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53–986—PDF 2007

S. HRG. 110–967

SMALL BUSINESS HEALTH INSURANCE:

BUILDING A GATEWAY TO COVERAGE

HEARING

BEFORE THE

COMMITTEE ON FINANCE

UNITED STATES SENATE

ONE HUNDRED TENTH CONGRESS

FIRST SESSION

OCTOBER 25, 2007

(

Printed for the use of the Committee on Finance

COMMITTEE ON FINANCE

MAX BAUCUS, Montana, Chairman

JOHN D. ROCKEFELLER IV, West Virginia

KENT CONRAD, North Dakota

JEFF BINGAMAN, New Mexico

JOHN F. KERRY, Massachusetts

BLANCHE L. LINCOLN, Arkansas

RON WYDEN, Oregon

CHARLES E. SCHUMER, New York

DEBBIE STABENOW, Michigan

MARIA CANTWELL, Washington

KEN SALAZAR, Colorado

CHUCK GRASSLEY, Iowa

ORRIN G. HATCH, Utah

TRENT LOTT, Mississippi

OLYMPIA J. SNOWE, Maine

JON KYL, Arizona

GORDON SMITH, Oregon

JIM BUNNING, Kentucky

MIKE CRAPO, Idaho

PAT ROBERTS, Kansas

JOHN ENSIGN, Nevada

RUSSELL SULLIVAN, Staff Director

KOLAN DAVIS, Republican Staff Director and Chief Counsel

(II)

C O N T E N T S

OPENING STATEMENT

Page

Baucus, Hon. Max, a U.S. Senator from Montana, chairman, Committee

on Finance ............................................................................................................ 1

WITNESSES

Ario, Joel, insurance commissioner, Pennsylvania Department of Insurance,

Harrisburg, PA ..................................................................................................... 3

Bianchi, Alden J., member, Mintz, Levin, Cohn, Ferris, Glovsky, and Popeo,

P.C., Boston, MA .................................................................................................. 5

Blumberg, Linda, principal research associate, Urban Institute, Washington,

DC .......................................................................................................................... 7

Newman, Monty D., 2007 vice president and liaison to government affairs,

National Association of Realtors, Hobbs, NM .................................................... 9

ALPHABETICAL LISTING AND APPENDIX MATERIAL

Ario, Joel:

Testimony .......................................................................................................... 3

Prepared statement .......................................................................................... 33

Responses to questions from committee members ......................................... 44

Baucus, Hon. Max:

Opening statement ........................................................................................... 1

Bianchi, Alden J.:

Testimony .......................................................................................................... 5

Prepared statement with attachment ............................................................. 50

Responses to questions from committee members ......................................... 59

Blumberg, Linda:

Testimony .......................................................................................................... 7

Prepared statement .......................................................................................... 64

Responses to questions from committee members, with attachment ........... 82

Hatch, Hon. Orrin G.:

List of sole proprietors by State, provided by the Coalition Supporting

Equity for Our Nation’s Self-Employed ...................................................... 100

Newman, Monty D.:

Testimony .......................................................................................................... 9

Prepared statement .......................................................................................... 101

Responses to questions from committee members ......................................... 109

Salazar, Hon. Ken:

Prepared statement .......................................................................................... 112

Snowe, Hon. Olympia J.:

Prepared statement .......................................................................................... 114

COMMUNICATIONS

America’s Health Insurance Plans (AHIP) ............................................................ 117

Healthcare Leadership Council .............................................................................. 137

National Association of Homebuilders ................................................................... 140

National Small Business Association (NSBA) ....................................................... 142

Professional Photographers of America/Alliance of Visual Artists ...................... 152

(III)

(1)

SMALL BUSINESS HEALTH INSURANCE:

BUILDING A GATEWAY TO COVERAGE

THURSDAY, OCTOBER 25, 2007

U.S. SENATE,

COMMITTEE ON FINANCE,

Washington, DC.

The hearing was convened, pursuant to notice, at 10:06 a.m., in

room SD–215, Dirksen Senate Office Building, Hon. Max Baucus

(chairman of the committee) presiding.

Present: Senators Rockefeller, Bingaman, Kerry, Lincoln, Wyden,

Hatch, Snowe, and Smith.

OPENING STATEMENT OF HON. MAX BAUCUS, A U.S. SENATOR

FROM MONTANA, CHAIRMAN, COMMITTEE ON FINANCE

The CHAIRMAN. The committee will come to order.

In 1790, Edmund Burke wrote, ‘‘What is the use of discussing a

man’s abstract right to food or medicine? The question is the method of procuring and administering them.’’

Two centuries later, we in this committee continue to debate the

right to health care. But two centuries later, the real question continues to be how to make sure that health care is actually available.

I have been saying all year that I view the expansion of the Children’s Health Insurance Program as the first step toward providing

access to health care for every American. I wish I could say we

have taken that first step. Now it is time to plan the second step.

We have not completed that first step, but we will soon. This morning we are here to explore our next steps. We are here to consider

how we can help employees in small businesses to get the kind of

health coverage they need, at a price they can afford.

Why small business employees? That is where half of the uninsured are. Half of the uninsured workers either work for employers

with fewer than 25 employees or are self-employed. We will help

a big chunk of the uninsured if we can figure out how to provide

affordable insurance options to small business employees.

It is our job to create a gateway to health coverage for the millions of small business employees who have none, or who are struggling to keep the coverage that they have. What we learn today

will help us to shape a bill that we can mark up in the committee

later this Congress. We have some difficult decisions to make.

Many proposals to assist small business employees share common elements: they include a tax credit to help defray costs; they

include a mechanism to provide more insurance options that are

2

meaningful and affordable; and they include opportunities to pool

risk across State lines. As usual, the devil is in the details.

There has been strong disagreement about how best to approach

broadening insurance options for small business employees. There

have been differences about what rules should apply to pooling

across State lines, and another difficult issue has been how to

make sure that the self-employed will benefit from small business

reforms.

The special concerns of the self-employed will be an important

part of small business health reform. A tax credit or other financial

assistance for a self-employed person is useful only if coverage is

available. Many self-employed people have to look for coverage on

the individual market, and in that market protections are limited

and coverage can be denied.

A bill that comes out of this committee should provide more insurance options to the self-employed, and it should also make sure

that this insurance offers real coverage that is worth the money.

I hope that we will begin to tackle this and other difficult problems

today.

Now, some may be thinking that we should not look at small

business reforms. Some may be thinking that we should be bolder.

Some may be thinking that we should revamp the whole system,

and believe me, I understand the need for broad reform. But for

now, I ask my colleagues to keep an open mind. Helping small

business employees is, itself, a worthy goal. In helping small business employees, we can also take another step toward broader reform.

This committee has a proud tradition of coming together to resolve difficult issues, and I believe that we can continue that tradition here today. I believe that we can produce a proposal that will

help small business employees get, and keep, meaningful health

coverage.

Let me assure you, children’s health insurance remains my priority at this moment. We will see it through. Then when we have

taken care of America’s children, we can take the next step to help

employees. We can help small business employees to get, and to

keep, health insurance coverage.

So we will continue to work to advance the right to health care.

We will continue to fight to expand coverage for America’s children

and small business employees, and we will continue the struggle to

ensure that affordable health care is available to all Americans.

I would like to introduce our witnesses. It is my pleasure to introduce Joel Ario, an insurance commissioner for the Pennsylvania

Department of Insurance. Thank you for coming today, Mr. Ario.

He will testify on behalf of the National Association of Insurance

Commissioners. Then Alden Bianchi, a member of the law firm of

Mintz and Levin. Next, we have Linda Blumberg, principal research associate at the Urban Institute.

I understand that Senator Bingaman would like to introduce our

other witness today. Senator, please do so.

Senator BINGAMAN. Mr. Chairman, Monty Newman is here, representing the National Association of Realtors. He is a very prominent citizen of our State. He’s the mayor of the town of Hobbs, NM

and has been for several years, and before that was on the city

3

council and had a number of other civic positions of responsibility.

He has been very successful as a realtor in southeastern New Mexico and is now the vice president and liaison of government affairs

for the National Association. So, I am very glad to welcome him

here, and thank you for including him as a witness.

The CHAIRMAN. Thank you, Senator. Welcome, Mr. Newman.

Thank you.

All right. Let us begin. Mr. Ario, why don’t you begin? As you

know—or you may not know, but I will tell you—all of your statements will be included in the record, and we encourage you to stick

within the 5-minute rule.

Senator SMITH. Mr. Chairman?

The CHAIRMAN. Senator Smith?

Senator SMITH. If I might give a special welcome to Mr. Ario. Before he was in Pennsylvania, he was the insurance commissioner

in Oregon. It is great to see him again. I am counting on him giving us a dual-State perspective. We are dealing with dual eligibles

all the time. Maybe you can talk about dual States, Joel. Good to

see you. Thank you for being here.

The CHAIRMAN. Now, why did he leave Oregon?

[Laughter.]

Senator SMITH. I assume it was money, because there is no other

reason.

[Laughter.]

The CHAIRMAN. Very good. All right.

Mr. Ario, with that, you can say whatever you want to say.

STATEMENT OF JOEL ARIO, INSURANCE COMMISSIONER,

PENNSYLVANIA DEPARTMENT OF INSURANCE, HARRISBURG, PA

Mr. ARIO. Thank you, Mr. Chairman. I have not yet come up

with a good answer for that, and I will not try today. It is good to

be with you today. This is an issue—small business insurance and

the affordability of insurance for small business—that has been at

the top of my agenda for my 14 years as a regulator, and has been

at the top of the NAIC’s agenda as well.

States have taken a number of important steps to help the small

business community, such as the small group reform laws that we

passed through the States that eventually led to the HIPAA law in

1996. We look forward to working with this committee to take further steps to improve the climate for small businesses.

Today I am going to address three of the specific comments that

are in front of the committee, as I understand it, in proposed legislation: the first one is multi-State pooling; second, pooling of individuals and sole proprietors into the small group market; and

third, creating a uniform benefit package.

