Chairman JOHNSON. Good afternoon. The hearing will come to order. Today's hearing focuses on uninsured Americans, who they are, and why they are uninsured. Since the Subcommittee on Health last held a hearing on the uninsured in 2001, the number of Americans without coverage has increased. Over 43 million Americans, more than 1 in 7, are uninsured on any given day. In my home State of Connecticut, more than a quarter million residents live and work without health insurance. As we develop legislative solutions, we need to understand the latest research on the uninsured and the barriers they face in purchasing coverage.

We will hear from our expert panelists that the uninsured are a dynamic group which is constantly changing as people gain and others lose coverage. The number of Americans who are uninsured depends on the definition of the uninsured, especially how long a person is uninsured and whom you count. Analysis by the Congressional Budget Office (CBO) shows that if you look at people who are uninsured for an entire year or longer, you find between 21 million and 31 million uninsured. If you look at any given day in a year, about 40 million are uninsured. If you consider those who are uninsured at any point during a year, nearly 60 million are uninsured.

The uninsured are a diverse and divergent group demographically as well. Among the non-elderly who are uninsured all year, one-quarter are under age 18, but one-fifth are over 45. Three-quarters have income less than two times the poverty level, but 5 percent have income four times the poverty level. One-quarter lack a high school diploma, but one-third attended college.

One characteristic may come as a surprise to many. About 90 percent of the uninsured live in working families, and 40 percent live in families with a full-time worker. Over 60 percent of uninsured individuals do not have access to insurance through their employer, often a small business. In Connecticut, for example, 59 percent of the uninsured adults work for companies with fewer than 100 employees and 30 percent, or 76,000 people in Connecticut, work at a company with fewer than 10 employees.

Finally, some of the uninsured are eligible for public programs but fail to enroll. For example, one-third of uninsured children were eligible for Medicaid. Others are eligible for the Children's Health Insurance Program (CHIP). The presence of the uninsured is a significant problem in our Nation's health care system. The Subcommittee understands the importance of addressing this problem, both because those without health coverage often go without health care and because the payment structure supporting our providers no longer accommodates the cost shifting that used to absorb the cost of care of the uninsured. Indeed, for the individual uninsured person, he or she is more than three times likely to delay care, more than three times likely to leave a prescription unfilled, and far more likely to face financial ruin as a result of health care costs than an insured individual.

From the point of view of the provider network, emergency rooms are closing and doctors are being forced to limit the number of nonpayers they accept for care as costs rise and payments fall. So, both for the sake of the individual uninsured people in America and to preserve our health care delivery capability for all, we must assure that every American has access to affordable health care. Today our experts will help us review the who, when, and why questions about the uninsured so that we may turn at a later date to the question of how to fix the problem.

First we will hear testimony from the director of the CBO, Douglas Holtz-Eakin, who will focus on the diversity of the uninsured, and, given that diversity, the multiple approaches in the future we will have to consider. Actually he is not going to consider the multiple approaches. I sort of misread my punctuation there. I say that, given that diversity, I believe we will be required to approach this problem from many different points of view.  Our second panel will turn to further examination of the uninsured population and our experts will discuss barriers to affordable coverage and myths about the uninsured. I would like to recognize Mr. Stark, the Ranking Member, for an opening statement.

Mr. STARK. Thank you, Madam Chair. I appreciate your calling this hearing. I must admit it feels a little bit like Ground Hog Day. Year after year we hold hearings and report on the uninsured and year after year we hear that the numbers continue to rise. Year after year we fail to take any action. I say that through a series of various administrations and political control. We know who the uninsured are and we know why they are uninsured and we could fix it.

Even President Bush knows how to get there, and that is why he is promoting national health insurance for the people in Iraq. It may sound strange that I agree with the President on something, but in this case his idea that a system of national insurance is the most equitable, efficient means of insuring all people is right. I only wish that he would decide to extend that same generosity to his folks here at home so that everyone in our great country could have the benefits of a national health insurance program.

My friend and our own Secretary of Health and Human Services has basically said that Americans deserve less than national insurance. A week ago, when he was asked about our policy in Iraq, he said, well, and I am quoting him: "Even if you don't have health insurance in America, you get taken care of." I am not sure what that means, "taken care of." That could be defined as universal health care. I find it alarming that our Administration would equate eventual treatment in an emergency room or a charity clinic, often too late to avoid serious damage or death, as universal health care.

We know better than that. The Institute of Medicine will tell us that 18,000 Americans die prematurely each year due to the effects of lack of health insurance coverage. The Kaiser Family Foundation in their 2003 health insurance survey found that half of uninsured adults postpone seeking medical care, and over a third say they need it but did not get medical care in the last year. Their survey also found that a third of the uninsured had a serious problem paying their medical bills in the past year and a quarter were contacted by a collection agency, if not having homes foreclosed or threatened with bankruptcy.

The uninsured are more likely than those with insurance to be hospitalized for conditions that could have been avoided. "Sicker and Poorer: The Consequences of Being Uninsured," a report by the Kaiser Commission on Medicaid and the Uninsured, found that better health would improve annual earnings by 10 to 30 percent for private companies.

The statistics go on. We know how to solve the problem. We have programs that work in this country. They work in the State of Hawaii. They are up above 95 percent covered, which is far better than we are able to do. We have employer-sponsored insurance for workers. We have got public programs such as Medicare, Medicaid, State Children's Health Insurance Program (SCHIP), Consolidated Omnibus Budget Reconciliation Act (COBRA). We could build on those programs. All we need is somebody in the White House and their adherence here and in the Senate to roll up our sleeves and say, let's do it. We could go to work tomorrow and require some kind of, I don't care what it is, pay or play. We could do it, there is nothing new in this world of providing medical care to all Americans. It ought to start right here and I would love to join with the Chair and introduce a bill next week and let's see how far we can go. Thank you.

Chairman JOHNSON. Thank you, Mr. Stark. I hope that our testimony today will create a better factual basis for legislative action. Dr. Holtz-Eakin.

STATEMENT OF DOUGLAS HOLTZ-EAKIN,  PH.D., DIRECTOR, CONGRESSIONAL BUDGET OFFICE

Dr. HOLTZ-EAKIN. Chairman Johnson, Mr. Stark, Members of the Committee, thank you for the chance for CBO to be here today and present some of the work we have done on the uninsured. I have a written statement which I will submit for the record and I will instead use this time to touch briefly on the highlights, some of which the Chairman has introduced in her opening remarks.

Probably the easiest way to do this is through the use of the four charts that we brought along. The first chart is focused on the question of how many people are uninsured. The answer really depends on how one asks the question. One could ask the question, How many people are uninsured for an entire year, for a full year? If the question is asked that way, using data from three different surveys--and these data are from 1998 but recent research suggests the basic patterns are unchanged--you would have an answer of roughly 20 to 30 million individuals who are uninsured for the entire year.

In contrast, you could ask the question, How many people experience some spell of uninsurance during a year, however short or long? If one asked the question in that way, you get a much larger number, about 60 million individuals. Those are the bars on the right-hand side of the chart. Instead what you typically hear is the number 40 million. That is the answer to the question, if you walked out on the street and asked how many people are uninsured in this week or on this day, there would be a mixture of those two groups: those who have short spells and long spells, and that number is about 40 million individuals.

As these numbers suggest and as we show in Chart 2, there are radically different experiences in terms of the duration of spells of uninsurance. For some individuals, about 45 percent, the duration of such a spell would be under 4 months. That is shown as the large wedge in the pie chart on the left. In contrast, about 29 percent, nearly 30 percent of individuals experience a spell of uninsurance that exceeds 1 year in length. The remainder lie in between.

As a result of this mixture of individuals with short and long spells, if you walk out on the street again and find a person who is not insured and ask the question, How long would this person be uninsured, you are more likely to find somebody who has a long spell of uninsurance because of their prevalence in the population and that is displayed on the right-hand pie chart. The policy implications of this, I think, are fairly straightforward. One size evidently does not fit all and it suggests that there are really broadly two different kinds of problems of uninsurance: those with short spells perhaps driven by labor market dislocations and job transitions; and those with longer spells which exceed a year in length.

The next question is, What do the individuals look like in these different spells? This is laid out in Tables 1 and 2 in the testimony. The highlights of that are that adults are more likely to suffer uninsurance in large part because the children are more likely to be covered by Medicaid and SCHIP programs in the United States. Those who are uninsured tend to be of lower income and lower education and, as the Chairman noticed in her opening remarks, in working families, but there is not a large difference by health status. There appears to be no like defining characteristic on that dimension.

Among those with longer spells, again we find those who are poorer, lower income, and lower education. This suggests that these are individuals who are in jobs without employer-sponsored insurance. There was also the case that among different ethnic groups, Hispanics are more likely to suffer long spells; and among the age distribution, younger individuals are more likely to be represented there as well.

A moral that comes out of looking at the vast array of statistics that characterize the uninsured and the duration of spells of uninsured is that it is a very multidimensional problem and it will not be simple to target a single characteristic to identify those who would be likely to be uninsured or even uninsured for a great length of time. All of this diversity and dynamics occurs within longer-term trends in the top line number, the fraction of individuals without insurance.

We show in the next chart some of the patterns over the past two decades in the level of uninsurance in the population. Out of the 160 million Americans with insurance, about 64 percent receive their insurance through their employer. That is down about 6 percentage points from the beginning of the chart in 1997. If you look, the large move occurred between 1987 and 1993 when there was about a 6 percentage point drop in the total level of employer-sponsored insurance. Since then, we have seen a modest rise and then a reversal during the most recent time period.

The Medicaid pattern in the green bar roughly offsets the trend in employer-sponsored insurance. This suggests that one concern may be that variations in new sources of insurance, such as Medicaid or expansions of other types, may offset existing employer-sponsored insurance or crowd it out to some extent, a topic to which I will return before I close.

The topic of the hearing itself, the dotted red line, is the rise in uninsurance, which is now about 17 percent overall, up about 3 and one-half percentage points. One lesson I think that is easy to draw from that chart is that the uninsured problem is not new; indeed it is a chronic condition in the United States and needs to be revisited in all its forms.

The final chart examines more carefully the link between health insurance premiums and uninsurance. I want to say at the outset that the link between these two is far from simple. One could imagine a situation in which premiums rose in the absence of any change in the underlying benefit from being insured, and in those circumstances it is quite rational for individuals to choose to purchase less insurance, and we might see uninsurance rise.

On the other hand, to the extent that health care costs per se simply go up, the value of insurance rises and one might expect more individuals to choose to purchase insurance and to negotiate with their employers to get coverage. So, there is not an absolute relationship between premiums which may be driven by benefit increases and premiums which are not and the rate of uninsurance.

