[Senate Hearing 111-1128]
[From the U.S. Government Printing Office]



                                                       S. Hrg. 111-1128
 
                    INCREASING HEALTH COSTS FACING 
                            SMALL BUSINESSES

=======================================================================



                                HEARING

                                 OF THE

                    COMMITTEE ON HEALTH, EDUCATION,

                          LABOR, AND PENSIONS

                          UNITED STATES SENATE

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                                   ON

       EXAMINING INCREASING HEALTH COSTS FACING SMALL BUSINESSES

                               2_________

                            NOVEMBER 3, 2009

                               __________

 Printed for the use of the Committee on Health, Education, Labor, and 
                                Pensions


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          COMMITTEE ON HEALTH, EDUCATION, LABOR, AND PENSIONS

                       TOM HARKIN, Iowa, Chairman

CHRISTOPHER J. DODD, Connecticut
BARBARA A. MIKULSKI, Maryland
JEFF BINGAMAN, New Mexico
PATTY MURRAY, Washington
JACK REED, Rhode Island
BERNARD SANDERS (I), Vermont
SHERROD BROWN, Ohio
ROBERT P. CASEY, JR., Pennsylvania
KAY R. HAGAN, North Carolina
JEFF MERKLEY, Oregon
AL FRANKEN, Minnesota
MICHAEL F. BENNET, Colorado

                                     MICHAEL B. ENZI, Wyoming
                                     JUDD GREGG, New Hampshire
                                     LAMAR ALEXANDER, Tennessee
                                     RICHARD BURR, North Carolina
                                     JOHNNY ISAKSON, Georgia
                                     JOHN McCAIN, Arizona
                                     ORRIN G. HATCH, Utah
                                     LISA MURKOWSKI, Alaska
                                     TOM COBURN, M.D., Oklahoma
                                     PAT ROBERTS, Kansas
                                       
                                       

                      Daniel Smith, Staff Director

                  Pamela Smith, Deputy Staff Director

     Frank Macchiarola, Republican Staff Director and Chief Counsel

                                  (ii)



                            C O N T E N T S

                               __________

                               STATEMENTS

                       TUESDAY, NOVEMBER 3, 2009

                                                                   Page
Harkin, Hon. Tom, Chairman, Committee on Health, Education, 
  Labor, and Pensions, opening statement.........................     1
    Prepared statement...........................................     3
Enzi, Hon. Michael B., a U.S. Senator from the State of Wyoming, 
  opening statement..............................................     5
    Prepared statement...........................................     7
Cullen, Art, Editor, The Storm Lake Times, Storm Lake, IA........    10
    Prepared statement...........................................    11
Specter, Hon. Arlen, a U.S. Senator from the State of 
  Pennsylvania...................................................    12
Rowen, Walter, President, Susquehanna Glass Company, Columbia, PA    13
    Prepared statement...........................................    15
Roberts, Hon. Pat, a U.S. Senator from the State of Kansas.......    16
Praeger, Sandy, Commissioner, Kansas Department of Insurance, 
  Topeka, KS.....................................................    17
    Prepared statement...........................................    19
Holtz-Eakin, Doug, President, DHE Consulting, LLC, and Fellow 
  Manhattan Institute, Arlington, VA.............................    22
    Prepared statement...........................................    24
Bender, Karen, FCA, ASA, MAAA, Actuary, Oliver Wyman, Milwaukee, 
  WI.............................................................    30
    Prepared statement...........................................    31
Gruber, Jonathan, Professor of Economics, Massachusetts Institute 
  of Technology, Department of Economics, Cambridge, MA..........    38
    Prepared statement...........................................    41
Merkley, Hon. Jeff, a U.S. Senator from the State of Oregon......    48
McCain, Hon. John, a U.S. Senator from the State of Arizona......    49
Franken, Hon. Al, a U.S. Senator from the State of Minnesota.....    52
    Prepared statement...........................................    53
Coburn, Hon. Tom, a U.S. Senator from the State of Oklahoma......    54
Bennet, Hon, Michael F., a U.S. Senator from the State of 
  Colorado.......................................................    58

