Etheredge, Lynn, George Washington University

Fronstin, Paul, Employee Benefit Research Institute

Gabel, Jon. R., Health Research and Educational Trust

Larsen, Steven B., Maryland Insurance Commissioner, and National Association of Insurance Commissioners

Pauly, Mark V., University of Pennsylvania

Singer, Sara J., Stanford University

SUBMISSIONS FOR THE RECORD

Advanced Medical Technology Association, statement

American College of Physicians--American Society of Internal Medicine, statement

American Hospital Association, statement

Blue Cross and Blue Shield Association, Employee Benefit Research Institute, and Consumer Health Education Council, joint statement

Consumers Union, Gail Shearer, statement

Healthcare Leadership Council, statement

National Association of Health Underwriters, Arlington, VA, Janet Stokes Trautwein, statement and attachments

Washington MSA Project, Issaquah, WA, Stephen Barchet, letter

Wednesday, April 4, 2001

House of Representatives,
Subcommittee on Health,
Committee on Ways and Means,
Washington, DC.

The Subcommittee met, pursuant to notice, at 10:05 a.m., in room 1100 Longworth House Office Building, Hon. Nancy L. Johnson [Chairwoman of the Subcommittee] presiding.

[The advisory and revised advisory announcing the hearing follow:]

Chairwoman JOHNSON. Good morning. The hearing will convene.

Today's hearing focuses on Americans who are uninsured and on solutions that in combination with the Commerce Committee policy initiatives and probably with the Education Committee actions can guarantee access to affordable insurance to every American.

It was 2 years ago, in a similar hearing on the uninsured, the Health Subcommittee found that a record number of Americans were uninsured. This year, for the first time in more than a decade, the number of Americans with health insurance has increased. Almost 2 million more Americans no longer lack health insurance, primarily because the economy has been strong and unemployment low.

However, 42 million Americans, more than one in six, remains uninsured. This is a problem that simply must be solved because those without health coverage often go without health care. Indeed, the uninsured are more than four times as likely to delay care, use 40-percent fewer services than insured individuals with similar health and experience a mortality rate 25-percent greater than insured individuals with similar characteristics.

Moreover, without affordable insurance, these Americans run the financial risk of catastrophic financial burdens and, in addition, impose an increasingly unbearable burden on providers and private payers.

The uninsured are a diverse group. More than four out of five uninsured are full-time workers for their families, and one out of five uninsured individuals work for employers who offer coverage, but choose not to take it. The primary reasons cited for these workers being uninsured was the cost of insurance. Making insurance more affordable will clearly help people purchase insurance.

Many of the uninsured, one-fourth of adults and two-thirds of children, are eligible for public programs, but fail to enroll, or there are many complex issues involved, reasons why eligible individuals do not enroll in public programs. According to the Commonwealth Fund, the majority of the insured would simply prefer not to have Government as the main source of coverage.

Today, we will hear testimony from researchers at the Employee Benefit Research Institute and the Health Research and Education Trust on trends in health insurance coverage and who has coverage and who does not, about who is uninsured in America and why they are uninsured. We will also hear their analysis about whether this favorable trend in insurance coverage will continue.

The second panel will turn to examining potential options for increasing coverage for the 42-million uninsured Americans and focus on tax ideas in particular. The panelists will discuss their evaluation of the effect of tax credits as well as other options.

President Bush has proposed a multi-pronged strategy to assist the uninsured, and two key components of his proposals to reduce the uninsured for which Ways and Means has jurisdiction are tax credits and medical savings accounts. In this vein, we will be examining tax credit ideas in this hearing. Secondly, Committee Chairman Bill Thomas will introduce the Medical Savings Account Availability Act today.

In addition, we will be working with our colleagues and other committees of jurisdiction to attack this problem by seeking ways to make insurance more affordable through group purchasing structure, improving enrollment in Children's Health Insurance Program (CHIP) and expanding access to community health centers and linking them more effectively with hospital coverage.

The hearing will provide a framework for the development of legislation to address the barriers faced in accessing health insurance coverage by the uninsured, and I look forward to working with the Bush administration and my Democrat colleagues on reducing the number of Americans with health insurance. I do consider that this Congress has a unique opportunity to attack this problem and pass the package of bills from a variety of committees that are necessary to really create access for the uninsured to affordable health insurance.

We have known what the components were now for several years. We have talked about them. Various committees have heard various things. Both Presidential candidates talked about this issue, and the time to act is now. This Subcommittee is going to do its work on the difficult issue of the role of tax policy in helping the uninsured gain access to insurance, but that will not be enough alone, and we are keenly aware of that.

I also want to mention that one of the reasons why we have to deal with the issue of tax policy for the uninsured is because not only do they not get the help they need, but they suffer a discretionary impact that is just profoundly unfair. It is unfair to provide a subsidy to every single person in American who enjoys employer-provided insurance and not at least provide the same subsidy at the same level to those who have to buy insurance on their own.

So this is not only about access to health insurance, but it is about fair, more even-handed tax policy, and I look forward to the inputs of those who are going to testify before us today.

I would like to recognize my colleague, Mr. Stark.

[The opening statement of Chairwoman Johnson follows:]

Mr. STARK. Thank you, Madam Chair, and thank you for today's hearing. I hope that we will be the first of many on this issue.

As is my staff's suggestion, I have a long, wordy opening statement, which is more than you want to hear, and I would ask unanimous consent that I be allowed to place that priceless tome in the record in its entirety.

Chairwoman JOHNSON. In its entirety.

Mr. STARK. I also have, I think, a very useful article in a set of charts from the Center on Budget and Policy Priorities dealing with tax credits for individuals buying health insurance, and I would ask that that be made a part of the record.

Chairwoman JOHNSON. So--

Mr. STARK. Thank you.

Having said that, let me summarize, that had I had unlimited time, what I might have wanted to read to you.

We have the disgraceful distinction of being the sole industrialized nation in the world that does not assure or ensure access to health insurance for all its citizens, and we still, in spite of yesterday's stock market, are probably the richest nation in the world. The uninsured are a problem that has been with us as long as certainly I have been involved in health care legislation.

It has gone up and it has gone down, but it has been hovering sadly around 40 to 42 million people. The number also depends on whether you count people who are insured all the time or only part of the time during the year. But a majority of uninsured are low-income, and while 80 percent of them are workers, more than 70 percent of those uninsured workers lack access to a job-based coverage which is where most Americans below the age of 65 get their health insurance.

The good news is that this idea of expanding health care or access to health insurance is back on our agenda, right up there with pharmaceutical coverage, and that is good. But the bad news is that even carefully constructed tax code proposals will not achieve the goal of increased coverage in the absence of significant financial resources being applied to this problem and some, if you will pardon the expression, stringent regulations.

I don't believe that just throwing a couple or even a few thousand dollars at this problem for each person will solve it. We could construct a refundable tax credit that would result in increasing health care coverage, but, if we are not careful, using the Tax Code could result only in our paying lip service to the issue while spending billions of dollars on tax breaks for those who already have insurance.

I think there are four elements that we have to keep in mind. The tax credits must be refundable to get to the people who most need them. The tax credit has to be large enough to subsidize a significant portion of the cost of a meaningful policy.

Sure, you can buy a policy for a thousand bucks a year, but it is not worth anything. It gives you 30 bucks a day if you get cancer in the hospital or something like that, but to get basic coverage that is at least as good as Medicare or Medicaid, you are going to need to spend a lot more than that. My guess is that the individual policies are around $2,500 and around $6,500 for a family policy, and a couple of thousand dollars towards that for a family with income of less-than-$30,000 doesn't get there.

There must be a mechanism to deliver the credit directly to the insurer and make sure that the funds are there consistently during the year. There is also going to have to be some definition--call it regulation, if you will--of the health insurance marketplace.

The tax credit would be worthless if the marketplace will not allow somebody to purchase a policy or if the insurers just raise the price to soak up that additional money.

I have not seen a proposal this year from either side of the aisle that meets all of these criteria, but our job is to see if we can make comprehensive insurance affordable and accessible, and subsidize it for those who can't afford it.

I have often said that in this country, there is only a very small group of Americans, a small percentage, that have a constitutional right to health insurance, and I will bet even the chairlady doesn't know who they are, but under Article IV, they are prisoners. I have always said what is good enough for Haldeman, Erlichman, and Rostenkowski is good enough for me. Therefore, I would like to see us move towards a right for every American to have health care coverage under the Constitution.

Thank you.

[The opening statement of Mr. Stark and Mr. Ramstad follow:]

Chairwoman JOHNSON. I would like to call the first panel now. Paul Fronstin, senior research associate, the Employee Benefit Research Institute; and Jon Gabel, the vice president of Health System Studies at the Health Research and Education Trust.

Dr. Fronstin, we have had a vote called, and my intention is to hear from Dr. Fronstin. We may have time to also hear from Mr. Gabel within the five minutes--I am not sure--and then come back for questions. Otherwise, we will have to break between the two speakers.

Dr. Fronstin?

Dr. FRONSTIN. Thank you.

Chairwoman JOHNSON. You have to talk right into the mic, and be sure it is on.

Dr. FRONSTIN. Okay, thank you. Thank you, Madam Chairwoman and Members of the Committee. I do appreciate the opportunity to be here before you today.

My name is Paul Fronstin. I am a senior research associate at the Employee Benefit Research Institute. EBRI is a private, non-profit, non-partisan public policy research organization based in Washington, D.C.

Data from the Census Bureau show that for the first time since at least 1987, the number of Americans without health insurance coverage recently declined.

In 1998, the number of uninsured Americans under age 65 had reached 43.9 million. By 1999, the number of uninsured declined to 42.1 million. The percentage of non-elderly Americans, those under age 65, without health insurance declined from 18.4 percent in 1998 to 17.5 percent in 1999.

The main reason for the decline in the number of uninsured was a strong economy and low unemployment. As a result, more workers and their dependents were covered by employment-based health insurance. The likelihood that a worker was covered by employment-based health insurance increased from 72.8 percent in 1998 to over 73 percent in 1999. The likelihood that a worker was uninsured declined from over 18 percent in 1998 to 17.5 percent in 1999. The likelihood that a child was covered by employment-based health insurance increased from 60 percent in 1998 to 61.5 percent in 1999, and between 1998 and 1999, the percentage of children without insurance coverage declined dramatically, from nearly 15.5 percent down to 13.9 percent.

Simply providing access to public programs, even free programs, does not guarantee that individuals will leave the ranks of the uninsured. Prior research based on family circumstances and income has found that over 25 percent of all uninsured adults and nearly two-thirds of uninsured children appear to be eligible for some type of public coverage. This accounts for about 15 million of the uninsured.

It is notable that the decline in the uninsured occurred at the time when health benefit costs were going up. When health benefit costs increase, the percentage of Americans covered by employment-based health benefits is expected to decline, but as I already mentioned, more workers and their dependents were covered by employment-based health benefits in 1999 than in 1998.