Nevertheless, a casual inspection of the historical record suggests some relationship between rising health insurance premiums, an episode in the late eighties and early nineties, and more recently have both coincided with declines in the overall level of the rate of insurance. That may come in roughly two kinds of categories, those which are related to business cycles. We discuss in the testimony the notion that COBRA coverage may also come with not only the opportunity to buy but the obligation to pay a much higher premium in the face of diminished income--that would be difficult--but also for longer-term movements in the crowd-out between the enhanced Medicaid programs and the acquisition of private insurance. Some estimates in the literature suggest that expansions in Medicaid are offset by as much as 10 to 25 percent in reduced private insurance. With that overview of the testimony, I would like to close and be happy to answer your questions.

[The prepared statement of Dr. Holtz-Eakin follows:]

Chairman JOHNSON. Thank you. Thank you very much. On this issue of crowd-out, which is perhaps the most difficult aspect of doing something about the uninsured, States have done different things in terms of coverage. Have you done any work on States that have tried universal coverage to see what the crowd-out impact, particularly on small business, was?

Dr. HOLTZ-EAKIN. We haven't done any work at CBO on that particular issue. We have relied on our surveys of the literature in looking at, particularly Medicaid expansions which have given the best body of evidence, to look at impacts with respect to different income levels as the expansions took place at different parts of the income distribution. We can go back and look at the literature and see if it gives us more evidence at the State level evidence and will be happy to work with you to get that back to you.

Chairman JOHNSON. I should think it would be interesting to look at TennCare in Tennessee and see whether the change in the public coverage affected employer-provided insurance,  particularly for small businesses. What were the other ramifications?

Dr. HOLTZ-EAKIN. We can go back and look at the Tennessee experience. Most of the academic literature tries to aggregate many different State experiences into a summary statistic on crowd-out without itemizing State-by-State experiences but it is certainly within the data.

Chairman JOHNSON. I don't know whether you can look at whether those States have taken up all the options under Medicaid, so they cover a much larger population, much higher up the income ladder, what the sort of comparison is between willingness to provide insurance in the small business sector in States with low Medicaid definitions versus States with high Medicaid definitions. I mention that because during the Medicare debate, one of the things that surprised me absolutely the most and one of the reasons I think the benefits in that bill are being grossly underestimated is that 38 States define Medicaid eligibility as 75 percent of the Federal poverty level.

So, for us to cover people basically up to 150 percent does make a huge difference for many seniors throughout the country. If that is what States are doing, then in those States, the small businesses may be finding a way to participate in their employees' health care at a higher rate than, for example, in a State like Connecticut that has  generous Medicaid coverage. So, if there is any way we could look at those two things I would appreciate it. I have two specific questions and then I will turn it over to Mr. Stark. In your charts and your testimony, you mentioned that there is somewhere between 21 million and 31 million, approximately, uninsured all year. That is a huge swing. That is a 50 percent swing. Why can't you do better than that?

Dr. HOLTZ-EAKIN. The range of estimates comes from looking at different data sources for information about the uninsured. To track completely a spell of uninsurance requires the kind of data that follows individuals through time. Such data sets are relatively rare. To the extent that they ask good questions about the nature of individuals' health insurance coverage is even rarer.

So, we have a restricted amount of data, quite frankly, that are available to answer this question. I guess it is in the eye of the beholder. From the point of view of someone who has looked at data on many problems in economics for a long period of time, I was less unhappy with that swing than you might have been. I think the key message is that out of the whole population of the uninsured, there is a smaller subset which is uninsured for a sustained period of time, and if one wanted to target that audience more carefully it might be useful to peel back more layers, look at those individuals who perhaps had not declined employer coverage. If they declined employer coverage, it is hard to argue that they were uninsured involuntarily. You could look at the degree to which they might be eligible for Medicaid and not take it up.

Chairman JOHNSON. Two things. First of all, I think it would be very useful to know more about the difference between 21 million and 31 million because what you are really saying is either half of the uninsured are uninsured for 12 months or more or three-quarters. So, I would like to know more about that figure.

Dr. HOLTZ-EAKIN. We can certainly provide that.

Chairman JOHNSON. I would appreciate that.

[The information was not received at the time of printing]

Chairman JOHNSON. Then in your other chart, about spells in progress and spells that began. On one chart you have 45 percent uninsured for less than 4 months, 26 percent for 5 to 12 months, and about 30 percent for more than 12 months. So, about 30 percent for more than a year. Then, in the chart beside it, 78 percent were uninsured for more than 12 months. You explained that with some man-in-the-street question. I didn't get that. If only 30 percent are actually uninsured for more than 12 months, why do 78 percent think they are?

Dr. HOLTZ-EAKIN. It represents the difference between watching someone progress through an entire spell, from beginning to end and seeing how long it is, versus walking out and finding people perhaps in the middle of a spell of uninsurance. There are a smaller fraction, 30 percent, who have very long spells, so you are more likely to run into that person when you survey. As a result, in the right panel, what you see is the answer to the question when we find somebody in the survey then and say are you uninsured, they say yes, they are more likely to be the kind of person who has a long spell because they are more likely to be found in such a survey.

Chairman JOHNSON. Do we ask them how long have you been uninsured or do we ask them how long do you think you will be uninsured?

Dr. HOLTZ-EAKIN. We ask the first question. The latter we can only track by following them for a long period of time. The data are fairly limited.

Chairman JOHNSON. It seems to me that the former number is the one that we as policymakers should be more concerned with. That is the number who actually are uninsured for more than a year. Is that the correct interpretation?

Dr. HOLTZ-EAKIN. Yes.

Chairman JOHNSON. Thank you very much, Dr. Holtz-Eakin. Mr. Stark.

Mr. STARK. I gather that this is sort of like labor statistics, and are you talking to the people at home or are you talking to the employers to get different employment figures? I don't think it makes a whole hell of a lot of difference. You still only had 21,000 jobs last month and when you need 300,000 or 400,000 jobs a month, we aren't doing very well, as we are not in taking care of people who aren't insured. I guess the real question is, How many people get sick when they don't have insurance? I don't know as we know that, do we?

Dr. HOLTZ-EAKIN. The onset of--

Mr. STARK. The onset of an expensive medical encounter. How many people have a heart attack or get diagnosed with diabetes? I don't think we know that. Maybe somebody does, but I don't know as we know. That is the key. If somebody makes it through the year, they are home free, and then they get insurance next year. Where they are going to get it, I don't know. The other thing that I don't believe you define, or anybody else that I know of, is what do you consider as insured. If they have the American Family Life Assurance Company (AFLAC), they get a hundred bucks a day if they get sick because they've got some kind of a hospital policy. Is that insured?

Dr. HOLTZ-EAKIN. In the longer paper that underlies this testimony, the data sources have different classifications. Basically they include employer-sponsored insurance. Not all the details about the policy are available, but these are standard insurance measures.

Mr. STARK. At the low end of the scale with some of the associated health plans, as we have been reading in the press lately about these plans that have cropped up that are phony. People think they have bought health insurance and the insurance company has gone south. We don't have, outside of, say, Medicare, a definition--maybe we do in the Federal Employee Health Benefit Plan (FEHBP). I don't know as the benefits are--if there is a minimum level of benefits there--but we really don't have a definition as to what is, quote, "insured," do we?

Dr. HOLTZ-EAKIN. The definitions will differ by the survey. It is often self-reported.

Mr. STARK. Particularly if somebody is on the margin, if they have high blood pressure or a host of things where they have been excluded as a preexisting condition, they are really not insured for the things they need most. I don't know how I could define that in a way that a scientific researcher could use it. I do think that with the vast difference in benefits and what is covered and what isn't, we would have a better understanding of how well we are dealing with this problem if we could define where we put somebody in the winner category. We just don't take them and give them some kind of schlocky insurance company that may not pay benefits, may not pay hospital benefits, may not have mental health.

We say, look, here is a standard of what a person ought to have; and then the question is, if they have a holdover when--as you say in your testimony--they move from job to job, but really do you count the time between when the new insurance goes into effect, which often is 60 days, 90 days? Yes, they may be insured, but the benefits don't start if you get sick in that trial period, and there may be preexisting conditions which have been precluded, all of which I think makes no difference. I am just suggesting that we could argue all day whether there are 30 million or 40 million, and nobody has brought up children. I keep hearing the number 12 million. What would you say is the number of children? How would you define that?

Dr. HOLTZ-EAKIN. Depending on the definition, we show in Table 1 some of the fraction of those individuals less than 19 who are uninsured at any point during the year. It is about a quarter in our data.

Mr. STARK. About 25 percent of the uninsured are kids?

Dr. HOLTZ-EAKIN. Yes. Of the kids are uninsured at some point during the year.

Mr. STARK. Again, I think this is all very interesting, but what does General Accounting Office (GAO) suggest we do to get all these people insured?

Dr. HOLTZ-EAKIN. I am not familiar with what the GAO folks would suggest, sir.

Mr. STARK. Okay. What do you think we should do? You are studying this. You say you think we have trouble affording it. What about the social costs? General Motors tells us they lose $1,300 by making a car here as opposed to making it in Canada. That may be an incentive to not have jobs here or there. In your opinion, is that something we should take into account when we think about Federal costs of insuring everybody?

Dr. HOLTZ-EAKIN. On the job location, I think the key thing to focus on is not any particular part of the benefit package, but labor costs in any location here versus Canada. I am not familiar with the particular number you quoted. Certainly if you want to look at the decision to locate a facility or a job in one place or another, the typical standard is unit labor cost relative to the productivity of labor, not a benefit in isolation.

The broader question, the intent of my remarks was not to tee up specific policy solutions but to identify the fact that there are many different features to the issue of uninsurance. There is the time series pattern of the total uninsurance, and then there is the fact that within the population, there appear to be different kinds of experience with spells of uninsurance. It wasn't meant to offer specific solutions but to frame up the issues.

Mr. STARK. So, you don't have a suggestion for us?

Chairman JOHNSON. Mr. Stark, we actually didn't ask them to come to talk about that. They are not prepared for that.

Mr. STARK. As a person who has a lot of knowledge about this, as an economist approach to what it will cost, I think you did say it would be expensive, didn't you?

Chairman JOHNSON. Let me go on to Mr. Crane.

Mr. STARK. Sure.

Mr. CRANE. Thank you, Madam Chairman, and thank you, Dr. Holtz-Eakin, for coming today. As you know, H.R. 1, the Medicare prescription Drug and Modernization Act, included language that created Health Savings Accounts (HSAs) for all Americans. Do you recall CBO's estimation for the number of individuals who would purchase a new HSA based on the new law?

Dr. HOLTZ-EAKIN. I don't know the number of individuals who would purchase them. I know the Joint Committee on Taxation scored the budget costs of it. We could certainly discuss with them the underlying mechanics of the estimate.

Mr. CRANE. According to the last Department of the Treasury report, 73 percent of people who had a medical savings account were previously uninsured, is that correct?

Dr. HOLTZ-EAKIN. I am not familiar with that number again. We can work with you to make sure that that is right.

Mr. CRANE. One of the arguments against HSAs is that this type of savings account drives people out of employer-sponsored health care coverage, but based on the Treasury Department's report, it seems that most people were not driven out of the system. They had no insurance at all. Based on factual data, it seems that these types of accounts are not undermining the employer-based health care system. Would you agree?