                          ADDITIONAL MATERIAL

Statements, articles, publications, letters, etc.:
    Senator Dodd.................................................    74
    Senator Burr.................................................    75
    Response by Sandy Praeger to questions of:
        Senator Enzi.............................................    76
        Senator Coburn...........................................    77
    Response by Douglas Holtz-Eakin to questions of:
        Senator Franken..........................................    79
        Senator Coburn...........................................    80
    Response by Karen Bender to questions of:
        Senator Enzi.............................................    82
        Senator Coburn...........................................    85
    Response by Jonathan Gruber to questions of:
        Senator Enzi.............................................    87
        Senator Coburn...........................................    88

                                 (iii)




                    INCREASING HEALTH COSTS FACING 
                            SMALL BUSINESSES

                              ----------                              


                       TUESDAY, NOVEMBER 3, 2009

                                       U.S. Senate,
       Committee on Health, Education, Labor, and Pensions,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 2:37 p.m. in Room 
SD-106, Dirksen Senate Office Building, Hon. Tom Harkin, 
Chairman of the committee, presiding.
    Present: Senator Harkin, Murray, Brown, Casey, Hagan, 
Merkley, Franken, Bennet, Enzi, McCain, Murkowski, Coburn and 
Roberts.
    Also Present: Senator Specter.