Let me start with the multi-State pooling issue. The States have

some experience with pools beyond the small group pooling. I think

it is important to always start with the fact that the small group

laws in each State are a form of pooling risk, so, in every State except my current State of Pennsylvania, Hawaii, and the District of

Columbia, there are small group pooling laws already that allow

the small groups to pool risk.

4

But States have gone beyond that to create purchasing pools—

the two most prominent examples are California and Florida—and

they had some success in offering small businesses more opportunities through those pools. But they did not work as well as people

had hoped they would on the efficiency and administrative savings

side, and both of those efforts have floundered and basically are not

operative today. So I think it is an area we want to proceed with

caution on—with purchasing pools—but it is certainly an area to

be looked at.

A couple of key issues that I would highlight from the insurance

perspective when you are dealing with small group pools, and I am

going to get right into the tough stuff here. One of them is the

question of benefit mandates. I think in order to have an effective

and efficient multi-State pooling, you have to have uniform benefits

across States. Then you get into the question of, how do you balance the benefits?

I know, Senator Smith, you have been active on the mental

health parity issue. You have seen some of the difficulty there

where folks at the State level have passed these mandates, and

they are very entrenched interests in the States and it is very difficult to figure out how to move across State lines and deal with

that benefit mandate question. So that is one issue I think you

have to wrestle with: how to define a uniform benefit package that

deals with that question.

The second question is of great concern to us at the NAIC. Each

State that has developed small group rating restrictions has done

so in a way that is responsive to local conditions in that State.

Sometimes people say, in order to have a multi-State pool, you

need to preempt those State rating laws to be effective. That is not

true.

In fact, insurance will be priced under a multi-State pool the

same way Medicare is priced today—differently, State by State. So

you can have a multi-State pool in which the rating laws stay in

effect State to State, and we think that is very important.

If you do not do that, if you have a multi-State purchasing pool

here and a State small group pool here, whichever one gives more

favorable conditions will get the good risk and the other one will

get the bad risk, and so you are going to create a lot of selection

opportunities. So we think the rating laws need to stay in place in

any multi-State pooling effort.

On the second issue, pooling of individuals and sole proprietors,

the individual markets, as the chairman’s remarks referenced, are

generally more open and flexible than the small group markets. A

lot of young and healthy people get pretty good rates in most

States in the individual market. So, pooling the individual and

small group markets is a very challenging thing to do because you

are mixing two different types of rating systems.

The option that may be a better practical first step is to look at

the sole proprietor issue and move them into the small group market. Twelve States already do that. When we get to questions, we

can look into some of the details of that, but I would commend that

as a first step rather than trying to merge the two pools directly,

although Massachusetts is experimenting with that as well today.

5

Finally, on defining a benefit package, the States do not, in general, in their laws, define a benefit package. What they do is say

health benefit plans have to have all these mandates and all these

other rules, except the plans that are not health benefit plans are

the following, and they do by exception what is not the benefit

plan. So it is a real challenge, I think, to define specifically a major

benefit package. But we as State regulators do look at that issue

every day, and understand the fine print of how benefit configurations are put together, and we would be happy to work with the

committee on those issues as you get into the details of doing that.

A final comment. I wanted to reference Senator Bingaman’s bill,

S. 325, which would give the States some funding and some potential to get some relief from ERISA and other restrictions that impede State reform efforts today, because I think the States and the

Federal Government need to be full partners in this. Neither of us

can go it alone. So, I would commend Senator Bingaman’s and Senator Voinovich’s bill as a good first step to allowing the States to

be full partners here.

With that, I will conclude. Thank you.

[The prepared statement of Mr. Ario appears in the appendix.]

Senator ROCKEFELLER. Mr. Bianchi? I apologize to the witnesses

and to my colleagues for my lateness. It rarely, rarely happens.

[Laughter.]

STATEMENT OF ALDEN J. BIANCHI, MEMBER, MINTZ, LEVIN,

COHN, FERRIS, GLOVSKY, AND POPEO, P.C., BOSTON, MA

Mr. BIANCHI. Chairman Baucus, Ranking Member Grassley, and

members of the committee, thanks for inviting me here to speak to

you today. Thanks, also, to your staffs, who facilitated my appearance.

My purpose today is to outline for you key features of health care

reform efforts at the State level, including my home State, the

Commonwealth of Massachusetts.

During 2005 and 2006, I had the privilege of serving as outside

counsel to the Romney administration in connection with our Massachusetts health care reform law, and I currently represent the

Massachusetts Health Insurance Connector Authority. The connector, as it is called, is a quasi-governmental agency. Its principal

purpose is to provide access to affordable health insurance by individuals and small businesses.

By way of background, and as the chairman alluded to in his introductory remarks, there are really basically two fundamental

ways to do health care reform: one is a government-run, single

payor approach, the other is market-based, where we facilitate coverage through private insurance companies. There is, of course,

sharp disagreement over the merits of each, but, whatever your

view of the merits, the market-based approach is the one that is

currently being given the most serious consideration. It is also the

approach that we adopted in Massachusetts.

I understand the committee is considering market-based reform

proposals, and in this presentation I have identified five features

that seem to recur quite a bit: (1) connectors and gateways; (2)

small group insurance reform; (3) a section 125 plan cafeteria manVerDate 11-MAY-2000 16:39 Jan 12, 2010 Jkt 000000 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 53986.000 SFIN1 PsN: SFIN1
6

date; (4) tax funding mechanisms; and (5) individual insurance

mandates.

Connectors or gateways—remarkably flexible creatures, these

things. They give the opportunity to provide information to folks,

and access, particularly by small groups, to health coverage. They

can also establish regulatory and underwriting standards.

A connector may or may not itself be a risk-bearing entity. It can

be governmental. It can be a quasi-governmental agency. It can

even be a private sector entity. Connectors could be State-wide,

they could be regional, they could be super-regional, and I suppose

you could even do a nationwide connector, if you like.

In Massachusetts, what the connector does is it establishes a

marketplace. It is not an insurer, but it establishes a marketplace

for insurance and it defines what constitutes minimum accreditable

coverage for purposes of our State individual mandate.

Our connector has been very successful for a reason, and it starts

with first-rate board appointments, both by Governor Romney and

Governor Patrick, and also skilled leadership under John Kingsdale and his senior management team and a dedicated staff. I assure the members of the committee that this is not just an opportunity to suck up to an important client, this is the consensus view

in the Commonwealth.

On the items of small group insurance reform, we did merge our

individual and small group markets. This was a big, big step. But

if you think about it for a second, the individual market tends to

be relatively smaller, but much more highly adversely selected.

When we merged the two, we ended up with a 15-percent decrease

in individual rates for only a 2-percent increase in small group

rates, and it is a trade-off that appears to be working pretty well.

Risk pools, as Mr. Ario pointed out, can be State by State, they

can be multi-State, and you also get the opportunity to address

such things as guaranteed issue, guaranteed renewability, and

portability, which Mr. Ario understands far better than I, I will

confess.

Cafeteria plan mandates. Obviously, a cafeteria plan, all it does

is convert post-tax dollars to pre-tax dollars, but that is a pretty

nice thing. In Massachusetts, we require it of employers, even of

those employers that do not themselves offer health care plans.

Their employees, rather than get coverage through employersubsidized coverage, can go to the connector and get coverage. Now,

to the extent that any of your proposals dispenses with pre-tax

treatment, you could still require employers to funnel contributions

from the paychecks to insurance coverage.

On the subject of tax funding mechanisms, one of the other alternatives is a tax credit. I think one of the early proposals there that

lays it out in good detail was by The Heritage Foundation, where

they proposed a refundable, assignable, and advanceable tax credit.

These could either replace the current system or be used in conjunction with it, either way.

There is also the issue of individual mandates. I am not certain

that that is something that is on you folks’ agenda, but in Massachusetts—I guess we do not know yet. We have not put the real

penalties in—but it does do a few things. First of all, it solves a

lot of the problem of underwriting, where insurers are not worried

7

about adverse selection because everybody has to get covered, with

the exception of folks who cannot afford it. We have affordability

standards in our State. It also reduces, or at least in theory should

reduce, substantially the ranks of the under-insured, thereby taking a lot of the pressure off of emergency rooms.

Thank you for this opportunity to address this committee. I appreciate your attention, and I would be happy to answer any questions at the end.

Senator ROCKEFELLER. Thank you, sir.

Mr. BIANCHI. You are welcome.

[The prepared statement of Mr. Bianchi appears in the appendix.]

Senator ROCKEFELLER. Ms. Blumberg? Were you properly introduced by the Senator from New Mexico? I mean, did he point out

the Urban Institute, and all that? Did he just give you a name and

pass on?

Senator BINGAMAN. The Senator from Montana had that responsibility.

Senator ROCKEFELLER. Oh. I thought he was somewhere else. All

right.

STATEMENT OF LINDA BLUMBERG, PRINCIPAL RESEARCH

ASSOCIATE, URBAN INSTITUTE, WASHINGTON, DC

Ms. BLUMBERG. Distinguished members of the committee, thank

you for inviting me here today to share my views on health insurance and strategies for health care reform that affect small businesses and their workers.

While I am an employee of the Urban Institute, this testimony

reflects my views alone and does not necessarily reflect those of the

Urban Institute, its funders, or its board of trustees.

In brief, my main points are as follows: small employers face substantial disadvantages relative to large employers when providing

health insurance to their workers. These problems can largely be

summarized as higher administrative costs of insurance, limited

ability to spread health care risk, and a workforce with lower

wages. All of these problems must be addressed if insurance coverage is to increase significantly among workers in small firms.

First, fixed administrative costs make it inefficient for insurers

to sell coverage to small employers. The per-person price of buying

insurance for a small group of individuals will always be higher

than buying those same benefits for a large group. Allowing small

employers and individuals to purchase coverage through organized

purchasing pools, such as the Massachusetts connector, State employee benefit plans, or other such groups is an approach that could

provide small employers, sole proprietors, and other individuals

with an avenue for more efficient purchasing.

With regard to the second general problem facing small employers, the limited ability to spread risk, small employers tend to have

workforces with greater variance in year-to-year health care costs

than do large employers. Even one or two workers having a year

with high health care costs can have a significant effect on the average medical costs in a small firm.