Dr. HOLTZ-EAKIN. I think it is important to look at the evidence. Certainly if you look at the incentives in an HSA, they will differ on both the dimension for insurance and the incentives for efficient use of health care. For some individuals who are already purchasing insurance to get a tax subsidy and take on the HSA is clearly to their advantage, it doesn't change insurance coverage at all. For other individuals who do not have insurance, there is an obvious incentive, lowering the cost. It will be an empirical issue as to which of those things dominates on the insurance front.

Mr. CRANE. You stated in your testimony that the vast majority of the uninsured are in working families and that over three-quarters of uninsured workers are not offered insurance by their employer and that low-income workers are less likely to be offered insurance by their employer and are less likely to accept it if it is offered. It seems to me that if we are going to find a way to help uninsured individuals, the first place we need to start is to make health care more affordable for individuals and small businesses. Would you agree?

Dr. HOLTZ-EAKIN. It certainly appears that the employer-sponsored part of this is an important part of it, especially the transitory spells of uninsurance.

Mr. CRANE. Thank you.

Chairman JOHNSON. Mr. McDermott.

Mr. MCDERMOTT. Thank you, Madam Chairman. There is a fascinating article in today's Washington Post entitled "Rising Costs of Health Care in the U.S. Give Other Developed Countries an Edge in Keeping Jobs." Some guy named Jim Stanford, an economist with the Canadian Auto Workers, said employers who operate in either country, meaning Canada or the United States, can save $4 an hour per worker by choosing Canada. He says that is a significant differential. It's one of the reasons the Canadian auto industry has done a lot better.

Officials from Ford Motor, General Motors, and DaimlerChrysler sent out a letter that said the Canadian public health system significantly reduces total labor costs compared to the costs of equivalent private health insurance services purchased by the U.S.-based auto makers. Then, finally, the Vice Chairman of the Ford company said, high health care costs have created a competitive gap that is driving investment decisions away from the United States.

My question to you is the Institute of Medicine did a study last year, a 3-year study on the uninsured and said that the U.S. economy loses between $65 and $130 billion each year because we don't have a system of universal coverage. Have you done any kind of look at that at all? Did you look at their study?

Dr. HOLTZ-EAKIN. I read the study briefly. I won't pretend to be intimately familiar with the research underneath it. At CBO we haven't done any estimate of losses of that sort.

Mr. MCDERMOTT. In a country where these things are true about Canada--presumably they are true. I remember that in 1994 we had a lot of people going around beating on their chests and very proudly saying we defeated the Clinton program and that the private sector would take care of it. Is there any evidence whatsoever that you can show me since 1994 that the private sector has done one thing to deal with the measure of uninsurance in this country?

Dr. HOLTZ-EAKIN. The evidence on uninsurance, we have presented in my opening remarks and in our testimony. I guess I would go back to--

Mr. MCDERMOTT. You think since 1994 it has gotten better?

Dr. HOLTZ-EAKIN. In the overall insurance rate, we saw a sharp drop between 1987 and 1993. Then it rose during the nineties and has declined more recently. We are at 64 percent overall in employer-sponsored insurance. I guess I would repeat what I offered to Mr. Stark, which is that, with all due respect to the individuals involved in the auto companies, I am not familiar with their numbers, it is not the full calculation to look only at health care costs in the two countries, especially at the employer level. It is the total cost of labor compensation relative to how productive those workers are that will be the key issue.

If health care costs rose and nothing else changed, certainly that is a competitive disadvantage. The evidence, however, over a long period of time in the United States and elsewhere is that if one part of the benefit package rises, it is usually offset to some extent by another part of the benefit package or wages. So, the total compensation package does not--

Mr. MCDERMOTT. So, workers wind up really worse off because more of their pay goes into their benefit package than it does into their pocket.

Dr. HOLTZ-EAKIN. Obviously they value the benefit. So, it is a mix that offsets one value of compensation with another.

Mr. MCDERMOTT. Are you testifying that from your research, that there is really no problem, then, with the health insurance? Eight years in a row of double-digit inflation. The private sector was going to take care of that, they told us in 1994, because they were scared that the--that the health providers would be scared and the insurers could get a better deal. We have had 8 years of double-digit inflation. What is happening here? Why does it continue to go up? We leave more and more people by the side of the road, even if for 3 or 4 months.

If you are uninsured and you get sick, it doesn't make any difference whether you haven't been insured for a week or 12 months and 25 days. It really is a question of what you do. Where is the control that is supposed to come out of the private sector? I am a free enterpriser. I believe in free enterprise, but I don't see them functioning at all. They put down the government system. So, where is the evidence that they control costs?

Dr. HOLTZ-EAKIN. I think the underlying question with the rising cost of health care in the United States, not insurance per se, starts with care. Then I think there is broad consensus that it is associated with technology adoption and the enhancement of technologies in the medical sector. They have not in the United States and elsewhere proven to be cost savers. The question is whether the difference in quality is worth the money.

Mr. MCDERMOTT. All this technology has not proven to be a cost saver. Why does the health care industry continue to do it then? Why does the insurance pay for it? If it doesn't save costs, why do they pay for it?

Dr. HOLTZ-EAKIN. As an economist, I would answer that if quality is higher, you would be willing to pay more for something. What remains the outstanding question is whether we are getting quality per dollar with the technology enhancements. That is the question for the United States in looking at the efficient provision of health care. Insurance is layered on top of that to spread the financial risk of providing that care. The underlying issue of the rising cost of health care is one in which it may be the case that quality is rising and as this Nation becomes older and wealthier it may choose to buy more health care. It may also be the case that at the margin, some of these enhancements do not provide the quality enough to offset their dollar cost. That is the key issue I think in terms of the cost.

Mr. MCDERMOTT. Did you do any cost-benefit analysis at all? Did you look at the cost-benefit analysis at all in terms of our system versus any of these other systems?

Dr. HOLTZ-EAKIN. We don't have a study on that. One of the questions that would be difficult is measuring benefits. As you can imagine just by introspection, valuing the benefits of additional medical technology is a very difficult task, both in economic and social terms.

Mr. MCDERMOTT. I yield back the balance of my time. We don't need another study, Madam Chairman.

Chairman JOHNSON. I don't know that I have ever seen a study that I thought was useful on that. At the time this issue first came up in the eighties, we had more computerized axial tomography (CAT) scanners in Connecticut than all of Canada. That says a lot about access to quality care. I don't know how you would deal with that in a comparative analysis of health care costs. That has been one of the difficulties.

I just wanted to put on the record one issue that I talked with you about that you did not mention in your testimony so I didn't talk--bring it up earlier. You don't mention the variation in the uninsured geographically. You talk about it demographically and in terms of income and age, but not geographically. I think we need to know that, because these sort of generic fixes end up having an enormous number of ramifications.

For instance, if you go to a policy that provides tax credits, even if they are refundable and they go to 100 percent at certain wages, that will certainly displace a lot of employer-provided plans. There are other problems with it. If we understood the geographic structure of the uninsured population, we would have a lot more levers to pull.

I just want to comment that the Health Resources and Services Administration is handing out grants to community health centers that will do two things, and they are 3-year grants. They will search out the underinsured and the uninsured in their region and bring them into the system and implant electronic technology so that any place they enter the system, whether it is the hospital, the doctor's office or their community health center, a home health agency, an optometrist, wherever, they can be brought into the system by electronic record so that then wherever they come again, their records will be available. It is a very exciting, big effort. I hope to get some report on where they are on that in some of the older demonstration areas as some portion of the guidance that this Committee will need. If you could talk with Census and search out and see what do we know about the geographic distribution, that would be something of interest to, I think, this Committee. Thank you.

Dr. HOLTZ-EAKIN. Certainly.

Chairman JOHNSON. We now will ask our second panel to come forward. As they are coming forward, I will just introduce them very briefly.  Diane Rowland is the executive vice president of the Henry J. Kaiser Family Foundation and executive director of the Kaiser Commission on Medicaid and the uninsured. I won't go through her whole biography but she has done a lot of very important work on Medicaid and long-term care issues, cost containment issues and so on.

I am very pleased to have Dr. Rowland with us. Dr. Nichols is from the Center for Studying Health System Change, a nonpartisan health policy research organization in Washington. He is an expert on private insurance markets, market-based reforms and the Medicare program.  Dr. Glenn Melnick is the Blue Cross of California Professor of Health Care Finance at the University of Southern California and a senior economist and resident consultant at RAND Corporation in Santa Monica. He has focused a lot of time and effort on areas such as pricing of hospital services, health insurance and health care markets. We appreciate him being with us here today. Greg Scandlen is with the Galen Institute and is an expert on financing, insurance regulation, and employee benefits and has written extensively on consumer choice and publishes a weekly newsletter, Consumer Choice Matters.

We welcome you all here today. We thank you for your input and your help as we embark on this effort to take some action on the uninsured. I know it is an old issue as Pete has mentioned. It has been with us for a long time, through Republican Administrations and Democratic Administrations. It is a hard problem, which is one of the reasons we haven't solved it. Also our system has a peculiar way of ultimately providing health care. At this point, it is not only the uninsured, we can't afford for people to be uninsured as a matter of principle, but also the caring system can no longer sustain the costs of nonpayers. Dr. Rowland, if you would proceed.

STATEMENT OF DIANE ROWLAND,  EXECUTIVE DIRECTOR, KAISER COMMISSION ON MEDICAID AND THE UNINSURED

Ms. ROWLAND. Thank you, Madam Chairman and Members of the Committee, for this opportunity to be with you today to discuss the Nation's uninsured problem and population. While surveys differ in their count of the uninsured and the time period without health insurance, all tell us that millions of Americans go without coverage each year, and many for long periods of time. The census data we use to monitor health insurance coverage that gives us in 2002 the number 43 million Americans at any given point without health insurance also helps us to understand how this number changes over time. In 2002, we saw an increase of 2.4 million without insurance over the previous year. The size of our uninsured population, in fact, is comparable to the number of beneficiaries you deal with in other legislation who are members of the Medicare program.

While the composition of the uninsured population includes Americans of all ages and incomes, the problem, especially for the long-term uninsured, is particularly focused on low-income families. Health insurance coverage in America is very much a patchwork. Having insurance depends on where you live, where you work, and what you earn. In fact, as you pointed out, Madam Chair, the geographic variations in the rate of insurance coverage are very significant. Those States with large firms and more affluent economies are more likely to have lower rates of uninsurance than those States with large poverty populations, small businesses and especially rural interests.

There are also many misperceptions about our uninsured population. They are, as you said, hardworking families that do not obtain health coverage through their jobs. Eight in ten of the uninsured come from a working family, but I think most important to remember is that for the most part, they are not affluent. Two out of every three come from low-wage families earning less than $30,000 for a family of three, families hardly able to afford $9,000 for a family policy on their own, and in most cases families who work for employers that don't offer coverage. In the few cases where the employer offers coverage to these low-income families, their share of the premium, averaging $2,400 last year for family coverage, is often too high a price to pay when the family budget is extremely limited.

