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61–560—PDF 2008

S. HRG. 110–1086

COVERING THE UNINSURED: MAKING HEALTH

INSURANCE MARKETS WORK

HEARING

BEFORE THE

COMMITTEE ON FINANCE

UNITED STATES SENATE

ONE HUNDRED TENTH CONGRESS

SECOND SESSION

SEPTEMBER 23, 2008

(

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

OLYMPIA J. SNOWE, Maine

JON KYL, Arizona

GORDON SMITH, Oregon

JIM BUNNING, Kentucky

MIKE CRAPO, Idaho

PAT ROBERTS, Kansas

JOHN ENSIGN, Nevada

JOHN E. SUNUNU, New Hampshire

RUSSELL SULLIVAN, Staff Director

KOLAN DAVIS, Republican Staff Director and Chief Counsel

(II)

C O N T E N T S

OPENING STATEMENTS

Page

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

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

Grassley, Hon. Chuck, a U.S. Senator from Iowa ................................................. 2

WITNESSES

Bertko, John, F.S.A., M.A.A.A., adjunct staff, The RAND Corporation, and

former chief actuary, Humana, Inc., Flagstaff, AZ ........................................... 4

Dreyfus, Andrew, executive vice president, health care services, Blue Cross

Blue Shield of Massachusetts, Boston, MA ........................................................ 6

MacEwan, Pam, executive vice president, public affairs and governance,

Group Health Cooperative, Seattle, WA ............................................................ 7

Holland, Kim, Oklahoma Insurance Commissioner, Oklahoma City, OK .......... 10

ALPHABETICAL LISTING AND APPENDIX MATERIAL

Baucus, Hon. Max:

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

Bertko, John, F.S.A., M.A.A.A.:

Testimony .......................................................................................................... 4

Prepared statement .......................................................................................... 35

Dreyfus, Andrew:

Testimony .......................................................................................................... 6

Prepared statement .......................................................................................... 39

Grassley, Hon. Chuck:

Opening statement ........................................................................................... 2

Holland, Kim:

Testimony .......................................................................................................... 10

Prepared statement .......................................................................................... 52

MacEwan, Pam:

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

Prepared statement .......................................................................................... 65

COMMUNICATION

National Association of Health Underwriters ....................................................... 71

(III)

(1)

COVERING THE UNINSURED: MAKING

HEALTH INSURANCE MARKETS WORK

TUESDAY, SEPTEMBER 23, 2008

U.S. SENATE,

COMMITTEE ON FINANCE,

Washington, DC.

The hearing was convened, pursuant to notice, at 10:04 a.m., in

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

(chairman of the committee) presiding.

Present: Senators Rockefeller, Kerry, Wyden, Salazar, Grassley,

and Hatch.

Also present: Democratic Staff: Bill Dauster, Deputy Staff Director and General Counsel; Billy Wynne, Health Counsel; Shawn

Bishop, Professional Staff Member; and Yvette Fontenot, Professional Staff. Republican Staff: Mark Hayes, Health Policy Director

and Chief Health Counsel; Michael Park, Health Policy Counsel;

Kristin Bass, Health Policy Advisor; Susan Walden, Health Policy

Advisor; and Rodney Whitlock, Health Policy Advisor.

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

FROM MONTANA, CHAIRMAN, COMMITTEE ON FINANCE

The CHAIRMAN. The hearing will come to order.

Let me begin today with a story of a young man named Jason.

Jason is 30 years old and lives in New Mexico. He works at a hotel.

He is the manager for a chain that does not offer health benefits.

Last year, Jason temporarily lost his eyesight. The doctors said he

had type II diabetes and that was the cause. After that, Jason applied for health insurance on his own. The insurance companies

turned him down. Shortly after that, a serious case of the flu sent

Jason to the hospital. His bills added up to $20,000. That is a lot

of debt for Jason, especially on a hotel manager’s salary.

Sadly, Jason’s story is not at all unusual. States are the primary

regulators of the individual health insurance market, but without

strict rules insurance companies can, and often do, avoid risk by

denying coverage to people who have health conditions like diabetes or a history of health problems.

Insurance companies often deny insurance to people who have

had cancer, for example, until they show years of remission.

Women often fare worse than men in the individual insurance market. New research shows that insurance companies often charge

women much higher premiums than men of the same age and

health status. In some States, insurance companies can deny

women coverage if they have had a Cesarean section.

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Some States have stepped in to make insurance policies more affordable, but insurance companies can still charge sky-high premiums that hobble family finances.

Let me read from a letter that I received from Ken and Shirley

Wagner. The Wagners are sheep ranchers in central Montana.

Here is what they say: ‘‘The insurance we managed to secure has

a $5,000 deductible and a co-pay, meaning we will owe another

$5,500. But we feel fortunate. Until June of 2005, we were paying

nearly $1,000 per month for a policy with a $10,000 deductible and

co-pays.’’

The Wagners, both middle-aged, say that they are looking forward to when they can get Medicare. They believe that their situation ‘‘isn’t near as bad as young people who own small businesses,

work for companies that don’t pay insurance, or are in agriculture.’’

Like Jason, the Wagner’s story is all too common. According to

a recent Commonwealth Fund study, 3 out of 5 working aged

adults found it difficult or impossible to find affordable coverage.

Insurance companies turned down 1 out of 5 people who applied for

individual coverage due to preexisting conditions, and almost 9 out

of 10 working aged adults who sought coverage in the individual

market from 2003 to 2006 ended up never getting insurance. Clearly, the individual market for health insurance is broken.

In group markets, Congress has enacted several laws to govern

insurance practices. But small companies who want health coverage for their employees still have to struggle mightily to offer insurance. At our June 10 hearing, Ray Arth, the owner of a Midwest

faucet company, told us that he has always provided health coverage to his employees. But offering coverage has become increasingly difficult because his employees are aging and premiums have

grown. Even after switching everyone to a high-deductible plan, his

company’s premiums increased by more than 30 percent in 1 year.

Why? Because one of his employees became seriously ill.

The insurance market for large groups appears to work better.

That is because large groups naturally spread the risk. But I often

hear from large employers that they, too, find it more difficult to

afford coverage, especially with the retirees. Premium increases are

forcing them to scale back benefits or to shift costs to employees.

Today we will explore ways to make health insurance markets

work better. Let us improve these markets so that millions of people like Jason can buy insurance. Let us improve these markets so

that millions of families, like the Wagners, can afford to keep it.

Let us improve health insurance markets so that businesses that

want to do the right thing for their employees can afford to do so.

Senator Grassley?

OPENING STATEMENT OF HON. CHUCK GRASSLEY,

A U.S. SENATOR FROM IOWA

Senator GRASSLEY. We have had a good set of hearings. We started off with two former secretaries of HHS. The committee has examined why costs are rising, but quality does not appear to be improving at the same rate. We have looked at who is uninsured and

why they are uninsured. We have explored how the tax code impacts health care coverage and what changes could be made that

3

would increase coverage. We have considered delivery system and

payment system reform.

In this hearing, we are going to look at health insurance markets. It seems as though they do not work very well. It varies widely depending on what State you live in. The price differences for

health insurance between New Jersey and Pennsylvania, two bordering States, are typically cited as an example of the impact of

State regulation on the market. And, while such criticisms are

sometimes warranted, the issue seems to be much more complex.

States govern small group plans and individual plans. Those are

the most expensive policies to sell, and that has nothing to do with

State regulation. Those policies are expensive because the cost to

sell and administer them is higher. When you sell to one person

at a time, it costs more than when you sell to groups of hundreds

or more.

It is expensive because people getting coverage that way often

tend to be sicker. It is expensive because there is virtually no tax

subsidy for an individual who is buying coverage in the individual

market. Yet, if we simply require insurers to take everyone who applies, then of course people will wait until they are sick to get the

coverage.

Now, Massachusetts has addressed this by requiring everybody

to have insurance. That State’s experiment is in its second year.

We are going to hear how it is working. Time will tell whether having a law requiring people to buy health insurance means that people actually buy it. Many States require drivers to have car insurance, but that is difficult to enforce. So we will hear about how it

is going in Massachusetts.

I am also interested in how insurers determine the rate they

charge small businesses and the rate that they charge individuals.

The National Association of Insurance Commissioners has two

model acts that address rating in small group markets: one limits

variation and premiums based on health status, in other words,

using rate bands; another allows for variation based on age, geography, and family. More States have adopted the first model than

the second model.

So, States are experimenting with different ideas in regulating

health insurance. Some States have functioning high-risk pools,

other States are thinking about trying reinsurance to help with

very expensive cases. All are ideas that have merit, and all these

ideas should be examined as we consider health care reform ideas.

As we know, in 1974 the Federal Government used ERISA to

limit the ability of States to regulate pensions and health insurance provided by employers. To the extent that an employer provides coverage, it cannot discriminate against sick people. Everyone

who takes group coverage must be charged the same rate regardless of age or health status. That is essentially guaranteed issue

and community rating.

Every big business in America that offers health insurance must

live under those rules. But when a State talks about imposing

those same rules on the products it regulates, the State insurance

market could disintegrate. As we look at health reform, we need to

understand what works and what does not work in developing

rules for the insurance market.

4

One last request, Mr. Chairman. I may have some additional information to insert into the record that is related to this hearing.

If there is no objection, I would like to be able to insert this information at a later date, as long as the hearing record is still open.

The CHAIRMAN. Without objection.

Senator GRASSLEY. I am done.

The CHAIRMAN. All right. Thank you.

I would now like to turn to our witnesses. First, we will hear

from Mr. John Bertko, who is currently adjunct staff at RAND and

former chief actuary at Humana. The second witness is Mr. Andrew Dreyfus, executive vice president for health care services at

Blue Cross Blue Shield of Massachusetts. The third witness is Ms.

Pam MacEwan. She is the executive vice president for public affairs and governance at Group Health Cooperative. Finally, we will

hear from Ms. Kim Holland, who is the Oklahoma Insurance Commissioner.

As a reminder, all written statements will be automatically included in the record. I would ask each of you to confine your remarks to 5 minutes.

Mr. Bertko, why don’t you begin? And say whatever you want to

say. Do not be bashful. Do not be shy.

STATEMENT OF JOHN BERTKO, F.S.A., M.A.A.A., ADJUNCT

STAFF, THE RAND CORPORATION, AND FORMER CHIEF ACTUARY, HUMANA INC., FLAGSTAFF, AZ

Mr. BERTKO. Senator Baucus, Ranking Member Grassley, members of the committee, my name is John Bertko, and I am honored

to have the opportunity to testify before you today about the rating

practices of private health insurance markets.