                  Opening Statement of Senator Harkin

    The Chairman. The U.S. Senate Committee on Health, 
Education, Labor, and Pensions will come to order. Today's 
hearing is about the increasing health costs facing small 
businesses in America.
    I might just say at the outset that about a week ago, on 
Sunday, I got a call early in the morning from Senator Specter. 
He asked me if I'd read the NY Times. And I said, ``Well, no, 
quite frankly I just got up.'' It was that early in the 
morning.
    And he said, ``Well, there's a story on the front page you 
got to read.'' I don't get it delivered so I went down, got the 
NY Times and read it. It was about the plight of small 
businesses and health insurance.
    Senator Specter and I talked about that later on. And 
Senator Specter suggested that this would be an apt subject for 
a hearing prior to the Senate debating and taking up the Health 
Care bill. I agreed wholeheartedly with him.
    So, I asked Senator Enzi if we could have such a hearing 
and he most obligingly agreed to hold this hearing in this room 
and to invite some of our small business people and others to 
this hearing. And I've invited Senator Specter, who is not a 
member of the HELP Committee, but is a member of the 
Appropriations Subcommittee on Health, to join us. So I want to 
thank Senator Specter at the outset for that phone call and for 
the heads up and for actually asking for this hearing.
    Well, we're on the verge of a historic moment in the U.S. 
Congress, and I think in the life of our country. Within a few 
days we'll begin debate on National Health Reform legislation--
reform the country has so desperately needed, but which has 
eluded our grasp for over half a century. This time we won't 
fail.
    For the millions of small business owners across the Nation 
who are desperately struggling to provide affordable health 
insurance to their employees, this moment cannot come soon 
enough. Over the past decade the cost of health insurance for 
small business has spiraled by 123 percent. The most important 
reason cited among small businesses who have dropped coverage 
is the high cost of health insurance. In an August survey, 15 
percent of small businesses reported being offered premium 
increases of over 20 percent to renew the same plan they had 
last year. And just over a week ago the NY Times ran this 
article, this front page article I just mentioned, with reports 
of premium increases of an average of 15 percent for the coming 
year.
    To confirm these trends the National Association of 
Insurance Commissioners conducted a survey of State insurance 
commissioners. The regulators reported back that in most States 
requests for premium increases are averaging 11 to 16 percent 
for 2010. In some States requests for premium increases are as 
high as 20 to 35 percent. And in five States, regulators have 
already taken some form of action to respond to the 
unreasonably high premium increases.
    As we will hear today from the small business owners on the 
panel, these general trends do not even begin to capture the 
crippling spikes in premiums that can occur for reasons beyond 
the control of the business. For premiums to skyrocket, all it 
takes is one diagnosis for one employee or even the spouse of 
an employee. All it may take is just one older employee. All it 
may take is a drop in the number of employees in the business 
or maybe all it takes is sometimes just one employee who 
happens to be a woman, especially if she's pregnant. All told, 
these arbitrary and discriminatory factors can jack up premiums 
for small businesses by 150 to 200 percent or more.
    I do not believe that this is right in this country of 
opportunity. America's small businesses are woven into the 
fabric of the American dream. They reflect our pioneering and 
entrepreneurial spirit. And they are the engine of economic 
growth in our country.
    Over the past decades small businesses have created over 65 
percent of all new jobs in our country. But faced with such 
wild and unpredictable swings in the cost of health insurance 
how are small businesses supposed to budget? How can they take 
the risk of expanding? How can someone with a good idea and 
with the energy to go out on their own start their own family 
business if they are crippled by either no health care coverage 
or excessively high coverage?
    Under the status quo small businesses are being forced to 
make choices they should not have to make. And the fear of 
crushing health costs is stifling the entrepreneurial spirit. 
At this hearing I would have liked to question health insurance 
companies about these trends and practices. We invited them. 
But not surprisingly insurance companies are not interested in 
discussing them. They declined to appear today.
    So today I'm announcing my own investigation into the 
pricing practices of health insurance companies that sell 
policies to small businesses. Health insurance companies should 
open their books. Explain to the American people why they 
support a health insurance market for small businesses that is 
so dysfunctional and so lacking in transparency.
    Small businesses are desperately trying to do the right 
thing for their employees. And doing the right thing will also 
make them more competitive and profitable. They need some help.
    Our legislation will create health insurance exchanges that 
pool small businesses together and increase competition. Under 
the status quo small businesses pay 18 percent more than large 
businesses for exactly the same insurance plan and coverage, 
same policy. The exchanges will enable small businesses to 
easily compare the prices, benefits and quality of health 
plans. In other words, they will make the market more 
transparent.
    Our legislation will end the discriminatory insurance 
industry practice of jacking up premiums because an employee 
got sick or older or because the business hired a woman. This 
will also reduce premiums because insurance companies will no 
longer be allowed to investigate the health condition of 
employees, eliminating the wasteful cost of underwriting. Under 
our legislation an estimated 3.6 million small businesses 
nationwide will qualify for a tax credit of up to 50 percent of 
premiums to make coverage more affordable. In my State of Iowa 
49,000 small businesses will be eligible for this premium tax 
credit.
    As is well known, our legislation will ban arbitrary limits 
on benefits and place limits on out-of-pocket expenses. It will 
require coverage of recommended, preventative care with no cost 
sharing, no co-pays, no deductibles. These reforms will provide 
security and peace of mind to small business owners. They will 
make employees healthier and improve their productivity.
    And finally, I'm very pleased that our legislation will 
increase competition by providing small businesses with a 
choice of a public insurance plan. A lot of times that's 
forgotten. Small businesses will be eligible for that public 
insurance plan.
    As the GAO has found there's very little competition in the 
small group market. Under the status quo small businesses do 
not have much choice. And we'll guarantee that they do have 
more choices.
    So to America's small businesses I have a simple message. 
We're fighting for you. And help is on the way.
    The time has come to act. We will succeed because the 
status quo is not an option. It's time to make health insurance 
markets work for all Americans--not just the healthy and 
wealthy, but also the sick, the old and entrepreneurs in 
pursuit of the American dream.
    [The prepared statement of Senator Harkin follows:]