Despite rising health benefit costs, small employers are increasingly offering health benefits to workers, and as Jon Gabel will show in his testimony.

According to a survey conducted by EBRI, the Consumer Health Education Council, and the Blue Cross/Blue Shield Association last year, most small employers report that offering health benefits helps with recruitment and retention and keeps workers healthy, which ultimately reduces absenteeism and increases productivity. Clearly, many employers realize there is real business value in providing health benefits to their workers.

As long as health benefit costs continue to increase, employers will seek ways to reduce those costs. However, as long as unemployment remains low, employers likely will be unable to modify existing health benefit programs. With low unemployment, the cost of not providing health benefits, such as the cost of recruiting and retaining employees, often outweighs the cost savings that can be attributed to cutting back on health benefits.

Whether the slowing economy will have an impact on employment-based health benefits depends on a number of factors. Massive layoffs have yet to have a substantial impact on the unemployment rate, which is still at 4.2 percent. However, the combination of a slowing economy, rising health benefit costs, and worker uncertainty about the future may make it easier for employers to modify health benefit programs. Even with low unemployment, if employees feared that they could lose their job or would have difficulty finding other jobs, employers may have more flexibility to reduce health benefits.

The release of the March 2001 CPS this fall may add to the confusion over the impact of rising health benefit costs on the uninsured. When those findings are released, the data for 2000 are expected to show that the number of uninsured Americans continued to decline. The combination of more employers adding health benefits and more children being covered by the CHIP program in 2000 likely resulted in continued expansion of health insurance coverage.

More than 42 million Americans were uninsured in 1999. Even if the number drops again later this year when the 2000 data are released, it is likely that 40 million Americans will still be uninsured. As long as the economy is strong and unemployment is low, employment-based health insurance coverage will expand and the uninsured will decline. However, if the economy continues to weaken and health benefit costs continue to increase, the uninsured will start to increase again.

For example, if the downturn in the economy was severe and the uninsured represented 25 percent of the non-elderly population, there would be 63 million uninsured just four years from now.

Thank you, again, Madam Chairwoman and Members of the Committee for the opportunity to appear before you today. My colleagues and I at EBRI look forward to working with you in the future on this important issue.

Thank you.

[The prepared statement of Dr. Fronstin follows:]

Chairwoman JOHNSON. Mr. Gabel, if you would proceed, please.

Mr. GABEL. Thank you, Madam Chairman and Members of the Committee.

I am Jon Gabel, vice president of Health Research and Educational Trust. The trust is a non-profit research organization sponsored by the American Hospital Association. The views I express today are mine alone.

Let me begin with my overall conclusion. I believe job-based insurance will cover a smaller share of working families in the future.

Public opinion studies suggest the public has two major misconceptions about the uninsured. First, the public is unaware of the close link between employment benefits and uninsurance. They are unaware that 80 percent of the uninsured are from working families. The uninsured are cab drivers, retail clerks, waters and waitresses, construction workers and hotel workers.

The second misconception of the public is this: the uninsured get the same care as everyone else. This is utterly wrong.

The uninsured are four times as likely to delay care. The uninsured use 40-percent fewer services than comparable people with insurance. When admitted to the hospital, they are sicker. While in the hospital, they get fewer high-tech services. They are more likely to die in the hospital, and they have a 25-percent higher mortality rate than similar insured individuals.

About one-half of the uninsured work for firms with 25 or fewer workers. These same firms only employ 15 percent of the work force.

Recently, there has been an increase in coverage, and this coverage was driven by the robust economy of the 1990's. Which small employers don't offer coverage? I refer to Exhibit 1 and Exhibit 2.

Earning of the work force largely determine whether a firm will offer coverage. This stresses that benefits are part of the total benefit package.

A key element in understanding the uninsured is the employer exclusion. I do not pay taxes on my employer contributions for health insurance. If my employer contributes $6,000 per year and my marginal tax rate, including State, Federal, and local government is 50 percent, then I receive a subsidy of $3,000.

Turning to Exhibit 3, we show that our employer-based system today is highly regressive. We give the greatest financial help to those who need the least assistance and the least help to those who need the most assistance.

A family earning less than $15,000 a year gets a tax subsidy of $71. Those making over $100,000 get nearly $2,500.

When we ask employers why they do not offer insurance, year after year, the overwhelming reason is it costs too much. I refer to Exhibit 4.

The implication is that employers would buy lower-priced bare-bones policies. The real-world experience of these policies is they do not sell.

Now let me turn to short-run forces. We have two adverse developments. The first is the return of health care inflation. I refer to Exhibit 4.

Premiums have increased by 8.3 percent last year, the highest increase since 1993, and the situation looks worse for the future. Higher prices mean fewer small employers will purchase coverage.

Second is the slowing of the overall economy. Over the past 5 years, a tight labor market has shielded American workers from rising health care cost. A slowing economy will enable employers to pass on higher costs to workers. Higher contributions will induce more low-income workers to decline coverage.

Now let me turn to long-term forces. Please refer to Exhibit 8. Job-based health insurance covers a smaller percentage of working Americans today than in 1977. The decline in coverage is concentrated among those Americans least able to compete in a global information-based economy.

Note, there was no decline in coverage among families with college graduates, but among families headed by individuals without a high school diploma, coverage fell from 52 to 34 percent.

I see globalization and the information revolution bringing about greater disparities in health coverage in the future.

Madam Chairman and Members of the Committee, I welcome your questions. Thank you.

[The prepared statement of Mr. Gabel follows:]

Chairwoman JOHNSON. Thank you very much.

Mr. Gabel, do you have any information about the number of employers that provide only partial of premium coverage?

In my district, I run across a lot of employers that provide only 50 percent of the premium cost, and those people in particular are very interested in the tax subsidy to help them stay in the plan. Although the kinds of employments that you point to in your testimony, I understand are uninsured, but there are many others out there. For instance, the examples in my district are small manufacturers, and they are doing their best to provide coverage, but it does require the employee to provide 50 percent of the premium and that is unaffordable to many of the workers industry.

Do we know much about this? Do we know much about what percentage of the employers do cover only 50 percent of the premium? Because I think whether or not tax credits keep people in and bring them in depends a lot on the vitality of that particular type of plan.

Mr. GABEL. Yes, we do have such data. In fact, the data goes all the way back to 1988. I know for each employer how much the employer contributes for each plan.

We have also analyzed how the out-of-pocket contribution for the employee affects the take-up rate. We find that if a firm has many higher-income workers, the contribution requirement does not reduce the take-up rate. If there are many low-income workers--and by that, I mean workers making less than $20,000 a year--these workers are very sensitive to the out-of-pocket contribution.

Chairwoman JOHNSON. Could you look at your data and get back to me on what the cyclical impact of rising and falling premiums has on that type of employer plan and whether that shows any difference, movement in and out, you know, employers dropping it earlier or later than more costly plans, if you can determine that. Thank you.

Mr. Stark?

[No response.]

Chairwoman JOHNSON. Mr. McCrery?

Mr. MCCRERY. I would like to ask both of you what you think the outlook is for employer-provided health insurance coverage. Do you think more employers in the future will be offering health insurance, or do you think fewer employers?

Dr. FRONSTIN. I think it depends. It depends on a lot of factors.

Mr. MCCRERY. Like what?

Dr. FRONSTIN. One, if we have a recession and unemployment does go up--it has not yet, despite the fact that we have slowed down considerably--if unemployment goes up, employees will be able to cut back, I think it will take two forms. One, I think we will see small employers dropping coverage.

Because of the rate at which premiums have been going up for those employers, as Jon Gabel shows in his study, he mentioned about 8.3 percent in 2000. It was actually higher. It was over 10 percent in 2000 for small employers, and that is expected to continue.

I think we will see large employers not necessarily drop coverage. Just about all of them offer it today, and just about all of them have always offered it, but you will see them change the benefits package around. You will see them ask their employees to pick up a greater share of the premium.

The one thing that small employers do not always have flexibility on is how much of the premium they can ask their employees to pay. Because insurance companies often require a certain percentage of employees to be covered, in order for the employer to get that high minimum participation rate, they wind up paying 100 percent of the premium.

If you look at employee data, if you look at employees and ask them whether or not they pay anything, you find that more employees in large firms pay something than employees in small firms.

This does not mean that there are not employees in small firms that do not pay anything. There is probably two pools there depending upon whether or not they are subject to minimum participation requirements. So I think certainly if the economy slows down, we can see employers pulling back from this benefit, like they did in the late '80s and early '90s when we had rising health care costs.

Mr. MCCRERY. So two things could reduce the employer coverage in the country: number one, economic downturn which would reduce earnings for the businesses; number two, increases in health care costs which would increase the premiums that they would have to pay. Is that correct?

Dr. FRONSTIN. I think you would need both to happen at the same time. I do not think that health benefit costs going up without a recession is going to translate into more workers leaving coverage because we have already seen--Jon Gabel’s data show this--between 1998 and 2000 more small employers started offering coverage. The percentage offering coverage, he has in Exhibit 1.

I hate to steal your thunder, Jon.

But it went up by 11 percentage points. I do not remember the number for the increase in cost between '98 and '99, but between '99 and 2000, it was over 10 percent for these employers.

So I think if you have a strong economy, coupled with rising health benefit costs, there is going to be some give-and-take, and if you have a strong economy, I think employers are in a better position to pay the higher health costs. So you may not see employers cutting back so fast.

Mr. GABEL. I am pessimistic. I am pessimistic because I believe we are in an economic downturn. We will have a softening labor market.

I am pessimistic because we know beyond a doubt that health inflation is back. What is most disturbing is that we have had a surge in underlying health care expenses for health plans in the last two years. It has been particularly driven by higher prescription drug expenses. We know from historical data that when you put those two forces together, you have declining coverage.

My third reason for being pessimistic has to do with long-run earnings of low-income workers. Health benefits are a form of income. When we examine the experience of low-skilled workers, particularly those who are not high school graduates, we see a real decline in wages of about 17 percent since 1973. I believe that is why there has been a decline in coverage among non-high school graduates.

Of course, when I was in school, you could get a very good job if you graduated from high school. There were manufacturing jobs with health coverage. Today, those graduates are in the service industry and do not get coverage.

So, for those three reasons, I am pessimistic about the future.

Mr. MCCRERY. How did we get started with this--oh, my time is up. That was a quick 5 minutes.

Chairwoman JOHNSON. Mr. Stark?

Mr. STARK. Thank you, Madam Chairman, and I would like to thank the witnesses.

Mr. Gabel, you show the average policy at about $2,400 and a family policy at about $6,400, suggesting that employers pay somewhere between 70 and 90 percent; 73 to 86 percent I think is the exact figure.

Does it then follow that if we are going to subsidize insurance and expect people to pick up insurance in the market, then we have to talk about subsidizing the insurance at about those rates for people to pick it up? Does that make sense?