The market is frequently described as having three separate segments: the individual insurance market, the small group segment

of employers who have 2 to 50 employees, and a large group segment for employers of more than 50 employees. Each of these segments has different rating practices and regulations.

To give you an idea of the size of these markets, there are about

17 million covered individuals in the individual insurance market,

about 30 million in the small group market, and more than 120

million in the large group market.

Rating practices differ for each of the segments and also differ

by State. Premium regulation is mainly by State insurance law,

but also follows the requirements of several Federal laws, including

ERISA, COBRA, and HIPAA. I will provide a very brief summary.

For the individual insurance market, there are two distinct approaches to rating methods allowed by States. In five States, insurers must offer policies to all applicants called guaranteed issue,

and are limited to rates that are similar regardless of health status, which is called adjusted community rating. So for these States,

rates will vary by age and gender, but not health conditions.

In all the other States, individual health insurance policies are

underwritten, meaning that the past health conditions of individuals are examined and rates are set accordingly. Generally, there

are three possible outcomes for underwriting: an applicant answers

a variety of health status questions and is underwritten as a standard risk and receives an offer of insurance at rates that are genVerDate 11-MAY-2000 14:03 Nov 05, 2010 Jkt 000000 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 61560.000 TIMD PsN: TIMD
5

erally lower than those for employees because they are healthier at

the time of issue; an applicant with some past or current health

conditions might be offered a policy at higher rates, called a rateup, or have certain specified conditions excluded, called a pre-ex

offer; and finally, some applicants with more serious health conditions will be denied coverage.

In the underwritten markets, about 70 percent of applicants will

generally qualify for standard policies, about 15 to 20 percent will

get either rate-ups or pre-ex conditions, and between 10 and 15

percent generally will be denied coverage.

Individual health insurance rates in these States that allow underwriting can vary with age, gender, and health status. On average, for the under 65 population, rates may vary by an actuarial

factor of 6:1, based on mainly their age. Then any rate-ups for

health status generally yield rates that are somewhere between

110 and 200 percent of standard rates.

In 32 States, individuals who are denied coverage might be able

to obtain coverage from high-risk pools if they can afford the highrisk premium and there is capacity in the pool. About 200,000

Americans now are covered in high-risk pools, and premiums in the

high-risk pool are usually 200 to 250 percent of standard premiums, and also heavily subsidized by either insurance assessments or other funding sources. Access to the high-risk pool is generally limited by the amount of subsidy available in the State and

by the ability of the applicant to afford the higher premium.

In the small group market, all States have followed the HIPAA

provisions and require guaranteed issue. This means that any

small employer will be made an offer of insurance as long as certain requirements are met, such as minimum employer contributions. Premium rates in the small group market are generally subject to rate band limitations, so rates are first determined based on

case characteristics such as age and gender of employees, location,

number of employees, and type of product. That determines an average rate.

Then in most States, a factor for health status or industry is applied to calculate premium rates within certain rate bands. Model

legislation from the NAIC specifies that the rates may deviate from

the manual rate by no more than plus or minus 35 percent, but

there is a lot of variation. The most common rate band is plus or

minus 25 percent. There are a few States that also specify adjusted

community rating in which there is no variation by health status.

For the large employers with more than 50 employees, premium

rates are determined mostly from the firm’s claim experience or

from a blended average with the average rates. Regulation of this

market is split between limited State regulation and ERISA, and

large self-insured employers use the ERISA exemption from State

regulation to offer the same benefits for multi-state locations.

Thank you for the opportunity to provide this summary. I would

be glad to answer questions about my testimony.

The CHAIRMAN. Thank you, Mr. Bertko.

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

The CHAIRMAN. Mr. Dreyfus?

6

STATEMENT OF ANDREW DREYFUS, EXECUTIVE VICE PRESIDENT, HEALTH CARE SERVICES, BLUE CROSS BLUE SHIELD

OF MASSACHUSETTS, BOSTON, MA

Mr. DREYFUS. Mr. Chairman, Senator Grassley, and members of

the committee, my name is Andrew Dreyfus, and I am the executive vice president of Blue Cross Blue Shield of Massachusetts.

Blue Cross Blue Shield of Massachusetts is a not-for-profit health

plan that covers 3 million members. Our company and our foundation played a major role in developing and supporting our health

reform law, and we remain committed to its success.

Under the leadership of our chairman and CEO Cleve Killingsworth, our company has also set a broader goal: to collaborate with

others to transform the health care delivery system in Massachusetts to provide safe, effective, and affordable patient-centered care

for all.

I would like to make four points in my testimony today. First,

health care reform is working in Massachusetts. We believe that

our experience has important lessons for State and national efforts

to expand coverage. Second, insurance market changes played an

important role in supporting our coverage expansions. Third, those

coverage expansions are at risk if we do not slow the growth in

health care costs. And finally, we believe that the most promising

route to slowing costs is by changing our payment system to reward high-quality, efficient care. In other words, insurance reform

is not enough, we need payment reform as well.

Let me touch on each of these points, briefly. Massachusetts’s

health care reform was signed into law 21⁄2 years ago, and I am

pleased to report that, while challenges remain, the law has been

very successful thus far. Recent State reports document that

439,000 previously uninsured residents now have coverage. The

latest U.S. Census report found that Massachusetts has the lowest

rate of uninsured in the nation.

How did we achieve so much so quickly? We began with a fertile

climate for reform. We had a low percentage of uninsured and

strong employer-based coverage. We were already spending $1 billion annually on care for the uninsured. We were already operating

in a regulated insurance market with guaranteed issue, prohibitions on medical underwriting, and modified community rating. We

had a generous Medicaid program called Mass Health, thanks to a

history of strong Federal support. Finally, we had a strong community and political commitment to the unifying principle of shared

responsibility, and I want to thank Senators Kerry and Kennedy

for their unwavering support of that principle.

This principle of shared responsibility provided the framework

for the law’s main coverage provisions, which included expanded

Medicaid eligibility for children, a new subsidized program called

Commonwealth Care, a requirement that all State residents purchase health insurance, and a separate requirement that employers

pay a fee to the State unless they make a fair and reasonable contribution to the health coverage of their employees. Collectively,

these programs and requirements have resulted in a dramatic drop

in the number of uninsured.

In addition to these changes, the health care reform law also included three key provisions to allow private health plans to develop

7

more affordable insurance products. The most important change

was the merger of the existing individual and small group markets.

That merger resulted in an average 15-percent decrease in rates for

individuals, and a modest 2-percent increase for small groups.

In addition to the market merger, reforms were enacted to allow

greater flexibility in health plan design, including the creation of

special low-cost products for young adults.

Finally, the law created the Massachusetts Health Insurance

Connector, a new, independent, quasi-public entity to connect individuals and small businesses with affordable private health insurance plans. The Connector has several important roles: it administers the subsidized program; it determines a schedule of affordability and the minimum level of coverage required to meet the

State’s individual mandate; it certifies products of high value and

good quality and makes them available to small groups; and, finally, it collects premium payments from those seeking coverage

and remits those payments to the appropriate insurer.

In our experience, the Connector provides an important service

by increasing awareness of insurance products and helping individuals compare products from different health plans.

But as I said, it is the cost challenge which is really facing the

Massachusetts reform movement right now; higher than expected

enrollment in the subsidized plan has created a shortfall in funding. But beyond these short-term budget issues, our new law faces

the underlying challenge of growing medical costs which pose an

increasing burden on consumers, employers, and government alike.

Without enduring solutions to health care costs, our historic coverage experiment will be at risk. In Massachusetts, we view this

new search for cost solutions as Health Care Reform Part II.

Let me just conclude by saying as I said in the beginning—and

I know in your last hearing you spent a good deal of time on this

issue—we believe that the best way to slow the rate of growth in

costs is by changing the way we pay for care, by rewarding quality

of care, not volume and intensity of care. We have a plan that we

are working on right now in Massachusetts to do just that, and we

would welcome your comments and questions on that plan.

Thank you for the opportunity to testify today.

The CHAIRMAN. Thank you, Mr. Dreyfus.

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

The CHAIRMAN. Ms. MacEwan?

STATEMENT OF PAM MacEWAN, EXECUTIVE VICE PRESIDENT,

PUBLIC AFFAIRS AND GOVERNANCE, GROUP HEALTH COOPERATIVE, SEATTLE, WA

Ms. MACEWAN. Good morning, members of the Finance Committee. I am Pam MacEwan, executive vice president for public affairs at Group Health, an integrated health care coverage and delivery system based in Seattle, WA. Thank you for inviting me to

be here this morning.

Let me begin by describing the Washington State insurance market. Washington’s insurance market provides affordable, highquality insurance products to consumers through the use of premium rating protections and the availability of a high-risk pool. In

8

Washington, insurance cannot be denied to any applicants for coverage if they are part of a group. This is called guaranteed issue.

However, exclusions and waiting periods are allowable for preexisting conditions to prevent people from waiting until they get

sick to enroll in their employer’s coverage.

Washington has struck an interesting balance for the individual

market. Everyone has access to coverage, either through the individual market or through the State’s high-risk pool. Washington

employs a State-mandated health status questionnaire for individual coverage.

Those without previous continuous coverage who score higher

may be denied coverage on the individual market, but will automatically be offered enrollment in the State high-risk pool. Generally, people who have complex medical conditions such as AIDS

or cancer, or a combination of conditions such as diabetes and

chronic hepatitis, would score high enough on the questionnaire to

be screened out of the high-risk pool.

For both the small group and the individual markets in Washington, monthly premiums are guided by what we call adjusted

community rating, which means that carriers can only adjust premiums by demographic factors such as age, geography, family size,

or by enrollees’ participation in certain wellness activities. This

system of rating constrains the amount of variability between the

premiums different individuals or small groups can pay, thereby

spreading the risk of the population’s health status among more

people.

For a brief time, our market was much more regulated than it

is today. In the 1990s, I was a member of the Washington State

Health Service Commission, working to implement the Health

Services Act passed in 1993. Under the bill’s sweeping reforms, everyone would have been required to have coverage through an employer or an individual mandate.

Unfortunately, things did not play out the way we had planned.

The law allowed the insurance commissioner to implement certain

changes before the full reforms took effect. This meant that some

changes—guaranteed issue, reducing preexisting exclusion periods,

and establishing a 3-month open enrollment period where people

were allowed to sign up with no waiting or limitations—were put

into effect without any of the underpinnings designed to make the

system sustainable.

There was no requirement that people enroll before they got sick,

no individual mandate, and no risk adjustment mechanism in

place. Soon afterwards, a change in political climate resulted in the

repeal of most of the law and the mandates, but the changes in the

insurance regulation were allowed to stand.

As a result, many individuals with serious health care needs

signed up for coverage. This rapidly led to a classic adverse risk

spiral in the marketplace. In short order, claims costs for many

health insurers were exceeding their premium collections.

