantially. People who are quite healthy can find MSAs attractive. If they do not expect to need much health care, they may 

prefer a high deductible policy. 

In addition, unlike IRAs, there are no income limits on MSAs 

that prevent wealthy people from making tax deductible contributions to MSAs. Healthy people with higher incomes can find MSAs 

additionally attractive because of their benefit as a tax shelter. If 

MSAs are made widely available, then young healthy people may 

choose to participate in substantial numbers, but older and sicker 

people would want to stay in traditional health insurance plans 

which generally require low deductibles and copays and provide 

comprehensive benefits. Because the traditional insurance pool 

would then have high risk, premiums will increase perhaps substantially making such coverage increasingly unaffordable. 

At the same time, it is unlikely that many more people would 

gain coverage as a result. I note that small businesses are already 

able to offer MSAs, yet, in general they provide traditional health 

insurance plans or unfortunately do not offer any coverage at all. 

Let us now look at individual tax credits and how they would affect 

the traditional employer-based health insurance system. The availability of the tax credit can lead to some employers to drop coverage for their workers and can induce many new employers not 

to offer coverage. 

The credit is also likely to draw younger, healthier workers away 

from employer coverage into the individual market. This leaves 

older, sicker workers behind driving up the average cost of employer based insurance. In response, employers may raise employee 

contributions leading even more younger, healthy workers to opt 

out. An insurance death spiral could result in which employers can 

no longer afford health coverage. Because small business premiums 

rise faster than average, they would be especially vulnerable to 

these increases. Many workers with health insurance now, especially those who are older and sicker, could therefore become uninsured. 

While some young and healthy people may be able to gain coverage through tax credits, many of the uninsured who are often in 

poor health may still remain without health insurance, even with 

the availability of a tax credit. That is because the individual market is generally unregulated. Insurers can vary premiums based on 

age and medical history, so-called medical underwriting, and can 

exclude people entirely. A family containing old or sick members 

could find itself excluded from coverage in the individual market or 

charge premiums that are unaffordable, even with a credit. 

Alternatively, such a family could be offered a plan that is affordable but does not provide coverage for a variety of significant medical conditions. Many plans in the individual market do not offer 

comprehensive coverage. They may require high deductibles, impose significant cost sharing and provide minimal benefits. Even if 

an individual can’t find a policy in the individual market, the proposed tax credit is not likely to make insurance more affordable. 

In order to obtain comprehensive benefits, even healthy individuals 

and families using the credit may have to pay 15 to 30 percent of 

their total income just to pay the premiums. Yet, for example, 

many of the uninsured workers and small businesses have low 

13

wages and are not likely to be able to afford health insurance in 

the individual market. 

If one wishes to address the problem of the uninsured through 

the Tax Code without undermining traditional employer-based 

health insurance, a superior alternative would be a tax credit provided to small businesses directly to help them subsidize the cost 

of their health insurance premiums. According to the survey by the 

Kaiser Family Foundation of small businesses, 89 percent of small 

businesses support this kind of approach. An employer credit would 

have the benefit of bolstering the ability of small businesses currently providing traditional health insurance to continue to do so. 

It could also encourage small businesses now unable to offer coverage to begin to provide health insurance benefits for the first 

time. 

Such a credit would be most cost effective if the credit was targeted to the small businesses than most need financial assistance. 

These would be businesses with the fewest workers and a substantial number of low wage workers who are the ones least able to 

provide health insurance now. The employer credit could, therefore, 

produce gains in coverage without the adverse effects associated 

with MSAs and individual tax credits. Thank you very much. And 

I look forward to answering your questions. 

Chairman TOOMEY. Thank you, Mr. Park, and I appreciate your 

testimony and the diversity of opinions that we have this afternoon. 

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

Chairman TOOMEY. I would like to begin the questioning with a 

question for Mr. Miller. It seems that Mr. Park has made an observation about—if I could paraphrase in a way the importance of relying on the traditional employer-based system, but it seems to me 

that, in some respects, this is the very system that contributes to 

some of the problems, which is to say it is one aspect of the dominance of third party payers that separates the patient from the role 

of the consumer. And I am wondering if you could comment on 

whether—some of the problems that arise as a result of a dominant 

reliance on third party payers. 