Mr. GABEL. I think what the research would indicate is that the subsidies have to be very substantial.

I just went to a conference, and if I can recall the number–the subsidy must constitute more than 50 percent of the costs.

The other point I want to make is these are employer-based figures. Those figures will be about 8-to-10-percent higher in 2001. Second, if we are talking about buying insurance in the individual insurance market, you are not going to get this kind of a buy. It is just not an efficient market.

Mr. STARK. I will come back, if I can, to that in a minute.

I wanted to ask, Dr. Fronstin, if you have any information for us. Somehow your testimony missed, I was going to say, what is a fact, but I think it is correct, that the employers are dropping coverage for retirees, and if these retirees are under 65, it seems to me there is a large chunk of the "uninsured" who are in that 50-to-65 range. Do you have any statistics on what has happened to them, or can you comment?

Dr. FRONSTIN. Congressman Stark, our data would indicate that there was a dropping of the retiree coverage during the late '80s and early '90s, going up the FASB, Federal Accounting Standards Board, and then after that, our numbers seem to go up and down. That is for the early retirees.

Mr. STARK. Yes.

Mr. GABEL. For the Medicare-eligible retirees, there does seem to be a decline.

Dr. FRONSTIN. I could submit this data when I return to the office, but what we have found is that since 1994 through 1999, the percentage of early retirees with coverage from a former employer have not changed at all. We hear the anecdotes about employers cutting back on retiree health benefits. We are trying to find out whether these cutbacks are for current retirees or future retirees. We need a better interpretation of the types of questions that are being asked of employers because, as of this point, it does not appear to have affected where retirees get their coverage from or whether or not they are uninsured.

Mr. STARK. Thank you. That would be useful information.

I want to come back to Mr. Gabel for a minute. You mentioned the Illinois experience with the bare-bones policies. Tell me, what is the difference between somebody, say, with an income of $15- or $17,000 and a $5,000 deductible policy and someone with no policy at all.

Mr. GABEL. Not much.

Mr. STARK. So that, I think that is key, and I do not know whether Dr. Fronstin's figures can be extrapolated. At some point, the coverage does not amount to much, and I wanted to note that.

The only other question is whether or not these figures include--and whether there is a difference--the folks off the books, both illegal, recent immigrants who are non-citizens, citizens who choose not to report or collect Social Security and working, as I say, off the books. I would presume your research does not cover them because they are sort of below the radar scope. Any estimates of how many that would add to the pot?

Dr. FRONSTIN. We are using data from the Census Bureau.

Mr. STARK. So you would include that?

Dr. FRONSTIN. If they included it, we would include it, but I do not know that there is any way to distinguish between the two in their data.

Mr. STARK. Thank you both very much. Thank you, Madam Chair.

Chairwoman JOHNSON. Mr. Crane?

Mr. CRANE. Dr. Fronstin, as you know, the current Tax Code provides an open-ended subsidy through the employer exclusion; that is, one receives a greater benefit for buying a more generous benefit package, particularly if that individual is wealthier and in a higher marginal tax bracket.

What has been the impact of this policy on health care, and has this resulted in over-consumption?

Dr. FRONSTIN. I think the question is whether or not the subsidy has resulted in over-consumption of insurance, more people being insured than we would have had without the subsidy. If we are talking about a higher level of income receiving a greater subsidy, even without the subsidy, they may have the means to buy insurance. So I am not sure. I think there have been some studies on this that have tried to quantify it. We could take a look through them, but I am not really sure exactly which direction it goes in.

Mr. CRANE. Do you think workers would be choosing different types of health care packages if a dollar of wages equals a dollar of benefits?

Dr. FRONSTIN. I'm sorry. Could you repeat that?

Mr. CRANE. Do you think workers would be choosing different types of health care packages if a dollar of wages equalled a dollar of benefits?

Dr. FRONSTIN. Well, I guess the question really is will employers offer a different type of benefit because employees often do not have choice. So, if employees demand less benefits, it is possible, but I think--you know, it is often said that we are over-insured because of the tax treatment and people are not sensitive to the cost of health care. I think it is because people are sensitive to the cost of health care that they have over-insured, and now that they have had experience understanding what health care really costs, they would rather stay with the insurance. I think even if we change the tax treatment, given people are more risk-adverse, they will probably, to some degree, stay with the insurance they already have.

Mr. CRANE. In your testimony, you tell us that the delay in collecting and reporting data often adds to the confusion on health coverage and the uninsured. What can we do about this? It is frustrating to those of us trying to understanding the current dynamics of an always changing market; that the best data we have available is already two years old.

Dr. FRONSTIN. It will take more money, first of all, but if you think about it, the way that the current population survey is collected, it is in March of every year. The Census goes out and interviews about 150,000 people and asks them about their health insurance coverage for the entire prior year. So they are not waiting that long between the end of calendar year 2000 and 2001 before they go out in the field to collect this data, and then they do a very good job in turning this data around in six months.

I do not see much room for improvement there. There are other studies that may be able to fill some gaps, but they face the same issues of the cost of going into the field at a certain time and speeding up the process of collecting the data and cleaning the data. Certainly, they are not going to get as large a sample size as the Census Bureau will.

Mr. CRANE. Thank you. I yield back the balance of my time.

Chairwoman JOHNSON. Congresswoman Thurman.

Mrs. THURMAN. Thank you, Madam Chairman. Thank you all for being here today.

I think, Dr. Fronstin, you must have mentioned something about the CHIP program. One of the things that I have followed over the last couple of years and particularly some of the issues in Florida that have come to bear on us is that when we decoupled the welfare Medicaid program that we an increase of uninsured children, and I do not believe that CHIP has picked that all up. That is actually being reflected more in the cost of the hospitals of who they are seeing in emergency rooms and bad debt and some of those things.

What kind of information do you have, and is there anything in that area that we should be looking at?

Dr. FRONSTIN. Right now, there is very little information.

There is some information from Health Care Financing Administration (HCFA) on the number of children enrolled in CHIP. That data really is not reflected in the Current Population Survey yet because it is only as of 1999 and you did not have that many children. There were about 2 million children enrolled in 1999, and there is no separate question for CHIP. So it is hard to identify them, and it hard to track people in the CPS over time. You just cannot do that.

Concurrent with the decline in Medicaid coverage for children and the increase in the uninsured, there was also an increase in percentage of children covered by employment-based plans between 1994 and 1997. So there is a lot going on there that we do not quite understand yet, and I think as the data becomes available, we will get a better sense of the dynamics behind the program.

Mrs. THURMAN. Do you want to comment on that as well, Mr. Gabel?

Mr. GABEL. I will pass.

Mrs. THURMAN. Let me ask another question. In the middle to the late '80s, there was a concerted effort, I think, by a lot of States to try to put some programs together called CHIP and some of these organizations, and what we have found is that at the beginning there seemed to be a lot of interest in those and people actually signed up. Then what happened was their costs began to rise, and, quite frankly, then the private market started to come in and offer all of these new plans and actually keeping costs down.

What has happened with those alliances to try for people to buy into those markets? We kind of don't hear about that much more when we kind of try to group folks together to keep the costs down and some of those issues. What is going on in that market today?

Dr. FRONSTIN. Well, in general, the alliances have not taken off. As you indicated, in Florida, they have been closed down.

Mrs. THURMAN. Pretty much.

Dr. FRONSTIN. I think generally regarded as the most successful one is the one in California, but even the one in California--even that, as I recall, only enrolls a very small percentage of the State's population. I think one problem is many small employers do not even know that these purchasing alliances exist.

A second problem has been that they have, in many cases, met the resistance of the broker community which is so important in the purchasing of health insurance for small employers. The third problem is the HIPCS needed a big volume in order to get big discounts to be effective. Since they have never achieved that volume, they have never reached that critical threshold point to really be successful.

Mrs. THURMAN. So part of it was marketing, people knowing about it, having the ability to fall into those alliances?

Mr. GABEL. That is very important.

Chairwoman JOHNSON. The other area that--and just, I guess, probably because of the part of the area that I represent--and I have to tell you, this issue is a growing issue and it is probably going to grow even more over the next couple of years, is this 55- to 64-year-old that is not on Medicare. Do tax credits help them?

I mean, I do not know how that helps.

Mr. GABEL. Well, if coverage purchased in the individual insurance market, the cost would be prohibitively high for a 55-64 year old. So it would require a very substantial tax credit.

On the other hand, these people do want coverage--we are not talking about the 21-year-old who thinks they are immortal. These individuals are very serious and concerned about the cost of health care.

Mrs. THURMAN. What we are hearing from our constituents is that they may not be sick right now, they do not know that they will not be sick before they get on Medicare, and part of what we are doing to them is because of the prohibitive costs that they are not going in to see their doctors, they are not doing their preventive care, and at some point, they end up very sick. It has really created a problem in the district. I can say that we hear about this every day. So I hope we can come up with some solutions here for those folks, and all of them.

Chairwoman JOHNSON. Mr. English?

Mr. ENGLISH. Madam Chair, insofar as I was profiting from the line of question being advanced earlier by the gentleman from Louisiana, I will yield my time to Mr. McCrery.

Chairwoman JOHNSON. Thank you, Mr. English.

Mr. MCCRERY. I thank the gentleman for yielding.

Dr. Fronstin, what is your Ph.D. in?

Dr. FRONSTIN. Economics.

Mr. MCCRERY. Good.

According to the Kaiser Family Foundation, workers paid only 14 percent of the cost of self-only plans provided by their employers, and those getting family coverage only pay 27 percent of the cost of that coverage.

As an economist, tell me, if my employer gave me 86 percent of the cost of a new car, do you think the market for Cadillacs might go up?

Dr. FRONSTIN. As an economist, I would say that the money that the employer is providing them for coverage really comes off their cash wages.

Mr. MCCRERY. Well, of course, it does. I did not ask that.

Dr. FRONSTIN. So are they really giving them the money for benefits, or can they take it as cash wages? Plus, they are actually not paying 14 percent because of the tax treatment.

Mr. MCCRERY. You have answered my question, even though it did not sound like you wanted to.

Of course, Cadillacs, you would need more demand for Cadillacs. If somebody is going to pay 86 percent of the cost of my new car, I am not going to go get a Yugo. I am going to go get a Cadillac because I can afford it, because you pay 86 percent of the tab. You do not have to be an economist to figure that out.

Dr. FRONSTIN. But I am questioning whether or not the employer is--

Mr. MCCRERY. But if you gave that employee wages, if you gave that me the equivalent in wages, instead of buying his health insurance, and you were asked this question before--I am going to ask it more directly. If you cashed out that employee and, instead of spending $10,000 on health insurance, you gave him $10,000 in wages and the employee then could go out and buy health insurance, do you think he would buy exactly the same coverage, first dollar of coverage that a single employee might--

Dr. FRONSTIN. Some will and some won't. Some will and some won't. It depends upon the person. It depends upon their income level. It depends upon what they can get in the individual market.