Community rating in this context meant that everyone’s premiums went up significantly. More individuals decided not to take

coverage. The individual market collapsed when the two major carriers, Blue Cross and Blue Shield, closed enrollment in the indiVerDate 11-MAY-2000 14:03 Nov 05, 2010 Jkt 000000 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 61560.000 TIMD PsN: TIMD
9

vidual market. Group Health soon followed suit because of adverse

selection.

We learned four things from this experience: first, that rules governing the insurance market must protect the consumer, but also

must make allowances so that massive adverse selection does not

drive insurers out of the market; second, that insurance reforms

will only be successful if there is an individual mandate to balance

risk in the insured population; third, as long as you have an individual mandate, some people will need financial subsidies in order

to be able to purchase insurance; and, finally, we have learned

that, in reforming the insurance marketplace, both individuals and

small businesses want flexibility in what they purchase.

One of today’s challenges is that States are playing by different

sets of rules. Some States do not have high-risk pools. And, while

Washington’s adjusted community rating system keeps variation

between premiums fairly low, a person with a severe medical profile in some other States would pay up to 9 times more than a

healthy individual for the same coverage.

I am not saying that Washington is perfect—in fact, we are

working hard to achieve further reforms. But the Federal Government can play an important role in studying what various State insurance rules have achieved, supporting those that work and Statebased rules that work, while recognizing the unique nature of regional markets. This will be critical if the Federal Government considers implementing marketplace mechanisms like the Massachusetts Connector on a national stage. Absent sensitivity to regional

markets, such an approach could squash regional innovation.

As the Federal Government considers insurance market reforms,

it will be important to protect States like Washington that have developed markets that are more generous to the consumers and that

work. Proposals allowing insurance to be sold across State lines

based on the regulatory framework of the State of domicile of the

carrier would severely destabilize our markets.

I want to tell a story that illustrates Group Health’s unique perspective. Back in March, a man named Fred Watley from Spokane,

WA needed a liver transplant. But when the time came for him to

get his new liver, he found that since his employer, a small group,

had transferred over to Group Health, he had entered into a new

6-month waiting period for a transplant.

Even though Mr. Watley had been continuously covered with

health insurance for years, he would have to stand a new waiting

period. Group Health doctors wanted him to receive the transplant,

but legally that would have meant he was on the hook for the

costs. Not only would that have been unfair, that would have been

a death sentence for him.

So we decided to change our policies, to change the rules. We

broke ranks with Washington State’s insurers and we approved his

transplant. He got his new liver, and over the following days we

very proactively worked with our insurance commissioner and with

other health carriers in the State and agreed to work on changing

the rules going forward. In the next legislative session, we will be

working to assure that others in Mr. Watley’s situation will be able

to get the care that they need.

10

A solution to Mr. Watley’s case was relatively simple when we

were willing to think differently, and thankfully it was also possible without waiting for a statutory change. As I hope I have illustrated, most problems in the insurance system are not so quickly

solved by the private sector. Regulatory strategies will require delicate balancing between State and Federal Governments. We urgently need coordinated action to improve both the insurance market and our Nation’s system of care.

Thank you.

The CHAIRMAN. Thank you very much, Ms. MacEwan.

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

The CHAIRMAN. Next, Ms. Holland. Thank you.

STATEMENT OF KIM HOLLAND, OKLAHOMA INSURANCE

COMMISSIONER, OKLAHOMA CITY, OK

Ms. HOLLAND. Chairman Baucus, members of the committee,

thank you for holding these hearings. Thank you for allowing me

to address you this morning.

My name is Kim Holland. I hold the elective office of Insurance

Commissioner for the State of Oklahoma. Prior to this service, I

spent 25 years counseling individuals and businesses on their

health insurance purchases and served on various boards and commissions dealing with our health care delivery system, including

Oklahoma’s State Medicaid Agency Board.

I have developed a keen awareness of the myriad and complex

issues that affect the cost of health insurance and, like you, some

passionate opinions about what we must accomplish to improve

health care access and quality for all Americans.

The written text of my testimony describes how States and State

regulators are working to address the high cost of health insurance. I describe in detail the commonly adopted rating models that

have effectively created State-wide pooling and explained States’

concerns over multi-state pooling concepts that create adverse selection and market disruption, and on behalf of many of my colleagues at the National Association of Insurance Commissioners,

offer suggestions on how the Federal Government can help us in

our common goal to improve the quality of life of our citizens.

However, for the few moments I have to speak with you today

I am going to talk to you about Oklahoma, not because our issues

are unique, precisely because they are not. They are the issues that

many States—and in some instances all States—are grappling

with.

I love my State, but when it comes to the health and health care

of our citizens, we are pretty sad. Oklahoma ranks dead last in

terms of the overall health of our population and in the performance of our health care system. We have the 5th-highest number

of uninsured in our Nation, with over 650,000 hard-working men

and women worrying over whether they can get the care they need

when they need it without insurance. We are a poor State in terms

of wages. Our average per capita income is well below the national

average.

The cost of treatment for our uninsured has had staggering consequences in our State, adding $954 million annually to the cost of

11

care and coverage, and perversely resulting in the growing numbers of uninsured. I adamantly support State-based health care reforms as the best means of meeting the distinct and diverse needs

of our populations. Under our leadership, Oklahomans from all

walks of life in all four corners of the State have, and are participating in the creation of a plan for systemic reform.

Similar initiatives are occurring in virtually every State in the

Nation, but our progress is hampered by inequities in the distribution of Federal resources and archaic Federal laws that have created their own adverse selection among programs and between

States, and contribute to our inability to improve access and care

to our citizens.

To illustrate our challenges, first, Insure Oklahoma, our innovative premium assistance plan, is funded in part by a Medicaid

waiver. This public/private partnership has made it possible for

thousands of lower-income adults to afford private insurance

through their small business employers.

Our efforts for a much-needed expansion of the program to cover

children of working families and college students has languished in

the hands of CMS for 14 months, marking it as the longest waiver

review process in our history and one that has been fraught with

unlegislated policy changes at CMS. Particularly troublesome to us

is that many jurisdictions have received approval for waivers during this same time period that do not meet CMS’s own policies for

use of Medicaid funds.

Oklahoma is second only to California in the number of residents

identified as American Indians/Alaska Natives. Oklahoma’s per

capita health care appropriation for the Indian Health Service population is less than half of the nationwide average. The amount we

receive represents only 44 percent of the actual need, and makes

Oklahoma the lowest funded area within IHS.

Federal disproportionate share hospital funds, or DSH, provide

financial support to hospitals that treat a disproportionately high

percentage of low-income population. In spite of our high poverty

rates, DSH allocations to Oklahoma are microscopically low, as

they are in Senator Grassley’s State of Iowa, while other States receive significant funding, in some instances more than they can

use.

Lastly, self-funded health plans, exempt from my regulation due

to Federal preemption under ERISA, do not pay the State taxes

that could be used to fund health care reform, are preempted from

the assessment that funds our high-risk pool although their employees have equal access to the benefits, and are known to dump

employees into social programs through plan designs that would

not be allowed by State regulators.

I am not saying we take from one to give to another; we have

done that and it does not work. I am saying that real reform cannot occur until we get everyone covered, and that will not occur

until we eliminate the vast funding disparities and inequities created by existing Federal policy. That should be the first step in any

national reform plan.

I am saying that we must marshal the necessary political will

and resources to ensure that every American, regardless of where

12

they reside, will have access to affordable health insurance and

high-quality health care. Thank you.

The CHAIRMAN. Thank you very much.

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

The CHAIRMAN. I would like to go back to, I guess, one point you

made, Mr. Dreyfus, with respect to the Massachusetts plan. That

is, one way to get at costs is to, I guess, better align payment.

Mr. DREYFUS. Yes.

The CHAIRMAN. Could you go into that in more detail and explain

why you think that will cut costs? That is sort of the more, if not

the concept of the day, it is certainly a concept that is getting more

current note. I would like you to just explore that a little bit more,

please.

Mr. DREYFUS. Absolutely. We are looking at the whole range of

efforts to slow health spending, from e-technology to better management of patients with chronic illness. But the fundamental

problem we see is that our payment system rewards volume, rewards activity, rewards complexity and intensity. I regularly talk

to physicians and hospital leaders, and I ask them, what percentage of the care that you provide is unnecessary? In the quiet of a

room, they will tell me 20, 30 percent.

The question is, how do we get that care out of the system because it is not clinically effective, and in some cases actually harmful, for patients? They say, well, what we are paid for is what we

do. We are paid for visits and we are paid for hospital admissions

and we are paid for tests. Yes, there are other factors that come

in there, such as malpractice environments, but it is really the payment system.

So what we have done is, we have developed a new payment

model which combines a fixed global payment, adjusted for health

status and adjusted for inflation, with significant performance incentives. We are starting to pioneer this with several large physician practices and hospitals in Massachusetts. For those physicians

and hospitals that see it as their strategic future to be the high

value provider in their market, high quality and efficient, this system should help them thrive and grow, and they are open to it.

But what I would just add is that we would love to have a partner at the Federal level. So, when we talk to physicians and hospitals about our new payment model, they often say, well, this

looks great, but Blue Cross, you only represent 25 or 30 percent of

our revenue; Medicare represents another 40 percent.

So, if Medicare were paying us the way you were paying us, that

would really change the way we practice care, allow us to be paid

for telephone visits, for electronic visits, for group visits, for prevention, for home visits, for care management, all the elements of

care that I think we would all say we would want for ourselves and

our family.

The CHAIRMAN. Are you able to quantify that in any way, quantify the cost savings?

Mr. DREYFUS. Yes. We have done models and we have actuaries

as well that have looked at this very carefully. Health care costs

in Massachusetts are currently growing at about 11 percent per

year, which again is one of the reasons why our health reform exVerDate 11-MAY-2000 14:03 Nov 05, 2010 Jkt 000000 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 61560.000 TIMD PsN: TIMD
13

periment could be at risk over time. We believe that this new payment model could, over time, over a 3- to 5-year period, cut the rate

of growth in half, to closer to 5 or 6 percent.

So, in other words, we are trying to bring medical inflation down

to something more closely resembling overall inflation, and we

think we could do that principally again by eliminating unnecessary care, by eliminating harmful care, and by providing the care

that patients really need.

The CHAIRMAN. So more specifically, what would you suggest this

committee ask of Medicare?

Mr. DREYFUS. Well, what we would ask of Medicare is, Medicare

has had a few small demonstration projects and experiments,

which in some cases are showing that new payment models can

work. We would ask that we expand that, that we consider Medicare waivers in addition to Medicaid waivers to allow States to experiment with new payment models, and to kind of liberate the

kind of constraints of the existing payment system. Especially if

physicians and hospitals are willing to work under a new payment

model, we think we should allow that to work.