Mr. MILLER. Well, the larger—it is almost fourth party payer 

when you get into the employer-sponsored system because you have 

both the effect of the employer first making the selection of insurance and then the insurer to the extent that insurance is comprehensive insulating the direct consumer of care from the full cost 

of it. I think a larger context of this is, some employers do a good 

job and others don’t. However, to strain and struggle so much to 

prop up the smallest employers to pose as would-be organizers, administrators and selectors of insurance has got it exactly backwards. You are trying to prop up a pool that doesn’t really exist. 

It is too small. 

We certainly should treat small employers in an equivalent manner as we do other employers, but to create a kind of an artificial 

tax subsidy to pretend that the small employers are the best people 

to determine what the benefits are for their workers is kind of 

counterproductive. You are not going to have any choice of benefits 

in those type of small employment arrangements. It is going to be 

one choice at best. The bargaining power is not there. The adminisVerDate 0ct 09 2002 17:02 Mar 24, 2004 Jkt 000000 PO 00000 Frm 00017 Fmt 6633 Sfmt 6633 G:\HEARINGS\92595.TXT NANCY
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trative capabilities are not there. We may be replacing what used 

to be the AFDC, Aid to Families With Dependent Children, to a 

new version of ASBDW, Aid to Small Businesses With Dependent 

Workers. 

I just don’t think that has much to go in that regard. Some of 

the other things that he mentioned briefly—the evidence actually 

is that this would be a death spiral of adverse selection doesn’t 

show up in MSAs. Aside from the MSAs that are currently in the 

marketplace, we had the same allegations made about the health 

reimbursement accounts, yet the experience would say that in the 

plans is the workers tend to be as old or older than the other workers. There is no indication of some segmenting relative to risk. In 

fact, if you look at the lifetime experiences as opposed to year-toyear experience, people get sick for a while and then they get 

healthy. 

If you stay in an MSA for a long period of time, you would end 

up netting a benefit from it. People are not chronically sick on an 

endless basis. In addition, people who suffer from particular unique 

conditions would like to have the flexibility to choose the treatment 

and doctor that they want which is much more conducive with an 

MSA where you can spend your money as you wish and also have 

the ability of a relatively unrestricted catastrophic insurance plan. 

So I think it stands on its head in terms of that analysis. 

Chairman TOOMEY. Mr. Snyder, you represent 3,600 companies 

that are members of your organization. Two questions for you, one 

is of all the challenges that they face, and there are an awful lot 

of challenges for small businesses, especially in the current economic environment we are in, approximately how high does affordable health care rank. Is it in the top handful of issues that these 

folks are struggling with. Is it a topic that is on docket pretty much 

each and every time the Chamber board gets together. Is this a priority concern? And that is one question. 

You listed several barriers that you think are obstructions that 

would—that if we removed them, would encourage greater use of 

MSAs. What do you think is the greatest single barrier. 

Mr. SNYDER. Well, the first question, the answer is yes. This is 

a constant struggle for our small business members for two reasons. First of all, it is cost prohibitive in many instances for them 

to afford health care, and these are possible alternatives, but for 

the reasons I stated previously, they are reluctant to do that. But 

it goes beyond the concern of providing health care for their employees when it comes down to attracting new employees. The fact 

is they can’t afford insurance and that is a barrier to getting qualified people to come and help their business grow and thrive. Add 

that on to the ever-increasing cost of health care insurance and so 

on, as you can imagine, it is a topic every month in the Chamber 

and how we can better help our people. 

With regards to—I don’t know if I can give you an answer as far 

as what the number one item is. I think it depends on the individuals we talk about as far as MSAs. I do know they also perceive 

it and it makes them better consumers. They perceive it as their 

money, therefore they work much closely with their health care 

providers in making sure it is the smartest thing to do. And we 

know that because it is their dollars, they are willing to spend 

15

more time and efforts considering wellness issues and preventive 

care issues, things of that nature. 

I can tell you with my company where we are not a small business, and we provide health care, at least we do today that, you 

know, those kinds of issues don’t come into play when it comes to 

controlling the health care costs, and there is always a third or 

fourth party that is intervening and so on. 

So I think there is a lot of positive effects to these MSA accounts 

that are of value. And I can tell you with regard to all the folks 

that I know that are in business, the issue is not is there an alternative, like MSAs as far as providing health care in the future or 

not, the issue is can we afford health care insurance anymore? And 

more and more of us are saying no. 