Mr. MCCRERY. Well, of course, individuals vary, but, generally speaking, do you think that employee might go shop around for a different product that would not cost him $10,000--

Dr. FRONSTIN. I think generally--

Mr. MCCRERY. So he could use some of that money for--

Dr. FRONSTIN. They will go shopping around. Certainly, they will go shopping around, but I think they will do their best to try and find the same product before they settle for something with less benefits.

Mr. MCCRERY. Mr. Gabel, can you give us some background on how this employer coverage started and what was the rationale for it?

Mr. GABEL. Our employer-based system is an accidental system. Other countries will point to a legislative act such as the National Health Care System in Britain. Ours grew out of wartime shortages during World War II where wages were capped due to wage and price controls. An executive decision was made to allow health benefits not to be covered by this cap. Once that occurred, a very strong growth in employer-based health insurance followed.

Mr. MCCRERY. Exactly. There was no public policy thought into this. It was just kind of an accident, and as a result now, we have this system that leaves out a lot of people because their employers do not provide coverage or they are in a type of work where they are in and out of work and they do not get coverage, whatever, and if you are a high-income worker, you get a big subsidy from the Government through the tax system, but if you are a low-income worker, even if your employer provides coverage, you get a little bitty subsidy from the Government. That makes a lot of sense, doesn't it?

Mr. GABEL. No. What if we could start all over again? I have met very few economists, liberal or conservative, who would say an employer-based system like ours is the right system. In fact, I do not know if I have ever met any economist who believes our employer-based system is the right system.

Mr. MCCRERY. Well, as policy-makers, why do we continue to fiddle with the current system around the edges instead of offering comprehensive solutions to health care?

Getting back to the cost issue, I guarantee you if costs continue to rise, employer-provided coverage is going to drop, and the more uninsured we have in this country, the greater the cry for us policy-makers to do something about it. The only thing you will hear, I am afraid, is let the Government do it. We will just pay for it, and then you may as well just have the Government pay for everybody. We already pay for Medicare, Medicaid, CHIPs, and now we are going to do the uninsured, a new tax credit. We may as well just make it easier and pay for everybody's health care and then tax everybody.

If somebody, Dr. Fronstin, does not start worrying about costs in the health care system and how to control those costs, we are going to be in a world of hurt because we will be controlling the costs through a universal budget, and a lot of people will not like the result of that, mostly me.

Chairwoman JOHNSON. I am going to recognize Mr. Pomeroy, who is a visiting guest from the larger Ways and Means Committee, for his background in this, in insurance. Mr. Pomeroy?

Mr. POMEROY. Madam Chairperson, you are very kind to allow me to ask questions.

I was a State insurance commissioner in a prior life and sat where you are testifying to this Subcommittee. This is the first time as a Member of the Ways and Means Committee I have had a chance to participate even as a guest on this Subcommittee, and I really appreciate it.

I very much enjoyed Mr. McCrery's questions and commend him for his creative and very sincere thinking on how we can do this better.

I have a different notion, and that is that the erosion of employer-based health care insurance will rapidly fuel cause for a full-blown public insurance system as opposed to private coverage.

In 1993, as we debated the Clinton health reforms, through '94, it appeared in looking at my own constituency that the momentum shifted significantly when those with employer-based coverage began to have questions as to whether the reforms would change, and change in a negative way, the kind of employer-based coverage that gave them security for their health insurance needs.

Dr. Fronstin or Mr. Gabel, do you have any observations in terms of whether or not employer-based coverage does achieve for our population critical mass of quality health care insurance, thereby being a mainstay for the ongoing support for private insurance?

Dr. FRONSTIN. Well, certainly employment-based coverage provides insurance for 90 percent of the population with private insurance, and it covers 160 million people. We know most of those people are satisfied with what they have, and are probably afraid of what they may lose under a new system and there is a lot of uncertainty about what that new system may bring. It is a lot of people to put into a new system and experience some type of potential disruption.

Mr. POMEROY. They were very risk-adverse when they began to really perceive a threat, I believe, is what the Clinton, say, health experiment would show us.

Mr. Gabel?

Mr. GABEL. I think public opinion polls would show that most people who have employer-based insurance like their health plan. They are satisfied with it, and, of course, in general, their coverage, they generally want to keep.

Mr. POMEROY. Mr. McCrery's point about an unacceptable level of insured that will probably, inevitably, rise and that is totally unacceptable is completely correct. I have come to the conclusion that keeping that which works in our system and building reforms for the rest of it is better than scrapping everything and starting anew. It is just too much of an undertaking.

That does get me to a second point, and that is a critical feature within the employer-based coverage is the risk-pooling that takes place. Some of the reforms would seem to pick away at risk-pooling. I would cite specifically the effort by some to have small employers self-insure or do it in an association context. I think this raises questions that you will inevitably return to, times in small group coverage where you have almost a churning, people coming in and out of insurance pools for very short durations of time. You also have questions in terms of whether there is an adequate solvency oversight on self-insurance associations of very small employer entities.

Dr. Fronstin and Mr. Gabel, do you have thoughts on that?

Mr. GABEL. Well, having studied the small employer market and talking to employers for many years, my belief is we know one thing for certain. The small employer market will never be an efficient market until we make major changes in it. Specifically, in a small employer market, so much of the premium dollar to the sales force, to the brokers.

Small employers might be paying 30 to maybe even 40 percent of their premium dollars for administrative expenses.

We do not have, as you noted, Congressman, the risk-spreading in the small employer market that we do among large employers.

Mr. POMEROY. My time is about out. I want Dr. Fronstin to also reply.

North Dakota, just for an example, is largely insured by Blue Cross/Blue Shield and operates under an administrative component under 15 percent, and by pooling all of the small employers in this insured program they have, they do achieve a significant spread of risk, although there is rating variables based upon the unique circumstances to a degree.

Dr. Fronstin?

Dr. FRONSTIN. We already have two systems now. Even if all the small employers were pooled into that, pooled together, we have the large employers pooled together in the sense that they are all self-insured and have pulled out of the fully insured market. That has implications for premiums and the way we spread risk as well, but I think the issues you raise are important issues. They could be addressed in legislation.

Chairwoman JOHNSON. We will have good testimony to both of those points in the next panel.

Before I move on to the next panel, however, I want to pursue the questioning of my colleague from Louisiana in a little different light.

First of all, I do absolutely agree with your fundamental point, and that is that cost is important and that, if you cannot pay for insurance, you do not get insurance. I think that was clearly demonstrated by President Clinton's effort to cover early retirees by opening up Medicare, and the result was that only one in five would be able to take it because it was too costly.

On the other end of the spectrum, your Exhibit 3 does not show it. It says it is only looking at employer-covered benefits. We do actually cover health insurance for 40 million Americans. That is more than the entire current retired population through Medicaid. We provide them with completely health coverage, a very generous plan, and 2.5 million children at this time. So, if you can afford it, you can have good health coverage, and tax credits are about affordability. That is, I think, important, as we move forward, to remember.

On this issue of who gets the subsidy, is it correct that if I an employer and I buy the same plan for everyone, low income and high income, I get the same Government deduction for the premiums of every one of those participants?

Mr. GABEL. You get the same deduction whether you paid for insurance or gave it to them as cash wages--

Chairwoman JOHNSON. Right.

Mr. GABEL. With the exception of--

Chairwoman JOHNSON. Correct.

Mr. GABEL. How it is treated by Social Security.

Chairwoman JOHNSON. But you get the same deduction for the premium for the high earner as the premium for the low earner, assuming the plan is the same?

Mr. GABEL. Yes.

Chairwoman JOHNSON. Right. So, from the employer's point of view, they get the same deduction.

Now, from the employee's point of view, they get the same health care, assuming it is the same plan for everyone, correct?

So, when your chart here shows on Exhibit 3 that low earners receive this very low subsidy, all that is saying is that because he is a low earner and he pays very low taxes that his marginal tax benefit, were he to get that as income, would not be great, but his health benefit is enormous. So this chart is only looking at, in a sense, economic impact on him of the Government-subsidized employer system. But it is not reflecting--if it were reflecting the health impact, then all the bars would be equal, recognizing that most plans are the same for all employees, most company plans are the same for all employees, would it not?

Mr. GABEL. What you are saying is correct. But I would add that if you are a low-income worker, you are far less likely to work in a firm that offers health insurance. If the firm has many low-income workers, predominantly low-income workers, they probably do not have health insurance or they probably have very meager health insurance.

Chairwoman JOHNSON. I certainly appreciate that, that most of the uninsured are working for small firms or self-employed like cab drivers, but if you are in a firm and many, many firms do provide the same plan for everyone, if that were translated into income, you would have a very marginal tax benefit. But if it is not translated into income, you get a very big benefit. So, if we are talking about health benefits as opposed to salary--and that is why this issue of translating this into dollars is a problem because not only is the income impact different, but the health quality access is different.

One of the reasons tax credits are so important is that it gives the employee more buying

power, and many of those small firms could buy a better plan, but this bill cannot be considered in isolation.

I think if you hear the next panel and some of the new work that has been done in how we cut marketing costs, how we put more affordable policies out there, which, of course, the Commerce Committee will be responsible for discharging that kind of information, but we also can have an opportunity here to do it, then you can see that there is an opportunity to really enhance health benefits through a combination of policies. I just do not want this chart to hang out there with its impression of variability when the impact on health benefit availability is very great for low-income workers, especially low-income workers who work for a company that has a good plan.

Chairwoman JOHNSON. Thank you so much for your testimony, Dr. Fronstin and Mr. Gabel, and I look forward to hearing a little bit more information back from you on these employers that I understand to be a rather small number of plans in the market, relatively speaking, where the employee takes a much higher responsibility for the premium. Thank you.

The next panel will be Lynn Etheredge, who is with the Health Insurance Reform Project at George Washington, University; Mark Pauly, a professor of Health Care Systems, Wharton School, University of Pennsylvania in Philadelphia; Sara Singer, the Executive Director of the Center for Health Policy, Stanford University; and Steven Larsen the Commissioner of the Maryland Insurance Administration, Baltimore, Maryland.

Welcome to all of our panelists, and, Lynn, thank you for your thoughtful conversations with me over many months now, and look forward to your testimony.

Mr. ETHEREDGE. Thank you, Mrs. Johnson. For the past several years, there has been increasing discussion about how to use tax policy to accomplish a number of important objectives: reducing the number of Americans, now 42 million, who are uninsured, for health insurance; expanding retirement plans and savings to assist half the workers who lack employer-provided pensions; raising the national savings rate, which is now at a 40-year low; and expanding higher tax credits for education, first-time home purchase and many other needs.

This morning I want to share with the Committee a new approach that might be useful to accomplish all of these objectives, a flexible benefits tax credit. Let me first describe how it might work, and then some of its major advantages.