The CHAIRMAN. All right.

Mr. Bertko, I am trying to get at what can be done in terms of

individual market reforms. We mentioned guaranteed issue, community rating, and also guaranteed renewability. To what degree

is a mandate required and necessary to accomplish these reforms?

Mr. BERTKO. Senator Baucus, an interesting question. I think

that a mandate could be a clear and straightforward way to do

that, but I do not think it is a necessary way to get there. States

have tried a variety of ways. I applaud Massachusetts for what it

has tried. In the absence of a mandate, though, if you have guaranteed issue, it means there will be risk selection. Ms. MacEwan described what happened in Washington State, and I think that is

likely.

So you would need to take some other issues—for example, looking at waiting periods, looking at standard open enrollment periods, things like that. Use of either risk adjustment, which would

spread the risk of enrolling one particular group of high-cost people, or reinsurance could be used. So I think there are a variety of

tools that actuaries could use to make it work in either way. The

mandate has a lot of appeal in some places, but it also comes with

a number of complications.

Finally, application of whether you use rating bands or adjusted

community rating also have implications on the amount of crosssubsidization between high-cost individuals and people at lower expense.

The CHAIRMAN. Well, my time has expired.

Senator Grassley?

Senator GRASSLEY. Yes. I am going to start with Mr. Dreyfus and

Ms. MacEwan. We have a situation, Mr. Dreyfus, in your State. It

chose to require all of its residents to have health insurance. In Ms.

MacEwan’s testimony, you imply that Washington State should not

have repealed its individual mandate.

So the question is about enforcement. States have a terrible time

even in enforcing drivers having car insurance. Mr. Dreyfus, would

you remind us how Massachusetts is enforcing its mandate? Ms.

14

MacEwan, how would you have Washington enforce such a requirement?

Mr. DREYFUS. Thank you, Senator Grassley. The enforcement of

the mandate was done in stages. It is done by our State Revenue

Department. Initially, those who did not comply with the mandate

would lose their personal tax exemption, which was worth about

$500 a year. In the following year, the penalty increased up to

about $950 a year.

There are exceptions. There is an affordability schedule, an appeal process, and some people have appealed. Certain people whose

income was deemed not high enough to be able to purchase affordable coverage were excused from the individual mandate. So it is

still early in our State, but the health reform law remains very

popular. There has not been a kind of uprising. And, while we may

not get 100-percent compliance and enforcement, as you point out

with auto insurance, we think we will get very close.

Ms. MACEWAN. The 1993 Health Services Act, I think, was vulnerable in a couple of respects. One is that it did not have strong

bipartisan support and there was not a good plan for enforcing the

individual mandate. I believe that is why it was repealed. I think

that the steps that Massachusetts has taken make a lot of sense.

Washington does not have an individual income tax, which takes

away some possibilities for enforcement.

So, first, I think you need broad bipartisan support so you have

the sustainability of the rule, so that you have the support for people to move forward. Then you need to work through other mechanisms to encourage enforcement. But it is very challenging to enforce an individual mandate, and it is challenging to think about

what the remedy would be for not complying.

Senator GRASSLEY. On another subject, Mr. Dreyfus, we have

discussed the idea of a connector like that in Massachusetts. They

have assumed it will improve the efficiency of the health insurance

system. To pay for the Connector, it is my understanding that in

Massachusetts there is a 4.5-percent administrative surcharge on

every health insurance policy sold in the State.

Two questions: does the Connector reduce any of Blue Cross’s administrative expense such as your advertising, sales, or enrollment

functions; and two, will you please explain to me what advantage

the Connector system brings to the system, if you say that there

is an advantage?

Mr. DREYFUS. Yes. The Connector does reduce our costs somewhat in two respects. First, part of that 4 percent pays for broker

fees and commissions, so that is not a payment we have to make.

Second, the Connector actually contracts with what they call a subConnector that does the initial intake for the policies. So there is

some lower cost, but I would say that that 4 percent ultimately is

spread across our entire now merged individual and small group

market.

In terms of the value the Connector plays, first of all, I think it

has played an important role in helping to publicize the mandate

and the need for coverage, and then enrolling people, particularly

in the subsidized plan. They have played a very important role in

that.

15

They have worked very hard to settle some very thorny public

policy questions about what should be a minimum level of coverage

and what should be a schedule for affordability that would allow

people to be exempted from the mandate. I think in our case, the

legislature set broad parameters and sent it to the administrative

agency that has a board that is made up of both public officials and

private sector leaders to work out some of these complex public policy trade-offs.

Senator GRASSLEY. All right.

And Mr. Bertko and Ms. Holland, there have been calls to require insurance to provide coverage to anyone who wants it and at

a price that would not take into account health status. In States

that have tried this, what has been the effect on the price of premiums and the choice of products in the market? Mr. Bertko, then

Ms. Holland, and then that will be my last question.

Mr. BERTKO. Senator Grassley, in general when guaranteed issue

is implemented, what happens is that in a previously underwritten

market rates will generally go upwards. This is because the healthiest people would have gotten the lowest rates before, and now we

are making an offer of insurance to anyone that comes in.

There is a secondary effect. When the healthiest people then find

their rates go up, they may be less likely to purchase insurance—

the economists call this elasticity—and so as a result the average

rates go from insuring mostly the healthiest at issue to closer to

an average rate. So, in general, rates are going to rise.

Senator GRASSLEY. Ms. Holland?

Ms. HOLLAND. And I will add to Mr. Bertko’s comments, Senator,

by just saying, in an environment where one does not have a highly

insured population, what occurs when costs go up is, obviously, it

has the consequence of having people drop off the coverage.

It also, in an environment where you do not have a requirement

that people purchase coverage, you can have an adverse selection

situation, where the people who do take up insurance—if you are

transitioning to a guaranteed issue environment, the first people

who are going to come to the table and purchase are those who are

most likely to need to use the benefit first. So it can have significant consequences depending on where you start and where you

are moving.

Senator GRASSLEY. Thank you, Mr. Chairman.

The CHAIRMAN. Thank you. Thank you, Senator.

Senator Wyden?

Senator WYDEN. Thank you, Mr. Chairman. I thank the panel.

The first question is for you, Mr. Dreyfus and Ms. MacEwan. I

believe today’s private insurance model is inhumane. I think it is

essentially about shedding risk. That is what you have to do to be

successful, so companies cherry-pick and they go out and take the

healthy people and send the sick people over to government programs more fragile than they are.

So what we have done here in the Senate, 16 of us, in the

Healthy Americans Act, 8 Democrats, 8 Republicans, is we said we

have to have a new business model in private insurance—not a

government-run health plan, but in the private sector. What we

have said is, everybody is required to show personal responsibility.

They have to buy coverage. We have changed the tax law so as to

16

better target the subsidies of people who are in the middle-income

and the lower middle-income brackets. Then we say the companies

have to take all comers. They have to compete on the basis of price,

benefit, and quality.

My question for you two is, do you not think that that is the kind

of model in which responsible private insurers can be successful in

the days ahead with those elements? Mr. Dreyfus?

Mr. DREYFUS. Sure. Thank you, Senator. Well, certainly many of

the provisions that you just mentioned exist today in Massachusetts in a system in which we have both employer and individual

participation. So I would say there is no cherry-picking in Massachusetts. It is not allowed. It is restricted by State regulation.

So, we believe that we can operate successfully on our current

business model in a way that protects consumers, protects employers, and so we think the mixed employer-based model is working

for us. I cannot speak for the experience of other States that do not

have the level of insurance regulation that we have in our States.

Senator WYDEN. Ms. MacEwan, do you think that the model I described is the kind of model in which private insurers can be successful?

Ms. MACEWAN. I think that many of the elements that you described could work. I think that a lot of different regulatory models

can work. I think, really, the devil is in the details and in building

the political consensus to move towards a different model.

In Washington, we do take all comers. They either can go into

the individual private market or they can go into the high-risk

pool. One of the things that becomes, I think, inhumane in Washington is not the regulatory model, but that people cannot necessarily afford the cost of the high-risk pool and there are not really subsidies available to help them. So, it is complicated. I think

the cost issue also drives problems. I thought the comments about

what we needed to do about our payment system will help us all

move towards a more humane system.

Senator WYDEN. Mr. Bertko, a question about cost containment.

I think the story of the States—and we are all, of course, rooting

for Massachusetts—is that they are doing a terrific job, given the

fact that they have very little bandwidth. The major cost containment tools are all owned by the Federal Government. We are talking about the tax code, we are talking about ERISA, Medicare,

Medicaid, even the graduate medical education program. Massachusetts is having this big challenge of getting enough workers,

and the Federal Government controls, to a great extent, the workforce supply.

Do you share that view that, in order to really contain costs, the

Federal Government and these Federal tools are going to have to

be redeployed in a new partnership with the States because of this

cost containment issue?

Mr. BERTKO. Senator Wyden, I share much of what you have

said. I would describe it more as a partnership. I think perhaps,

as Mr. Dreyfus said, about 50 percent of health care costs at the

provider level—hospitals, for example—come from the private sector and about 50 to 60 percent from government programs. I am

a MedPAC commissioner. I think you heard from Mark Miller, perhaps, in a previous session.

17

There are many things that need to be done on the Federal level.

Medicare, in particular, can be a leader in all this. But then I

would also suggest that the private sector, insurers like Blue Cross

of Massachusetts and the Group Health cooperative, need to join

in those efforts. They become combined efforts as opposed to only

Federal efforts.

Senator WYDEN. I thank you.

One question for you, Ms. Holland. We admire very much the

work you are doing at NAIC. I think probably the thing I have

been proudest of in the health field was the work in the Medigap

law back in the 1990s, where we got some standardization so that

you could really compare private choices, and did it with the 10 alternatives, as you know, in the Medigap law. I still think some

standardization of benefits—not complete, run-from-Washington

standardization—is going to be important in health reform. What

do you think?

Ms. HOLLAND. Thank you, Senator. Actually, I think there is

some merit to that. One of the challenges I think that we are struggling with in terms of standardization of benefits comes from the

lack of standardization in the delivery of medical care. They are all

so intrinsically tied.

If I could give you an example of something I just dealt with in

Oklahoma that was really heartbreaking. I had a family who had

a daughter who was diagnosed with a type of brain cancer that was

in a particular area of her brain, and the treatment for that was

considered experimental because it did not provide any curative

treatment and really offered only a small hope of continuation of

her life. It was denied, in terms of the contract policy and the medical evidence, not inconsistent with what we see across the board.