Chairman TOOMEY. My time for questioning has expired. I do 

have some other questions. I will wait until the second round of 

questioning. At this time, I will recognize the gentlelady from California and ranking member. 

Ms. MILLENDER-MCDONALD. Let me first apologize for my absence earlier because I had an amendment on the floor and then 

I had a markup and then the bell rang, and I had to run to the 

floor. So for all of you who have testified before my coming in, I 

apologize I did not hear you, but I have read some of your testimony. I want to ask all of you—you know, Mr. Miller, this is really 

not a laughing matter, it is really a very deep concern of the small 

businesses in my district. And I suppose we get to the bottom of 

what do we define as a small business and we go from that vantage 

point as to whether or not we can afford all of these MSAs and the 

flexible spending accounts and all of those that has been outlined 

here. 

It is important to address, though, the current state of the health 

care crisis, especially for small businesses, if we, again, talk about 

all small businesses and we are talking minority women and others 

and we are talking about from the mom and pop stores to the ones 

that have, I suppose, 50 or more employees. And I think where we 

have to have some dividing lines because really when you talk 

about that person who is trying to stay or sustain as an entrepreneur as opposed to one who are sustained and really have a bottom line profit, if you will, we are talking about two different types 

of small businesses. And we look at six out of every ten uninsured 

Americans are in families headed by workers who are self-employed or work in a firm with less than 100 employees. 

So how can this help that minority who has this type of scenario, 

fewer than 100 employees, and is trying to stay on board to break 

even in some cases or maybe have a slight bit of a profit. How 

would these MSAs or flex savings accounts help them? 

Mr. MILLER. Well, to take them in pieces, the medical savings account allows the small employers to do what the employers can do 

best, first stay in business, continue to offer a good job to the employees the best they can, and provide the best value insurance 

choice that they can afford. It ultimately is the total value of what 

is produced in the enterprise and the worker who is working there. 

The money is not coming from some independent realm. By combining the lower cost premium of a higher deductible insurance policy we are targeting the dollars for insurance to where they can do 

16

the most good, the greatest need which is high cost, serious medical 

conditions, which is what insurance at a minimum should be there 

to protect you against. 

In addition, it allows the opportunity to better manage your own 

compensation dollar to be able to devote it and target to the type 

of health care expenses that the individual worker believes delivers 

the best value to them. And over time, as they manage their health 

care most effectively they reap the rewards from that. That is what 

the accumulation of funds and the MSA or the opportunity to 

spend it on other types of out-of-pocket health care would allow 

them to do. It doesn’t allow the business to have more money than 

it was currently was earning. It doesn’t allow the employee to have 

a higher wage than they had, but they get to find better value for 

that same amount of the compensation dollar. 

Ms. MILLENDER-MCDONALD. How would you—and I am interested in trying to give some tax credits to small businesses. To me 

that is the first and foremost of helping them. When we talk about 

obstacles, those obstacles to me start with some type of tax credit. 

Now are you amenable to that before we get into the other proposals we have here today. 

Mr. MILLER. I think we need to think about who is in need and 

what that need is based upon. Just because there is a small business I am not quite sure why they step up to the window and say 

feed me first. What is the small business supposed to be doing? It 

is running a business for a profit. Unless we wish to subsidize 

every small business in the country which doesn’t have a positive 

profit picture, I am not quite sure what the theory in that regard 

entails. There may be workers in those companies who might need 

assistance, or at least be able to gain the same type of tax assistance that other workers do, but that is a different issue than saying in effect that somehow they move in front of the income subsidy line. 

We have people who are disabled. We have people who are very 

low income who are not adequately being served in the traditional 

public program. 

Ms. MILLENDER-MCDONALD. Let us get real. We are not talking 

about subsidies per se, we are talking about tax credits that will 

enable them to go into a type of health based or a health insurance 

type of policy or proposal. But we are not talking about a subsidy. 

We don’t talk about subsidies when we talk about the higher end 

of the tax credit being given to business. We are talking about tax 

credits to afford them the opportunity to do other things with the 

funding they would otherwise have to pay in taxes. 

Mr. MILLER. The current Tax Code says if you are a business, ordinary and necessary business expense includes health care compensation as well as wage compensation. It is deductible. That is 

available to you currently under the Tax Code. 

Ms. MILLENDER-MCDONALD. And an additional tax credit you 

would not be amenable to then? 