This is not the case in a large firm, since there are so many individuals over which to spread the excess costs of a small percentage

8

of high-cost workers. Their greater variability in health care costs

means that small employers are, in general, better off when the

health care costs of their workers are spread very broadly.

The third general problem, and the one that I think is by far the

primary barrier to coverage for small firm workers, is that small

employers tend to have lower-wage workforces than large employers. This means that expansions of insurance coverage will require

significant income-related subsidies in order to make coverage affordable for a substantial number of uninsured workers.

For example, in 2007 a family of four with an income of 200 percent of the Federal poverty level earns $41,300. The average cost

of a family insurance policy in the employer insurance market in

the same year is about $11,730, or over 28 percent of that family’s

income. Because employers largely finance insurance by lowering

the wages of their workers, it is not practical to expect low-income

workers to voluntarily seek out that type of trade-off.

As a benchmark, it is worth noting that the median middleincome family with employer-sponsored health insurance today

pays only about 6 percent of their income in the combination of

premiums and out-of-pocket costs.

Once one accepts that significant subsidies will be required to expand coverage significantly, a host of design issues come into play.

These include defining what is affordable for families at different

income levels to contribute to the cost of their own medical care—

including protecting the unhealthy from excessive out-of-pocket

costs, mechanisms for making voluntary participation in insurance

coverage as easy as possible, and keeping the administrative costs

associated with delivering subsidies as low as possible.

I am quite confident, however, that we can design a policy approach that would significantly expand health insurance coverage,

would spread health care risks more broadly, and would do so at

reasonable administrative costs. Designing such a reform, complex

as it may sound at first, is actually the easy part.

The most difficult truth is that financial resources are necessary

for ensuring accessible, affordable, and adequate insurance for all

Americans. There are many options for identifying the necessary

funding, but I believe that serious consideration should be given to

a redistribution of the current tax exemption for employersponsored insurance.

The level of this tax expenditure is sufficient to finance comprehensive health care reform and is already dedicated to subsidizing health insurance. The current exemption is not particularly effective in expanding coverage, however, since it subsidizes

most those who are most likely to purchase coverage even in the

absence of any subsidy at all.

Reallocating the subsidy to provide greater value to the lowincome would be tax dollars better spent. But any changes to the

current tax treatment can be highly disruptive to the existing system of employer-based health insurance, so must be preceded with

significant reforms to the private individual insurance market to

ensure that access to insurance coverage for those already insured

not be adversely affected.

9

Thank you very much for the opportunity to share my thoughts

on these important issues, and I will be happy to answer any questions that you might have.

Senator ROCKEFELLER. Thank you very much.

[The prepared statement of Ms. Blumberg appears in the appendix.]

Senator ROCKEFELLER. Mr. Newman?

STATEMENT OF MONTY D. NEWMAN, 2007 VICE PRESIDENT

AND LIAISON TO GOVERNMENT AFFAIRS, NATIONAL ASSOCIATION OF REALTORS, HOBBS, NM

Mr. NEWMAN. Thank you, Mr. Chairman. My name is Monty

Newman. I am a realtor from Hobbs, NM, where I own two real

estate businesses. I also serve as the mayor of the city of Hobbs.

I appear here today in my capacity as the 2007 volunteer vice

president of the National Association of Realtors, representing the

Association’s 1.3 million members. We thank you for holding this

hearing, for the opportunity to testify, and particularly for your

willingness to explore the unique obstacles the self-employed face.

Our members have been heartened by the attention that you and

your colleagues on the committee have given this matter, as well

as that which Senators Durbin, Lincoln, Enzi, and Ben Nelson

have also demonstrated. Nearly all of NAR’s members are either

real estate sales agents who are treated as self-employed independent contractors, or self-employed broker/owners. The individual market is their primary source of health insurance.

Currently 28 percent of realtors have no health coverage. Ten

years ago, only 13 percent did not have health coverage. That high

number might surprise you. After all, under current law the selfemployed seem to have the best of all possible worlds, an abovethe-line deduction for 100 percent of their health insurance premiums.

This deduction has value, however, if, and only if, self-employed

individuals can find an affordable insurance product. The realtor

health insurance stories in our written statements show that affordable insurance products, even with high deductibles and/or

minimal coverage, are often out of reach or unavailable.

NAR would submit, Mr. Chairman, that the self-employed will

continue to struggle until there are corrections and improvements

to both the individual and small group health insurance markets.

We believe the tax incentives need to be coupled with the mechanisms that would create insurance coverage, gateways, and/or additional pooling mechanisms to create a more rational and effective

system than currently exists.

Imagine yourself without health insurance or without an employer who covers a significant portion of your premiums. Would

you be able to commit 10 percent of your income to insurance premiums? How about 20 percent, or even 25 percent? This is the dilemma of the self-employed person. Equally troubling, even if they

are willing and able to pay such prices for coverage, many realtors

have found that no insurers will offer them coverage. NAR has not

the expertise that would enable us to provide you with a full-blown

market reform model. That said, we do not have much good to say

10

about the current individual health insurance market. It simply

does not serve the needs of our self-employed members.

Based on our experience and the things we do know, we can

make several observations. First, the self-employed must be enabled to enjoy the benefits of larger pool risks, much as large group

plans provide their participants. This would facilitate greater market efficiency so that the individuals can benefit from the economies of scale that large plans currently enjoy.

We have no preference on whether pooling should be on a State,

regional, or other basis, but we do not seek Federal operation of

these pools. We believe pooling structures used should permit individuals to continue their health insurance coverage, even when

they move between States, and facilitate greater market efficiency

to keep down premium costs.

Second, some sort of mechanism is needed to bring insurers and

self-employed workers together, call that mechanism a matchmaker, gateway, coordinator, whatever you will. We believe that

some combination of private, public, or private/public venture must

be developed to allow self-employed persons to compare apples to

apples in their analysis of insurers and insurance products. We do

not seek a single-payor or a Federal insurance system. We do seek

an official, reliable, regulated, information source or sources that

will improve insurance market access for self-employed individuals.

Third, stakeholders, including insurers, regulators, legislators,

health policy advocates, and consumers, must grapple with the

question of what constitutes essential coverage. Today, a crazy

quilt of mandates has contributed to a regulatory landscape that is

fragmented, administratively complex, and obscures the fundamental reality that more or rigid coverage mandates may lessen access to health insurance for many consumers.

No single policy or list of mandates can satisfy the competing

tensions between providing all desired, or desirable, coverage and

creating affordable choices. It may be difficult to come up with

guidelines to distinguish what constitutes ‘‘essential,’’ ‘‘preventive,’’

‘‘desirable’’ or ‘‘Rolls-Royce’’ levels of coverage, but we do believe

that it is possible.

Mr. Chairman, to close, I would simply reiterate my earlier statements. NAR believes that tax incentives are useful, important, and

often necessary. Tax incentives will be most effective when they are

accompanied by significant reforms to the individual and small

group health insurance markets.

I thank you for the opportunity this morning to testify.

[The prepared statement of Mr. Newman appears in the appendix.]

Senator ROCKEFELLER. You have all broken a record, because you

all have ended exactly on time.

[Laughter.]

Senator ROCKEFELLER. Now comes our part, which is sort of the

lesser part of all of this. However, on a high note, we are going to

start the questions with Senator Bingaman.

Senator BINGAMAN. Well, thank you very much, Mr. Chairman,

for that very generous introduction. I appreciate it.

Let me ask about this issue of spreading risk and getting larger

pools. Everybody seems to agree that that is a good thing. One of

11

the reasons that it costs so much for small employers to provide

coverage or for the self-employed to get coverage is that the pools

are not large enough.

Senator Lincoln and Senator Durbin had proposed a bill in the

last Congress—I think again in this Congress—which would provide that we have a pool set up nationally for small businesses, essentially that would, as I understood it, be operated similar to the

Federal Employees Health Benefit Plan pool, but it would be a pool

strictly for folks who are involved in small business, employees of

small businesses, and the self-employed.

We never were able to get the votes to move ahead with that, but

I would be interested in any comment. Ms. Blumberg, you make

reference here that some of the multi-group purchasing entities,

such as proposed Federal licensing association health plans, would

tend to further segment the risks of small business workers as opposed to spreading them more broadly. So you are opposed to the

association health plan bill that I gather has been considered. Have

you looked at this other option? Does it make any sense, or not?

Ms. BLUMBERG. I have not looked at this bill specifically. But my

general comments are that when you are thinking about pooling

risk more broadly, you have to think very carefully about the fact

that we are still in an insurance system that is voluntary, so people

can opt in and out of different types of coverage. Depending on how

one of these pools is structured, you are either going to have more

success or less success with achieving your goal.

Let us say you continue to allow small businesses that can get

better prices to purchase their coverage outside such pools. If you

are having the only guaranteed source of coverage with a broader

risk pooling base in the purchasing pool, then you may still have

very significant selection problems that do not really address your

broader goals.

So, very much depends on how rating works within the purchasing pools and what other options are allowed for small employers. If they are opting in and out of these different options based

on health care risk, the goal of achieving broader-based pooling is

not going to be achieved.

Senator BINGAMAN. Mr. Ario?

Mr. ARIO. Yes. I agree very much with what Linda said there.

I would just add this. The starting point is that 48 of the 50 States

already have small business purchasing pools. They are called the

small group rating laws. In my former State of Oregon, that was

200,000 lives; in some of the big States, it is more than a million

lives. So there are those pools. They all have slightly different rating rules. Some of them are close to community rating, some of

them have much broader rate bands. But they share the commonality of bringing all the small group risks together and forcing

the carriers, the insurers, to pool the risk and then spread it a little bit underneath the rate band. So that is a starting point.

If you create another kind of pool, I think you can get some real

advantages from it in terms of employee choice and that sort of

thing, but you do not want to do it in a way that allows for the

selection issues that Linda talked about there. So we think it is

vital that those purchasing pools have the same rating rules as the

State pools, otherwise one of them is going to lose. One of them is

12

going to attract all the good risks, one of them is going to attract

all the bad risks; whether that is the national pool or the State

pool, it is not going to be good overall.