The uninsured, of course, are predominantly adults because our public programs have actually helped to extend coverage to 1 in 4 American children. Today Medicaid and SCHIP provide coverage to over 25 million low-income children and have dropped the uninsured rate among low-income children from a high of 23 percent in 1997 to 14 percent at the beginning of 2003.

Ms. ROWLAND. Indeed, a success story in our efforts of extending coverage. This drop in the number of children without insurance has helped to counteract the rise in the uninsured as a result of loss of employer-based coverage. I don't believe it is all crowd-outs. For the most part, you have provided coverage through Medicaid and SCHIP to millions of children previously uninsured, not those who were in the employer-based market. However, limited eligibility for parents and restrictions on coverage of childless adults and Medicaid leave over 20 million low-income adults, half of America's uninsured population on any given day, outside of Medicaid's reach. Unfortunately, in today's economy with weak job growth, the number of Americans without health insurance is likely to grow, not shrink.

Rising health insurance costs are compromising employer-based coverage as more and more employers shift increased costs for premiums and additional cost-sharing burdens onto their employees, making coverage ever more unaffordable for the lowest-wage employees. Meanwhile, State fiscal constraints are putting Medicaid and SCHIP coverage at risk. Fiscal relief in the tax bill really did help stave off deeper cuts and reductions in Medicaid and reductions in eligibility during the last year, but the matching rate increase will expire this June putting the State's fiscal considerations back on the table.

It is hard to see how we will be able to make progress extending coverage to the uninsured or maintaining the coverage Medicaid now provides without a commitment of additional Federal resources. Addressing the uninsured is, as you have said, a national priority. People without health insurance often go without appropriate care and get sicker and die sooner than they should because of it.

Leaving millions uninsured and coverage of millions more at risk in Medicaid is a poor prescription for our Nation's health. So, I look forward to working with the Committee to find ways to secure the coverage we have and extend coverage to the millions of uninsured who need assistance in meeting their health care needs. Thank you.  Dr. Nichols.

[The prepared statement of Ms. Rowland follows:]

STATEMENT OF LEN M. NICHOLS, VICE PRESIDENT, CENTER FOR STUDYING HEALTH SYSTEM CHANGE

Mr. NICHOLS. Madam Chair, Representative Stark, and Members of the Subcommittee, I am honored to testify before you today on a topic of such importance to our Nation. My name is Len Nichols, and I am the vice president of the Center for Studying Health System Change. I am also a participant in the Economic Research Initiative on the Uninsured (ERIU), a project that convened a group of health and labor economists from around the country to sort out what we do and do not know about the uninsured. ERIU recently published a book entitled Health Policy and the Uninsured, and my written testimony is organized around 10 myths about the uninsured which are implicitly debunked in different chapters of the book, one of which I coauthored. My remarks today shall highlight four of these myths.

Myth number 3: Coverage is coverage is coverage. As Representative Stark alluded to, the punch line is that head counts in coverage are not enough. Insurance differs in terms of the kind of financial protection it offers, the potential for improvement in health, and the humanity of the treatment when you enter the delivery system. To put it slightly differently, imagine a policy that gave every American as much insurance as $100 could buy. We would then have zero uninsured, but we wouldn't be very much better off than we are now.

Myth number 4: Health insurance would improve the health of all the uninsured. This is among the more complicated and emotional disputes in health policy analysis. It turns out that standards of proof about causation in this area have not been as high as they should have been. Researchers have come to realize there may be important but unobservable differences in people that make different choices about things like insurance, diet, exercise, and education. If we merely observe what people do without proper research controls, it is hard to be sure what caused and what was merely associated with health outcomes. When appropriate standards of proof have been met, the evidence suggests that health insurance does indeed have positive effects on the health of certain key populations: the poor, the elderly, the truly sick, and children. What has not been proven by this standard is that universal coverage would improve the health of all of the uninsured, and this leads economists to the following three inferences: We cannot say with certainty that more public subsidies for health insurance for the general population would be the best way to improve health. The second thing, understanding more about the complex relations between health status, health services, health insurance, personal behaviors and information would help us improve our policy advice. Third, there are many reasons to support universal coverage, but the analytic case for the general short-run positive health effects is not the strongest one.

Myth number 9, one of my favorites: Economists don't know anything about why people are uninsured. Sometimes it seems that a normal person might listen to economists argue among themselves and conclude that nothing has ever been satisfactorily proved. That is not the case. This issue is so important, I devote the last two myths to embellishing the point. There are three things most economists actually do believe about the lack of insurance coverage, and this one is key. The single most important reason people are uninsured in this country is they are not willing to pay what it costs to insure themselves. This unwillingness to pay is highly, but not perfectly, correlated with low income. Thus, if policymakers really want to increase coverage, they are going to have to provide substantial subsidies since most of the uninsureds have incomes below twice times poverty.

Finally myth number 10: The combined research evidence supports doing nothing to address the problems of the uninsured today. Now, I want to be clear. Economists and health policy analysts cannot tell you as a scientific matter that you should implement new subsidies and other policies designed to reduce the number of uninsureds. We can, when we are at our best behavior, articulate and help you see the tradeoffs involved, but only you who have been entrusted with the power of the people can decide if the opportunity cost is worth it; that is, which competing priorities will and should get less attention and fewer resources. A politically neutral observer might conclude from our relative inaction on behalf of the adults in the last 35 years that the case for doing something substantial about the uninsured must be weak. I believe this is the wrong conclusion to draw from the evidence I have reported on today as well as some other recent empirical work.

The case for some kind of significant coverage expansion seems persuasive to many health economists and health policy researchers today, but perhaps the best proof of the value of health insurance lies not in statistics or econometrics, but rather in the fact that all of the health policy analysts I know--and I have lived long enough to know quite a few of them--actually seek out and keep health insurance even when self-employed. They even buy for their recalcitrant adult children when the latter emerge from college feeling immortal but also stunned at the rental price of nice apartments in our great cities.

The choice is less funny for two working parents who make, say, $7.50 an hour and therefore earn $30,000 a year. Their children would in most States, as Diane pointed out, be eligible for SCHIP, but they would not likely be offered health insurance at their jobs, and they make far more than most States' Medicaid income cut-off for adults. They are also not likely to spend a third or more of their income on family health insurance than the nongroup market. To add one final touch of realism, you may assume they are healthy today.

Are we willing to require them to obtain health insurance? If they do get sick, they will use resources that will impose costs on the rest of us, and thus a requirement to purchase would be responsive to the free rider justification for universal coverage. Of course, at $30,000 a year, they can't afford it, so we would also have to subsidize their purchase of insurance or impose an inequitable burden upon them. At the same time, they are healthy now, so the Nation would be essentially buying for them true insurance with no necessary immediate health benefits; that is, we would be buying protection from risk, a risk of potentially devastating financial, emotional, and health consequences of unforeseen health problems which could strike any of us this very afternoon.

The question comes down to, are we willing as a Nation of communities to pay to protect these parents from living with this risk that we all pay to avoid for ourselves and to protect us all from free rider costs? These are the ultimate questions that only you and your colleagues can answer, but we would be glad to help. Thank you very much.

[The prepared statement of Mr. Nichols follows:]

Chairman JOHNSON. Thank you very much, Dr. Nichols.  Dr. Melnick

STATEMENT OF GLENN MELNICK, PH.D., DIRECTOR, CENTER FOR HEALTH FINANCING, POLICY AND MANAGEMENT, UNIVERSITY OF SOUTHERN CALIFORNIA, LOS ANGELES, CALIFORNIA

Mr. MELNICK. Good afternoon, Chairwoman Johnson and Members of the Subcommittee. I am privileged to have this opportunity to share with you my recommendations on what Congress might do to improve the pricing information in the health care marketplace. Such improvements can be a first step in helping to protect the uninsured from arbitrary and excessive prices and to lay a foundation for serving individuals under the HSA insurance option.

I am a professor of health care finance at the University of Southern California, where I direct our Center For Health Financing, Policy and Management. We have been conducting analyses of hospital pricing for many years using data from California and other States. In my short time today, I hope to leave you with a better understanding of how hospital pricing as currently practiced impacts the uninsured and what might be done to improve it. My written information supplements my testimony.

I first began with two powerful trends of hospital pricing that I am afraid worsen the problem of the uninsured in America and may stifle the market for HSAs. I will then present recommendations designed to limit the negative effects of these trends. Hospital pricing as currently practiced negatively impacts the uninsured. We have witnessed a very significant and rapid increase in hospital prices over the--list prices over the last 8 years. Hospitals have two sets of prices, list prices and net prices. Hospital list prices are the standard set of prices established by hospitals each year for all their services. The list price is more or less equivalent to the rack rate that hospitals display--that hotels display for their rooms.

All patients are charged the same list price for the same service; however, very few patients actually pay the list price. Insurance companies and other third-party payers generally have contracts with hospitals which allow them to pay a discounted price that is significantly below list price. Uninsured patients, referred to in most hospital accounting systems as self-pay, are charged the list price and then, depending on the individual hospital's policies, may be offered a discount.

To illustrate how this affects the uninsured, I turn your attention to Exhibit 1 in the handout. This exhibit shows list and net prices for patients admitted to California hospitals for an appendectomy in 2002. The list price is $18,229, the same to all patients. However, as you can see, the net price differs depending on the patient's insurance status. Managed care plans paid about $6,000, a 66 percent discount. Medicare paid about $4,800, a 73 percent discount from list prices. The uninsured self-pay patients are divided into two groups, those that qualify for hospital indigent programs and all other uninsured. The indigents end up paying the lowest net price, about $1,700. Nonindigent self-pay patients paid the highest net price, about $8,000. They did receive a discount, but it was the smallest one.

Please note that these numbers are not exact, but they do accurately portray the pattern of pricing out there. Hospital pricing strategies are driven by a complex mix of contracting arrangements as well as market forces, and as a result, hospitals have focused largely on net prices. However, since most hospitals can continue to increase their revenue from insured patients by raising list prices, there is a strong incentive for them to continue to increase list prices. The data in the attached exhibits show that list prices have increased rapidly and substantially in recent years throughout the United States. An indirect and largely, I believe, unintended affect of these trends is that they have created hardship for the uninsured patients. In fact, hospital prices that the uninsured population pay are increasing more than any other group.

Given the incentives in the system, I believe that hospital list prices will continue to rise faster than costs and net prices, and will further exacerbate the problems facing the uninsured. In some cases hospitals do discount from list prices for self-pay patients; however, the practice of granting discounts to self-pay patients is ad hoc at best right now. The net price that an uninsured patient will pay depends on too many arbitrary factors, such as the patient's level of education, their negotiation skills, where the patient lives, the hospital they are admitted to, their ability to pay, and which collection agency their unpaid bills are sent to. Furthermore, the lack of a rational and transparent pricing system for self-pay patients may hinder development and adoption of the HSA reforms.