                  Prepared Statement of Senator Harkin

    We are on the verge of a historic moment in the U.S. 
Congress, and in the life of this great Nation. Within the next 
week or so, we will begin debate on national health reform 
legislation--reform that this country has so desperately 
needed, but which has eluded our grasp for over half a century. 
This time, we will not fail.
    For the millions of small business owners across the Nation 
who are desperately struggling to provide affordable health 
insurance to their employees, this moment could not have come 
soon enough. Over the past decade, the cost of health insurance 
for small businesses has spiraled by 123 percent. As a result, 
the percentage of small businesses offering coverage dropped 
from 68 percent to 59 percent. The most important reason cited 
for not offering coverage is the high cost of health insurance.
    In an August survey, 15 percent of small businesses 
reported being offered premium increases of over 20 percent to 
renew the same plan they had last year. And just over a week 
ago, the New York Times ran a front-page article with reports 
of premium increases of 15 percent for the coming year.
    To confirm these trends, the National Association of 
Insurance Commissioners conducted a survey of State insurance 
commissioners. The regulators reported back that in most 
States, requests for premium increases are averaging 11 to 16 
percent for 2010. In some States, requests for premium 
increases are as high as 20 to 35 percent. And in five States, 
regulators have already taken some form of action to respond to 
unreasonably high premium increases.
    As we will hear today from the small business owners on the 
panel, these general trends do not even begin to capture the 
crippling spikes in premiums that can occur--for reasons beyond 
the control of small businesses. For premiums to skyrocket, all 
it takes is one diagnosis for one employee--or the spouse of an 
employee; all it takes is one older employee; all it takes is a 
drop in the number of employees in the business; and all it 
takes is one employee who happens to be a woman. All told, 
these arbitrary and discriminatory factors can jack up premiums 
for small businesses by 150 to 200 percent or more.
    That is not right in this country of opportunity. America's 
small businesses are woven into the fabric of the American 
dream: they reflect our pioneering and entrepreneurial spirit. 
And they are the engine of economic growth in this country: 
over the past decade, small businesses have created 65 percent 
of all new jobs.
    But faced with such wild and unpredictable swings in the 
cost of health insurance, how are small businesses supposed to 
budget? How can they take the risk of expanding? How can 
someone go out on their own to start their own family business? 
Under the status quo, small businesses are being forced to make 
choices they should not have to make, and the fear of crushing 
health costs is stifling the entrepreneurial spirit.
    At this hearing, I would have liked to question health 
insurance companies about these trends and practices. But not 
surprisingly, insurance companies are not interested in 
discussing them. So today I am announcing my own investigation 
into the pricing practices of health insurance companies that 
sell policies to small businesses. Health insurance companies 
should open their books and explain to the American people why 
they support a health insurance market for small businesses 
that is so dysfunctional, and so lacking in transparency.
    Small businesses are desperately trying to do the right 
thing for their employees--and doing the right thing will also 
make them more competitive and profitable. But they need help. 
And with the release of the Senate's legislation within the 
next week or so, help is on the way.
    As we'll learn today, our reforms will not only help 
families, they will also help the economy, too. Our plan for 
affordable, quality health care will save small businesses tens 
of billions of dollars in spending on health insurance premiums 
each year, saving tens of thousands of jobs each year. Now 
that's a prescription for progress.
    Our legislation will create health insurance exchanges that 
pool small businesses together and increase competition. Under 
the status quo, small businesses pay a tax of 18 percent on 
health insurance because of exorbitant administrative costs. 
The exchanges will enable small businesses to easily compare 
the prices, benefits, and quality of health plans.
    Our legislation will end the discriminatory insurance 
industry practices of jacking up premiums by up to 200 percent 
because an employee got sick or older, or because the business 
hired a woman. This will also reduce premiums, because 
insurance companies will no longer be allowed to investigate 
the health condition of employees--eliminating the wasteful 
cost of underwriting.
    Under our legislation, an estimated 3.6 million small 
businesses nationwide will qualify for a tax credit of up to 50 
percent of premiums to make coverage more affordable. In Iowa, 
49,000 small businesses will be eligible for this premium tax 
credit.
    Our legislation will ban arbitrary limits on benefits, and 
place limits on out-of-pocket expenses. And it will require 
coverage of recommended preventive care, with no cost-sharing. 
These reforms will provide security and peace of mind to small 
business workers, make them healthier, and improve their 
productivity.
    And finally, I am very pleased that our legislation will 
increase competition by providing small businesses with a 
choice of a public insurance plan. As GAO has found, there is 
very little competition in the small group market: the market 
share of the largest small group insurer rose from 33 percent 
in 2002 to 47 percent in 2008. Under the status quo, small 
businesses do not have much choice, and we will guarantee that 
they have one.
    So to America's small businesses, I have a simple message: 
we are fighting for you, and help is on the way. The time to 
act has come. We will succeed, because for you and for America, 
the status quo is not an option. It is time to make health 
insurance markets work for all Americans--not just the healthy 
and wealthy, but also the sick, the old, and the entrepreneurs 
in pursuit of the American dream.