Mr. MILLER. I think we need to consider why we would be steering an additional type of tax assistance to some people and not others. What is the basis of equity there? 

Ms. MILLENDER-MCDONALD. No. I am not suggesting that. It 

would be across the board. 

17

Chairman TOOMEY. The gentlelady’s time has expired and we 

will do another round. And at this time, I would like to recognize 

the gentlelady from Georgia. 

Ms. MAJETTE. Thank you, Mr. Chairman, and good afternoon 

gentlemen. I, too, like the gentlewoman from California was not 

here for all of your testimony, but I certainly do appreciate you 

being here and your interest in sharing the information with us. 

From what I understand, concerning the MSAs, they have been 

in existence since 1999, and at that—with that, there really haven’t 

been very many set up in the grand scheme of things. And I guess 

my question is, given the small number of those that have been set 

up, what makes you, Mr. Miller, or any of you think that we have 

a large enough sample that this should be something that should 

be expanded to a larger number of people if there—or a larger 

number of businesses if the 750,000 MSAs that could have been set 

up still haven’t been set up. 

And does that indicate at all a lack of interest or that this particular model is not one that is really going to be cost effective in 

terms of providing the kind of coverage that we—I think we want 

to make sure that people have in the system? 

And, Mr. Miller, if you could address that. 

Mr. MILLER. Sure. The problem is not the numerical cap of 

750,000. It is a problem of who was allowed to be eligible to set 

up an MSA. It was deliberately—the market was artificially limited 

to be, in effect, thwarted before it could grow. It was limited to employers with 50 or fewer employees as opposed to being available 

to all businesses. 

That has been the fundamental reason why the MSA market has 

not grown larger; it hasn’t been potentially large enough or attractive enough to major insurers to invest in that market, as well as 

some other rules that may be kind of complex and difficult to get 

under way. 

They were set up in 1997, and then there are different estimates 

in terms of the number of MSAs. The IRS count tends more to be 

a low-ball count around the 60,000 mark. It is probably about 

100,000 or so Archer MSAs currently. 

What the MSA option potentially offers is simply a chance to 

kind of reconfigure the health benefits dollar. If you wish to kind 

of cut it up differently and decide to buy less insurance and provide 

more ability to handle health care on a first-party basis and save 

some money and be cost conscious, you have the opportunity to do 

so. So all we are trying to say is, let’s have a fair and honest, level 

playing field experiment, which is to say, buyers of all types of 

health insurance and health care should be able to access this option along with any other one. 

Mr. PARK. If I may——. 

Ms. MAJETTE. Yes. I was going to ask you, Mr. Park, to give me 

your perspective on it. 

Mr. PARK. Well, when the MSA demonstration project was originally established, part of the legislation included a GAO report 

that said, you know, this is—the GAO is going to examine to see 

if adverse selection actually is—which was the potential risk that 

some opponents had raised whether it would actually happen. 

18

Unfortunately, because of the sample size, there hasn’t really 

been an ability of GAO to finish that report. They never were able 

to analyze the adverse selection effects. So it is a question of 

whether we are willing to expand the MSA project to make it universally available without a cap to all individuals, all businesses, 

without being able to verify whether or not adverse selection could 

result. And as my testimony indicated, adverse selection is definitely a risk. 

I think the other point I would like to raise is that one of the 

arguments in favor of MSAs is that it discourages unnecessary utilization of health services if you have a large deductible, for example, less comprehensive benefits. The RAND health insurance experiment which is sort of the largest examination of cost sharing 

found that cost sharing does reduce utilization. But for low- and 

moderate-income individuals, it discourages necessary use of health 

services. The value of comprehensive services is that people who 

are poorer, sicker, older, can get the services they need. And MSA 

could leave many of the poorer, older, and sicker workers out in the 

cold. 

Ms. MAJETTE. Thank you. 

Mr. MILLER. Well, that is overstating and misstating what the 

RAND—there is an evidence of kind of—some screening for high 

blood pressure, which could have been handled through other 

means, is about the only blip in the data which—that is a great exaggeration of some kind of unneeded care not being done by lowincome people. 

Most of the other speculation about adverse selection is simply 

that, speculation. We don’t find the evidence actually going out 

there in the marketplace. 

Ms. MAJETTE. You are saying screening for high blood pressure? 