So I think that the key issue in thinking about pooling is, do not

upset the State pools, but you can do other pools on top of it as

long as they have the same rules. The sole proprietor issue is, I

think, a separate issue, because only 12 States allow the sole proprietors into those small group pools today.

A first step could be to say that all of the States should allow

those sole proprietors in, but, if you did that, you are going to create the problem that Linda talked about, which is the ones that are

the most healthy are going to go into those individual markets

where there are very few restrictions, and where if you are a good

risk you get a really good rate, and so the ones that will tend to

go into the small group pool from the sole proprietor side are the

ones that cannot get a good rate in the individual market. So, you

have some selection issues. But 12 States have figured out how to

do that, and that seems like a practical place to look.

Senator BINGAMAN. Let me ask one other question before my

time is totally gone.

Could you talk a little more about ERISA? Mr. Ario, you referred

to the fact that ERISA provisions interfere with the ability of

States to do some of the things that we would like to see States

doing here. What is that problem, and is it something we ought to

try to fix?

Mr. ARIO. Thank you very much for that question, Senator

Bingaman. It is a very important problem at the State level. We

cannot, today, even collect data on the large employer market in

order to figure out, what are their dynamics across the marketplace, because ERISA prohibits that kind of data collection. So we

think at a minimum we ought to be able to collect that kind of

data.

A lot of States, including my current State, Governor Rendell

would like to do some form of pay-or-play system so that employers

have a real stake in providing coverage. That is a big question

mark under ERISA today. So what we would like to see is some

relief from ERISA. We would prefer to have it across the board on

certain issues like pay or play. I think there are a lot of folks that

think States ought to be able to experiment with employer pay-orplay systems, and ERISA relief would allow that to happen.

If we cannot get that, then I think your bill is a very good bill

which says we will at least give some funding to the State to do

experimental things, and along with that funding we will give specific waivers of specific ERISA provisions as part of a specific reform effort. It is similar to what we have on the Medicaid side, and

Oregon has been a leader in using the Medicaid waiver. So at a

minimum, we think we need some kind of ERISA waiver to allow

the States to experiment, but even better would be some more clarity from the Congress that would allow States to do pay-or-play

type systems at the State level.

Senator BINGAMAN. Thank you, Mr. Chairman.

Senator ROCKEFELLER. Thank you, Senator Bingaman.

Senator Wyden?

Senator WYDEN. Thank you, Mr. Chairman.

13

I really see this very differently than the discussion we have had

today. If you open a small business today in the United States,

your premiums go up something like 12 or 15 percent a year and

you are up against foreign competition that gets health care for

free. So what happens is, an American small business today spots

their foreign competition something like 18 percentage points the

day they open their doors. I think tinkering with this is not going

to do very much.

I think that this fundamentally stems from a time warp that we

have had since the 1940s. What we did is, we put it on the employers’ shoulders and said, somehow you figure out how to make this

work. Now we are the only country on earth that so directly puts

health care into the price of goods and services.

So what I would like to ask you about is your thoughts about

something that essentially takes us out of the vacuum tube era

where we are and moves us to the microchip world for health care.

What we do is, over a period of time, cut the link that says primarily health care ought to be on the employers’ shoulders. Then

we fix the private marketplace along the lines that you have said,

Ms. Blumberg, because you are absolutely correct on that.

Then say we are going to have the individual purchase health

care in a fixed, private marketplace and have the employer be a

contributor to that, help to finance it. I would just be interested in

your thoughts on that. Why do we not just go right down the row?

There are nine U.S. Senators on a bipartisan basis who think that

is the way to go.

Mr. NEWMAN. Senator, first of all, our members truly do appreciate the attention that you have given to significant health care

reform. We also recognize that, as the American workforce continues to change, that there will be a continued erosion of the

employer-based insurance program.

What I would mention is, while we are not experts in the insurance field, we would be willing, and are willing, to work with you

in a very significant way regarding the health care needs of the

Nation. But we do, in fact, recognize a changing in the structure

of the American workforce, and health care coverage is a key component to our ability as a Nation to continue to meet the demands

of products and services worldwide.

Senator WYDEN. Before we go on, let me thank NAR, because you

all consistently are willing to work with us, and do it in a bipartisan way. People like Jerry Giovanella and others deserve great

credit for their bipartisan approach, and we thank you for your

comments.

Why don’t we go, next, to you, Ms. Blumberg? And thank you

also for pointing out that you can do this within the amount of

money that is being spent today on American health care.

Ms. BLUMBERG. Thank you, Senator. In general, I have feelings

that are quite consistent with yours on the current prominence of

the employer-based system and the difficulties with it. I may have

a couple of issues with some of the ways that you are thinking

about this with regard to the burden of maintaining a financing responsibility for employers. While it is difficult to think politically

about raising sufficient revenue to remove the employer payments

from the equation, we just——

14

Senator WYDEN. We do not do that. The employers continue to

have a shared responsibility.

Ms. BLUMBERG. No, I understand that. But my concern is that

we think about that shared responsibility very carefully, because

part of the problem with employer mandates, requirements of financing health care reform via employers, is that economists believe that the vast majority of the dollars that are contributed by

employers for the benefits of their employees really are paid, in essence, by the workers through reduced wages over time.

When you think about putting new requirements on employers,

the requirements are really going to fall most heavily, of course, on

those employers and individuals who do not have health insurance

today. Those are, in large part, the lower-wage, lower-income workers. So if you are thinking about putting more requirements on employers of low-income workers, then you have to think about that

as putting a new burden of financing on the low-income worker. So

that, I want to be really careful about.

The other issue that I would raise is that, when you are moving

from a largely employer-based system to one that is more individually based, the transition is going to be very critical. You do not

want to create new incentives to peel certain types of people out

of the existing employer-based insurance market when there is

really nothing to catch these people when they lose their coverage

through their employer. Particularly this is the case for the lowincome population and those with high medical needs.

So while I do not think any of us would pick the health care system we have today if we were starting from the beginning, we do

have what we have, and we have to be very cautious about how we

transition out into something new so that we do not, in the process,

disadvantage people who currently do have good coverage.

Senator WYDEN. I share your view. One of the reasons that I feel

so strongly about the change is that, if you make what we are calling for in terms of the tax changes, you get the money to subsidize

those people and you also get administrative savings because you

do it through the Internal Revenue Code. I know I am right on the

brink, and I will stop talking and let the other witnesses comment.

Senator ROCKEFELLER. Wait. This is an interesting technique. In

other words, you are a minute over your time.

Senator WYDEN. I learned this on the Intelligence Committee.

[Laughter.]

Senator ROCKEFELLER. Oh, you did? So you just ask all of them

to comment, and 12 minutes later Senator Kerry gets to speak.

Senator WYDEN. I am done, if that is the chairman’s pleasure.

Senator ROCKEFELLER. No. The chairman’s pleasure is to keep

you relatively happy.

[Laughter.]

Senator KERRY. In which case you make one relatively unhappy.

[Laughter.]

Senator KERRY. No, I am joking.

Senator ROCKEFELLER. Go ahead.

Mr. BIANCHI. A health care economist by the name of Len Nichols observed that if you assigned an economics graduate student to

design a health care system, the worst health care system possible,

that student would come back with what we have now.

15

I think there are five things, five criteria, that I think are required to make your proposal work, if I may be so bold: (1) guaranteed issue; (2) guaranteed renewability; (3) portability; (4) and this

is, I will admit, a little out there, I think the individual mandate,

because it does address the question of adverse selection. You get

everybody into the pool and then you are not fighting the battles

over that.

Then lastly, none of the proposals that I have seen to date address underlying cost. They are all aimed at access to coverage,

which is very laudable, but at the end of the day, if we do not want

to see the trend rate continue to climb, we have to do something

about the underlying costs.

Mr. ARIO. I have heard you speak about your proposal, Senator

Wyden, and we have had it presented at the NAIC. I think it is

a very good proposal. I think if we were starting from scratch

today, your proposal wins hands down over the employer-based system. So to me, the set of questions are, we have the employer-based

system. Do we move immediately to your system or do we try to

build on the employer-based system?

Governor Rendell wants to build on the employer-based system

that we have and have elements of your plan come into it. I think

one of the things that is very attractive about the individual approach is that it becomes an easier way to get at the cost control

sorts of issues.

It is easier to get the consumer involved in a meaningful way in

their own decisions, I think, under an individual approach as opposed to an employer-based approach. But I do think you need all

of the things that Mr. Bianchi testified to. I would add to that list

community rating, which I think is part of your proposal, too.

Senator WYDEN. Yes.

Mr. ARIO. If you have a level playing field for everybody, then

conceptually I think you have a very strong proposal. It tests out

well with the actuaries and so forth. It is just a question, really,

of getting from our current system to that system and whether we

want to preserve some of the things we have in the current system

in terms of employer role in the system.

Senator WYDEN. Thank you, Mr. Chairman.

Senator ROCKEFELLER. Senator Kerry?

Senator KERRY. Thank you, Mr. Chairman.

Senator Snowe and I have had the pleasure of working together

as chair and ranking member of the Small Business Committee,

and earlier this year we held hearings on this topic. We have sent

a letter to Chairman Baucus and to Ranking Member Grassley in

which we have set out four principles that I think ought to guide

our approach to this.

One is, obviously, we have to increase health insurance coverage

of small business, and we have been trying to do that by stabilizing

the ability of small employers to provide that care through targeted

employer-based tax credits for those who cannot afford it now. I

think tax credits is one critical way of encouraging it.

But, two, you have to have some kind of pooling mechanism that

empowers them to spread the risk and reduce the costs, but, third,

at the same time protects—and this is critical, and this is where

we find the greatest difficulty—vulnerable firms and workers from

16

being priced out of the market from cherry picking and through the

issue of the mandates, et cetera. We want to increase the options

available to them. Fourth, we want to provide self-employed and

sole proprietors with additional opportunities to be able to buy it.