    Senator Harkin. I'd now like to turn to our Ranking Member, 
Senator Enzi.

                   Opening Statement of Senator Enzi

    Senator Enzi. Thank you, Mr. Chairman. I appreciate you 
holding this hearing. I've had an intense interest in this 
since I owned a small business.
    The Chairman. Yes, you are a small businessman.
    Senator Enzi. It's been working like that for a long time, 
and the status quo in health care is unacceptable.
    Health care costs are skyrocketing. Insurance premiums are 
increasing. And too many small businesses can no longer afford 
to offer health insurance to their workers.
    While I agree that we need to change our current system, 
the approach reflected in the current health reform bills is 
the wrong answer. I object to the current health reform bills, 
not because I support the status quo, but because the bills 
really do little to address the problems of increasing costs 
and premiums for small business. These bills will not reduce 
health care costs and will actually increase insurance premiums 
for most Americans.
    I fought for years to enact common sense reforms that will 
slow down health care cost growth and make the insurance market 
work better for small businesses. Before I entered politics, my 
wife and I had shoe stores. We know firsthand how hard it is to 
meet payroll and provide meaningful benefits for the employees.
    I understand how the current insurance market fails to meet 
the needs of many small businesses. That's why I fought for 
real reforms that will actually help small businesses. In 2006 
I introduced a small business health plan bill that would have 
saved the taxpayers about a billion dollars and would have 
provided health insurance to almost a million people. The bill 
would have made common sense reforms to the insurance market 
and given more leverage to small businesses to help them 
negotiate lower insurance premiums.
    Incidentally, the idea from that came from Ohio because it 
was already happening in Ohio where they had a big enough 
population that they were able to do small business health 
plans. And the people doing that in Ohio said, ``do you know 
how much we could save if we could cross State borders, if we 
could maybe go nationwide?'' They were saving 23 percent just 
on administrative costs.
    The insurance industry working closely with many of my 
Democratic colleagues fought to defeat my bill. And 
unfortunately they were successful on the motion to proceed. 
And the motion to proceed kept us from doing the amendment that 
would have cleared up probably about 30 more votes to solve the 
one outstanding issue that was still there which was the 
mandate issue. So we didn't get it in 2006. I know how tough 
reform is to get done.
    Since 2006 little has changed in the insurance marketplace. 
Health care costs and premiums continue to spiral upwards. The 
Kaiser Family Foundation reports the cost for small businesses 
with less than 200 employees and I've got to tell you I think 
200 employees is big business to me.
    But nevertheless their study, said with less than 200 
employees, rose by 4.7 percent from 2006 to 2007, 2.2 percent 
from 2007 to 2008, 5 percent from 2008 to 2009. And they're 
expected to rise again this year. Small businesses cannot 
continue to sustain these types of price increases.
    They need and want reform. And Congress should deliver 
reform. Congress should pass a bill that decreases the cost of 
health care and reduces insurance.
    As I said before, unfortunately the bills that Speaker 
Pelosi, Leader Reid and President Obama are pushing through 
Congress will do little to address spiraling health care costs. 
And will actually increase the insurance premiums most 
Americans pay for their health care. Even worse these increases 
in premiums will come at a time of rising unemployment.
    The 2,000 page House bill and the 1,500 page Senate Finance 
bill and the 1,000 page HELP bill will drive up costs. They'll 
increase taxes and they'll expand the size of government. The 
nonpartisan Congressional Budget Office, the Administration's 
own official actuaries, the National Association State 
Insurance Commissioners and at least six other private studies 
have all reported that the Democrat leadership bills will drive 
up costs.
    Actuaries at the consulting firm, Oliver Wyman, which did 
one of the studies, estimated these bills will increase 
premiums for small businesses by at least 20 percent. WellPoint 
which is the largest BlueCross/BlueShield plan in the Nation 
looked at their actual claims experience in 14 States in which 
they operate, and concluded premiums for healthier, small 
businesses will increase in all 14 States and in Nevada by as 
much as 108 percent.
    Even the Congressional Budget Office has said, ``Premiums 
in the new insurance exchanges would tend to be higher than the 
average premiums in the current law individual market.'' When 
the 85 percent of Americans who already have health insurance 
hear the term health care reform they want Washington to do 
something that lowers the cost of their insurance premiums. 
Unfortunately the bills that Congress has developed will do the 
exact opposite.
    Our economy can't take the higher taxes, higher 
unemployment and higher mandates these bills impose. Taken 
together the new taxes, mandates and regulations will 
cumulatively increase health insurance premiums for millions of 
Americans who currently have health insurance. These higher 
taxes, higher premiums and higher costs are not the change that 
American people voted for.
    Unemployment is higher than it's been in decades. The 
housing market is in distress. And more and more middle class 
Americans are feeling squeezed by irresponsible decisions being 
made here in Washington.
    We all agree the health insurance market is broken and 
needs to be fixed. Everyone who wants health insurance should 
be able to get it. And they shouldn't have to spend all of 
their hard earned savings to get it. No American should be 
denied health insurance because they have cancer, diabetes or 
some other pre-existing condition. No one should be denied 
health insurance, period.
    These reforms are very important and long overdue. We also 
need to enact common sense reform, similar to the reforms I 
advocated in 2006 with the small business health plans. And 
then in 2007 and 2008 with my Ten Steps to Transform Health 
Care in America which is on my Web site.
    I look forward to hearing from our witnesses about the 
impact of these bills. I also hope that this information will 
encourage my colleagues to go back to the drawing board to 
develop bipartisan health care solutions that will actually 
reduce costs and make health insurance more affordable for 
small businesses. I thank the Chairman.
    [The prepared statement of Senator Enzi follows:]