For example, let's assume that the Congress were to provide a $1,000 to $1,500 flexible benefits tax credit for workers as part of this year's tax legislation. For workers without health insurance, this tax credit would go to pay for health insurance, usually a private plan chosen at the work place or maybe through a State safety net program if the worker declined the credit in writing. In this way, all workers would be covered for health insurance, financed by the tax credit and their own contributions. So for workers without health insurance, the tax credit goes to health insurance. For workers who have health insurance but don't have an employer retirement plan, the $1,000 to $1,500 could be elected by them as a payment to their retirement or savings plan, like an IRA. IRAs can now be used for higher education, first-time home purchase and catastrophic medical expenses. So these flexible benefits credits could help to finance those purposes, as well as retirement. And then, finally, the workers who have health insurance and retirement plans already, could elect to take their $1,000 to $1,500 flexible benefits credit as cash income.

This example makes clear, I think the most important point about a flexible benefits approach. It adapts, or more accurately, it allows the American worker to adapt the tax credit assistance to the family’s needs at one point in time. When a worker is without health insurance--and that is usually short term, 6 or 12 months--the credit pays a health insurance premium. When the worker has health insurance, a flexible credit helps with other needs like savings for a home, or higher education, or retirement savings, or if working have health insurance and a retirement plan already, they could take the credit as cash income.

The second important point about flexible benefits is that not only does it offer a menu for American families, it makes very efficient use of taxpayer dollars compared to many stand-alone health credit proposals. In a typical health insurance tax credit, for example, the designers have to worry a lot about unraveling employer group coverage, so we usually add billions of dollars, sometimes tens of billions of dollars, for people who already have health insurance, even for employers. That just makes the current health insurance subsidies more expensive. In some bills more than half the costs go to people who already have health insurance.

Now, with a flexible benefit approach, the workers who already have health insurance can elect new benefits in a form of cash, either cash payment into their pension retirement account, which they will be able to spend, or as cash income. So the workers themselves get the cash income, not employers.

And, third, another important aspect of flexible benefits is that adding this flexibility to new options doesn't really increase government's costs. With a $1,000 to $1,500 credit per worker, the government's cost is still $1,000 to $1,500 per worker, even if the American family has more options for spending it. For example, to put it into a tax favored pension plan if they have that need.

Finally, one last point, and that is that this flexible benefits approach, which I lay out more in the testimony and the attached paper, is a concept that is compatible with a large number of health insurance tax credit ideas. And I think it broadens the potential support and the potential usefulness of those ideas. It would fit with many of the ideas that other people on the panel will be describing.

In summary, I would suggest that the Committee think about a flexible benefits tax credit as a new approach for helping people meet health insurance, and also retirement and other needs. It has important advantages, as part of a legislative strategy. And most importantly, I think the American families and workers would welcome these types of benefits, as well as the ability to make choices that meet their needs. Thank you.

[The prepared statement of Mr. Etheredge follows:]

Chairwoman JOHNSON. Thank you, Mr. Etheredge. Dr. Pauly?

Dr. PAULY. Thank you, Madam Chairman and members of the Committee for inviting me today. I am Mark Pauly, Professor of Health Care Systems and Economics in the Wharton School at the University of Pennsylvania. I am happy to be here today to discuss the results of my research and policy analysis with Bradley Herring, now at Yale, that appeared in a recent issue of Health Affairs.

We analyzed options for the design of refundable tax credits intended to assist people in buying health insurance. We focus on the most numerous population group among the uninsured, those who are not poor, but have family incomes too low to allow everyone to afford health insurance. If you define this group as people with incomes between 125 and 300 percent of the poverty line, 40 percent of the uninsured fall into this category.

There are three important characteristics about this group of uninsured people. First, there is general agreement that they are uninsured primarily because the premiums for insurance are high relative to their incomes. The problem is affordability, and there is no better solution to this problem than a subsidy that lowers the net premium for insurance. Hence, critics of this approach who say it will be ineffective cannot at the same time maintain that the problem is lack of affordability.

Second, people in this group can nevertheless afford to pay something for their insurance, just not the whole premium. In fact, most people in this income bracket do obtain private insurance, and even the uninsured on average pay substantial amounts out of pocket for medical care. For them, even a partial credit, what some critics of this approach call a "10-foot rope for someone in a 30-foot hole" is of considerable value because they do have some resources. They have some rope down in the hole themselves, and the trick is to figure out how to tie the pieces together.

Finally, as we emphasized at great length in the article, all estimates of the impact of tax credits are fraught with uncertainty, and therefore it is important to build in flexibility in any policy design, rather, I think, than regulating to prevent anything possible that could go wrong.

The most important design feature of any credit plan is how generous it will be to the target population. There is more here though than just the general observation, if you spend more money, you are going to get more effect. Our research suggests that there is a very pronounced notch or threshold below which credits have small effects, and above which effects become much larger.

For example, we estimate that a credit of half of the premium for an average policy will reduce the number of uninsured by about half, whereas a 25 percent credit will only affect a few people, primarily those who are not wage workers. Here is why. Take a worker who has not taken an insured job and who is in the lowest marginal income tax bracket. The value of the exclusion is about 30 percent, combining the payroll and the income tax, and the loading for individual insurance is 15 to 20 percent higher than for group insurance. So someone in this situation would need a credit of at least 45 to 50 percent just to be as well off, tax wise and cost wise, as they would have been had they taken a job that offered the insurance options they rejected. The punch line here is: credits will work.

Second, another design feature is the specification of the policies that qualify for a partial credit. At one extreme the required policy might be very comprehensive. At the other extreme, there might be minimal restrictions in terms of coverage and cost sharing, effectively requiring only that the premium be at least as large as the credit. Then there should be virtually universal take-up of a policy that many will regard as parsimonious. The punch line here: some insurance, even if incomplete, is better than none.

The third design feature is whether the credit is offered to everyone who obtains a qualified insurance policy at a given income level, or whether those who are currently insured or who are offered insurance in an employment-based group plan should be ineligible. If the credit is fairly generous, but is restricted to those not in groups, there will be an incentive to employers and employees to drop coverage in order to claim the larger credit. There will be crowd-out. The economically efficient policy here is somewhat counter-intuitive. The best credit is a neutral one made available to all, regardless of how they obtain coverage, and the higher budgetary cost for such a plan, relative to a targeted one, is not a real cost to the economy, but only a tax reduction, and one that to boot improves both equity and efficiency. It is, after all, manifestly unfair to offer a credit to someone who has neglected thus far to obtain insurance, while denying it to someone at the same income level who already made the sacrifices needed to take the job that provided coverage. The punch line: tax credits or tax cuts are for the lower-middle class, and should be offered to all.

The final design feature is the form of administration. The punch line here, I think, is: arm millions of people with credits and private insurers will find them.

My own preferences in this matter are to suggest an adequately-funded minimally-restrictive credit plan, and be prepared to learn from the experience with such a program, and especially the experience with a transformed individual insurance market. In particular, I would suggest credits on the order of $1,500 for self-only coverage, and $3,500 for family coverage, and permit those credits to be used for health insurance offered either by a private or a public insurer. These credits could be made available in the form of a redeemable coupon, $1,500 off your next insurance policy.

All people with incomes in the target range would be eligible for credits even if they obtained employer-paid coverage, but the value of the tax exclusion will be netted out of the credit in the latter case. It would also be desirable eventually to offer larger credits, equal approximately to the premium for a comprehensive policy, for people with incomes below 125 percent of poverty. They could use these credits for CHIP, Medicaid, a government-contracted plan, or for a private plan of equivalent coverage. The most fundamental point, however, is that after years of talking about helping the uninsured, tax credits provide us a way to do something, and we ought not to make the unattainable perfect the enemy of the feasible good. Thank you.

[The prepared statement of Dr. Pauly follows:]

Chairwoman JOHNSON. Thank you, Dr. Pauly. Ms. Singer, a pleasure to welcome you to Washington.

Ms. SINGER. Thank you. Good morning. Chairwoman Johnson and members of the Committee, thank you for inviting me here this morning to discuss potential solutions to the problem of the uninsured. It is very nice to be back.

My name is Sara Singer. I am a senior research scholar at Stanford University, and Executive Director of the Center for Health Policy.

As I left home yesterday to come here, I explained to my almost-2-year-old daughter, Audrey, that I was invited to Washington by some very important people, to help them find a way to make sure that when she grows up, she will always be able to see a doctor when she needs to. In very simple terms, this is my hope and my purpose here today.

To reduce the number of people who lack insurance requires both subsidies to make coverage affordable, and cost containment to keep it affordable. This cost containment could be achieved by providing multiple choices, structured competition, and incentives to select high-value plans.

Only a small minority of purchasers today have created these conditions. They include the Federal Employees Health Benefits Program, the California Public Employees Retirement System and Stanford University. Though these are prominent purchasers, alone they have not transformed the health care delivery system. Transforming health care delivery will require that providers actively seek ways to cut costs without harming quality, and this in turn requires that a significant portion of their patients demand value.

I would like to share with you some ideas for creating the necessary conditions for effective health care reform. These have been generated through discussions with colleagues, Alan Garber and Alain Enthoven at Stanford, at the invitation of the Economic and Social Research Institute, and with sponsorship of the Robert Wood Johnson Foundation. Our plan has six key elements.

First, insurance exchanges for individuals and groups, to offer choice and promote competition among plans based on price and plan quality.

Second, a United States Insurance Exchange, USIX, a Federal insurance exchange program like the Federal Employees Health Benefits Program, to serve as a backup for individuals and firms with fewer than 50 employees.

Third, refundable tax credits for low to middle income individuals to purchase insurance through an exchange.

Fourth, a default plan that would support safety net providers. Those eligible for subsidies who do not choose a plan would be automatically enrolled in the default plan.

Fifth, a phased-in cap on the exclusion of employer or individually paid health benefits to encourage value-based purchasing.

And, finally, sixth, a new Insurance Exchange Commission, like the Securities and Exchange Commission, with narrow, specific powers to oversee the exchange market and to distribute the tax credits and the default plan payments.

The President's proposal, like ours, would use tax credits to expand coverage, but his proposal offers considerably smaller subsidies targeted to low-income individuals and employment groups without coverage. These small tax credits are unlikely to reduce substantially the number of uninsured due to low take-up rates and crowding out of employer-provided coverage. Even for those who receive tax subsidies, there may not be a viable market to purchase coverage due to adverse selection.

Insurance exchanges can create a structured and competitive market, and facilitate expanded coverage at little cost. They can increase insurance coverage whether subsidies are large or small, and they would require little change if subsidies start small and are expanded later.

The simplest approach to creating an insurance exchange at the national level is to form a USIX, like the Federal Employees Health Benefits Plan (FEHBP) available to Federal employees. USIX could encourage development of high-quality coverage, priced within reach of those eligible for subsidies, and it could structure the market to create competition and combat adverse selection.