Mr. MILLER. It was a tiny fraction of the entire population. What 

the RAND experiment as a whole said was, for all the—the average 

user and most of the users in that experiment, their health outcomes were not affected in any way, but they consumed a good bit 

less health care. Primarily, they were economizing on outpatient 

care; hospitalization was about the same. There wasn’t a lot of 

shopping around for different dollars. 

This was done in about the mid–1970s, but these worries about 

folks suddenly having major health care needs not being met because of these higher deductible choices are not borne out in the 

RAND data whatsoever. 

Ms. MAJETTE. My time has expired. 

Chairman TOOMEY. The gentlelady’s time has expired, and we 

will begin a second round and you are more than welcome to stay 

and ask another round of questions. And I will begin with a question for Mr. Hall. 

As I was trying to follow your example, your personal example 

of your experience in obtaining health insurance as a self-employed 

individual, it sounds to me like you pay a total of about $1,000 in 

extra taxes, 15 percent of $7,000-odd roughly, more than what 

would be paid in taxes if you were an employee of a corporation 

providing the exact same set of services and receiving the exact 

same compensation. 

Is that about right? 

19

Mr. HALL. That is correct. 

Chairman TOOMEY. And you mentioned that, you know, we use 

tax policy often as a way to try to influence behavior. And we have 

what we famously call ‘‘sin taxes’’ where we impose really quite 

substantial taxes on items that we think it is probably not such a 

great idea for people to consume, such as tobacco and alcohol for 

instance. And the result, of course, is to try to discourage people 

from consuming those things. 

I wonder, do you think that we are having the unintended effect 

of discouraging people from going out and buying health insurance 

by imposing this artificially high or, at least I would argue, unfairly high tax on it? 

Mr. HALL. Well, I certainly hope that is not the intent. I think 

I had mentioned earlier that I personally believe that this particular inequity in the Tax Code is an inequity that has been overlooked until now. 

I think if you go backwards and talk about the sin tax, or trying 

to encourage consumers to respond in a particular different way 

than they are doing, to promote some action, then this tax would 

look like we are trying to encourage the self-employed not to have 

insurance, which again, based on the testimony here today, the 

conversations that you have got—have had over months, would certainly not make sense. But it is certainly a situation where the 

self-employed pays 15.3 percent more for the same coverage than 

the guy sitting right next to him does, just because he is self-employed. 

Chairman TOOMEY. Thank you. 

Mr. Park, do you support H.R. 1873? 

Mr. PARK. I haven’t had a chance to fully examine that. 

Chairman TOOMEY. Okay. Fair enough. 

I wanted to ask you a question about employer-based health 

care, and I am not seeking to, by any means, do away with employer-based health care. I think there are a lot of merits to it. But 

I also think there are problems. And, you know, I can’t help but 

observe that employers don’t typically provide any other form of insurance for their workers—life insurance or automobile insurance 

or property casualty insurance. It doesn’t strike me as pure coincidence that those forms of insurance which an employer could go 

out and buy for their employees wouldn’t get the same kind of tax 

treatment as health care insurance does. 

My question is, do you believe there is something intrinsic to 

health care insurance that it ought to be provided by employers 

and that there isn’t any other model; or do you think there is a better model out there? 

Mr. PARK. I think the value of employer-based coverage is the 

pooling mechanism. I think that selection issues are certainly a 

phenomenon that occur when insurers look at a health insurance 

provision and the ability to pool together both—primarily healthy 

risks, low risks with older and sicker workers who may be higher 

risks allow the provision of health insurance at an affordable rate. 

I think that if you move in the system where people are individuals out on their own, then you have a medical underwriting situation where an individual’s risk is assessed, where an older and 

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ices in their experience history will be unable to access coverage in 

the individual market because it is generally unregulated. 

So I think that’s the value of employer-based coverage. It serves 

as a pooling mechanism for health insurance. 

Chairman TOOMEY. So you—and the purpose, in your—if I understand you correctly, of the value of having a pooling mechanism 

is to avoid adverse selection. 

Mr. PARK. Yes. 

Chairman TOOMEY. Mr. Miller, you don’t believe that adverse selection is really a problem with individually-purchased insurance; 

is that correct? 

Mr. MILLER. No. The actual better research in the field indicates 

there is less pooling that goes on in the employer group market 

than is commonly believed. There is actually some separation like 

with—older workers have wage offsets, so in effect there are some 

implicit take-backs of what is supposed to be this great pooling of 

health care costs. 