So, she did pass away a very short time afterward. The surgery

might have cost $150,000, and was a stem cell replacement, but

she was denied that care.

At the same time, I have a person in Oklahoma who is an HIV

AIDS patient, an HIV hemophiliac who acquired AIDS through a

transfusion. He decided, in spite of very, very poor health, he wanted a knee transplant. Against a doctor’s orders, he said, I am entitled to this, my insurance will pay for it, I am going to have it. He

had the surgery. He had all the consequential problems that his

doctor warned him against. He is on medication that costs between

$6 and $10 million every year—$6 and $10 million every year! So I have on one hand the life of a 17-year-old that, for $150,000

we would not do that because of all the reasons, it is experimental

or whatever, and at the same time a plan is paying $6 to $10 million a year on medication for the voluntary actions of an individual,

because our system can. That is in the health care environment. I

mean, that is not about insurance, that is about health care. I do

think that it is so critical.

You have heard that point made already today that we understand how the two are tied together. Until we resolve the high cost

of health care and grapple with some of those issues about how we

do deliver the necessary and critical care to our citizens in an equitable way, we are going to continue to struggle with being able to

afford health insurance, and all of these issues are going to be

moot.

18

The CHAIRMAN. Thank you very much.

Senator, I regret that I have to leave to go manage a tax incentive bill on the floor in about 5 minutes, but Senator Rockefeller

will take over.

Senator Salazar, you are next.

Senator SALAZAR. Thank you very much, Chairman Baucus.

My concern, frankly, for this committee is, we have spent so

much time working on this health care reform issue and see it as

being one of the major things that we would be working on in 2009

as a committee and trying to move forward with health care reform

in a meaningful way, and yet this ominous cloud of $700 billion

that we are trying to struggle with today, I think, may end up creating huge challenges for us as we try to deal with health care reform and other important priorities of the Nation into the coming

year. So, it is something which looms large and ominous over all

of us.

I have a question for any of you who want to respond to this. Mr.

Dreyfus, you said that in Massachusetts, as you move forward with

the implementation of your plan—and I applaud Massachusetts for

moving forward with the kind of innovation and the pilot that it

moved forward with—you are still facing the reality of these runaway costs. Eleven percent, you said, was the cost of health care

this last year.

I think that we still do not know exactly how we are going to

somehow bring those runaway costs under control. If you look back

in terms of health care costs and how they have been rising from

1960 until today, it is this runaway train that we simply cannot

slow down.

So I would like, starting with you, Mr. Dreyfus, and any of the

rest of you, just give us some elaboration on how it is that you

think we can get our hands on this runaway train.

Mr. DREYFUS. Well, I think one place to start would be to look

much more closely at the variation in costs and quality in the Nation and within communities. So we know, for example, there are

regions of the country that spend much less than, for example, we

do in Massachusetts and achieve equal or better outcomes. What

are they doing there? We know actually, within individual physician practices, there is great variation, for example, in how commonly a group of surgeons will perform back surgery.

Senator SALAZAR. So let me push you on that, though. We know

that and we know the regional variations and we know the variations even within States.

Mr. DREYFUS. Right.

Senator SALAZAR. Do we figure out a way of setting up some kind

of Federal medical protocol board that can help us standardize

some of these treatments? How do we ultimately get at that disparity?

Mr. DREYFUS. I think, two things. First of all, I know this committee has looked at the issue of establishing a comparative cost

effectiveness institute at the national level, and we think it is time

for that kind of Federal intervention. But at the local level, there

is a lot we can do.

We are beginning to experiment with—often health plans have

much better data than physicians and hospitals themselves do. So

19

we are starting to experiment with giving physicians their own information about the variation and in their own practice because,

when they have that information, they actually often want to

change.

So, if we can give a group of surgeons comparative information

about how often they are using MRIs and other high-tech imaging,

how often they are prescribing expensive medications, how often

they are performing surgery as opposed to considering less expensive interventions, their behavior would actually change.

Senator SALAZAR. Would that be better done at the State level

and let 50 States go ahead and do their own thing, or would it be

better for us as a national initiative to say this is what we are

going to do across the country?

Mr. DREYFUS. What I would say is, I think the Federal Government can set standards, such as could be done by a comparative

cost effectiveness institute, and then let, not even State communities, but local communities—it’s really practice-by-practice,

hospital-by-hospital—go in and help show people their variation,

how they perform, how they compare to their peers, and I think we

will get change. I think, national standards with local interventions.

Senator SALAZAR. Mr. Bertko?

Mr. BERTKO. Yes. Just to add to that, I will use a different

phrase for what I think Mr. Dreyfus said: using resource use information. MedPAC is on record for saying we should use the Medicare data files to do that. I suggest that, at a Federal level, that

is more practical, because in most States information is split

among 4, 5, 10 different insurers. The amount of data that is in

the Medicare file is enough to look at everyone and determine

which physicians are using more imaging, which are using more of

other things.

I would also suggest, and I think this is a similar statement, that

we need to change the payment incentives. Most private insurance,

as well as Medicare, is done on a fee-for-service basis. We have had

discussions about bundling payments together so that hospitals

and physicians work together, driving primary care as being one of

the important parts of the system’s capacity.

Then lastly, I, too, would recommend establishing a comparative

effectiveness board to take care of where a health care trend is

going—that is, the inflation factor—over the long run, because we

need to know better what works and what is evidence-based and

what is an appropriate use of services.

Senator SALAZAR. With the permission of the chair, may I have

each of the other witnesses respond for 10 seconds or so?

Senator ROCKEFELLER. Yes.

Senator SALAZAR. Ms. MacEwan?

Ms. MACEWAN. I would agree with what Mr. Dreyfus and Mr.

Bertko said. I think the only thing I would have to add to it is, we

are currently rewarding the system for doing more, doing what is

unnecessary. That is really how to earn more. I am not saying that

all physicians and systems make those decisions, but there is nothing to discourage them to think differently or to deliver care in a

different way. So fundamentally changing the payment mechanism,

combined with delivery system reform, will be what ultimately

20

makes changes. We know at Group Health that primary care is a

much more efficient way to spend our dollars.

Senator SALAZAR. Thank you.

Ms. MACEWAN. But currently very few doctors are choosing primary care.

Senator SALAZAR. Ms. Holland?

Ms. HOLLAND. Just one thing to add, and that would be the use

of health information technology, which actually can do a great

deal to improve the transition of care from one physician to another

or one medical setting to another. So that, combined with different

incentives and payment mechanisms, I think can go a long way to

helping.

Senator SALAZAR. Thank you very much.

Senator ROCKEFELLER. Are you done?

Senator SALAZAR. My time has expired, Mr. Chairman.

Senator ROCKEFELLER. That was a long time ago.

Senator SALAZAR. I know. I have seven more questions, but I

know you will not let me ask them.

Senator ROCKEFELLER. Yes, I will.

One thing which I think is often overlooked is, one of the reasons

that the Connector works in Massachusetts is that, well before

those reforms were made, you had already redone the small group

and individual markets, making the requirements—community rating, all of the good stuff that has to happen—and then you did your

State-wide reform.

So my question, in a sense, is, do you have to have those parts

in place, which are controversial, before you do State-wide reform

as you have? And also, Ms. MacEwan, if you would comment,

please.

Mr. DREYFUS. That is a very good point. In fact, one of the unwritten stories about Massachusetts’s health care reform is that

there were actually a series of laws over a number of years which

built the foundation for the reform law. I think you are absolutely

right, it was much easier to introduce and implement a Connector

when we already had significant insurance market reforms such as

modified community rating.

I think it would be challenging. It was challenging in Massachusetts, as successful as we have been, to implement as much as we

did within a relatively short period of time. I think it would have

been much, much more challenging to do it all at once. Again, although the big insurance market reform that was part of this law

was the combining of the individual and small group market, and

that in itself has been successful thus far, I agree, the other insurance rules were foundational to our reform law.

Senator ROCKEFELLER. And in the reforming of the first part,

was that particularly difficult or did it just happen to hit a good

period?

Mr. DREYFUS. You know, they were somewhat controversial. But

you also have to remember that in Massachusetts, almost all the

health plans are not-for-profit. There was a strong kind of emphasis on protecting the community. We had had a regulated hospital

payment system in the 1970s and 1980s, so there was kind of a

history of a strong government involvement in health care, so it

21

was not as surprising or unusual as it might be in a State without

that legacy.

Senator ROCKEFELLER. That is interesting.

Yes?

Ms. MACEWAN. Yes. I agree. I think that we are actually experimenting with a Connector model in Washington State, where it is

very difficult. Basically it will become a way to deliver subsidies to

small businesses that want health care to be more affordable.

In the Massachusetts model, when they moved the individual

and small groups together, the rates for a small group went up. Individuals came down, small group went up. You know the voice and

power of small business in the States. You cannot do that unless

you have broad support to move ahead, unless people really see

that there is something to gain as well as to sacrifice in moving forward. So I fully agree, you need to build step-by-step and get the

reforms in place and build the support before you start making the

big changes.

Senator ROCKEFELLER. Is there also a part of that which is true

simply because people are a little bit more comfortable if you do

not try to do too much and if you do it piece by piece, and each

piece makes sense to them or the second piece becomes more sensible because you have done the first piece?

Ms. MACEWAN. Right. In health care—like so many things—we

are very willing to reform someone else’s health care, but when it

comes to our own arrangements, our health plan and our physicians, people are loathe to change those, as I am sure everybody

at this table would agree. So, yes, absolutely. You have to really

take it step by step.

Senator ROCKEFELLER. It is interesting, because we are facing

that here. I mean, all the candidates are promising complete health

reform by the end of 2009. Of course, there is no way that is going

to happen, financially or otherwise. So do you do the building

block? Now, when you say ‘‘incremental,’’ it is now kind of a wimpy

word but, if you do Children’s Health Insurance and a few other

things, you sort of create a sense of momentum.

The other argument is, if you do something like Children’s

Health Insurance, which we could do, I think, rather easily, that

you take away from the sense of momentum of working towards a

larger reform, and I do not buy that. I think that you have to show

that you can get stuff done, and that is what creates momentum.

Do you have views on that?

Ms. MACEWAN. There is nothing wimpy about Children’s Health

Insurance. We passed it in our State, and it was a lot of work, and

it is an incredibly important reform. So I agree, I think that sometimes the more courageous thing to do is to take the smaller steps,

building towards something that is longer-term.

Senator ROCKEFELLER. Building confidence.

Ms. MACEWAN. Right.

Senator ROCKEFELLER. Because we have been through this before

and it did not work, so the confidence is lacking.

Ms. MACEWAN. I have tried it the other way.

Senator ROCKEFELLER. It was not health insurance for children

that I was calling wimpy, it was the word ‘‘incremental’’ that I was

calling wimpy.