Now, Mr. Bianchi, you have been through the experience of Massachusetts. We have this mandate there. But in Massachusetts, we

have some of the highest mandates with respect to the care that

we provide. The minute you start expanding this pool across State

lines, you run into this huge issue of dumbing down the system,

of not requiring people or not putting people in a position where

they are going to lose coverage that they currently have, or employers are racing to an alternative that is less comprehensive than

what they currently have.

They may have certain screening tests, they may have certain

coverage that just is not going to be available in the other State.

How do you deal with that? Do you take the highest level of care

and say that is going to be the care in the pool, and if you want

to be in a pool it is going to be the highest? How do you avoid this

scaling down of the quality of care between States and pools? Mr.

Bianchi, do you want to go ahead?

Mr. BIANCHI. Sure. I think one approach was suggested in the

association health bill, either last year or the year before, and Senator Enzi’s bill, where they looked to a combination of the mandates of various States that mixed them together into kind of a

mash-up of mandate requirements and then used that regionally.

I kind of like that idea.

Senator KERRY. But the minute you sort of do that mix-up, mash,

whatever you want to call it, let us say you are covered for X number of visits or you have a particular cancer screening that is covered, or mental health, or some other component, and then the

minute you switch out of there, those are not there? Are you not

creating an incentive for people to rush to the lesser coverage because it is less expensive?

Mr. BIANCHI. Well, Senator, I am not sure. We do not do that

now. Even in Massachusetts, you can buy low, medium, and high

coverage, with higher deductibles and co-pays. So I am not sure

there is ever a way out of that conundrum, except to say that we

all know, or we suspect, that a policy ought to at least cover critical

major medical items. I think there is, if not a consensus, some general agreement on the big——

Senator KERRY. But there are differences between the States in

what they are mandating.

Mr. BIANCHI. No question. No question.

Senator KERRY. So there are different standards of care that are

being provided.

Mr. BIANCHI. Right.

Senator KERRY. So if, all of a sudden, you cross those State lines,

who is going to regulate? I mean, are you giving up the mandate?

Is there no longer a standard of care in that State?

Mr. BIANCHI. I think ultimately, if you want to do this on a

super-regional basis, the answer is yes. I think that is a huge political step that would move us away from the McCarran-Ferguson

structures where the States were primarily responsible, to having

some sort of super-regional responsibility. It is possible and it is

17

one way to, I think, start to address your dilemma. But it is a big

step.

Senator KERRY. Yes. I wanted to ask Ms. Blumberg. But go

ahead, Mr. Ario.

Mr. ARIO. I think you are right on point, Senator Kerry, with the

issue of adverse selection there. Right now we have a system where

each State has its own mandates that are different State to State,

but people cannot pick and choose among the States. They are in

one State or another. If you open up the multi-State issue and have

a different mandate—just take mental health—you will have, then,

people in Massachusetts or in Oregon where we passed a very

strong mandate, or in Pennsylvania where we have a very strong

mandate, looking at those mandates versus the regional mandate.

People who really want mental health will stay in the State and

people who see the other mandate will move.

Senator KERRY. It is a big issue. I appreciate your saying that.

It seems to me that, if you are not going to see the system go backwards, then you may have to say, all right, if we are going to get

the virtue of pooling and therefore expand the risk pool and bring

well people into it to hopefully lower premiums, we are also going

to provide the highest standard. That may be the only way to skin

that cat.

But let me just ask you, because my time is up, Ms. Blumberg,

if I could, just quickly. I have a bill that gives a refundable 50-

percent tax credit for employers to provide the premium, and I also

introduced in 2004 the concept of a reinsurance pool which would

take all the catastrophic cases off the backs of small business, any

case $50,000 or more, which would lower the premiums automatically by $1,500 per individual.

If you then add to that a 50-percent premium to a 50-percent tax

credit to the employer for the purchase of the insurance, you will

not only have the lower premium, you also have the advantage of

the 50-percent tax credit, so you are really reducing those premiums, which makes it very attractive to purchase the insurance.

The President, on the other hand, wants to give tax incentives

to individuals, not to the business, for that health insurance. Could

you comment on the efficiency of providing a meaningful tax credit

to the employer versus providing it to the individual?

Ms. BLUMBERG. Well, there are a couple of issues that are kind

of tied in there together, because there is the administrative cost

of putting the tax credit in place and just having the IRS interacting with the employers, and then there is the target efficiency

of a subsidy.

When you look at small businesses, the reason that I referred to

the low-income problem as being a primary problem with coverage

in that population is that the probability of a worker being below

200 percent of poverty is much higher in a small firm than in a

large firm. This, of course, moves a little bit depending upon how

you define small, but the worker is twice as likely, or more than

twice as likely to be low-income if they are working in a small firm

than in a large firm.

But when you look at small firms, not all of those workers are

low-income. You have heterogeneous workers even in the small

firm pot. So when you provide subsidies that are directed to the

18

employer, you have a situation where you end up not targeting to

the most high-need individuals very well because you end up subsidizing all the people in the small firms, many of whom are lowincome, but many of whom are not. So that is the target efficiency

difficulty with subsidizing the employer. They have a mix of workers.

When you are targeting your subsidy to the individual, you can

much more easily peg the dollars that you are spending to the individual characteristics of the people that you want to help.

Senator KERRY. What about the efficiency of actually getting

them covered, though?

Senator ROCKEFELLER. This will be the last.

Senator KERRY. Yes.

Senator ROCKEFELLER. I mean, we are way, way over time here.

Ms. BLUMBERG. You cannot just give an individual a tax credit,

a modest tax credit, and send them out into the non-group market,

for all the reasons that were discussed here today. They just do not

have access to adequate, affordable coverage that way. So, if you

are not going to do something through an employer, then you have

to have another catch-all for them to buy affordable, adequate coverage.

I would suggest that, even if you want to target your subsidies

to the small employers, that you have that kind of mechanism anyway just because small firms are not efficient purchasers of health

insurance, and I would hate to throw dollars after purchasers who

are really not efficient at getting the coverage.

Senator KERRY. I appreciate it.

Mr. Chairman, thank you for your indulgence.

Senator ROCKEFELLER. Thank you.

We have not had very good success on the Democratic side with

respect to discipline. I expect that standard to increase now substantially with Senator Smith.

[Laughter.]

Senator SMITH. Thank you, Senator Rockefeller.

Joel, when Mr. Newman’s good realtors from all over the country,

particularly from Oregon, come in to see me, they invariably ask

me to support what we debated last Congress, which is the association health plans. I did not do that in the end, not because I was

not trying to find a solution, but because, frankly, we ran into the

buzz saw that you referred to earlier, which was the mandates that

Senator Kerry has mentioned, and others. There are tremendously

entrenched bureaucracies in every State as it relates to their view

of what insurance ought to be, at least at a minimum level.

It seems to me, and I think what you are saying is, the one area

where Congress might be able to incentivize some cost savings is

through the whole standardizing rate guidelines. Am I understanding that correctly, that there are the savings that we could

pursue if we wanted to incrementally approach health care reform?

Mr. ARIO. Senator Smith, I think you could achieve some savings

in that direction, although when you look at the issue State by

State, you do see some significant differences. So, coming to some

kind of common agreement on where that standardization fits, I

think, is difficult. I think it is probably much more difficult today

than it was even 10, 15 years ago. When Senator Kitzhaber started

19

the Oregon Health Plan, there was kind of agreement that we

could define a common benefit package.

In the intervening time, we have seen this rise of consumerdriven health care and a lot more products that are a lot more differentiated and aimed at particular constituencies. So I think

today, talking about kind of a one-size-fits-all benefit package

across the country would be a heavier lift than it would have been

even 10 or 15 years ago.

I do think that it is an important issue on the association health

plan issue that you referenced, which is, if the association health

plan is the way it was proposed last Congress, that it is a cherrypicking operation where the rating can be different than it is at the

State level and it is based on health status and so forth, or other

factors that are proxies, then I think it does have a detrimental effect on the States.

If it is more in line with what I hear the realtors saying, which

is a community-rated kind of pool, multi-State pool or State pool,

then I think it offers just another option. So, it really comes to how

the rating is done in an association or broader pool as to whether

it will weaken the current pools or whether it can be complementary.

Senator SMITH. And if association health plans were modified to

include that feature, would the State bureaucracies not go crazy

with such a proposal?

Mr. ARIO. Senator Smith, I do not think there is a good way

around the issue, as you have seen with mental health parity.

Senator SMITH. Yes.

Mr. ARIO. People are going to look at their own specific mandate,

and, if there is even an iota of difference between it and what is

being proposed, they are going to see disadvantage in it. That is

my experience.

Senator SMITH. Well, that might even happen with my colleague’s plan then, which is a much more national approach to setting the standard. It would still undermine the State bureaucracies.

Mr. ARIO. Senator Smith, I think, again, you are going to see the

same issue play out on the mandates.

Senator SMITH. Speaking of Senator/Governor Kitzhaber, I have

met with him many times on his plan. As you know, when we did

the Oregon Health Plan, it basically has a defined benefit for anyone on Medicaid. This would take it to everyone, essentially, as a

defined benefit.

It is his view that the only way we ever get a control on cost is

to produce such a defined benefit, whether you do it through government providing it or markets providing it, and that that be done

at least on a State-wide basis or a national basis. Anything anyone

wants above that, they simply pay fee-for-service. Is that your understanding?

Mr. ARIO. Senator Smith, I believe that is former Governor

Kitzhaber’s view. I think he got religion on cost control because he

saw that the gains that were made through the Oregon Health

Plan in the early 1990s washed out with the recession earlier in

this decade, so he is now focused on cost control.

20

Most of what we are talking about today does not really directly

affect cost control, but that is the elephant in the room, and it has

to be addressed. I think if Congress were able to get to a minimum

benefit plan for everybody, achieve a definition that worked and

could be approved, it would have some very positive impacts.

Senator SMITH. So you would agree with him that that is the

only way, ultimately, that we will get a handle on health care costs

in our country?

Mr. ARIO. Senator Smith, I think there are more ways than one

to skin a cat.