In closing, I have two sets of recommendations: Form a national task force to study the current patterns and practice of pricing to the uninsured; and, two, charge the task force to do the following: Develop guidelines and policies regarding pricing and payment options for the uninsured; mandate that hospitals report both the policies for discounting charges to the self-pay patients and the procedures used to ensure that all patients are aware of those policies and procedures; and, finally, mandate that hospitals annually report their actual experience publicly vis-a-vis the uninsured in terms of charges, discounts, and collections. Through mandated public disclosure and media attention, social pressure will be brought to bear on hospitals to develop fair and reasonable pricing for the uninsured. These explicit policies and better reporting can serve to moderate the negative and arbitrary effects of rising hospital charges until we have a more systematic solution to covering the uninsured and could lay the groundwork for the emerging HSA market. Thank you.

[The prepared statement of Dr. Melnick follows:]

Chairman JOHNSON. Thank you very much, Dr. Melnick.  Mr. Scandlen.

STATEMENT OF GREG SCANDLEN, DIRECTOR, CENTER FOR CONSUMER DRIVEN HEALTH CARE, GALEN INSTITUTE, ALEXANDRIA, VIRGINIA

Mr. SCANDLEN. Thank you, Madam Chairman, for the opportunity to share some thoughts with you. I think it is worth stepping back a few paces and looking at how we got here if we are looking at the underlying causes of noninsurance in this country. I think my perspective will be different than most of what you have heard in the past several years.

Generally people will cite the growth of technology, the aging population, labor market effects in looking at what is behind the uninsured. I think these things, perhaps with the exception of the aging population, are more symptom than cause, and I think the technology--for instance, in most industries technology will actually save money, but only in health care does technology actually add to overall costs. I would suggest this is because only in health care are we subject to a system of third-party payment. Third-party payment distorts the market so that economizing technologies are given short shrift while revenue enhancing technologies are highly valued.

Third-party payment itself is also not the ultimate cause, I don't believe. We have adopted a system of third-party payment largely because of State and Federal policy that has been adopted over the years. There are two things that I would like to focus on particularly today, although these are only two of many. It is Federal tax policy dating back to 1943, and the Employee Retirement Income Security Act (ERISA) that goes back to 1974.

Starting with the tax situation. As you know, the Internal Revenue Service ruled that employer-sponsored health insurance benefits would be free of taxes, excluded from income for workers, and Congress codified that ruling in 1954. It was seen, and I think it was, a good way to encourage more coverage. The numbers of Americans with health insurance grew from about 12 million in 1940 to 80 million in 1950 to 132 million in 1960, and the coverage became more generous and more comprehensive, switching from basic hospitalization services to major medical-type approaches.

It has also had two substantial, I think, negative consequences. First of all, it advantaged only those with access to employer-sponsored health insurance. It did not advantage people that bought their own coverage or people that paid directly for services. The large amount of new money that was put into the system as a result of this incentive raised prices for everybody, including those not associated with an employer, with employer-based coverage. Now, that includes the aged and the poor, but it also includes the self-employed and people whose employers simply did not choose to provide coverage. These people found it increasingly hard to pay for their services.

In 1965, Congress addressed part of this problem by enacting Medicare and Medicaid, but the rest of the affected population, the self-employed and people without employer-based coverage, were not helped.  These days, the cost of these subsidies are enormous, $250 billion in Federal money for Medicare in 2003, $160 billion for Federal spending on Medicaid and SCHIP, and $180 billion for employer-sponsored coverage in 2004.

There is another consequence of this subsidy as well. The extraordinary amount of the subsidy causes that anyone who could possibly get employer-sponsored coverage will do so, leaving behind only those people who are unable to.  That includes lower-income workers, people too sick to work, people who are semiretired,  and people in seasonal employment. This is the pool that is available for the individual insurance market, so their costs are considerably higher than the employer-sponsored pool, and coverage is ever less accessible for them.

I think ERISA has had a similar story. The primary result of ERISA was to divide the employer-based market into very large employers, influential employers who are completely unconcerned about State regulation, and small, powerless employers that were subject to State regulation. With the absence of the larger employers from the political scene, State legislators went on a feeding frenzy of regulation that raised costs for smaller employers and for individuals and made--and in some States destroyed the insurance market, and in all States making coverage much less affordable for people not in the employer-based system.

I would be happy to share additional information with you sourcing these assertions, but also discussing some of the other provisions in Federal law that have been problematic.

[The prepared statement of Mr. Scandlen follows:]

Chairman JOHNSON. I thank the panel very much. You have brought out a number of different things that create barriers for people getting access to health insurance. Dr. Melnick, in your charts you demonstrate how rapidly gross patient charges have grown, particularly disparate to patient costs. To what do you attribute this? Since raising their charges, I appreciate that raising their charges also has an impact on raising what they actually get for their services. Nonetheless, the difference between the publicly announced charge and the received payment is extraordinarily large. If you were to do the bar chart on the bottom of page 8 where you talk about trends in hospital charges and costs in California, if you were to do that for any other product sector, would you see as big a difference, for instance, in retail clothing between the marked price and the discounted price at Marshall's?

Mr. MELNICK. I can't think of any example outside of health care. I think the peculiar aspect of the way health care financing payment has evolved over the last 10 or 15 years with contracting, and the fact that embedded in many contracts is a formula which includes charges on which some payments are made. So, what happened is hospitals figured this out and said, well, wait a second, we can raise our charges and get a higher revenue. Even if it is only a small fraction, a half of a percent, why not do it? I think that is how we got to where we are today.

Chairman JOHNSON. I think behind that lies the complexity of the Medicare payment system and there are points at which raising your charges will reap you very big benefits for small groups of patients.  So, there are factors that drive this behavior. In my experience, Medicaid is the worst actor in this in the sense that the managed care plans tend to bargain across the board; Medicaid tends to have a fixed price. So, if you want to comment on that, I would be happy to hear that.

Mr. MELNICK. Well, I think, in preparing my testimony for today, one thing I am struck by is we know very little about actually this side of the whole pricing and how hospitals operate in their data systems. I think one of the things we need to do is improve that side of the hospital industry in order to understand it better and prepare for other products. I think third-party private sector contracts also many times have charges built into the contracts so hospitals are rewarded both through the Medicare side as well as through the commercial side.

Chairman JOHNSON. Thank you.  Dr. Rowland, in your research, since you have done quite a lot of research, we all agree that the most disadvantaged under this system are the people who aren't poor enough to be on Medicaid or aren't signed up for Medicaid whether they are poor or not, and those who work for an employer that has a good plan or who can afford a plan themselves. What do we know, outside of the demographics, about where these people are?  If they are mostly in the cities, do we know why they are not signed up for Medicaid? It is astounding that CBO could say that we have 25 percent of the children uninsured when we have two different policies to cover children. So, we need to understand more why those policies don't reach.

One of the things about SCHIP is it discovered an awful lot of Medicaid kids who were eligible for Medicaid and hadn't signed up. How big a problem is that really? How many of the uninsured live in a reasonable circumference of our community health centers which will provide them with care according to their income?  So, we need to know more about who is using the resources we have out there for people under 200 or 300 percent of poverty income, and why do people who are eligible and nearby don't use it? Has any of your research led you down these particular trails?

Ms. ROWLAND.  Well, our research has clearly shown that the kinds of rules and eligibility requirements in place for Medicaid prior to SCHIP, the documentation required when you apply for coverage, the face-to-face interview, the enrollment forms that were 24 pages long and asked numerous questions, the requirement to bring in birth certificates and all kinds of documentation helps to impede families from coming in to apply. So, with SCHIP, the streamlined eligibility that came in for SCHIP and then has been implemented in many States for the Medicaid population as well; the fact that a working family doesn't need to take the day off to come in and sign up.

Chairman JOHNSON. How much has that helped? Can you see that in the data?

Ms. ROWLAND. We can clearly see. We have almost doubled the number of children on Medicaid as a result of some of these practices in the States that have streamlined it, and we can show you the increased enrollment State by State from some of the statistics that we collect.  So, the children's story is that when you simplify eligibility, you begin to increase participation.  What we see in a State like Wisconsin is that when you cover the parents as well as the children, you have an even higher participation rate.

So, some of the lack of coverage now is that in a State like, for example, Louisiana, children are covered up to 200 percent of the poverty level, that is about $30,000 per family of three, whereas a parent in that State is only covered up to about $3,000 per year, so that this gap between covering the parents and the children has really resulted in some lag in enrollment.

Chairman JOHNSON. If you could provide us with that State by State data, that would be helpful.

Ms. ROWLAND.  I will certainly do that.

Chairman JOHNSON. Both for children and for adults.

Ms. ROWLAND.  The other issue is that the uninsured children live throughout the country, and they are often in rural areas. So, really looking at access to facilities like community health centers can help and really does help in many of the urban areas, but has been a much less available source in the rural areas.

Chairman JOHNSON. The same kind of studies about community health centers and who they serve and how that has grown and changed that you have around SCHIP.

Ms. ROWLAND. We have some studies that have looked at the number of people served by community health centers and how many of those are actually on Medicaid. About one-third of the revenue today to community health centers comes from providing services to people already on Medicaid and that helps to supplement the direct core funding of community health centers. I think that is an important thing to remember when you are looking at trying to make that access more available.

Many community health centers have also become part of the managed care plans that States contract with for their Medicaid plans. We really need to look at both the delivery side of care as well as the insurance card, because we know a Medicaid insurance card can be fairly empty if it doesn't connect you into a network of physicians. The low payments rates historically have really made access to care for some specialists especially difficult for Medicaid patients.

Chairman JOHNSON. Of course, the access to care with the community health centers is less of a problem since community health center doctors don't have malpractice costs, and the community health centers are reimbursed on costs. They are only one of the few actors in the systems that are reimbursed that way. So, any information you can give us about --SCHIP and children and adults, but also about community health centers and any ways in which you see them participating more aggressively in the uninsured and serving the uninsured population.

Chairman JOHNSON. Now, Connecticut lost a large, very large, number of jobs when a big insurance company went under and regardless of their income, I told them to go, there was an excellent facility. It was a great boon to the community health center because all those people were full pay.  Full pay at that time was $27 for an annual physical. Now, this is 10 or 12 years ago. So, that was $27, but at that time that was about $60 normally. So, they are very affordable. It is mysterious to me that people of higher incomes when they are unemployed don't use these facilities.

So, I think we need to know more about who uses them, whether the unemployed go there, and so on and so forth. So, how can we use the resources we have in the system better is one of the most rapid avenues to reaching out that we would have. Then, of course, what else do we need to do. So, anyone who wants to offer on that. My time is up, and I don't want to take much more, but I do thank you, Mr. Scandlen, for your insight into current law, and, Dr. Nichols, for your work.  Mr. Stark.