22

This other is just sort of nasty. But in part of the preparation

for this, I see Blue Cross of California, Blue Shield of California,

HealthNet, Pacific Care, these are massive programs. They have

rescinded, in a number of cases, care for individuals just as they

happened to become sicker, and therefore a higher cost for the insurer to cover.

I come from a relatively small State where those things seem to

happen, but I just do not associate that with companies like that.

There was an example where a California hair salon owner was

awarded $9 million after HealthNet canceled her insurance policy

in the middle of chemotherapy treatment. I do not understand how

that happens. Obviously the current regulatory structure is not

strong enough, but how does that happen? I mean, how would a big

company like that do something like that? Nobody is going to sue

you for answering the question.

Ms. MACEWAN. I think it is California law.

Mr. BERTKO. Senator Rockefeller, let me try to answer. I have no

business in California, and have not for a while. These, I believe,

were part of the individual insurance market. As I described in my

testimony, there is generally an underwriting questionnaire at the

start of it that says, what conditions do you have. A person presumably fills that out to the best of their ability, truthfully.

When they then have some incident, a cancer claim, some of the

companies would have done what I think was called post-claim underwriting, and looked back and said, you must have known about

that condition, and hence, rescinded the policy. I think that is a

matter for State regulation. I would look to Commissioner Holland

here to make a comment, but I think I probably described the correct mechanism.

Senator ROCKEFELLER. Before you answer, let me just say one

more thing. In HealthNet, the employees who created this practice

of, we cannot do this, they were given bonuses because they identified expensive cases for rescission. I mean, that just has no place

in America. Help me understand.

Ms. HOLLAND. I cannot help you understand that, Senator, because I do not understand it. I mean, quite frankly, State regulators would find that practice appalling were we to identify it.

The issue with post-claim underwriting, as was mentioned, is in

large part in determining the veracity of the individual who is applying for coverage. If they knowingly and willingly did not disclose

information, then insurers protect themselves against taking a risk

that they would have otherwise had the opportunity to underwrite

reasonably had they known about a situation.

There are so many gray areas, though. The complexities of an application can allow one to, perhaps not intentionally, not share information. A simple example would be someone who in their early

years was diagnosed with mitral valve prolapse, never had any

problems, was not ever treated, and then all of a sudden has heart

palpitations. Is that non-disclosure because they did not say on

their application that they had a heart condition? Well, I would say

that that was not intentional misinformation. They were not treated for it.

So we are working as regulators to tighten up those situations.

The rescission issue seems fairly isolated to California. In my State

23

of Oklahoma, we did not have those problems. The National Association of Insurance Commissioners, in response to this issue, is

not only surveying States in terms of what kind of complaint activity they have had about rescissions, but also insurance companies

on their policies. We hope to have that complete soon. But I can

tell you and speak for our organization, that that is an unacceptable practice.

Senator ROCKEFELLER. So, when the National Association gets

those things worked out, will that stop these California companies

from doing those things?

Ms. HOLLAND. I think California has already passed legislation

that prohibits——

Senator ROCKEFELLER. To stop it?

Ms. HOLLAND. To stop that. Yes. Yes. But it——

Senator ROCKEFELLER. When?

Ms. HOLLAND [continuing]. Certainly would give us the tools

then to——

Senator ROCKEFELLER. When did they do that?

Ms. HOLLAND. Just recently, just this last session.

Mr. BERTKO. Yes. I believe it was this past summer.

Ms. HOLLAND. About 3 months.

Senator ROCKEFELLER. All right.

Senator Wyden?

Senator WYDEN. Thank you.

Senator ROCKEFELLER. Thank you very much.

Senator WYDEN. Thank you, Mr. Chairman.

I am very much in favor of most of the suggestions that we have

heard this morning. I think, Mr. Dreyfus, you talked about the new

payment models. Several of you mentioned comparative effectiveness training. Put me down as for all of those kinds of things.

The harsh reality, though, is that when legislation gets scored—

and here we have this Congressional Budget Office—they really do

not score much of that as savings, if any. We just went through

this with the Healthy Americans Act, and we have legislation that

includes most of that. They said our bill was revenue-neutral in 2

years, and then in the third year it would start bending the cost

curve downward. They, for all practical purposes, did not score any

of the things that you are talking about. They basically said the

savings were because we changed the incentives that drive individual behavior.

So what I want to ask you is, I want to ask you to give me your

assessment of a statement that Peter Orszag, who runs the Congressional Budget Office, gave to me when I asked him a question

about cost containment and see what your thinking is about it.

What Dr. Orszag has been talking about is that the inefficiencies

are so enormous that, unless you involve the individual in a different way, you are never going to drive the costs down.

So I asked Dr. Orszag this question. I believe the only way to

bend the cost curve downward is to take two very concrete steps:

(1) to demonstrate to our people directly how much the inefficiencies cost, for example, in reduced take-home pay; and (2) to pass

health reform legislation so that in a more efficient, fairer system

our people have a new financial incentive to select health care

24

more carefully. Would you agree with that? And Peter Orszag said

yes—a one-word answer: yes.

Let us just go down the row, starting with you, Mr. Bertko.

Would you agree with Peter Orszag on that two-part test of what

it is going to take to hold costs down?

Mr. BERTKO. I would certainly agree on the second part, that

there are new incentives that are needed. I am a believer in the

Alain Enthoven model of managed competition. On the first part,

I think it is necessary, but not sufficient. That is, people have a difficulty in determining, particularly at the time of urgent service,

where the most efficient care should be. I think some of the things

Mr. Dreyfus described——

Senator WYDEN. Well, the first part is simply the wake-up call,

knowing what they lose out on in terms of reduced take-home pay

as a result of the inefficiency. That is not anything else other than

just, here is the information.

Mr. BERTKO. I would respond to that by saying, when I was with

Humana, we had examples of that that operated on our 20,000 or

so employees. The wake-up call affected, in its first year, only

about 6 percent or so of the employees. It took a while to disseminate all of that through there, so it is a slow process.

Senator WYDEN. Mr. Dreyfus, your thoughts about whether Peter

Orszag is right?

Mr. DREYFUS. I think there is truth in both statements. I think

the thing I would add is that we do need to provide much stronger

incentives to individuals to promote their own health, but I think

we also have to provide equal, if not even more powerful, incentives

to the delivery system, to physicians and hospitals, and we have to

find a way to align those incentives so they are working together.

I think only then will we get the cost savings that we need to fund

expanded coverage, both locally and nationally.

Senator WYDEN. Ms. MacEwan?

Ms. MACEWAN. I would agree. I think that consumers, patients,

look to the systems to provide the information and the answers

about what it is that they need, and that is why the incentives are

so fundamentally important. But there is a new area that is being

explored called shared decision-making, in which consumers are involved in making decisions about their health care and their treatment. The evidence shows that, when people are engaged in that

way, the way that you are describing, they actually make more responsible decisions that result in better outcomes.

Senator WYDEN. Ms. Holland?

Ms. HOLLAND. Just to support Ms. MacEwan’s comments, we initiated a State-wide consumer opinion drive, basically, which went

around our State to elicit our citizens’ opinions on what should be

included in a basic health benefit plan within a certain financial

framework.

When we did that, again, to support what she was saying, as we

informed them about the costs of the uninsured population to them

and their current costs of insurance and gave them an opportunity

to understand the components of the benefit plan and the decisions

that policy makers make in trying to provide the broadest coverage

within some kind of financial constraint, we found them to make

very, very wise decisions.

25

So I do think that the information to policy holders, to any individual out there about their health care choices, is a wise one, and

the cost-shifting has a dramatic impact on business, as well as individuals. The more they know about that the better, and I think

the more inclined they are going to be to support reforms.

Senator WYDEN. Mr. Chairman, I have one additional question,

but I can wait until after your next round.

Senator ROCKEFELLER. No. Mine is so good that I will let you go

ahead. [Laughter.]

Senator WYDEN. I want to ask one question about insurance reform. Senator Rockefeller touched on this, of course, as being discussed in the presidential campaign about the individual market.

There has been considerable back-and-forth on this.

I have come to the conclusion that it is an absolute prerequisite

to holding costs down, to make it possible for people to join large

groups. If you are essentially out there by yourself trying to figure

out how to traipse around and get coverage, it is almost impossible

to do. It is hard to comparison-shop for the reasons we are talking

about when you do not have a lot of bargaining power.

So what we do in the Healthy Americans Act is, we make sure

that everybody is part of a large group—they will be in a position

to have more clout in the marketplace—but still have a chance to

have some of what people have talked about who advocate the individual markets, which is the chance to gain individually when they

make a careful purchase.

Just conceptually, I would be interested in your thoughts about

that approach to insurance reform, where you start with the proposition that people ought to be part of a large group so you have

more bargaining power, but still be in a position to have marketplace forces where individuals benefit from a sensible purchase.

Mr. Dreyfus? Actually, we can just go right down the row.

Mr. BERTKO. Senator, I think there is some advantage to having

either a large group or organizer. If I look at the Connector or

health insurance exchanges, something that tries to line up benefits so they are easy to compare, and then in some of the models

bargains for them, I think that can be useful.

The second part of this is, I think benefit choice is very important. I lived in California for a number of years. Many people there

liked Kaiser, other people cannot stand it because they want to be

able to go to anyone. That kind of difference in benefit choice is important.

Third, an organizer like that which has multiple models can also

make it possible for the health care delivery systems—and Group

Health of Puget, I think, is one of these—to make investments in,

say, disease management or care coordination that may take many

years to pay off, but, if the person can stay in that system for those

years, there is a greater incentive for the companies to make those

investments.

Mr. DREYFUS. I agree, Senator. Let me just throw out a few numbers. When our State considered bringing together our individual

and our small group markets, there were about 65,000 people in

our individual or non-group market and about 700,000 in the small

group market. When we brought them together, as I said earlier

in my testimony, the rates for individuals fell by about 15 percent,

26

some people found their premiums cut in half, while the small

groups went up modestly, a little under 2 percent. And so I think

that is an example of larger groups working.

Now, within that, however, I think you are absolutely right: we

still want to preserve both some individual choice and incentives

for individuals to choose high-value health care. I think one of the

promising developments is that the measures that we can use

today to measure quality and efficiency in care have improved so

dramatically over what was available only a few years ago.

So whereas before some of the literature suggests that consumers

were not looking at public information when they made health care

decisions, I think that is going to change and I think a younger

generation that is used to shopping for all sorts of goods and services online and looking at comparative information will start to approach the health care buying question differently.