I also suggest that you consider default plans, that is, automatic enrollment in default plans for subsidy-eligible individuals who do not enroll themselves, and default payments tied to performance. This mechanism would subsidize safety net providers and would create incentives for preventive care, that should reduce hospital costs, and for expansion of coverage.

In conclusion, any serious proposal for reform of health care financing should include elements of competition that encourage consumers to seek value, and subsidies for lower-income individuals. I urge you to support a proposal that would do both. Thank you very much.

[The prepared statement of Ms. Singer follows:]

Chairwoman JOHNSON. Mr. Larsen?

Mr. POMEROY. Madam Chairman, if I just might say a salutary word about Mr. Larsen. He comes to the position of Insurance Commissioner with extensive prior experience, both as legislative aid to the Insurance Committee in Maryland, as well as private practice work for USF&G. He has been--my brother was formerly the Insurance Commissioner of North Dakota and a colleague of Commissioner Larsen, so I know personally of his good work and very high credibility with the Nation's insurance regulators.

Chairwoman JOHNSON. Thank you, Mr. Pomeroy. Mr. Larsen.

Mr. LARSEN. Thank you very much.

Chairwoman JOHNSON. Now, you see, you must be very good.

[Laughter.]

Mr. LARSEN. Thank you for those comments from one commissioner to another, and I am very glad to be here. Thank you for the opportunity to testify.

As was mentioned, I am current Commissioner/Chair of the Health Insurance Committee at the NAIC and also co-chair of a Maryland task force to study the individual market, and I would like to just provide a few comments about the current characteristics of the individual market, which I think will be most important. That is the market into which recipients of a tax credit would be going to purchase their coverage. And I think many of us think about insurance companies and their job being that of paying claims, but I think companies would view their job as managing risk. And the way they do that is through pricing policies and underwriting policies, high risks high prices, bad risks frequently excluded from coverage.

And I think the most vivid example of those types of practices was when the small group market became dysfunctional in the late 1980s and early 1990s, in which pre-existing condition exclusions, non-renewals, price spikes were characteristic of the market at that time and that is what led to the enactment of almost nationally across all the States, small-group market reforms, which include guaranteed issue, guaranteed renewability, and modified or full community rating.

Importantly, the individual market shares the same characteristics that the small group market did back when these reforms were initiated. Insurers today use the same types of risk management techniques, pricing and aggressive underwriting, in the individual market. But currently the individual market is much less regulated and has much fewer consumer protections than does, for example, the small group market today. Only 19 States have any rating restrictions. That means that insurers can determine rates based on health conditions when they issue policies, with no upper limits on the initial rate or rate increases upon renewal. Only 12 States have some form of a guaranteed issue. I know that you all passed Health Insurance Portability and Accountability Act of 1996 (HIPAA) a few years ago, but HIPAA provides limited protection for those who are moving from group coverage into individual coverage.

I would just like to share with you some statistics that I think highlight some of the problems that you see today in the individual market. As part of our task force review in 1999, we did a survey, and we found, for the largest carrier in Maryland, the Blue Cross plan, Care First, that 32 percent of the individuals who applied for individual coverage were rejected under their medical writing standards. Now, those individuals had the option of going into an open enrollment product that we have in Maryland, but that product was substantially inferior with fewer benefits than the medically underwritten product. Last year the legislature tried to remedy that by making a richer benefit package for the open enrollment products, and immediately Care First came in with a rate increase of 100 percent for the product.

Recently, the Kansas Insurance Commissioner had the opportunity to compare rates between the individual and small-group market in her State. And just to give you an example, she looked at a small group plan with $1,000 deductible, and for an individual the rate ranged from $73 to $122 a month. She then looked at a comparable individual market policy, and the rates were almost double the rates that you got in the small group market. And it was only by increasing the deductible five-fold that you end up with comparable rates. So you would have ended up with a policy, to get comparable rates in the group market, the deductible would have gone up to $5,000.

And I think clearly, the higher deductible policy premiums are lower. It is difficult to imagine with some of the target population, the uninsured could afford such a high deductible to get comparable rates.

It is also very difficult to shop currently in the individual market because there is little standardization, products vary by age, gender, health and many other factors. And the individual market is very fragile. There have been a number of States in which the individual market has collapsed because of a number of different factors. Both in Kentucky and Washington, I think, every carrier at one point had withdrawn from the individual market. Many States do have high-risk pools, but again, rates are frequently very high and the coverage varies in those pools.

In conclusion, I would just like to say, of course it is very important that we look at every option for expanding access and coverage to individuals who do not have health insurance, but I would just caution you that looking currently to the individual market as a way to accomplishing that, I think, at this point is a risky propositions. And with that, I would be happy to take any questions.

[The prepared statement of Mr. Larsen follows:]

Chairwoman JOHNSON. Thank you very much. Thank you very much. Ms. Singer, do your health exchanges--your insurance exchanges, would they overcome the kind of problem that Mr. Larsen is describing? Would they serve individual buyers, enable them to get group rates, and for society to manage the risk issues involved that have already increased cost in the individual market?

Ms. SINGER. That is the idea, and I think that would be the result. They would act like large employers do, and so the individuals who have subsidies, purchasing through the exchange, would have all the benefits of large employment groups: guaranteed issue and renewability, community-rated premiums, multiple choices, information about those choices, et cetera.

Chairwoman JOHNSON. And in California is there experience with this kind of mechanism that also involves risk--management of risk across plans?

Ms. SINGER. Yes, in the small group market, the Pacific Business Group on Health manages Pac Advantage, which used to be called the Health Insurance Plan of California (HIPC), which was previously managed by the State. PBGH risk adjusts premiums across plans within that marketplace to accommodate for plans that get different risk mixes.

Chairwoman JOHNSON. And that is the largest HIPC in the country, is it not?

Ms. SINGER. Yes, it is.

Chairwoman JOHNSON. Mr. Etheredge, why do you think $1,000 is going to make a difference, when the average cost of family coverage is over 3,000?

Mr. ETHEREDGE. Well, I think $1,000 is probably the lowest number you ought to consider. I get to $1,000 by starting with the Medicare benefit package. These are estimates done by Gordon Trapnell, of the Actuarial Research Corporation. A Medicare benefit package for the working population will now average about $1,500 per worker. That is much less than the typical policy that is sold, but we all know Medicare has a lot of things it doesn't cover, like prescription drugs, and has very high deductibles--I guess we are getting close to $1,000 now in Part A and Part B. And then I look at the fact that we ask Medicare enrollees to pay over $600 a year, and they are on an average Social Security benefit of $10,000. So, at a bare-bones level, I am thinking we should try to assure at least the Medicare benefit. That is what we have had as a national standard, and ask workers to pay something, maybe comparable to what we ask elderly people to pay. And that logic leads me from a $1,500 premium, and I subtract out about $10 a week, $500, as a reasonable contribution from the worker. So, a $1,000 tax credit per worker, as a national average, could support a Medicare-level benefit.

That isn't the national average health plan, but I think if you told uninsured people that they could get a Medicare benefit, and the government will be paying two-thirds of the cost, that is probably a viable proposal. So that is how I got to $1,000. I would be happier personally with a more generous policy, but I think it is an interesting exercise to reason that through.

Chairwoman JOHNSON. Thank you. I am going to limit my questions. You are just an excellent panel, very good, and I appreciate it.

And if each member takes about three minutes, and then if we have time, we will come back for a second round, but you all get to question before we vote. Mr. Stark.

Mr. STARK. Thank you, Madam Chair. I would like to thank the panel. In the brief time we have, I guess I would like to ask Mr. Larsen two questions. One, what is the experience in the States in general, regarding the sale of very high-deductible policies? Are they popular? In your opinion, do they provide a meaningful assistance?

And before you answer that, I am going to recall the experience we had back in the 1990s with kid's health insurance. The companies came forth with a lot of policies that offered $50 a day if they were hospitalized, and almost what I would classify as meaningless insurance. So, what does an insurance commissioner do in terms of protecting the consumers from paying for a policy where the benefits won't really provide health care? I mean, they will provide little pieces of it, but not a broad coverage?

Mr. LARSEN. Well, ultimately the consumers have the choice. I think as a practical matter, high-deductible policies are not the preferences of many consumers, and in fact, consumers often aren't able to have the foresight to understand that they are paying a low premium now, but actually when it comes time to need the coverage, they are sometimes surprised to learn that the coverage is low or they don't have the coverage until they have spent 5,000 or 10,000 out of their own pocket. So I think conceptually there may be appeal for that. I think as a practical matter, I don't think those are attractive to many consumers.

Mr. STARK. Ms. Singer, welcome back. It appears that Mr. Enthoven has had an epiphany judging by the HIPCs that are missing from your testimony, which I can only suggest is the best thing I can say. You do suggest that unless there are larger tax credits, it is unlikely to reduce the number of uninsured, and you also suggested there may not be a viable market for individuals to purchase coverage. Do you have a figure in mind as a ballpark figure of where these credits would have to go, or the subsidy would have to go in terms of dollars, to provide an adequate coverage for individual or family today?

Ms. SINGER. Well, I haven't done the type of research that Professor Pauly has done, but I am working with a nonprofit organization in California, to look at what they could provide at a much-reduced price to serve those receiving a low level of subsidy. The issue we are struggling with is that this managed care organization is used to providing first-dollar coverage. They are considering increasing levels of cost sharing, as opposed to implementing high deductible.

From the perspective of a consumer, who would be a subsidy recipient, the notion that they would be covered for catastrophic care, but not for first-dollar coverage, is probably not terribly attractive.

Mr. STARK. But how do you get that dollar figure? You don't have it?

Ms. SINGER. My point is that plans could offer a lower-priced product to accommodate a low level of subsidy. I don't have a dollar figure. I am sorry.

Mr. STARK. And the last thing--because my time is up--is, Mr. Larsen, would you expound a little bit, in layman's language, on the real dangers to the new rise in the association health plans, and how they can really harm small businesses rather than help them?

Mr. LARSEN. Well, I think whenever you set up a system of insurance that is outside State regulation, you do a couple things. One, you get rid of all the consumer protections that are in place for the small businesses, guaranteed issue, guaranteed renewability. You essentially, I think, end up destroying, as we saw previously under the Multiple Employer Welfare Arrangement (MEWA) example, the existing insurance market, all the, quote, good risks end up going to the unregulated market. It leads to so-called bad risk, people with sicker employees in the insured market, and then you get into what even laymen call an actuarial death spiral, where rates go up and up and up, and you drive people out. At least laymen that I hang around with use that term.

So, you know, we had that model many years ago, and I think from a regulatory and consumer perspective, it was a failure.

Mr. STARK. Thank you. Thank you, Madam Chair.

Chairwoman JOHNSON. Mrs. Thurman. And you have as much time as you--we have 5 minutes to vote, and they hold it open 2 minutes, so 6 minutes left? 6 minutes left. Mr. McCrery is coming back.