Senator SMITH. All right.

Mr. ARIO. So I do not think that is the only approach, but it is

one approach.

Senator SMITH. I have 7 seconds left. I just want to ask one question to Massachusetts. That is, I am intrigued with the plan. I

think it has many good features, but some I do not fully understand. I know there is low-income support, and I suppose it is

somewhat like Medicare Part D for prescriptions for low-income

people. I am wondering, is there low-income support for small business?

Mr. BIANCHI. Senator, there is no separate support for small

business.

Senator SMITH. All right.

Mr. BIANCHI. The subsidies are for low-income individuals. There

is a provision in the Massachusetts Health Care Reform Act that

allows small businesses to designate the connector as the small

business’s own group health plan. Now, what that does, it is still

an ERISA-covered plan, but what it does is it takes all of the administrative issues off the back of the small employer and places

them with the connector. The connector is currently working on

regulations implementing that. It is not out yet.

Senator SMITH. Thank you, Mr. Chairman. I am only a minute

over.

Senator ROCKEFELLER. A minute and 5 seconds.

Senator SMITH. Oh. Sorry.

[Laughter.]

Senator ROCKEFELLER. But you were worth it.

[Laughter.]

Senator ROCKEFELLER. One of the things which has always angered me about health insurance, among the many things that do,

is the way we treat people with preexisting conditions, or rather

how we do not, how badly we treat them. I would like, Ms.

Blumberg and Mr. Newman, to have you kind of comment on this

problem. They do not basically have access to health care. I will

just make that flat statement. All right. It is not in the American

spirit. It is discrimination of a legal and lethal nature.

Under current law, employed individuals can move from one

employer-based health plan to a new employer-based health plan

and they do not have to worry about preexisting conditions. On the

other hand, individuals with preexisting conditions who move from

employer-based plans to the vaunted individual market, about

which I have a great deal to say, to one of those plans or those who

move from one individual market plan to another, are subject to

denial of coverage due to preexisting conditions.

21

Now, I do not know how much people care about that, but I think

it is one of the great disgraces of our maw of the health care system. Because of preexisting conditions, these individuals are, in

fact, uninsurable. Now, I am going to introduce a bill this week

which gets at this. The crazy thing is, in the end we all end up paying for it anyway, everybody else does, so it just ratchets up the

cost of health care while taking people who, through virtually no

fault of their own, are deprived of one of the things that America

is meant to stand for.

So, Ms. Blumberg, I would like to have you comment on that.

Then, Mr. Newman, I would like to have you comment on how preexisting conditions affect your members. If, for example, we took

away the preexisting condition barrier for individuals seeking coverage in the individual market, would that increase access to coverage for those who work for the realtors?

Ms. Blumberg?

Ms. BLUMBERG. I agree with you that the lack of access to adequate coverage for people with high medical needs is one of the

great disgraces of our health care system. My concerns in trying to

deal with this problem within the existing non-group market are

founded in the fact that the non-group market is very, very small.

In fact, a recent analysis has suggested that our household surveys,

which show that maybe 4 to 5 percent of the Nation is covered in

the non-group market, may be overstating that enrollment by a factor of as much as 4. So we are talking about——

Senator ROCKEFELLER. A factor of four what?

Ms. BLUMBERG. That there is probably a fourth as much of

enrollment——

Senator ROCKEFELLER. Oh, I see.

Ms. BLUMBERG [continuing]. In private, non-group insurance

today as we see in the household surveys that we rely on, like the

Current Population Survey. So we are talking about a private market that is tiny. In all of the issues that we have discussed today

with regard to risk and risk selection, it is the law of large numbers that helps you. The more bodies over which you have to

spread these costs, the better you are able to deal with them.

So when you think about the unregulated non-group market,

which clearly does not serve this population well, anything that

you do to maintain high-cost individuals in that small market is

going to have some kind of impact on the premiums in that existing market. So it is not going to be costless for those in the existing

non-group market to put more regulations in place to keep highercost people in that market.

It may be a reasonable short-term strategy, but I think in the

longer term what we really need to be focusing on are ways to

make sure that the costs of the high-cost population are spread

very broadly across the entire insured population, or that we are

doing some kind of explicit subsidization based on a broad-based

revenue source, to make sure that these costs are shared among

the population as a whole.

Senator ROCKEFELLER. Thank you, Ms. Blumberg.

Mr. Newman?

Mr. NEWMAN. Senator, based on some survey work that we have

done, approximately 7 percent of our membership would not have

22

access to coverage because of preexisting conditions in the individual coverage market.

I think in the real estate industry it is important to understand,

so let me give a brief synopsis of what my company is like, for example, in a small market. I have seven people whom I have employed, four people in the property management department and

three people who work in my residential/commercial firm.

Of that, I have eight associates who are brokers under my license

who work for me. They are truly independent contractors. They are

self-employed. They have no other employees working for them, so

their direct coverage has to go to the individual market.

Now, I range anywhere from single moms with children to older

adult males and females, some single, some married. Some have

preexisting conditions, others are very healthy, so it is all over the

place. But one particular agent in my office is a close friend of mine

who is in her 70s and has a preexisting heart condition. The only

way that she was able to find coverage was through a State health

insurance pool. Outside of that, she would have been denied coverage, given the preexisting conditions.

I do concur, and I think it is explained in our testimony, that the

ability to pool and to manage that risk across broad-based numbers

is absolutely imperative, and the ability, might I say, that in the

event a self-employed individual moves from one State to another,

that that coverage be able to move with them is critical to solving

this issue.

Senator ROCKEFELLER. I thank you both. I am over my time.

I call upon Senator Snowe.

Senator SNOWE. Thank you, Mr. Chairman. I want to thank all

of you for being here today on this critical issue. I have been traveling this journey on small business health insurance plans since

I was chair of the Senate Committee on Small Business and Entrepreneurship back in 2003 and I introduced the original association

health plan bill.

As Senator Kerry, who is now chairman of the Small Business

Committee, indicated, we have not only established various guidelines that we think are essential, but it has also been premised on

the numerous hearings that have been held, both in the Small

Business Committee because of the impact on small businesses in

Maine and throughout the country, but here in the Senate Finance

Committee as well. It has been a long journey, and most especially

for small businesses and their families who depend on some type

of change and reform at the Federal level to make it happen.

The question is, how do we jump-start this process? We went

from the original bill that I introduced, association health plans,

then Senator Enzi, as former chair of the HELP Committee, developed a plan. There were some problems with the preemption of

benefits because in my bill it included preemption of benefits in the

plans themselves, but not in the individual and group insurance

markets.

So that meant the preemption of benefits across the landscape,

which, obviously, created serious problems. Last year, we developed

an amendment that would have been offered to bridge the divide

on what mandates should be included. I used the standard of 26

States. I introduced this with Senator Byrd. Those benefits that

23

had been adopted in 26 States, basically became the median of that

standard. Those benefits would be benchmarked to the Federal

Employees Health Benefit Plans and the three most heavily subscribed plans utilized in terms of the level of care in those benefits.

But, unfortunately, we did not get to that point.

Now, of course, I have been working with Senator Lincoln, and

we are trying now to bridge this political divide as well, along with

the chairman of this committee and Ranking Member Grassley. I

have worked with Senator Bingaman as well on cafeteria plans, because I think that should be part of a solution. We have been working mightily. I hear the concerns, and also the preferences that

have been discussed here today.

But if we were to try to arrange a potential solution between refundable tax credits and offering a multi-State pool as one approach, how do we address the rating issue? I know in my State

we have adjusted community rating and it allows for premium

variations at a range of 4.2 to 1, on various issues such as age, geography and industry. How do we standardize a rating across the

regions? Do the States have to be contiguous or not? What are the

issues that could help us now to overcome and transcend some of

the serious impediments to developing a program that will address

this crisis for small business owners in America? It is a crisis. I

mean, it is a decline of 10 percent of employer-sponsored health insurance over the last 6 years.

Maine’s rates just came out on October 1 for individual and family plans. In the Maine small group insurance market, it is now

$14,605 for family plans and $4,868 for an individual policy. That

is in the small group market. I hesitate to think about others who

cannot even get into that market. So that is the point here. We are

facing escalating costs. So what could we do?

I will start with you, Mr. Ario, because you represent the insurance commissioners. We have heard from them repeatedly. Could

you create a standard? If we would create a multi-State pool, for

example, could you come up with an adjusted community rating

standard, and how do we handle the benefits issue?

Mr. ARIO. Senator Snowe, yes, we could. I believe you are absolutely right about the nature of the problem. We want to work to

solve it. I think on the rating issue there is a clear pathway to a

solution, which is to say that the States, each of which has decided

what kind of rating makes sense in their State, have the multiState pool incorporate each of those State plans.

Again, when you go State to State in a multi-State pool, the rates

are going to vary anyway. It is going to be just like Medicare. The

rates are going to depend on what local conditions are in the marketplace, the nature of the delivery system, and so forth. So you

are going to have differential pricing State to State so you can have

each State’s rating system left in place, and then the pool operates

with a common benefit package, priced differently State to State.

So I believe that will work. It would protect the State pools. It

would allow for the purchasing options. It would allow broader

choice. It would allow more carriers to get involved, and so forth.

So I think the rating issue can be solved in that way. The benefit

issue that you reference, I do not have an easy answer on that. I

24

know as an insurance regulator, our role when the legislature is

debating a new mandate is to provide information on both sides.

Once a legislature votes a mandate, my experience in both Oregon and Pennsylvania is that my Governors are dead set against

Federal preemption of any of the details of those mandates, so that

is a very difficult issue that way. But on the rating issues, I believe

we can get there in the way that I outlined.

Senator SNOWE. Well, that is why we went with a 26-State approach, and it would change over time. If another State adopted a

benefit, then that would obviously add to the expansion of benefits.

But it is really a struggle. I think that there has to be a way to

transcend these barriers, and we need your help in that respect because you do represent the insurance commissioners of various

States. I think that is a critical issue here in trying to resolve this

question. I would hope that you could come up with some ideas in

that respect so that we could address this.