Mr. STARK. Thank you, Madam Chair and the panel, for your efforts in trying to enlighten us.  I guess, however, there are two questions for Dr. Nichols and Dr. Rowland in particular. We talk about the diversity of the uninsured, but it is my sense that perhaps two-thirds, just to pick a number, of the uninsured come out of the lower-income population. Now, they may be lower-income because they lost their employment and thereby their insurance. I don't know as there is any cause and effect here.

What would be the low income--if it is systemic, if they have been in low-paying jobs in the service sector, in jobs that are part time, in jobs that have multiple employers in the service sector, and they are unapt to have--they work for Wal-Mart, what would be your recommendation, just briefly for each of you, of reaching that 60 percent or two-thirds of the uninsured, however many there are out there? I think we would all agree that a substantial majority of the uninsured are low income. What is the best way to provide them coverage? Diane?

Ms. ROWLAND.  Well, certainly I think building on the experience of Medicaid and SCHIP with children and to try to continue some of the outreach and enrollment simplification to get those children that are already eligible for coverage but are not enrolled, enrolled and into coverage.

Mr. STARK. Okay. In that, do you think you could find some studies that you could send on to me that would show that that is economically efficient, as opposed to individual policies with a tax subsidy or other alternatives that are mentioned?

Ms. ROWLAND.  We have done some recent work in conjunction with Jack Hadley and John Holohan at the Urban Institute that looks at the low-income population, the coverage received within Medicaid versus comparable coverage through private insurance. In fact, Medicaid treats, because of the nature of the population it enrolls, a sicker population than those privately insured in the low-income groups, but does so at a much lower cost per person when you adjust for the differences in health status. The reason for that is partially the low payment rates that Medicaid pays to providers, but it is also that Medicaid operates fairly efficiently for that population. We can make that study available to you for the record.

Mr. STARK. I would appreciate it.

[The information follows:]

Medicaid: A Lower-Cost Approach to Serving a High-Cost Population

Medicaid is our nation’s principal provider of health insurance coverage for low-income Americans.  The program is generally the only source of health coverage available to the 38 million low-income children and adults who are enrolled.  Discussions about Medicaid spending and financing are a perennial feature of policy, legislative, and budget deliberations at both the federal and state level.  Some contend that Medicaid is excessively costly and argue that the private sector could provide coverage more efficiently.  Others maintain that, for the population covered and the services provided, Medicaid is, in fact, an effective vehicle for providing coverage.

New research conducted by Jack Hadley and John Holahan of the Urban Institute examines this issue and shows that Medicaid is a lower-cost approach to providing coverage when compared with private insurance – once the poor health status of Medicaid’s beneficiaries is taken into account.[1]  The study brings new empirical evidence to bear in the debate concerning the efficiency of Medicaid versus private health insurance as a mechanism for covering low-income children and adults. 

The researchers sought to assess whether, for non-elderly adults and children with incomes below 200 percent of the federal poverty level, Medicaid is a high-cost program relative to private health insurance.  Using statistical methods to control for differences between the demographic, socio-economic and health characteristics of those with Medicaid and those with private insurance, the investigators examined whether health care spending would be lower under private coverage than through Medicaid.[2]  This policy brief highlights the key findings from this study.

Study Highlights

The Medicaid Population is Much Poorer and Sicker than the Low-Income Privately Insured Population

Income.  The Medicaid population is much poorer than the low-income privately insured population.[3]  The analysis by Hadley and Holahan indicates that the average family income for adults with Medicaid was only $18,614 – 56% of the average family income for low-income adults with private insurance.  Similarly, average family income for children with Medicaid was 58% of average family income for low-income children with private coverage.

The much lower average income of the Medicaid population reflects the extremely high concentration of poverty among Medicaid enrollees.  Among low-income adults, over 70 percent of those with Medicaid had incomes below the poverty level, compared with only 20 percent of the privately insured (Figure 1).  Likewise, 73% of Medicaid children came from families below poverty, compared with only 21% of privately insured children.

Health.  Health status is markedly worse among both adults and children in Medicaid than among their privately insured counterparts.  Among adults, the disparity is dramatic.  In particular, over one-third of adults with Medicaid report that they are in fair or poor health, compared with only 11 percent of the privately insured.  Nearly 60 percent of low-income adults with private coverage reported that they were in excellent or very good health, compared with only 34 percent with Medicaid (Figure 2, Table 1)[4].  The health status differentials for children are similar, though not as dramatic.

Disability is also much more prevalent in Medicaid.  Nearly half of adults with Medicaid report physical or cognitive limitations – a proportion over four times greater than among low-income adults with private insurance (Figure 3, Table 1).  Among children, the disability rate is 20 percent in Medicaid, but 13 percent among the privately insured.

Health Status Explains Medicaid’s Higher Per Capita Spending

Driven largely by health status, per capita expenditures for adults with Medicaid were higher than the corresponding amounts for low-income adults with private coverage.  However, when health status differences were adjusted by excluding disabled adults[5] from the analytic sample, per capita expenditures were significantly lower for Medicaid adults than for the privately insured.  This result suggests that the higher per capita spending associated with Medicaid adults was due to the much poorer health of the Medicaid population.When all sample adults were included in the analysis, per capita spending was $4,877 for those with Medicaid, compared with $2,843 for the privately insured.  When only non-disabled adults were included, spending per Medicaid adult dropped by nearly two-thirds, to $1,752 – about 78 percent of the corresponding private insurance level of $2,253  (Figure 4, Table 2).

Among children, per capita expenditures were significantly lower (p<.10) for those with Medicaid than for those with private coverage – even when children with disabilities, who are more prevalent in the Medicaid population, were included in the analysis (Figure 5, Table 2).

Benefits Often Cited as “Overly Generous” Account for Small Share of Medicaid Spending and a Larger Share of Private Insurance Spending

Dental and other services that states are not required by federal law to provide under Medicaid were found to account for less than ten percent of per capita spending for non-disabled adults in Medicaid.  In fact, per capita spending for these services was higher for the privately insured than it was for the non-disabled in Medicaid (Figure 6).

Medicaid Protects against the High Out-of-Pocket Spending Faced by the Low-Income Privately Insured

Low-income people with private insurance incur much higher out-of-pocket costs than do those covered by Medicaid.  Presumably, the higher out-of-pocket costs they bear are attributable to cost-sharing charges and spending for non-covered benefits.

Privately insured adults below 200% FPL had out-of-pocket costs more than twice those of Medicaid adults, $585 versus $266 (Figure 7, Table 2).  When disabled adults were excluded from the sample to increase comparability between the Medicaid and privately insured groups with respect to health status, the out-of-pocket gap widened to nearly a six-fold difference – $508 for the privately insured versus $91 for those in Medicaid (Figure 8).  In the case of children, the privately insured spent roughly seven times more than those with Medicaid – whether children with disabilities were included or not.  The limits on cost-sharing in Medicaid appear to protect its beneficiaries from large out-of-pocket obligations.

The higher out-of-pocket health care costs incurred under private coverage would be difficult for the sicker and poorer Medicaid enrollees to afford if they were enrolled in private plans unless states provided comprehensive “wrap around” or supplemental protection to cover these costs.

Simulation Results: Estimates of Spending per Person under Medicaid and Private Insurance

If the average person enrolled in Medicaid were shifted to private insurance, simulation models indicate that per capita spending would increase by $1,265 for an adult and by $76 for a child (Figure 9).[6] 

Per capita spending for an adult Medicaid beneficiary in poor health would rise from $9,615 to $14,785 if the person were insured privately and received services consistent with private utilization levels and private provider payment rates.  For an adult in excellent health, a shift from Medicaid to private coverage would increase per capita spending by $675 (Figure 10).  The results for children are generally similar, but less dramatic because the spending per person is so much lower.

Medicaid’s low per capita spending levels are due, in part, to lower provider payment rates under Medicaid than in private insurance.  Inadequate payment rates have affected some providers’ willingness to participate in the Medicaid program and have impeded access to care.  But, as discussed below, this research indicates that utilization of basic services among Medicaid beneficiaries is generally the same as or higher than the utilization of these services by the low-income privately insured.

Utilization of Services

When controlling for income, health and other characteristics, adults in Medicaid appear no more or less likely than those with private coverage to have a medical expense (i.e., use a service).  Among the adults who did have an expense, total spending was significantly lower for those with Medicaid than for the privately insured, largely reflecting Medicaid’s lower provider payment rates.  Unlike adults, children with Medicaid were found to be more likely than their privately insured peers to use a service.  However, among children with any expense, total expenditures were also lower for those covered by Medicaid. 

Using simulation techniques, the predicted utilization of Medicaid adults shifted to private insurance is not significantly different from their actual utilization under Medicaid (Figure 11).  However, the findings for children are different – children in Medicaid have more doctor and office visits under Medicaid than they would be expected to have if their utilization followed private insurance patterns (Figure 11).  This may reflect Medicaid’s emphasis on well-child care, and the deterrent effect on utilization of the much higher cost-sharing requirements of many private plans. 

It should be noted that while utilization of broad categories of service was examined, possible differences in the detailed content of the care (e.g., specialist services, surgical procedures, diagnostic tests, etc.) between the Medicaid and privately insured low-income populations were not analyzed.

Discussion

When the poorer health status of Medicaid beneficiaries is taken into account, Medicaid provides coverage at a lower per capita cost than private insurance.  The study findings highlight the distinctive profile of the Medicaid population, compared with other low-income people, and the special role that Medicaid plays as an insurer.  Neither higher utilization in Medicaid nor the program’s more comprehensive benefit structure are key factors driving Medicaid spending.

The results of this research suggest that using public funds to purchase private coverage would cost considerably more than building on Medicaid.   However, any reform based on a broad expansion of Medicaid would need to address the low provider payment rates long associated with the program.  Additionally, the prospect of much higher out-of-pocket costs for the Medicaid population if they were moved to private coverage could limit their access to needed care, particularly considering their poverty and extensive health care needs.

As policymakers evaluate Medicaid’s performance as an insurer for low-income non-elderly adults and children, and private-market coverage as a potential alternative, these key study findings and implications warrant consideration:

• The high per capita spending associated with non-elderly adults and children with Medicaid, as compared with the privately insured low-income population, is due to the much poorer health of those with Medicaid.  The Medicaid population differs significantly from the privately insured low-income population.  Comparisons between the two groups need to account for their different income and health profiles.  Medicaid plays a critical role in our health insurance system as the source of coverage for many of the sickest and poorest Americans, whom private insurance does not reach.
• Out-of-pocket spending for the low-income privately insured is six to seven times greater than that faced by low-income Medicaid beneficiaries.  These much higher out-of-pocket costs would represent a heavier financial burden for the much sicker and mostly poor population in Medicaid.  If Medicaid beneficiaries were moved into private coverage without the financial protection of “wrap around” or supplemental coverage, access to care could be diminished for those most in need.
• Medicaid’s comprehensive coverage of dental care and other optional services accounts for less than 10 percent of per capita spending for individuals with Medicaid; per capita spending for these services is higher for individuals with private coverage.
• Lower per capita spending in Medicaid (adjusted for differences in health status) reflects, in part, Medicaid’s lower provider payment rates, raising concerns about access to care in the program.  Although this study indicates that expected utilization of basic services by Medicaid beneficiaries is comparable to what would be expected for the privately insured, further analysis is needed to examine whether less access to medical specialists, advanced diagnostic and therapeutic procedures, and high cost drugs contribute to Medicaid’s lower costs.
• Moving those who are now on Medicaid into private coverage could significantly increase health care spending and might not improve access if cost-sharing proved to be a barrier.  Better access to specialty care or better quality of care through market-based coverage would need to be balanced against budget concerns, and against the risk that higher cost-sharing might diminish access to care and increase financial hardship for very low-income people.