                   Prepared Statement of Senator Enzi

    Mr. Chairman, the status quo in health care is 
unacceptable. Health care costs are skyrocketing, insurance 
premiums are increasing, and too many small businesses can no 
longer afford to offer health insurance to their workers.
    While I agree that we need to change our current system, 
the approach reflected in the current health reform bills is 
the wrong answer. I object to the current health care reform 
bills, not because I support the status quo, but because the 
bills do nothing to address the problems of increasing costs 
and premiums. These bills will not reduce health care costs and 
will actually increase insurance premiums for most Americans.
    I have fought for years to enact common sense reforms that 
will help slow health care cost growth and make the insurance 
market work better for small businesses. Before I entered 
politics, my wife and I ran a small business. We know firsthand 
how hard it is to meet payroll and provide meaningful benefits 
to employees. I understand how the current insurance market 
fails to meet the needs of many small businesses.
    That is why I have fought for real reforms that will 
actually help small businesses. In 2006, I introduced a small 
business health plans bill that would have saved the taxpayers 
about a billion dollars and would have provided health 
insurance to almost a million people. The bill would have made 
common sense reforms to the insurance market and given more 
leverage to small businesses to help them negotiate lower 
insurance premiums.
    The insurance industry, working closely with many of my 
Democratic colleagues, fought to defeat my bill. Unfortunately, 
they were successful, and 43 Senators voted to block our 
efforts to get the Senate to pass these reforms.
    Since 2006, little has changed in the insurance 
marketplace. Health care costs and premiums continue to spiral 
upwards. The Kaiser Family Foundation reports that costs for 
small businesses with less than 200 employees rose by 4.7 
percent from 2006 to 2007, 2.2 percent from 2007 to 2008, 5 
percent from 2008 to 2009, and they are expected to rise next 
year.
    Small businesses cannot continue to sustain these types of 
price increases. They need and want reform, and Congress should 
deliver reform. Congress should pass a bill that decreases the 
cost of health care and reduces insurance premiums.
    Unfortunately, the bills Speaker Pelosi, Senator Reid, and 
President Obama are pushing through Congress will do nothing to 
address spiraling health care costs and will actually increase 
the insurance premiums most Americans pay for their health 
care. Even worse, increases in premiums will come at a time of 
rising unemployment.
    The 2,000-page Pelosi bill and the 1,500-page Senate 
Finance bill will drive up costs, increase taxes, and expand 
the size of government. The non-partisan Congressional Budget 
Office, the Administration's own official actuaries, the 
National Association of State Insurance Commissioners and at 
least six other private studies have all reported that the 
Democrat Leadership bills will drive up costs.
    Actuaries at the consulting firm, Oliver Wyman, which did 
one of the studies, estimated these bills will increase 
premiums for small business by at least 20 percent. WeIlpoint, 
the largest Blue Cross Blue Shield plan in the Nation, looked 
at their actual claims experiences in the 14 States in which 
they operate, and concluded premiums for healthier small 
businesses will increase in all 14 States--in Nevada by as much 
as 108 percent.