And in the individual market it is much more erratic. There is 

no kind of clear sign that, in effect, the highest risk is paying the 

highest cost. In fact, the problem with the individual market is, the 

administrative loads are so high that that kind of makes it a bad 

value for a lot of people until they can search out a better number. 

What we need is a more effective, deeper pool of parties in the individual market. 

In addition, you can protect against what are your worst fears by 

simply adequately financing high-risk pools, which deal with a tiny 

fraction of the population which might be subject to high health 

care costs. That is something where a State or another body needs 

to step up to the plate and say, we recognize that these folks can’t 

afford their health care; it is way beyond the bounds of private insurance prices for them to afford. 

But that involves a small section of the market, while we should 

allow the rest of the market to do what it does. 

Chairman TOOMEY. So in a way you are saying, we shouldn’t design a system around the exception, but rather let the system work 

for the vast majority and then find a solution——. 

Mr. MILLER. Correct. 

Chairman TOOMEY.—that works for the folks that would be an 

exception? 

I will yield the time to the gentlelady from California. 

Ms. MILLENDER-MCDONALD. Mr. Miller, what would be that solution for those who are unable to be in that larger pool of businesses 

that would then buy into the proposals that we are outlining here 

today? 

Mr. MILLER. Well, I am not suggesting any kind of one single 

pool of businesses. I don’t want to kind of steer you wrong in that 

regard. Each business, or the worker, should decide what their options are. 

The general concept of the high-risk pool tends to operate at the 

State level. Some States do it well; other States don’t. It usually 

comes down to how generous they are with the funding for this. 

I would point to the State of Illinois as doing a particularly good 

job in terms of running a high-risk pool. They, in effect, find if an 

individual has been denied by several private insurers, or at least 

21

priced beyond a certain level; sometimes it is set at 150 percent of 

the standard rates for someone in their particular category, or 200 

percent. Then, in effect, the cost of their comparable insurance coverage, run through the high-risk pool—usually through, in effect, 

the subcontracted private insurer—is subsidized by the State. 

A lot of States probably make the mistake of imposing premium 

taxes on the insurers in the State, and they just recollectivize the 

surcharge as it is. The better way is to do it through State general 

revenues. But the political impulse is always to try to hide the cost, 

and they even kind of put it through regulatory cross-subsidies 

rather than simply acknowledging the fact that something ought to 

be paid for, it is the right thing to do. 

Ms. MILLENDER-MCDONALD. Given that the MSA is a relatively 

new concept and the GAO report has not been completed, why are 

we rushing to do this? 

Mr. MILLER. There are two different things going on here. The 

high-risk pools have been around for a long time. They have actually been growing. I think we are at about 30 States right now with 

high-risk pools. And if you recall, the trade adjustment assistance 

provisions actually provided some additional Federal seed money 

both for more States to set up high-risk pools, as well as to subsidize the operating costs in future years of the current ones. So 

I think that is something that is growing, and there is more support for the high-risk pool approach. 

With regard to MSAs, again Congress set up a very bad—what 

is said to be an experimental demonstration project, which had a 

lot of flaws in it. You didn’t run the—the experiment wasn’t run, 

so in effect what was kind of a ‘‘the dog chewed up my homework’’ 

GAO response to that was simply because there weren’t very many 

folks in it. 

But there is nothing to be afraid of in allowing people to make 

their best value—maximizing choices in a more open environment. 

We shouldn’t be petrified at the idea that people of all walks of life 

should be able to go out and spend their health care dollars for 

what they think works best for them. 

Ms. MILLENDER-MCDONALD. Mr. Hall, how large is your business? 

Mr. HALL. I have three employees and myself. 

Ms. MILLENDER-MCDONALD. Okay. And so this would work well 

for you with three employees and yourself, these proposals that are 

before you today? 

Mr. HALL. Yes, I believe they would. 

Ms. MILLENDER-MCDONALD. Not going into your bottom-line 

net—your net worth, or your bottom-line profit—I will skip over 

that for the moment—but would you agree that expansion of MSA 

programs would generally benefit those who are healthy, as opposed to—and are in the higher income tax bracket? 