Mr. Bianchi, could you share with us anything on the Massachusetts level that would help in that regard?

Mr. BIANCHI. Senator, this is really beyond my area of expertise.

I am going to pass on that one.

Senator SNOWE. All right.

Ms. Blumberg?

Ms. BLUMBERG. I would just echo Mr. Ario’s comments. The key

is that, as soon as you put a wedge between what is being done

in a State outside a pool and what is being done inside the pool,

you are going to set yourself up for trouble with selection. So I am

not sure how to get around this problem either, but you do not

want to make segmentation of risk worse, whatever you do. You

want to be working towards greater pooling, not less.

Senator SNOWE. Could you use actuarial value? That is something I understand the Federal Employees Health Benefit Plan

does. I do not know if you referenced it, Mr. Ario, on using an actuarial value of benefits. Is that possible?

Mr. ARIO. Senator Snowe, yes. There are many approaches to defining the standardized benefit package. We certainly are expert at

looking at benefit packages and giving expert advice on what does

or does not cover what kinds of situations, that sort of thing. We

would be happy to work with the committee. It is when you get to

the next level of it, whether that is going to please all the different

constituencies, that is kind of beyond our control as insurance regulators.

Senator SNOWE. All right. Thank you. Thank you very much.

Senator HATCH. I think I am next in line.

Senator LINCOLN. You are. Absolutely.

Senator HATCH. All right. Thank you.

Well, I want to thank everyone here today for your testimony.

There is broad agreement here on Capitol Hill in the policy making

community that our health care system is in need of reform. But

how do we go about it? Can we make targeted and progressive

changes that will create a better health care marketplace for Americans? Is the system in need of radical reform and nationalization?

In short, do we use a scalpel or do we use a sledgehammer?

The testimony today recommends a scalpel. I would like to thank

the chairman for drawing attention to really an important, but

25

often overlooked, fact about access to health care. Certain groups

are much more likely to have trouble accessing health care insurance than others. The self-employed are at the top of this list. According to the 2005 data from the IRS, the number of sole proprietors filing a schedule C was 21,287,828. In the States represented

by members of this committee, there are 5,601,405 schedule C filers. My State alone had 167,994 in 2005.

We can help these folks right now. Today, Senator Bingaman and

I will introduce legislation that would merely provide tax equity for

the self-employed. Corporations are allowed to deduct health insurance premiums as business expenses, and of course forego payroll

taxes.

Yet the tax code, perversely, punishes the self-employed for their

entrepreneurship. The self-employed must pay an additional 15.3-

percent self-employment tax, the equivalent of payroll taxes on

those expenses. Now, in my opinion, this is ridiculous, and it is

very unfair. It is something that we could fix today.

Mr. Newman, let me just ask you this question. Short of wholesale reform, how would the changes that Senator Bingaman and I

are proposing impact you, your family, and other self-employed

Americans who currently do not have these rights?

Mr. NEWMAN. Senator, I think I am on very safe ground saying

that we would absolutely support that concept. It would be a tremendous relief to the small business person as relates to its operational business model, and we would wholeheartedly support and

endorse that concept.

Senator HATCH. Well, thank you. I would ask consent that we

put into the record a list of the sole proprietors by State.

[The list appears in the appendix on p. 100.]

Senator HATCH. You will find that there are a lot of people here

who just are not being treated fairly, in my eyes. I think hopefully

we can pass this bill, even though it is a small, little thrust compared to what probably most all of us would agree needs to be a

major wholesale reform. But I appreciate your testimony.

If anybody else has any comments about it, I still have a few

minutes. I am going to finish on time.

Mr. ARIO. Senator Hatch, I would just say that I, too, agree that

focusing on the sole proprietor has more promise than trying to

merge all of the individual market and all of the small group market, and would cause some issues in the small group market that

would have to be managed. But 12 States have already done it and

included the sole proprietors in that market, so I think that is the

kind of scalpel approach that you are talking about.

Senator HATCH. Well, thank you very much. Thanks to all of you.

Senator LINCOLN. Last, but not least, I am here. I apologize for

being late. It certainly is no reflection of my interest in this issue.

We are marking up the farm bill over in the Agriculture Committee, and that is where the rest of this bunch has all gone, I

think.

But we are appreciative of you being here. I am certainly pleased

to be here today to continue to explore the challenges that we see

with small businesses and self-employed individuals and what they

face in providing health care coverage to their employees, to themselves, to their families.

26

We definitely want today to be not just the first step, but a continuing step in working to find a solution. I want to thank Senator

Snowe before she leaves, because she has been an incredible part

of this discussion, and I have certainly appreciated working with

her. We are going to keep working at it, without a doubt.

We do have to find many solutions to so many of the questions

that both you have heard from here that we have posed, but also

some that you have posed yourselves in answer to those questions.

Our hope is that we can build a gateway to coverage that will really encompass a large portion of America’s working families in a

way that is responsible and accessible.

We certainly have seen Medicare, Medicaid. Those were programs that were designed over 4 decades ago covering health care

needs to some of our most vulnerable, our seniors and our lowincome. Through the years, we have made changes, some of them

good, some of them not so good.

The 10-year-old bipartisan CHIP program was created because

even Medicare and Medicaid do not reach out and encompass all

that needs to be encompassed in terms of facilitating and getting

individuals, particularly working families, into the marketplace.

Our hope is that we will be able to come to some resolution.

I do hope that the reauthorization of SCHIP will come first, and

that it will come soon. It certainly should not take—and I do not

believe has taken—the place of the discussion that we have had

here, because many of us, although we may not have had public

hearings like this, have been working behind the scenes tremendously on health care availability to the small business industry

and to the small business market and the self-employed.

I constantly hear from my small businesses in my State, and I

am sure I am on the list that Senator Hatch just put into the

record. Based on their size, they disproportionately shoulder the

burden of the ever-increasing cost of health care benefits, and particularly to their employees. It is a huge issue for us in States like

Arkansas.

I have just come from where we have had a very long, 2-day debate on the farm bill. I come from a 7th-generation Arkansas farm

family, and my dad was a little bit of a novelty, I guess, in the

sense that most farmers hired their workers seasonally and my father had several workers on the farm that he kept year-round, and

he did so with health insurance. They had children. They had families. They did not want seasonal jobs, they wanted a year-round job

that provided them health care coverage. He knew what that

meant to his family, and he knew what it meant to their families,

and it made a big difference.

So I think it is absolutely essential that we consider health care

legislation in the weeks and months ahead, particularly directed in

this direction. But we have to be smart about how we focus because

we know, with the longevity we have seen in both Medicare and

Medicaid, we also see not only the positive aspects of SCHIP, but

the fact that it is here and it is going to continue and we are going

to make sure that it continues, that we do want to get as much of

this right the first go-around as possible, because the popularity of

it, as well as the success of it, is going to depend on that. I think

that gives us incentive to really try to work hard to get it right.

27

Following up Senator Snowe’s question, which was, as usual,

quite on target, and your responses, I think, showed that, what we

have learned from our work on the issue of the past few years is

that you do run into trouble with the States when you start talking

about Federal preemption of benefit mandates. We have tried to

work through that issue, making sure that what we are providing

is not only an accessible product, but one that is comprehensive

enough and is certainly a good product. I do think that we are at

a point where we are going to have to reach a collaborative approach, though, for addressing the mandate issue.

If any of you all want to expand on that, and some of what Senator Snowe brought up, but to comment on how we come to a

strong State and Federal dialogue on this issue. Do we establish

Federal principles and let the States work within those confines?

How do we really start that dialogue in a productive way? You

have had a lot of practice at it, Mr. Bianchi.

Mr. BIANCHI. Senator, the issue of ERISA preemption is certainly

a daunting one, and I think there are just solid arguments on both

sides, whether you maintain strong preemption or you loosen up

the rules and allow the States to enter more into the health regulatory universe. If you look at the original ERISA bill before it was

passed, before it went to committee, if you look at the bills from

both sides, neither had this strong ERISA preemption provision.

That was inserted in the conference committee in the last 10

days before ERISA was signed back in 1974. Before that, there was

language to the effect that States could regulate within—and I am

drawing a blank now on exactly what the language was, but it did

give the States——

Senator LINCOLN. Well, it was 1974.

Mr. BIANCHI. Yes. And I was not paying much attention to it

back then, to be honest. There was a much greater role for the

States, and I think your committee wants to get a sense of—you

have some precedent to look to. You can go back and look at that

history and see what is out there.

Senator LINCOLN. Well, that is interesting. Of course, also, I

guess, our objective, too, is some of what Ms. Blumberg brought up

when she said, if you build a wedge between there, then you create

more room for, I guess, really, the problem of adverse selection, and

we do not want to do that either. We do not want to create States

that are winners or losers.

We want to maintain the quality of health care as well in terms

of what is available. We want it to be meaningful. I guess that is

what always draws us back to setting principles so that we can feel

like there is a collaborative effort of what is meaningful in terms

of coverage.

Did you want to comment?

Ms. BLUMBERG. Yes. I would like to make one suggestion, Senator. If we are talking about the problem of small businesses, or

businesses really of any size, when they are purchasing coverage

for their workers who reside in multiple States, they do not want

to be shopping in every State for different kinds of packages and

having to negotiate in different ways.

Senator LINCOLN. Right.

28

Ms. BLUMBERG. Maybe the way to address this, instead of thinking about a way in which to have a single plan that conforms

across all States, is to think about it as a system across all States

of having organized purchasing entities for small businesses and

sole proprietors. You could even potentially do it for larger businesses who are in a similar situation with multi-State workers.

And in each of those States, those purchasing pools would have

regulatory rules consistent with regulations in the markets outside

of that pool. But if that pool was set up in such a way that it was

an individual worker choice pool, as has been in the case of a number of the different small business purchasing pools that have been

set up across the country, the employer says, this is where you are

getting your health insurance benefits, I am making a contribution

of X dollars, but you can take those X dollars into the pool and

choose the plan that works best for you. And those plans are contracting with the State purchasing pool, not with the individual

employer.