Mrs. THURMAN. Okay. I won't take that long. Mr. Larsen, you had said in your opening things that there were consumer issues that needed to be addressed, and if you could get those to me, I would really appreciate that. That is the only question, because I think this is a very important issue if we are looking at any kind of--I don't want to spend $1,500 on a tax credit and find out that it has all been spent on administrative costs, quite frankly. I want something that is actually going to do what it was intended to do, and that is to take care of the uninsured in this country, and I think we need to really look at some of those issues out there. So if you could get some of that to us, I would appreciate it. Thank you, Madam Chairman.

Chairwoman JOHNSON. Thank you. Now, Mr. McCrery is going to come back, if you could hang around and--actually, I have a minute, so I am going to ask Ms. Singer if you could respond to Mr. Larsen's comments? In other words, are there and maybe Mr.--either one of you might have some comment on this, because the problems he points to are the current problems with the individual market, and what we have to look at is if we provide a tax credit to individuals to increase their buying power, can we also provide them with a way of buying? Now, you can through some of the new proposals, reduce the cost of marketing very clearly, and certainly both of your proposals do that, so that reduces cost considerably. And we had earlier testimony that 30 or 40 percent of the premium is marketing. So that is really a big bust. And then ERISA has demonstrated that ERISA protection can provide lower cost plans in the market, so you can drive cost down that way. And can you then also deal with this issue of risk in such a way that the individual market doesn't look at medically underwriting every individual? Ms. Singer, and then Mr. Etheredge and Dr. Pauly?

Ms. SINGER. Yes. I think that you can address the issues that the individual market is experiencing through pooling those individuals into groups. I think it helps a lot that they are subsidized individuals and would lose those subsidies if they don't purchase something in the market so they have a strong incentive to purchase something. But I think that giving them the opportunity to purchase through a group is a key element, and I don't think that it has to be necessarily an employment group, but some other mechanism and that is why we have proposed---

Chairwoman JOHNSON. Dr. Pauly?

Dr. PAULY. I think it is wrong to look at today's individual insurance market and imagine that is what it would look like, even without additional regulation, if you offered substantial subsidies. The reason why administrative costs are so expensive in the individual insurance market, paradoxically, is because individual insurance is so expensive. So the companies have to offer substantial commissions to persuade people to take this over-priced insurance.

If, on the other hand, you offer a tax credit of 50 or 60 percent of the premium, the stuff will sell itself. And there has actually been experience in States that have cross-subsidized individual coverage. When the cross-subsidy is generous, the administrative cost for the individual coverage falls down to the 15 percent level, so that is sort of the first point. I think it is a mistake to look at today's individual insurance market and imagine that is what it would be like if you transformed the financing.

The second point I want to make is I think it is a mistake to obsess about risk segmentation in that market. What we know is, if we community rate, maybe that is more just, but it doesn't get more people insured. It leaves the number of uninsured the same. The real problem with the individual insurance market, as I have written, is not that it is expensive for high risks, it is that it is expensive for everybody. And one way to get that down is to offer the subsidy itself, and the other is to offer the opportunity of group insurance purchasing, although I am somewhat skeptical about how much you can lower costs there. A custom suit is a lot more expensive than an off-the-rack suit, and even if I buy my custom suit from Sears, it is still going to cost a lot of money. If you sell things on a one-on-one basis, it does cost more. But I think there is some real opportunity to get those costs down, many of which--many of the opportunities which would be caused by the availability of subsidies.

Chairwoman JOHNSON. Mr. Etheredge, one minute.

Mr. ETHEREDGE. Sure. I think there are two sets of regulations that would be useful, assuming we want a Federal/State framework where most regulation still rests with the State government. The first is HIPAA type regulation of no preexisting condition or medical underwriting, and that could be applied to the group of people eligible for the tax credit. So simply extending HIPAA to people eligible for tax credit will solve that medical underwriting problem.

The second set of rules you need after availability is rating rules. There I would say you could have a fairly straightforward Federal rule which says if the State uses something other than community rating, it has to adjust the credits to match the factors that are used by the insurance plans. So you want to make sure the credit matches what the premium variations will be.

Chairwoman JOHNSON. In other words, there are possibilities. I do think it is significant that Maryland is one of the highest--the States with the highest number of State mandates, and of course, the individual market is controlled by State mandates, and part of the goal would be to provide a buying option that would allow people to get out from under State mandates like most employer plans are under State mandates.

Unfortunately, my time is expired, so that I really do have to go, but Mr. McCrery is returning within minutes. So I will recess the hearing, but as soon as he gets back, he will begin his questioning. Thank you very much for your testimony, and we will be back in touch with you, and if you care to add comment from hearing the comments of your co-panelists or those that preceded you, we would be happy to receive those. Thank you.

[Recess.]

Mr. MCCRERY. [Presiding.] The hearing will come back to order. Thank you all, members of the panel, for waiting for us to get back from the vote. I am sorry I missed the questions from the other members of the Subcommittee, and forgive me if I cover some of the areas that they have already covered.

First of all, let me say I am very appreciative of the time that all of you have given us. I know that you all are very well-respected experts in the field of health care and insurance, and so it is very nice of you to come all the way from California or Penn or Maryland to be here with us today.

I have a lot of questions, and some comments. I guess I will start with Dr. Pauly. You said that the perfect shouldn't be the enemy of the good, and we will do what we can, and you proposed a tax credit scheme. What good will your plan do? What is the good that your plan does?

Dr. PAULY. I think there is a number of things. The most obvious one, at least according to our estimates, is it would cause a substantial number of the currently uninsured to purchase or obtain insurance because it would make it affordable for them. Secondly, it would put in place--at least the version we have that would offer this credit to people who got insurance, no matter how they got it--it would put in place the appropriate neutral incentives for people to decide how to get their insurance. If their employer can arrange insurance in an attractive way, then that is an appropriate way for people to obtain their insurance in a group, and group insurance is actually one of the greatest inventions known to mankind.

On the other hand, particularly small groups and distracted small employers don't do a very good job of arranging insurance, and when they do buy the insurance, their employees hate it. And I guess our thought here is that by giving those--instead of under the current situation, offering a tax-related bribe to let your boss arrange your insurance, if you could get the same tax credit either way, then the harried small employer and the irritated workers might be better off going to a non-group, at least a non-employment-base group setting or maybe an individual setting. So I think those are probably the two main advantages, that it would help everybody who needs serious help to get insurance, and it would set in place incentives for them to make the right choices about where to get that insurance.

Mr. MCCRERY. About what percentage of the uninsured do you estimate would get insurance under this plan?

Dr. PAULY. Well, our ballpark estimates would be for the kinds of credits we propose, it would be more than half of the uninsured, probably on the order of 60 percent or so because the credits are on the order of 55 to 60 percent of the premium.

The other point though that I think is important to make, although I wish I could tell you more about it, we are convinced that above and beyond the design of the credit, the other absolutely most important thing is kind of the marketing of the insurance. If you follow the Medicaid and make the subsidy hard to get, if people have to have a face-to-face interview, as they do in New York, in order to establish eligibility, you will have the same experiences with Medicaid. And the simple thought, and my modest proposal, is if you mail people these coupons, you can use the power of private enterprise to market its product. After all, those coupons don't turn into money until an insurer sells a product. And I have hope--or maybe it is faith--that that would substantially--that would be a better way--a good way of getting to the uninsured and reminding them of the value of insurance as opposed to the sort of public service announcement approach, which we tend to do for Medicaid.

Mr. MCCRERY. Have you estimated the cost of your proposal?

Dr. PAULY. No, I have not. It will be high though if you offer credits of that order of magnitude to everyone, although, as I said in my remarks, I think the right way to look at that is as a tax cut, and it potentially could substitute for the less-directed tax cuts that are currently being contemplated, could be included in that.

Mr. MCCRERY. Fine. Does your proposal do anything about cost and the health care system?

Dr. PAULY. It would help to lower the administrative costs. If you subsidize insurance, then insurers have to put much less resources into persuading people to buy it. It will sell itself, and if it sells itself, you don't have to pay commission to an insurance agent.

As to overall health care costs, there is, of course, the general belief that if you offer people neutral incentives, they may choose policies that are more cost containing, because there is no longer a subsidy at the margin, and so high-deductible policies, medical savings accounts, or even fairly strict managed care plans, where you are being rewarded for the bother by having a lower premium. So I think that would be the main impact.

My view of what is currently happening is that the rises in health insurance premiums are largely driven by the increased spending on new drugs, which I think the market has already told us--since most employers are not cutting back--workers really value that coverage. And so I think it is not important not to focus too much on cost, or spending growth, as if it were necessarily evil. What you want to do is get the right rate of spending growth--and here again, it is kind of the economists' perspective--if you get the incentives right, which what I am talking about would do, neutral tax credit proposals, then whatever rate of spending growth comes out of that you can feel reasonably confident is the right rate.

Mr. MCCRERY. Well, let me just interject. I don't think costs are evil. I just think we need to do a better job of containing costs. Otherwise, we are going to find ourselves with public policy makers containing cost for the system, and that--

Dr. PAULY. Well, I think we need to do a better job of convincing ourselves, if we can, that the costs we are incurring are worth the--the benefit is worth the cost.

Mr. MCCRERY. Exactly. But that should be up to the marketplace and not up to government to decide how much we should spend on health care.

Dr. PAULY. That is right.

Mr. MCCRERY. If hundreds of thousands of individuals every day in the marketplace decide they want that drug, then they can pay for it. But for us to create a global budget and say everything has got to fit within this global budget, it is a recipe for dumbing down the health care system, in my opinion.

Dr. PAULY. Yeah. I have been trying to get investors for my new HMO, whose slogan is going to be, "Last year's technology at last year's premiums."

[Laughter.]

Dr. PAULY. And I haven't gotten very far, so I think there are worst things than growing premiums. It depends on what the money goes for.

Mr. MCCRERY. Right. But again, if you allow those premiums to be generated by private decision making, you are probably going to have more money spent on health care than if we create a budget for it, and the quality of health care is likely to be better as a result. Do you have a problem with that?

Dr. PAULY. No, I don't.

Mr. MCCRERY. Ms. Singer, welcome back. It is nice to see you again, both you and Dr. Pauly, who have been kind enough in the past to suffer through my questions and educate me a little bit about health care and health insurance.

You propose a cap on the tax exclusion. Do you know where you would put the cap? Would it be $5,000 or the average cost of a policy, or where would you put the cap?

Ms. SINGER. What we propose more specifically in our plan is to phase down the current tax exclusion. We would start at double the price of the median plan, and we would reduce that over a 10-year period to the price of--essentially the price of a median plan, that is actually the price of last year's median plan plus 5 percent, which we assume will account for increasing premiums.