Mr. HALL. I am not sure how to address that. I think Mr. Miller’s 

comment on seed money, providing small business on a—first 

point, back to my testimony—equal footing with big business so 

that whether it is MSAs, it is tax credits, or it is moving the deductibility of health insurance premiums off the face of their tax 

return over to schedule C for self-employment tax, I think, is the 

critical part for small businesses like me. 

22

MSAs, in my experience, can be relatively complicated. I think 

the requirements of a specific type of health insurance policy, the 

high deductible, the fact that there has to be a third-party administrator involved are hurdles for small business people like me. 

I think Mr. Snyder had mentioned a couple of concepts of changing those deductibles required on the policies, changing things that 

I think would be very beneficial to people like me. My bias, my personal bias, is that it is not as attractive to the higher income people 

because I don’t think they typically have as much of a concern for 

the $1,000 of extra costs that I have, that could be saved under 

H.R. 73 just because the dollars are different. I am not sure that 

is necessarily reasonable. 

Maybe that’s not the way that it should be approached, but I 

think the higher volume of money that you have, whether that is 

defined as earnings or cash in the bank, some of those decisions become easier. I think that is a hurdle that the self-employed, the 

microbusiness may have to face, that some of the larger employers, 

the more wealthy individuals, may lose contact with because the 

volume of dollars just gets bigger and it is easier to make some of 

those decisions. 

I think there is a chance, a point-blank answer to your question, 

that those factors can help businesses like me. The thing I am here 

today to talk about personally again is moving my health insurance 

premiums that I do pay to the right place on my personal tax return. That seems to be the easiest approach to save me 15 percent. 

Ms. MILLENDER-MCDONALD. Mr. Chairman, I am going to have 

to ask Mr. Park this question. I am trying to get some of that time 

I am recouping from the time I was not here. I just want to ask 

him, are there any reforms other than the refundable tax credit 

that will help individuals purchase health insurance when their 

employer does not offer coverage? 

Mr. PARK. I think that, besides the credit to employers, one could 

also talk about public program expansions. I think that a number 

of small businesses, the ones who are least able to provide health 

insurance, are those with a disproportionate percentage of lowwage workers. The Kaiser Family Foundation, looking at small 

businesses they, were unable to offer coverage. Those that had an 

average wage of less than 2,200 per month were—less than half of 

those small businesses were able to offer health insurance. So these 

workers are in the range of 100–135 percent of poverty, where they 

could be able to access public programs, which is not only group 

coverage, but generally is affordable and provides comprehensive 

benefits. 

Now, certainly right now, with the State budget crisis, there is 

a need to shore up what is currently existing for public programs 

through fiscal relief to States to help them maintain their current 

programs. But over time the State budgets recover. Being able to 

help them expand coverage to working parents, who are disproportionately in a lot of these small businesses, would be very helpful. 

Ms. MILLENDER-MCDONALD. Thank you. 

Thank you, Mr. Chairman. 

Chairman TOOMEY. The gentlelady from Georgia. 

Ms. MAJETTE. Thank you, Mr. Chairman. I have lots of questions. I guess the—from your perspective, Mr. Snyder, in terms of 

23

the members of the Chamber of Commerce in your area, do they 

think or do you think that this is the right approach to take, the 

adoption of the MSAs, and that that will really help to resolve this 

issue of the cost of the insurance and making sure employees buy 

coverage and how that is going to play out in the marketplace overall? 

Mr. SNYDER. The answer is, it is one of the things that can be 

of great help. In my testimony, I pointed out that we have over 

4,000 members, 3,600 for small business, and we classify it as 50 

employees or less. And one of the roadblocks for them participating—and when you talk about pooling, we work hard at the 

Chamber to pool our members for insurance, and while that lowers 

the cost that you can buy—as far as them individually, it lowers 

the cost—it still doesn’t make it affordable in pooling in that situation. 

The roadblocks are, you know, that people are uncomfortable 

with it being temporary. That is one reason why they haven’t 

joined in the past. I mean, it is a very emotional issue. So the last 

thing you want to do is say let’s go over the emotion of giving you 

this program, and then face the potential of a year or two down the 

road pulling it away again. So people have been reluctant to do it 

because of that reason. 

The other is the relatively high deductibles. It has been pointed 

out that the small business person usually is—the employees are 

on the lower income end, and a vast majority of them have figured 

out, well, what is the sense of me belonging, because if I look at 

my cost, you know, there will be very few years where I actually 

hit that deductible and be covered. 