Ms. MACEWAN. I agree. I think that any of us who benefit by

being in a large pool for insurance know that that is better. It is

advantageous to the individual. But I think that there are other

ways—much of what we have been talking about this morning,

Senator, is about protecting the vulnerable in our system, people

who have much higher health care costs needs. There are other

ways to do that, other ways besides doing medical risk adjustment—the high-risk pool does that—and reinsurance are other approaches that take care of the cost of the sickest.

Ms. HOLLAND. The only thing I would add to that, Senator, is I

actually support the notion of a State-wide pool. Every jurisdiction

is different, however. We have different tolerances within our State

in terms of benefits and taxation and other things that make it

challenging to go beyond a State-wide pooling process, I think, or

State-wide effort, except, perhaps, in the area of reinsurance. I

think the notion and the idea of a national reinsurance pool that

allows the very high risk to be pooled across a very broad population has some real merit, and I would be interested in seeing how

that might work.

Senator WYDEN. Thank you, Mr. Chairman.

Senator ROCKEFELLER. Thank you, Senator Wyden.

My question comes out of the blue. I have to then go, and you

being senior, Senator Kerry, will be chairing, and you can ask probably 30 or 40 questions if you wish. [Laughter.]

This is out of the blue, and that is why I like it. Everybody is

talking about cost containment. We all know the fact that 25 percent of the entire cost of Medicare is spent in the last 6 months

of life. It brings up something called end-of-life care, which brings

up several other subjects. Doctors take the Hippocratic Oath that

says ‘‘Do No Harm.’’ I have a mother who died from Alzheimer’s

over a period of 12 years. The doctors insisted on keeping her going

when she clearly did not want to go on, and her children did not

want her to go on in that state. It was humiliating for her. This

was repeated over, and over, and over.

Now, there are some people who can live to be 91, 95 and they

are just jogging every day, practically. But there are a lot—the majority—who cannot. So my question to you is, where is the intersection in the Hippocratic Oath of ‘‘Do No Harm’’ when you keep people living, and under the threat of suit—when the doctor came to

27

visit at our house when we took her out of the hospital, I mean,

he was sweating. He was really sweating. Where is the intersection

of ‘‘Do No Harm’’ on getting somebody to live longer and allowing

somebody to live longer when perhaps that is doing harm? Philosophical. Please?

Mr. BERTKO. Senator, that is one of the most difficult questions.

My mother-in-law passed away 2 years ago under somewhat similar circumstances. One thing I would point out that is available

these days is advanced medical directives to indicate your personal

choices on all this, and perhaps having those more used, more

readily available would be one.

Senator ROCKEFELLER. But you know, we have been working on

that since 1989. They were all there, charts at the end of the bed.

They were all there. They are overridden by this determination to

do no harm, therefore to cure no matter what.

Mr. BERTKO. I will have to turn that over to someone else, then.

Senator ROCKEFELLER. No, no. You have an opinion.

Mr. BERTKO. Again, in the case of where we were, we worked

through hospice care and palliative care, reduced the medications

for my mother-in-law, and she passed away very peacefully with

her family around. That, in my mind, was a good outcome for what

was a very debilitating disease to her. But thought had gone into

it. My in-laws had signed their directives. It was, like I said, a

peaceful and organized process for them.

Senator ROCKEFELLER. Mr. Dreyfus?

Mr. DREYFUS. I also had a similar situation with my mother-inlaw. Unfortunately, it resembled more your story than this story,

where despite DNRs and despite advanced directives, there still

were interventions that I think the family felt uncomfortable with.

I guess what I would suggest is not only for end-of-life care, but

for the larger health care system, we need to change the culture

from a culture of blame to a culture of care and protection and

safety. I think when we do that over time—and it will take a while,

and I think there are instances of this across the country where the

wishes and interests of families become more prominent.

If you go, for example, as I have gone, to Cincinnati Children’s

Hospital, which is one of the most advanced improvement organizations in the country, when you enter, your child enters, they hand

you the medical record and they say, this is your record, not our

record. You can enter notes in it every day if you want. We may

have greater medical expertise, but you know your child the best.

I think they have created a culture there, and I think there are

other cultures which would make it less likely to have the kind of

experience that sounds like we both had in our families with sometimes people getting medical care that they did not need, they did

not want, or ultimately was harmful.

Ms. MACEWAN. I think those situations are extremely difficult to

navigate. We also had a story with my mother-in-law, and it was

a better experience because she and my father-in-law, who is a

physician, had spoken for many years about their wishes, and her

wishes. They had those recorded, and the family understood them.

But most important, I think her physicians understood her wishes.

I think that health care is also a relationship of trust. One of the

things that we were talking about earlier on the cost of health care,

28

a primary care physician in that situation can be the family’s advocate. I think physicians tend to see death as a failure, and, if they

do not know the family, that is how they will behave. So, I think

a relationship of trust can help in that situation.

Senator ROCKEFELLER. Thank you.

Ms. HOLLAND. I have no answer, Senator, but an observation. I

think, and I have thought for a while, that our technological advancements have surpassed our ability to deal with the social consequences of those advancements when you look at our aging community and the cost of treating people at various stages of their

life. I think, first and foremost, we have to get people to take better

care of themselves during their lifetimes so that they can enjoy a

higher quality later in their life, and perhaps counsel with families

on a ‘‘good death,’’ if you will. But I think that is the challenge, and

will be the continued challenge of the whole health care environment to grapple with those costs and our opportunities to continue.

Senator ROCKEFELLER. It is a huge thing which we somehow

avoid discussing. That has to cease.

Chairman Kerry?

Senator KERRY. Thank you very much. I promise you, there will

not be 30 or 40 questions. But I thank the chair. I apologize for

not being able to be here sooner. I am not going to keep you long,

either.

Andrew Dreyfus, thanks for coming down. I appreciate what you

are doing in Massachusetts. Thank you, all of you, for taking time

to be part of this panel.

The success of the Massachusetts effort is actually, I think, fairly

significant. I think there are some good lessons to draw from it. As

Andrew I know testified, there are nearly half a million previously

uninsured folks who are now being covered with quality health insurance. What is interesting in all of the arguments we have

around here is, those folks have not just joined a government plan.

There has been a huge increase in the number of individuals getting private insurance through their employers.

And yes, it does require some serious investment, but the reports

of the costs being ‘‘out of control’’ and so forth really misrepresents

the reality. I am not sure, Andrew, whether you discussed some of

that previously already.

The fact is, health care reform in Massachusetts has been a little

bit more expensive than people thought, simply because there were

more uninsured than people thought. But we have maintained and

supported the parts of the system that are effective, while filling

in some other gaps creatively. We did not gut employer-based

health insurance, which I think is really important as we consider

on this committee what we are going to do next year.

We had a breakout session when we did our session over in the

Library of Congress regarding employer-based insurance, and there

seemed to be a consensus that it is a very critical base that is already working and would be very difficult if you suddenly deregulated the marketplace.

In fact, the events of the last week on Wall Street, which are now

consuming us this week here in Washington, underscore what happens when an ideological belief in deregulation is excessive. I do

note that there was an article written by Senator McCain advoVerDate 11-MAY-2000 14:03 Nov 05, 2010 Jkt 000000 PO 00000 Frm 00032 Fmt 6633 Sfmt 6633 61560.000 TIMD PsN: TIMD
29

cating for a similar approach to health insurance, so I hope the

committee will work carefully as we think about sort of what the

best approach is here and what is not.

I know from staff that you were already asked about the consumer protections and market regulations in Massachusetts as

they affected the community rating and price and quality issues.

Let me follow up by asking a question about New Hampshire’s experience with that deregulation.

As I understand it, the State of New Hampshire moved away

from an adjusted community rating system in the small group market and allowed significantly more premium variation, which is

what comes when you get deregulation, you let people go out and

set their premiums and target their markets.

As one would have expected, the premiums for smaller firms

with older and sicker workers and firms in certain geographic

areas faced large premium increases, while larger firms with

younger and healthier employees saw their premiums fall. Among

firms with 2 to 9 workers, 41 percent of employers faced premium

increases of 30 percent or more. New Hampshire then literally

stepped back, repealed the law 2 years later because it was not

working in that deregulatory atmosphere, and went back to the

community-based rating system that it had before.

Share with me, if you would, Mr. Dreyfus, first of all, what does

this tell us about the most sustainable way to approach insurance

market reform, if anything?

Mr. DREYFUS. Sure. Well, first, thank you, Senator Kerry, for all

the work you have done to support our health care reform law in

Massachusetts, as well as the work you have done on other important health care issues, most recently e-prescribing in the Medicare

bill, which is going to be a really important step for us and demonstrates how the Federal Government can put incentives and

rules in that can help the payment and delivery system improve.

I think the New Hampshire example is an instructive one.

In Massachusetts, we were able to stabilize, not destabilize, our

insurance market by putting in thoughtful regulations that were

acceptable to the private health plans, acceptable to the business

community, often developed in a bipartisan way in the State, and

that has really been the foundation or the backbone of our health

care reform law.

The fact is, many individuals in Massachusetts are paying less

today than they would have otherwise for their insurance as a result of the insurance protections that were built into the law. So

we think a fundamental concept of insurance is the spreading of

risk fairly among different parties, and I think we have been able

to achieve that.

Senator KERRY. Mr. Bertko?

Mr. BERTKO. Yes. I would only add, Senator Kerry, that adjusted

community rating is one method for applying subsidies. These are

then inter-group subsidies. Other tools might also be useful depending on where a State starts from, such as using risk adjustment across that particular market or even reinsurance with subsidies. Then last, of course, you might have low-income subsidies

which would help, again, some of the lowest-waged of those kinds

of employers.

30

Senator KERRY. I accept that. I think the key here is that you

create some sort of stability and spread that risk adequately

through the system, which a completely deregulated system does

not necessarily do.

One of the challenges here is, as people talk about this deregulation concept and allowing people to sell across State lines, there is

a lot of fear that that is just going to result in a kind of rush to

the bottom and you lose the quality or standards that you have and

some of the mandates you have today.

Do you want to comment on that?

Mr. DREYFUS. Yes. We would be very concerned about new rules

which would allow insurers to sell across State lines, to not protect

the integrity of the mandates and regulations that existed within

a State like Massachusetts, and that could really disrupt the reforms and progress we have made.

Senator KERRY. Does anybody else want to comment on that?

Ms. MACEWAN. Well, I would just say that the story you told

about New Hampshire, I am not familiar with the details, but I

think it illustrates the vulnerability of the small group and individual markets and how important it is to maintain the stability.

A lot of times the rules that are set up, no matter what we may

think about them, there is almost an ecosystem that occurs that

keeps the markets together. I would agree with what Mr. Dreyfus

said, that selling across State lines based upon the State you are

domiciled in could be——

Senator KERRY. Well, what happens, essentially, is people start

competing to woo the plans, and that takes them down in terms of

what becomes attractive to the plan itself, not necessarily the consumer. Correct? Yes, Ms. Holland?