That way, any employer can say, there is one of these organized

pools with acceptable plans meeting State requirements in each

State, here is how much I am willing to contribute in each State

for each of my employees, and then there is no wedge set up, there

is no concern that they have to be buying the same thing for every

worker in every State. The worker is getting choice from having

the available pool, and the firm can just decide what their contribution is and not worry about the negotiations for contracting with

individual plans.

Senator LINCOLN. That sounds similar to—I know I have heard

there are some different products out there, particularly for wholesalers. I know that there is a contract basis for—I think it’s Sam’s

Wholesale that does a very similar package to something like that,

which is interesting because it goes across different States, obviously, and then they contract and then the employee goes to that

contract and chooses what they want, and then chooses how much

they are going to add to whatever the employer puts into it.

I think that one of the other questions that I really think is important to be asked, and I am not expecting you all to pull a rabbit

out of a hat here, but it is something we have to talk about. That

is, how do we pay for a small business tax incentive? That is obviously one of the things this committee does, and it is a component

that is likely to be included in a Finance Committee product on

this issue.

It is going to be those tax incentives of some sort that are going

to assist the employees of small businesses with the purchase of

health insurance coverage. So, whatever the incentive is, it is going

to have a cost and that, in this day and age for us, with pay-go and

everything else, requires us to come up with a way to pay for it.

I think one of the things that is a little bit different on this initiative is that the largest tax expenditure in the code today is the

exclusion for employer-provided health benefits. It costs more than

$2 trillion over 10 years in income tax, and almost half of that is

FICA contributions. So there is an existing cost now already.

I guess my question for you all would be your thoughts on how

we approach the revenue loss associated with new small business

tax incentives. Do we just lay that on top of what we are already

29

doing or do we look innovatively in some ways to try to make sense

of some modest modifications to the current exclusions?

Maybe some wholesale elimination of exclusions like the President is offering could cause, I think, some significant disruptions.

I do not know. I would like to know your opinion in terms of what

might happen if we just had this total exclusion of those benefits,

what that does to the marketplace, and are there some simple

modifications? I am not a tax attorney. I do not know if you all are

or not. But maybe some modifications there where we can use

those existing revenues that are already being spent.

Mr. BIANCHI. Senator, I will be glad to address that, but I am

not sure I can add a lot. In Massachusetts, we faced a microcosm

of that same question. But one of the ways we solved it was a creative reallocation of our Medicaid monies. I am not sure that anyone solved that problem yet, and it remains to be seen whether we

truly did in Massachusetts, once we get past the first 3 years.

Senator LINCOLN. So you redirected your funding stream, or

some of your funds.

Mr. BIANCHI. Yes. We did two things. We redirected the funding

stream. We also took the money that we were spending on the uncompensated care pool and Medicaid, principally the uncompensated care pool, and redirected that into subsidies for low-income

folks on the theory that we could expand coverage that way and

drive down the cost of the uninsured.

Ms. BLUMBERG. I think there is potential for restructuring the

current tax exemption for employer-sponsored insurance, but my

concern is that you have to approach it very cautiously.

Senator LINCOLN. Oh, yes.

Ms. BLUMBERG. Because, as you mentioned with the President’s

proposal, any wholesale change which can disrupt the balance between incentives to be purchasing through employers versus

through the non-group market could end up releasing a lot of people from their employer-sponsored insurance in the non-group market who will not be well-served by that market as it stands. So

there has to be something set up there and organized for them to

have a reasonable alternative for buying adequate insurance before

any kind of wholesale change like that can take place.

So ‘‘approach with caution’’ is exactly the right way to be thinking about this. In terms of near-term revenue sources, you could do

something like putting a cap on the tax exemption, particularly for

higher-income people. That would be something that I think you

could do with minimal disruption to existing insurance arrangements. Because you are talking about directing a new subsidy to

small businesses, you want to be very careful about taking away

the tax exemption which is providing some subsidy and assistance

not only to high-income people, but also to middle-income people.

The middle-income people in larger firms are not going to be the

beneficiaries of the new subsidy that you are putting in place.

So let us say you are thinking about small businesses as being

under 25 workers or under 50 workers. Those individuals could be

getting a new subsidy under whatever policy you develop. But if

you are paying for that by taking away a tax subsidy from a

middle-income person who works in a firm of 100, then that indiVerDate 11-MAY-2000 16:39 Jan 12, 2010 Jkt 000000 PO 00000 Frm 00033 Fmt 6633 Sfmt 6633 53986.000 SFIN1 PsN: SFIN1
30

vidual may have their affordability of insurance affected adversely,

even though you are helping people in the under 50 group.

So you want to be sure that the people who are going to be most

responsive to changes in subsidies in terms of their decision to buy

coverage, and those are people who are middle-income and of more

modest income, you do not want to decrease their subsidy in order

to pay for a new subsidy.

Senator LINCOLN. Right. You do not want to shift the burden.

Ms. BLUMBERG. Exactly. You do not want to finance help for

modest-income people in small businesses by taking money away

from modest-income people in middle-sized businesses or large

businesses. But I think there is some potential, without disruption,

for capping the existing tax exemption for higher-income people.

Senator LINCOLN. Any comments from anybody else on that?

Mr. ARIO. Just the observation, going back to what Ms. Blumberg

said much earlier, most of the problem with uninsurance in the

employer community is with the small businesses which have generally lower wages, so some form of capping of the sort that she

is talking about would have a general subsidization from people

who currently are doing quite well to people who are most in need.

Senator LINCOLN. All right.

Mr. Chairman, I will gladly hand this all back to you.

The CHAIRMAN. Thank you, Senator, very much for your questions. I also thank the panel.

I have a question for Mr. Ario. I think in your testimony you may

have said that 12 States help self-employed persons by redefining

the size of a group from 1 to 50, as opposed to 2 to 50. I take it

you think that is a better way, a good way—a potentially good

way—to help provide insurance for the self-employed. The question

is, how has that worked in those 12 States?

What about preexisting conditions, maybe for the one, and other

problems that otherwise would occur, the problems that the selfemployed may have faced? How are those problems remedied with

those 12 States that redefine a group from 1 to 50 instead of 2 to

50? If you could just comment on that, please.

Mr. ARIO. Mr. Chairman, good question. Some of the little bit

broader frameworks—at this point, Massachusetts is the only State

that has experimented with combining the individual and small

group markets, and I think in general those two markets are quite

different in most States.

The CHAIRMAN. Right. Your view is, that is not a good way?

Mr. ARIO. I think that would cause a lot of disruption along the

lines we have been talking about today with selection issues and

so forth. A more modest step is exactly the one that you are talking

about, which is to take and build on the experience of the 12 States

that have said if you are self-employed and can show that through

tax records and so forth, you can come into the small group market

essentially as a business of one.

That, too, does create some of the selection issues in the States

that have done it, and it is somewhat interactive with how broad

or narrow the rules are in the individual market because, of course,

when you do that, the individuals who have a choice—unless you

change the rules for that. In today’s market, they will have a choice

between the individual market—will tend to stay there if the indiVerDate 11-MAY-2000 16:39 Jan 12, 2010 Jkt 000000 PO 00000 Frm 00034 Fmt 6633 Sfmt 6633 53986.000 SFIN1 PsN: SFIN1
31

vidual market is more wide open and they are healthy. They will

tend to go into the small group market if that market is better for

them, so you are bringing some new risk probably into the small

group market, but you are spreading that risk among all the small

businesses.

So it has been something that the 12 States have done, and none

of those States, to my knowledge, has repealed that once they have

done it because it has worked well enough that it has kept the

small business market, small group market, effective. But you have

to do it very carefully and you have to be sensitive to the adverse

selection issues there.

The CHAIRMAN. Yes. So you are basically telling me those States

so far have been able to basically handle the adverse selection

issues or questions.

Mr. ARIO. Mr. Chairman, I know in some of those States that

there have been vigorous debates back and forth about trying to

undo that, because there is a claim by other small businesses that

it is driving up costs too much for everybody else.

But so far, in the balancing of all those factors, to my knowledge,

none of those States has seen fit to repeal it because it does serve

the kind of interests of the sole proprietors that Mr. Newman represents here today. It is clearly good for them. The question is, how

much new problem do you bring into the small group market when

you do it?

The CHAIRMAN. Are other States looking at redefinition?

Mr. ARIO. Mr. Chairman, to my knowledge that is not a hot topic

among the States. The realtors in the State that I am familiar with

have tended to propose more association-type approaches to the

problem, requiring the insurers to serve associations that would include their members rather than this strategy of adding sole proprietors to the small group market. But Mr. Newman could probably speak better to that than I.

The CHAIRMAN. Right. But have there been more self-employed

covered in those 12 States?

Mr. ARIO. Mr. Chairman, yes. Yes, it clearly does. It takes individuals, who today in the individual market can either not get covered at all because of a preexisting condition or get rates that they

considered too high, too unaffordable, it does give them guaranteed

access to the small group market.

The CHAIRMAN. And that has been the experience? That has been

the experience in those States?

Mr. ARIO. Yes. It would give that access, yes. It clearly would

give the access to those people who may not get favorable treatment today in the individual market.

The CHAIRMAN. All right.

Mr. Newman, do you want to comment on that?

Mr. NEWMAN. Thank you, Mr. Chairman. I think the comment

that I would basically like to make is, it is a concept of being able

to pool in broader markets in order to create efficiencies in the cost

for health care, and also to provide for those who might not be able

to receive it in the individual market an opportunity to, in fact, receive it. Whether it be through an association health plan or

whether it be through pooling, it is absolutely critical to bring people into the system.

32

The CHAIRMAN. Any other comments on that basic question, Ms.

Blumberg or Mr. Bianchi?

[No response.]

The CHAIRMAN. All right. I want to thank you all very, very

much. I apologize for my inability to be here for most of the hearing. I was in an Agriculture mark-up and had to be there. But we

have great staff who heard everything. We will have lots of followup questions we are going to ask. I know Senators asked terrific

questions. So, thank you, all four of you, very, very much for taking

the time.

The hearing is adjourned.

[Whereupon, at 11:45 a.m., the hearing was concluded.]

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A P P E N D I X

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