I think they see it as a viable alternative to a much bigger problem that needs to be addressed now and in the future. I think they 

will use it more if they—if we do make it a permanent program, 

if we lower the deductible, if we do make a couple of changes that 

I have had in my testimony, I think you will find a lot more interest in that. And I don’t agree, as somebody who is out there trying 

to get it done, that other businesses will see this as an alternative 

to dump—those businesses that are providing health care insurance, to dump that insurance for a less costly alternative. 

Ms. MAJETTE. And what would—from your frame of reference, 

what would be a reasonable deductible or one that, for the most 

part, your members would feel as though they could accommodate 

and would make sense for them to have? 

Mr. SNYDER. $1,000 for an individual, 2000 for a family. 

Ms. MAJETTE. Per year? 

Mr. SNYDER. Yes, ma’am. 

Ms. MAJETTE. And that thousand deductible would have to be 

paid before there was any—would there be a copayment after that, 

once that $1,000 deductible had been met? 

Mr. SNYDER. We don’t get that detailed, or at least I don’t—can’t 

answer that question. I mean, the big hurdle was the deductible 

and how high they are. And so the incentive, or the feedback, was 

to go with $1,000, as I said, for the individual and 2000 for the 

family. 

Ms. MAJETTE. And, Mr. Miller, I see you frowning. 

24

Mr. MILLER. Well, we have just got another dog that is barking, 

and it isn’t being heard on this issue, which is health reimbursement accounts. 

In effect, we are running a different experiment that is beginning 

to grow, primarily starting in the self-insured, larger-employer 

market, but it is going to move down to the small employers fairly 

rapidly. That is, from last year, if you recall last year’s tax ruling 

which, in effect, said you could get kind of like an MSA, except it 

had to be employer money, through a health reimbursement account. 

What employers increased—they were already beginning in a 

post-managed-care world, trying to figure out how to make insurance affordable without the type of controls that their workers 

didn’t want. So what they have gone to is increased cost sharing, 

other ways to, in effect, hollow out or carve out that front end of 

coverage. 

What they are combining that with are what are called these 

‘‘health reimbursement accounts,’’ which are tax advantaged, in 

which the employer says, we will fund some up-front benefits for 

you to deal with things like preventive care, some things that you 

want to use up front, and then there is a deductible after that generally. It’s usually 500, $1,000, probably about at most $2,000, and 

that is not most of them. And we are seeing more and more employers going to this as a way to get around what are the barriers 

to having straightforward MSAs. 

And the general experience with these accounts is, the utilization 

is down, the workers are happy, the budgets are under better control, and more and more employers are going on to them. The flaw 

in this is that the money is exclusively the employer’s contribution 

because of the way the Tax Code works. 

It is not vested in the employee; if you leave the job, unless you 

have the very benevolent employer we haven’t found out there thus 

far, you don’t get to take it with you; so you don’t have that kind 

of long-term buildup of equity that you get in an MSA. But, in effect, the market is trying to do the best it can with the tools it has. 

Ms. MAJETTE. Mr. Park, did you want to jump in on this? 

Mr. PARK. Well, I think the issue with health reimbursement accounts is that most of the large employers looking at these accounts are looking to cut costs. So that means that the coverage 

that they are going to provide, the sort of high deductible policy, 

similar to an MSA—but as Mr. Miller said, without the tax advantages—and the amount of money that the employer contributes to 

that account on behalf of the employee for use as part of this arrangement is generally going to be less than the value of the premium for more comprehensive, traditional coverage. 

So for workers who have significant health care needs, who may 

not be able to afford that, especially those who are lower income 

and do not have the resources to meet that differential between the 

out-of-pocket costs that would be covered by comprehensive coverage and the lesser amount that may be in their spending account, plus the high deductible and other less comprehensive benefits of getting through high deductible policies. 

Ms. MAJETTE. Thank you. 

Chairman TOOMEY. Well, thank you all very much. 

25

We will let Mr. Park, who has provided an articulate dissenting 

opinion for the most part today, and I thank him for his testimony, 

as well as everybody. And I would also like to thank you all for 

your patience during the long interruption. I think this was a very 

useful exchange and I appreciate the input from each and every 

one of you. 

And the hearing is adjourned. 

[Whereupon, at 11:45 a.m., the subcommittee was adjourned.]

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