[1] For more details on the findings and methodology described in this issue paper, see Jack Hadley and John Holahan, “Is Health Care Spending Higher under Medicaid or Private Insurance?” Inquiry, Vol. 40, No. 4, Winter 2003/2004.  This research was supported by the Kaiser Commission on Medicaid and the Uninsured.

[2] Hadley and Holahan based their analysis on pooled data from the Medical Expenditure Panel Surveys (MEPS) conducted in 1996, 1997, 1998, and 1999.  The expenditure data were inflated to 2001 dollars using the annual percentage increase in the National Health Accounts.

[3] “Low-income” is defined as income below 200% of the Federal Poverty Level (FPL).

[4] Tables 1 and 2 appear at the end of the brief.

[5] For purposes of this analysis, “disabled” individuals are defined as those reporting any physical or cognitive limitation (see Table 1).

[6] See Hadley and Holahan, 2004, for more details on the simulation models used.

Mr. STARK. Dr. Nichols, which way would you go to handle this group?

Mr. NICHOLS. Well, sir, I would want us to remember that the picture here is quite diverse even among the lower-income uninsured. Some work for firms that actually do offer now, and they feel like they can't afford it. So, you might think about low-hanging fruit, including subsidies to people to pay their employees' share. That will end up being expensive because a lot of low-income workers who are offered today do take.

So, you have got this diversity problem which will lead to an equity problem. So, in some ways it really does depend, sir, on how much you want to spend. If you want to pay for equity, that is expensive. If you want to target the money just for those who are currently uninsured, then you might think, well, the best thing to do would be to focus on those who don't have employer offers, who don't have any other alternative. Like Diane said, you might insure them efficiently through Medicaid, but you might also give them tax credits; you might also give them access to maybe let them buy into the State employee plan. That is a big umbrella plan; it ends up being--it is like FEHBP on the State level. It ends up being an avenue that you can enroll people in every county; it ends up being a way you can guarantee choice.

So, I would submit, it depends--you have got to tell me a little bit more about which way--what your values are, what your choices are. Tell me that, and I can design a system. I would say at this point, do something, because we are looking at 40-something million. I would submit, if there is one thing I could say today that would be my main point on all of, it is we are now in a dynamic system where health care costs are growing faster than wages, and they have for 30 years. No matter what we do, that seems to be the reality and what that means at a personal level is that an increasing fraction of our workforce cannot afford health care as we know it. Thus, if we don't intervene --

Mr. STARK. Let me toss this in. Just think about it, and send me a letter if you are concerned. Half of--more than half of personal individual bankruptcies are related to medical expenses, but 80 percent of those people filing had health insurance. Now, what does that tell you? Does it begin to tell you that the health coverage or quality of their insurance is inadequate, or they wouldn't be going bankrupt? Generally they can't get the check and spend it on a new car and not give it to the insurance. Most of the health insurance goes right to the provider. So, the bankruptcy has got to be for the extra charges that the insurance didn't cover.

So, again, that is something--it is one of those little factoids that troubles me when we are dealing with--we are saying, well, we can't--Holtz-Eakin said we don't know. What is insurance? It sure wasn't good enough for the people who went bankrupt who had insurance. Let me just--one more question, if I may, Madam Chairwoman, to Dr. Melnick. Maybe you know her, maybe you don't, but missing, at least conspicuous to me but not to most people, from your testimony and your charts was Maryland, where I suspect your problems are all solved.

Mr. MELNICK. You have a good eye.

Mr. STARK. I happen to be a fan of the all-payer system, and all of your testimony wouldn't apply in Maryland, would it?

Mr. MELNICK. To tell you the truth, I didn't know it was missing, so I am not sure.

Mr. STARK. Maryland has a State-set all-payer system. So, between cost, they charge everybody the same.

Mr. MELNICK. Right.

Mr. STARK. So, there is no pricing strategy there because the prices are set. They can't offer every person who walks into any particular hospital pays the same rate no matter how they are insured. That would solve your problem, wouldn't it?

Mr. MELNICK. That would solve this problem.

Mr. STARK. Thank you. Thank you.

Chairman JOHNSON. Mr. Camp.

Mr. CAMP. I thank the Chairman. I want to thank all the panelists for your testimony today. I think it has been very helpful. What I take away from what you have been saying is that the uninsured are a diverse population that is constantly changing as some lose coverage and some gain coverage. That may mean that different solutions might be required depending on the group of people that we are trying to help.

It seems that estimates of the number of uninsured vary depending on what time frame is used. Dr. Rowland, you testified that there were 43 million uninsured in 2002, and you gave some of their characteristics in your testimony. We have heard from CBO and others that obviously that time frame is important when you look at this number of uninsured, and that there are more uninsured if you consider people who lacked coverage at a particular time. I think you stated that 43 million are uninsured, which is similar to CBO's number of those uninsured at particular times.

So, are your conclusions based on that same premise, that those are people who are uninsured at a particular time? If not, would those conclusions differ? Or would that change your analysis; if you considered the uninsured for an extended period of time, would you come up with a different number of uninsured people?

Ms. ROWLAND.  I certainly agree with the analysis that CBO presented to you. We tend to use the snapshot of the uninsured that comes from the current population survey so that we can measure how that snapshot changes from year to year. That is where the 43 million comes from, from the latest numbers for 2002. If you look at people who have a bout of uninsurance during the course of the year, that would increase that number much higher.

One of the other surveys that we have worked with, the National Survey of American Families conducted by the Urban Institute, showed, for example, in 2002 that there were some 49 million people who were uninsured at some point during a 12-month period, and that of those, half, or 26 million, were uninsured for the whole 12 months. I think what really is important here is that there are lots of people who move in and out of coverage when they are between jobs, when they are young and move off of their family's health insurance policy, or when they are on Medicaid and their income changes and they lose coverage.

I think what really is important in looking at solutions is that we have to look at that short-term set of people with perhaps a different set of solutions than the very hard-core, long-term uninsured. That group remains primarily a very low-income population and one which tends to have bouts of uninsurance that are 12 months or longer. So, the chronically uninsured, I think, is a different problem than those who are between jobs or certainly family situations.

Mr. CAMP. So, that your analysis of those for an extended period of time, more than a year, is similar, falls into the same range as CBO?

Ms. ROWLAND. Right.

Mr. CAMP. I appreciate that.

Dr. Melnick, you mentioned that the uninsured paid more, and they are more likely to pay above the list price. It does seem to me that lack of transparency is a real problem, because it is hard to find out what something costs around the country. You make a series of recommendations. What do you think is the most significant thing we could do with regard to that?

Mr. MELNICK. Well, I think we need to shine a light on the policies and procedures at the hospital level. We need hospitals to, first of all, look at what they are doing. A lot of hospitals, because it is kind of an artifact of their main line of business, which is insure patients, this problem has emerged--a lot of them may not even know that they are imposing a hardship on uninsured self-pay patients. They get the bills, they send the bills out, and then they turn it over to collections. So, a lot of hospitals may not know and plus, they pay the collection agency anywhere from 20 to 80 percent of the revenue that the collection agency collects. So, a lot of hospitals may not even know the hardship they are imposing on their patients. So, I think the first thing I would do is shine a light on this, force hospitals to look at it; publish their policies and procedures; make it clear to patients that when they get this giant bill in the mail, they are not responsible for that. There is a procedure to go through to get a discount.

Mr. CAMP. Thank you.

Dr. Nichols, I know my time is almost expired, but I realize we are dealing with a diverse group of people in terms of the uninsured. What is the one thing that we could do to help the uninsured? I realize that is a varied group, but what is the one thing that Congress might be able to do that you think would be most helpful?

Mr. NICHOLS. Well, it seems to me that the evidence is most clear on the low-income population being the target and would most benefit from some kind of health insurance, and their health status would be improved the most. We cover today about half of the population below poverty in various ways, mostly through Medicaid and about 10 or 12 percent or so through employer-sponsored coverage. I would submit, commit yourselves to making sure that all of the people who are below poverty are covered somehow. There are lots of different subsidy mechanisms that could get us there, but that would be a goal you should set, because you know you would do good.

Mr. CAMP. Thank you.

Chairman JOHNSON. Thank you.  Mr. McDermott.

Mr. MCDERMOTT. Thank you, Madam Chairman.

I don't know quite what to ask you, because I have sat here for years and years and years and heard the same stuff go round and round and round. People ask, well, what little thing could we do here; one little thing we can do there? It is pretty obvious nobody wants to have a universal system, so we are going to continue to tinker with it.

I noted, Mr. Scandlen, you didn't like what State legislators did. You kind of gave a kind of an off-hand slap to the fact that legislators insure things that don't get covered by insurance companies, like Dr. Melnick. I think the States are really hamstrung in this whole business and what is fascinating about the two proposals that are floating around here, this Association Health Plan (AHP) business and HSAs, the AHP is deliberately set up to get rid of that problem with State legislatures, just knock them out of the box. Knock them out, knock out insurance commissioners, and leave the insurance industry with no regulation at all except a two-man operation over at the Department of Labor.

Now, I can't see any evidence from any--either of those proposals, either the AHP which allows small businesses to get together--they can do that now. They could do it before this bill passed. They have been--they have had that open to them for a long time. Didn't reduce costs anywhere, it didn't get any more people covered. Now we have HSAs and the idea that you would have $5,000 to put into an account that you could start drawing out over the year for anybody making less than $40,000 a year sounds like pretty much pie in the sky. I would like to hear from either Dr. Rowland or Dr. Nichols. Do you think either of those proposals will significantly improve the number of covered people in this country, reduce the number of covered people in this country?

Mr. NICHOLS. Well, sir, I actually testified on AHPs a year ago before the Senate Small Business Committee, and I think it is fair to say that there is a lot of passion on this issue and relatively little light. I will tell you what I believe. I believe that benefit mandates are real. They do add to costs. They don't add as much to costs as the advocates of AHPs believe.