Mr. MCCRERY. Okay. So eventually you would get to allowing the tax exclusion for up to the cost of an average plan basically. And you would do that to foster the consumer seeking value?

Ms. SINGER. Well, actually, to encourage employers to offer employer contribution policies that would encourage consumers to seek value, yes.

Mr. MCCRERY. Wouldn't it be more effective if consumers themselves were shopping for their own value? In other words, rather than having the employer do all the work in coming up and saying, "Here is your product", wouldn't it be more effective from a seeking value standpoint, if each consumer were out in the marketplace shopping for that product?

Ms. SINGER. Do you mean paying for 100 percent of the premium?

Mr. MCCRERY. Sure.

Ms. SINGER. Actually, the important point is that the consumers pay the marginal cost--the difference between the prices of different plans. So it is important that consumers have choices, but absolutely every choice may be more detrimental if this creates a bewildering array of choices.

Mr. MCCRERY. I understand that. But assuming that we could put in place a structure somewhat like you suggested so that consumers would have a marketplace kind of a store to go to to shop and choose from among a variety of plans, wouldn't it be more effective from a value standpoint and getting value in the marketplace, to have each of those consumers going and making those decisions themselves, rather than the employer doing it?

Ms. SINGER. Absolutely. Individual choice is very important.

Mr. MCCRERY. Yes, I agree, individual choice is important, but isn't it also important in terms of cost in the system, making the consumer aware of the true cost of purchasing that health care?

Ms. SINGER. Yes, absolutely. If consumers are aware of the differences in the prices of plans, they are more likely to seek value when they choose their plans, and we hope that this will encourage consumers to begin to demand value. When the consumers demand value, then the providers who are providing services to those consumers see it in their interest to begin to try to provide value, and that is a big part of what is missing now. Both the consumers and the providers don't see it in their interest to seek value, and so the health care delivery system isn't cutting costs where it is possible to cut costs and still either improve quality, or at least not harm quality.

Mr. MCCRERY. I couldn't have said it better myself.

Ms. SINGER. Thank you.

Mr. MCCRERY. Very well stated. Mr. Larsen, you talked about some other--I don't know what State it was; maybe it was Maryland, maybe another State, and somebody went out in the market and bought a product in the small group market and it cost X, and then somebody went out in the individual market and bought essentially the same product, and it cost 2X. Is that--

Mr. LARSEN. Yes. That was a comparison done by one of the States for roughly a comparable policy between small group, individual market.

Mr. MCCRERY. In that small group market, was that composed of employer groups?

Mr. LARSEN. Yeah. The small group markets generally is groups up to either 25 or 50, generally 50, with a number of reforms wrapped around that market to make sure that there is access, renewability.

Mr. MCCRERY. Are the employers in that group under ERISA?

Mr. LARSEN. The small group is generally a regulated market, so that is the insured market that States can regulate, yes.

Mr. MCCRERY. So they are subject to the same mandates that the individual market would be?

Mr. LARSEN. Yes.

Mr. MCCRERY. Have you--do you have any studies that tell us the increase in cost due to State mandates?

Mr. LARSEN. I can get that to you. The Maryland Health Care Commission actually has done a study on the marginal cost of mandates, Maryland being, I guess, some would say for better, some would say for worse, the king of the mandates. That study demonstrated that it was actually a relatively small, meaning less than 5 percent marginal cost due to the mandates. I know there is a lot of generalized discussion that mandates add a lot of cost, but in fact, at least in Maryland we have found that that was not the case. And I would be happy to get that study to you.

Mr. MCCRERY. Yes, I would like to see that. Did any of the other panelists say anything on the increased cost due to State mandates?

[No response.]

Mr. MCCRERY. No. And you mentioned some reforms in the small group market, and I believe one of the reforms was community rating within that market.

Mr. LARSEN. Yes. Some States have pure community rating, and some have modified community rating, right.

Mr. MCCRERY. And I know some States, New York I guess being the best example, mandated community rating in their insurance industry, and you saw insurance companies leaving the State, and some say because of the community rating mandate. And while that is true, part of that, I suppose, was because they could go elsewhere, they could go to other States that didn't have community rating and sell their products and make more money. And so they left. What if we had community rating on a nationwide basis, wouldn't that solve a lot of the problems that we have in the insurance marketplace today?

Mr. LARSEN. Well, I think it might solve the particular problem that you are referring to, in that it then doesn't make sense to move to a neighboring State because the rules are the same. There are a lot of issues surrounding community rating, how to do it, what the particular characteristics of the marketplace are. I think that is why some States have pure community rating and some States have modified community rating. And I think it is why States regulate insurance, why we have a State system of regulation, is that marketplace do vary from State to State. But in answer to your question, if the particular problem you are trying to solve is leaving one State because I can get a better deal in the next State, I think that would address it, but it might raise a number of other issues.

Mr. MCCRERY. Well, it would negate the need for assigned risk pools and all that that we do to try to cover people that can't get insurance in the regular market, wouldn't it?

Mr. LARSEN. I am sorry?

Mr. MCCRERY. If you do nationwide community rating, it would solve the problem of assigned risk pools, trying to come up with some device to get products to people that can't get them in the marketplace today, they are too expensive?

Mr. LARSEN. Again, I think community rating has benefits and disadvantages, and there are some--there are definitely some advantages to it and some disadvantages to pure community rating. I guess it is hard for me to speculate what the effect of a national community rated system will be.

Mr. MCCRERY. Anybody else on the panel have any thoughts before I give it to Mr. Pomeroy?

Mr. ETHEREDGE. I think where you are going is asking the question:--if government comes up with a tax credit, how much regulation do we need from the Federal level of this market? If you start with the assumption that you want as much regulation as possible left at the State and local level, rather than have the Federal Government getting into that, there are two basic sets of rules I think are needed to make a tax credit work. One is availability of the product, and there I think you can extend the HIPAA rules and say no preexisting condition exclusion. So the tax credit eligible groups get the HIPAA protection. That makes the insurance available.

The other set of rules is rating rules. There could be a community rating standard, since we have a level tax credit. You can add one more rule, and that is that, if a State is going to allow insurance companies to depart from community rating, it would need to provide subsidies that match those rating rules. So if a State allows age and sex variations, it has to come up with the money, maybe with a Federal matching equalization fund that adjusts the credits for those factors. If insurers have a geographic difference in premiums, a State has to provide for this difference in adjusting the credit.

So HIPAA has to make available the policies, and basic rating rules so that the tax credit matches the premium. I think those are at least the two logical essentials.

Mr. MCCRERY. Okay.

Dr. PAULY. I presume you would have to allow for some geographic variation in the premium. If you had a national uniform standard, you would reduce the number of insured in New York, but raise them in Louisiana. So some kind of modified community rating would probably not do a great deal of harm, although I personally think it wouldn't do a great deal of good for the number of uninsured. It would change the composition of the uninsured population to be more higher risks and fewer lower risks, and maybe some people would think that is an improvement, but I doubt it would affect the head count very much.

My own belief is that an awful lot can be done to solve the problem of what happens to high risks by putting more emphasis on guaranteed renewability and on the idea that people should be subsidized to buy insurance while they are still low risk, and have that insurance contain the provision, as it required by HIPAA now, even for individual insurance, that if you remain insured, your premium cannot be increased by more than the average for your group, and that effectively protects you against the disaster of being a high-risk person and not being able to obtain insurance at reasonable premiums.

So the problem with community rating, of course, in the extreme version, is people only buy insurance when they think they are going to be sick, which of course, then makes it very expensive for everyone. So, personally, I would rather see much more emphasis on guaranteed renewability and that type of device before we go to community rating, and then if it turns out--as I said in my remarks, you need to be flexible--if it turns out that there is still a substantial number of high-risk people without coverage, then we might think of what best to do for them. But in some sense, by definition, the number of people who are unusually high risk is bound to be a small fraction of the total population, and it does seem a bit disproportionate to me to want to restructure the whole insurance market just to deal with that small fraction. Perhaps they can be handled reasonably well with a properly run high-risk pool, coupled with guaranteed renewability to make sure that most people don't get in that pool.

Mr. MCCRERY. Well, thank you very much. I certainly wouldn't go to a community rating standard absent significant other reforms, such as an individual mandate to purchase and other things that would solve our problem. So I didn't mean to imply that we should just change that element of the market.

Well, thank you all very much for your testimony and for responding to our questions, and we look forward to working with you as we try to solve the problem of the uninsured, and other problems in our health care system.

Thanks.

[Whereupon, at 12:36 p.m., the hearing was adjourned.]
[Questions submitted by Mr. Crane, and Dr. Pauly’s response follow:]

Wharton School, University of Pennsylvania
Philadelphia, Pennsylvania 19104-6218
April 12, 2001

Both a tax credit and a tax deduction can reduce taxes by the same amount for a given individual, so in that sense both can produce the same result. For example, if I am in the 28% marginal income tax bracket, my taxes would be equally affected by a $1000 credit or permission for me to take a $3571 deduction. However, the difference is that a given dollar tax credit produces a uniform tax reduction to all who are eligible, whereas a given dollar deduction produces different amounts of tax reduction depending on the person’s marginal tax rate. If one wanted to reproduce the credit’s effect with a deduction, one would have to have limits on the deduction that varied inversely with the marginal tax rate, which would be complicated. More generally, deductions tend to offer lower tax reductions to lower income taxpayers who pay lower marginal rates, while credits can be made uniform or made to increase as income falls. Deductions also are often limited to those who itemize on the individual income tax return, while credits need not depend on how a person calculates their income taxes.

If a tax deduction and a tax credit both provided the same tax reduction to a given individual for the same activity (e.g., obtaining a specific health insurance policy), both devices would have the same budgetary cost and the same real resource cost.

Refundable tax credits provide a money refund to individuals whose credit exceeds the value of their tax obligations. Compared to a non-refundable credit, refundable credits permit larger subsides to be directed to people with low tax liabilities.

A refundable credit could produce a negative tax balance to an individual whose credit exceeded that person’s income and payroll tax liabilities. The Treasury treats this as an appropriation. There is, however, an economic difference between "appropriations" which simply transfer income to individuals and appropriations which go to pay for public expenditures that draw real resources out of the private sector for public purposes.

Since any tax credits I have considered have been defined in dollar terms and are under the control of the legislature, I find it hard to see how they could become entitlement programs—unless the Congress wanted to set up an entitlement program.

Sincerely Yours,

Mark V. Pauly
Chair

Advanced Medical Technology Association, statement

American College of Physicians--American Society of Internal Medicine, statement

American Hospital Association, statement

Blue Cross and Blue Shield Association, Employee Benefit Research Institute, and Consumer Health Education Council, joint statement

Consumers Union, Gail Shearer, statement

Healthcare Leadership Council, statement

National Association of Health Underwriters, Arlington, VA, Janet Stokes Trautwein, statement and attachments

Washington MSA Project, Issaquah, WA, Stephen Barchet, letter