Ms. HOLLAND. Senator, in terms of the rating bands, I do want

to reassure you that, on the rating band models, there are basically

one of two models that are adopted by States. Both are regulated

and both are intended to make sure that you limit—effectively,

pool—within limits and constraints.

The rate band model is no doubt a broader model than the adjusted community rating. But for a State like Oklahoma, for instance, where I have a high population of uninsured, it is really important for me to be able to attract as many healthy young people

as I can in my existing marketplace.

So those models are effective only to the extent that they are coupled with other things—guaranteed issue, mandates such as Massachusetts is doing to ensure that you get as much of your population insured as possible. Thus, your point is exactly right in

terms of how a competing model, a national insurance policy, pool,

or whatever can have a very disruptive effect on local markets and

actually adversely select against our markets.

Senator KERRY. Right.

Ms. HOLLAND. So, regulators, too, have grave concerns about

that.

Senator KERRY. Did you guys grapple with the question of mandate?

Ms. HOLLAND. Do we grapple with it?

Senator KERRY. Did you?

31

Ms. HOLLAND. Yes, we did, actually, this last session, extensively. Oklahoma is what most would consider a low mandate State

under any circumstances. We have a conservative kind of pullyourself-up-by-your-bootstraps mentality around there that does

not support, really, laws that say you have to do this or that.

But I have to tell you, in talking to our business community, they

are keenly aware of how much they are paying to cover the cost

of care to those who are not insured. I think it does kind of affect

their attitudes about providing inducements or creating inducements for people to be covered.

Senator KERRY. What percentage of that youthful population is

uncovered, do you know?

Ms. HOLLAND. Well, in our State we have almost 20 percent of

our population that is uninsured, and the majority of it is between

19 and 32.

Senator KERRY. And do you know what percentage of that 20

percent is employed?

Ms. HOLLAND. All of them, virtually. All except a very small percentage. They are working people.

Senator KERRY. Yes. So in effect, if they have a traumatic accident of some kind, everybody else in the State is going to pay for

it?

Ms. HOLLAND. If they have a traumatic accident or the flu, somebody is paying for it besides them.

Senator KERRY. So why is there a reluctance to not want to

spread the risk more effectively? It is much more cost-effective. Everybody else’s premium will go down.

Ms. HOLLAND. In part, I think it is education. I think it is helping policy makers really understand that the cost of care is being

paid for. It is a hidden tax in our system that we need to extract

and redistribute, and I am leading that initiative. But I have a conservative legislature, so——

Senator KERRY. No, I know you do. I understand that. But it just

makes business sense. I mean, the conservative CEOs ought to be

leaping at this——

Ms. HOLLAND. They are.

Senator KERRY [continuing]. Because it is a reduction in their

drag on business. I mean, it makes good business sense.

Ms. HOLLAND. You are so correct. We started an initiative just

recently to identify the top 25 corporations in the State of Oklahoma that are headquartered there, and the top 25 with the largest

employment base. I have a presentation I am taking them that explains the cost of coverage and ideas on creating inducements, as

well as taxation to support that.

Senator KERRY. Yes.

Ms. HOLLAND. And I can tell you, uniformly, regardless of whatever their political party is, they understand the impact to their

business.

Now, they are asking the question, if I tax myself, am I going

to see a commensurate reduction in my insurance costs? So some

of my biggest employers are hospitals. I have to say to them, am

I going to see a commensurate reduction in what you are charging

in order to get a reduction in insurance costs? So, it is all tied.

32

Senator KERRY. Yes. Well, politics is about choices. That is what

elections are about. People need to focus on the fact that this is not

an advertisement for one candidate or the other, but they ought to

focus on what each is proposing. Senator McCain has a plan that

effectively is deregulation with tax incentives, which affects those

who can benefit from the tax incentive, and the deregulation will

have all the negative impacts you have described.

Senator Obama, on the other hand, has a plan that tries to use

reinsurance, which we have just mentioned, as a means of lowering

premiums and offering better structure in terms of quality, affordability, and accessibility. So, hopefully people will focus on it.

Just a couple of more quick ones. I might comment, incidentally,

that Len Nichols, who is a moderate health economist at the New

America Foundation, says that that cross-state selling race-to-thebottom incentive to attract business will be such a disaster for ordinary Americans, that it will be the quickest way for the country to

end up with single-payer health care. So I think that we need to

look carefully at the cuts or maybe we should just all adopt it and

solve the problem.

You spoke earlier, Mr. Dreyfus, about the new payment model

and how it links payment to quality. Can you share with us a little

more about how you structured the incentives to providers in a way

that actually achieves their buy-in?

Mr. DREYFUS. Absolutely. Today, if a group of physicians working

at an outpatient clinic at a hospital in Boston is successful in intervening early and preventing a patient with congestive heart failure

from being admitted to the hospital, their reward for that good

work is that they are paid less. So what we have done is, we have

looked to the best national measures of quality, safety, and effectiveness. There is no black box back at Blue Cross. They are measures that have been vetted and approved nationally.

We have said to physicians and hospitals, if you are willing to

come together and end the fragmentation of care that exists today

and truly integrate your care around the needs of the patient, we

will pay you up to 10 percent higher, 10 percent more, if you

achieve the highest levels of quality.

So the early pay-for-performance experiments would often add a

half a percent or 1 percent, and those are good ideas, and they

often rewarded process measures. We are saying, if you achieve

better outcomes for our members, for your patients, we will pay

you substantially more. So that is the first piece of it.

The second piece is, we are paying what we call a global payment, and we specifically do not call it capitation because it is different than the capitation in the past. We adjust those payments

for the health status of the patient so that there is no incentive for

people to turn away or turn down sicker patients. By combining

those two incentives together, you get up to 10 percent higher payments if you improve care, and fixed payments, adjusted for health

status and for inflation. We believe that the best providers that are

providing the best care will succeed, and that everyone has an incentive to be more efficient.

Senator KERRY. Have you actually seen a marked increase in capacity as a result of that?

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Mr. DREYFUS. Well, we are just starting. We are just in the process of signing our first contracts. I would say one other interesting

feature is that health plans, physicians, and hospitals tend to have

adversarial relationships where, every year or every other year,

they negotiate a contract and they tend to get stuck on the finances.

These are 5-year arrangements where we as a health plan and

the physicians and hospitals are saying, let us work together as a

partnership. We are optimistic. Not every physician or hospital is

ready to accept these kind of payments for small practices. We are

optimistic that there will be significant take-up of this new proposal.

Senator KERRY. A final question on the reinsurance issue. I have

been a huge proponent of that, and in 2004 I proposed a national

plan that used reinsurance as a central mechanism for reducing

premiums all across the board. One of the criticisms that people

come up with is just the cost. They say, wow, you are going to take

X percentage of cases off the top and it is going to cost us a lot of

money, so to speak, the government.

I believe, obviously, that the cost is well worth it because, if you

remove those most expensive—I think that 1 percent of all the

claims in the medical system equal 20 percent of the cost. That 20

percent of the cost is affordable to the Federal Government on an

annual basis in X numbers of billions of dollars.

But if you take that off the system, you are then reducing the

exposure of every business’s employees. You know exactly what

their full risk level is. Once the most catastrophic cases are gone,

you can limit risk to any business in the country to save $50,000

or something. Once everybody knows, wow, that is all my premium

is going to be actuarialized against is $50,000, the premiums sink

across the board, which then helps small businesses to be able to

buy in. You get more coverage, more individuals can afford to buy

in. So are there not market benefits that come from the reinsurance pool that just outweigh that question of cost?

Mr. DREYFUS. Absolutely, Senator. We admired your proposal on

that in 2004. In fact, I have described and have praised the Massachusetts law. The one provision of the law that we advocated for

that unfortunately did not make the final bill was a reinsurance

mechanism, particularly in the small groups. I described earlier the

combining and merging of the individual and small group markets.

We had recommended that a reinsurance mechanism be placed

on top of that for precisely the two reasons that you said: first, it

provides some price relief to small employers; and second, it forces

everyone to focus on those 1 percent of members who result in 20

or 25 percent of total spending. We have strong programs, care and

disease management programs, for those patients today, but I

think there would be an added incentive to the whole system to

work on behalf of those incentives. So, we strongly support reinsurance.

Mr. BERTKO. Senator, I agree with Mr. Dreyfus’s comments,

which he characterized as reinsurance. Your numbers follow my actuarial experience. I would also, though, suggest considering riskadjusted payments in addition to the components above $50,000,

which are basically catastrophes, really bad happenings.

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You might want to consider incentives for taking, say, the care

of serious diabetic patients where the cost of those folks might be

in the $20,000 range or so, and the risk-adjusted methods these

days are good enough to identify and pay for those patients. Even

some hybrid of your reinsurance mechanism with this could, in

fact, be useful.

Senator KERRY. With respect to diabetes, I am told that, if we

were to get more people covered, and therefore more people

screened earlier, we would be able to intervene earlier and avoid

unbelievable numbers of amputations and dialysis, which would

save the system upwards of $50 to $100 billion on an annual basis.

So people need to begin to see both sides of the ledger here. It

is not just an outlay. There is a cost benefit which, incidentally,

OMB, in the scoring process, never takes into account. So all of our

judgments here are based on a completely artificial balance sheet

because we never get savings where there are savings, and we

never get cost reductions where there are cost reductions, or plus

benefits, anyway.

Does anybody want to add anything else before we wrap it up

and send you back to Oklahoma?

Ms. HOLLAND. I might add, Senator, in terms of reinsurance, the

NAIC invited Dr. Katherine Swartz from Harvard to speak to us

on reinsurance. You may know, she has written extensively on

that. She said yesterday that the cost of a national reinsurance

pool that would allow ceding of risk by insurers for those extraordinary risks that are really hard to quantify, and as a result we

pay for them in advance, that it would be somewhere around the

neighborhood of $5 to $20 billion annually.

Senator KERRY. That is fair.

Ms. HOLLAND. I would just offer, that seems like a little, tiny

amount these days, does it not?

Senator KERRY. When you are talking about laying out $700 billion on top of $1.6 billion, on top of $12 billion a month in Iraq,

yes, it sure does.

No. Absolutely, it does cost that. We put out some very fair numbers on it. But again, the upsides on the back end, in so many different ways, I think begin to balance that out.

At any rate, we really appreciate your input. The committee will

be digging deeply and quickly into this next year, regardless of who

is President. We look forward to working with all of you. Thank

you very much.

We stand adjourned.

[Whereupon, at 11:48 a.m., the hearing was concluded.]

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