If you look at the study done by the Department of Insurance in the State of Texas, which is not known to be a left-wing bastion, they concluded that their benefit mandates, which include inpatient mental, which, as you know, is one of the more expensive--the full month thing for alcohol and substance abuse. They concluded their benefit mandates added about 3 percent to the premium. Now, 3 percent is no small number when you are talking about premiums that are $9,000, $10,000. I don't want to imply it is trivial and if you are a small business on the cusp. That can make a difference, but that is not the kind of belief that I think a lot of people who advocate AHPs hold.

So, I think there is kind of a search, if you will, with all due respect, for fool's gold there. They are looking for savings that aren't really there, because at the end of the day they are going to have to pay the same costs everybody else does. What is driving cost is technology.

Mr. MCDERMOTT. It is the waste, fraud, and abuse sort of argument. That is what they are looking for.

Mr. NICHOLS. Well, sir, I believe that they are sincere. In some cases I think they do think that it is that nasty insurance company middleman that somehow thinks there are costs there to be taken that are not.

Mr. MCDERMOTT. Well, but when a State legislature requires that supplies for the diabetic patient be paid for, the number one chronic disease in the United States, the hospitalization costs, all the problems that come, all the disability costs that come out of uncontrolled diabetes, do you think that that is a wasteful effort on the part of the State legislature?

Mr. NICHOLS. No. I believe a number of studies have found that even if you didn't have specific things mandated, as you know, most physicians who are going to try to get their patients the right care, which is true everywhere, are going to find a way to make what is needed covered. So, that is part of the reason, by the way, the benefit mandates studies don't find all that much of a cost increase, because the reality is they are getting that stuff anyway, and they are going to get it.  What you don't get if you don't have mandates are things like in-vitro fertilization and in some cases maternity care, which is not sold in the nongroup market as a matter of course.

Ms. ROWLAND.  I would also point out that while we have talked about the diversity in uninsured, the diversity of small businesses in America is also something that you have to take into account.  The majority of the small businesses that don't offer health insurance coverage tend to have a very low-wage workforce where I think some of these efforts would be far less effective than in areas where the workforce has a higher income. We have begun to start doing some modeling of the HSAs to see what the take-up rate might be and hope to have those results in a few weeks.

Mr. MCDERMOTT. I would like to see them when you have them done.  Thank you, Madam Chair.

Chairman JOHNSON. I hope you will also model the HSAs, because the--

Ms. ROWLAND.  Actually, it is the HSAs that we are modeling.

Chairman JOHNSON. The other proposals do get small business out from under State mandates the very way big business is out from under State mandates. The fact that big business offers roughly the same spectrum of benefits indicates that mandates aren't the key difference. On the other hand, all the little different mandates in high-mandate States do mean that you have to insure to a higher standard. In Connecticut, which is a high-mandate State, I am being told over and over again we could cut premiums 10 percent if we could choose of the mandates the basic ones that everybody offers.

So, while we don't know exactly what it will cost, the idea that I am bound by what the legislature does--and the legislature is going to do what is politically useful--is a problem. Then don't underestimate the power of bargaining. The big difference between these associated health plans or the HSAs is that you are going to have an employer group bargaining price, and your charts say loud and clear what a big difference that makes.

So, as you look at HSAs, one of the things about HSAs that could make a huge difference is employer creativity and being able to add more in a good year and less in a poor year so that they are not obliged. With a rollover capability, they can even have some variation of benefit depending on catastrophic problems or big health problems.

So, there are a lot of permutations of HSAs. People will have a lot more control over what they look like, both the employees and the employers. So, it is hard to model, but I think we do need to think about it.  What I want to ask you is do we know anything at all about how many of the--what percentage of the uninsured have a health problem during their spell of uninsurance by group; the under 4 months, 4 months to 12? Obviously, people who are uninsured for 12 months, of course, will access the system.

Mr. MELNICK. The Institute of Medicine study reported statistics of 62 percent of the uninsured use health services while they are uninsured, about 1 in 30 use inpatient care, and about 1 in 15 use the emergency room, and a higher percent use physician services as well.

Chairman JOHNSON. This includes the long-term uninsured as well?

Mr. MELNICK. Correct.

Chairman JOHNSON. Do we have any breakdown?

Mr. MELNICK. I can get you that.

Chairman JOHNSON. If you will get that to me, I would be interested in that.

[The information follows:]

Health Services Utilization and Spending by the Uninsured

The uninsured, while they use fewer services than the uninsured, still use health services during periods without health insurance coverage.  Several researchers^1,2 have utilized the Medical Expenditure Panel Survey (MEPS) to study and compare utilization patterns for the uninsured and insured populations. Provided below are three tables based on 1996 data from this prior research to provide a picture of utilization and spending patterns of the uninsured (for different time periods) compared to the insured. 

Probability of Using Health Services

Table 1 presents data comparing the probability of using different kinds of health services depending on whether an individual is insured or uninsured for a full year. In general, the insured have a higher probability of using all health services, except for hospital emergency care. A number of other key findings include:

For under-65 population, 89% of the people who were privately insured for the full year in 1996 used at least one health service, compared to 62% of the people who were uninsured for the full year in 1996.

4.6% of privately insured population used inpatient hospital services compared to 2.9% of the uninsured.

The percentage of privately insured population was more than double compared to the percent of uninsured population using services such as Outpatient hospital (13.4% vs. 6.2%) and Dental (53.1% vs. 20.4%).

A larger portion of privately insured population used preventive care services compared to the uninsured.

Total Spending and Out of Pocket Spending

Table 2 presents data on total spending from all sources on behalf of the insured and uninsured and out of pocket spending by the insured and uninsured.  The estimates of per capita medical care spending are for the under-65 population and include estimates of the uninsured for an entire year or part of a year. A number of key findings include:

Total per-capita spending for the uninsured (for the entire year) was about $923 per person compared to $2,484 per person for privately insured and $2,435 per person for publicly insured.

Total per capita spending on behalf of the uninsured (for the entire year) was substantially below the insured population -- about 38% of the total spending by an insured person.

For the uninsured population (including those uninsured for the entire year or part of the year), total per-capita spending on medical was about $1,335 per person

This represents about 54% of total per-capita spending compared to an insured person.

Average per capita out-of-pocket spending for an uninsured (for a full year) person was $426 compared to $402 for a privately insured for the entire year.

Out of pocket spending by the uninsured was not substantially different from the insured population in 1996.

Financial Burden

A final measure of the effects of being uninsured is the financial burden of out-of-pocket spending on uninsured families.  Table 3 presents estimates of the percent of privately insured and uninsured families that spent greater than 20% of their annual income on health care in 1996.  A number of key findings include:

Overall, about 4% of the uninsured families and about 1.1% of the privately insured families spent greater than 20% of their family annual income on health care.

For poor families (income less than or equal to federal poverty line), and for low income families (125-200 percent for federal poverty line), a greater portion of the privately insured families spent more than 20% of their annual income compared to those that were uninsured.

References

¹Taylor, Amy K., Joel W. Cohen, and Steven R. Machlin. 2001. Being Uninsured in 1996 Compared to 1987: How Has the Experience of the Uninsured Changed Over Time? Health Services Research 36(6, Pt. II): 16-31.

²Hadley, Jack and John Holahan. 2003a. How Much Medical Care Do the Uninsured Use and Who Pays for It? Health Affairs Web Exclusive (1): W66-W81

Tables

Chairman JOHNSON. Then the other thing that does continue to frustrate me, How much do you know about--there is money in the system now for the uninsured, and you have talked about Medicaid money and SCHIP money. States are cutting back on Medicaid, in case you didn't notice. The Federal Government's budget is stressed. I believe budgets are going to be stressed at both the local and the State level, no matter which party is in power, for at least a decade, if not for 20 years. So, I am not optimistic about solving this through annually appropriated programs.

I am interested that the President put 70 billion dollars in over 10, even in this year's budget for the uninsured. So, there is some money allocated to this. In none of this conversation--this is exactly the same hearing we had 2 years ago, and yet this administration has committed itself to and is methodically doubling the number of community health centers, and they expect that next year, with the additional allocation they are putting in, that they will be providing total coverage for 15 million uninsured and underserved individuals.  About 7 million of these are in rural areas.

We need to know what is happening as these expand. Who is being served? Are they Medicaid people? Are they SCHIP people? Are they uninsured? Are they underinsured? Not to know that does really weaken our ability to move forward. There are so many urban areas in which there are outstanding multiservice clinics, and they do mental health, and they do dental. So, why is it we have completely neglected in our study of the uninsured who is going there?

Now, what do we know about disproportionate share hospital (DSH) payments? How effective are DSH payments? Are they just actually covering overhead for some of these people that you charge who it turns out are paying more than any average bloke, more than any other payer? So, what do we know about DSH money? It is big, and we give it to a hospital in ways unrelated to the burden they carry. So, what do we know about that money? What do we know about indirect medical education money and its relationship to uninsured?

So, I hope that, given your resources, you will help us narrow this problem beyond the kind of definition we have given it today, because the debates to this point have covered exactly the kinds of things we have talked about today.  Clinton laid down the challenge to the Congress to provide universal health care to all Americans. There was a bipartisan bill, Rowland and Michel, that met that challenge and had a majority vote, and that is why it was not allowed to come to the floor of the House. It covered everybody. That last segment it covered through means-tested premiums so everyone would have access, but it did a number of other things.

So, it isn't that we haven't thought about this a lot at the Federal level. We have. It is hard, because nobody understands the interactions of what happens at the end if we subsidize premiums. I have been amazed at how many small companies I represent, small manufacturers, where the employee pays 50 percent of the premium. That is tough. So, we need to be thinking more clearly about how do we reach and how do we do it in an affordable way, and how do we do it to encourage modest use of our resources.

I am surprised that you haven't talked more about consumer involvement. One of the things that is dramatic about disease management--and I want to commend the administration right here and now for offering to pay half the cost of implementing disease management programs in Medicaid because they pay back so fast. It will be budget neutral for the States in a year or two. It is just astounding for people with chronic illness. We need to think about this problem: Who is it that is uncovered that needs help, where do they live, who could they go to? Do we need a combination of community health center expansion and special payments for physicians in rural areas who just take all the people who are uncovered?

We need to think more specifically about the nature of this problem. I appreciate your input. It has been very good. It has been broad, and it has brought back to the table the basic research and state of knowledge about this issue in America. It isn't exactly the information that can drive specific solutions. If we are going to do specific solutions, we need to think about the next step. I hope to have your help in doing that. Thank you very much for being here. The hearing is adjourned.

[Whereupon, at 4:00 p.m., the hearing was adjourned.]
[Submissions for the record follow:]

AdvaMed, statement

American Academy of Actuaries, statement

American College of Physicians, statement

Associated Builders and Contractors, Arlington, VA, statement

Catholic Health Association of the United States, Michael, D. Place, statement

Communicating for Agriculture and the Self-Employed, Fergus Falls, MN, Wayne Nelson, letter

March of Dimes, Marina L. Weiss, statement

National Conference for Community and Justice, Sanford Cloud Jr., statement

National Federation of Independent Business, statement

Neltner Billing and Consulting, Independence, KY, Martin E. Neltner, statement