    Even the Congressional Budget Office has said: ``premiums 
in the new insurance exchanges would tend to be higher than the 
average premiums in the current-law individual market.''
    When the 85 percent of Americans who already have health 
insurance hear the term ``health care reform'', they want 
Washington to do something that lowers the cost of their health 
insurance premiums. Unfortunately, the bills that Congress has 
developed will do the exact opposite.
    Our economy can't take the higher taxes, higher 
unemployment, and higher mandates these bills impose. Taken 
together, the new taxes, mandates and regulations in these 
bills will cumulatively increase health insurance premiums for 
millions of Americans who currently have health insurance.
    These higher taxes, higher premiums, and higher costs are 
not the ``change'' the American people voted for. Unemployment 
is higher than it's been in decades, the housing market is in 
distress, and more and more middle class Americans are feeling 
squeezed by irresponsible decisions being made here in 
Washington.
    We all agree the health insurance market is broken and 
needs to be fixed. Everyone who wants health insurance should 
be able to get it, and they shouldn't have to spend all of 
their hard-earned savings to get it. No American should be 
denied health insurance because they have cancer, diabetes, or 
some other pre-existing condition. No one should be denied 
health insurance, period.
    These reforms are very important and long over-due. We also 
need to enact common sense reforms similar to the reforms I 
advocated for in 2006 with small business health plans and then 
in 2007 and 2008 with my plan, ``Ten Steps to Transform Health 
Care in America''.
    I look forward to hearing from our witnesses about the 
impact of these bills. I also hope this information will 
encourage my colleagues to go back to the drawing board to 
develop bipartisan healthcare solutions that will actually 
reduce costs and make health insurance more affordable for 
small businesses.

    The Chairman. Thank you very much, Senator Enzi. Other 
statements will be made a part of the record.
    I say to all of our witnesses, your statements will be made 
a part of the record in their entirety. We will go from right 
to left. Senator Specter wanted to introduce Mr. Rowen. I will 
honor that after our first witness.
    I'd ask each of you to summarize your statements in 5 
minutes or so. I don't hold fast to 5 minutes. If it goes over 
a little bit, fine. But once it starts getting near 7 minutes, 
I will start picking up the gavel.
    But if you can keep it around that because we'd like to 
have a general discussion with most of you. I read all of your 
testimonies last evening.
    We'll start on my right, first with Mr. Art Cullen. Art 
Cullen is the editor and part owner of the Storm Lake Times, a 
twice weekly newspaper of 3,300 in Storm Lake, IA. Art is a 
native of Storm Lake, graduated from St. Mary's High School, 
the University of St. Thomas in St. Paul, MN.
    He's been a reporter and editor at the Algona Upper Des 
Moines in Algona, IA. Managing editor of the Daily Tribune in 
Ames, IA. News editor of the Mason City Globe Gazette. In 1990 
Art returned to Storm Lake and with his older brother, John, 
launched the Times in their hometown. Art and his wife, 
Delores, who also works at the Times, have four children.
    A few weeks ago, I had my weekly press call. We were 
talking about the Health Care bill. Mr. Cullen was telling me 
about his situation. And I thought that just really typified 
what a lot of small businesses are going through. So I asked 
him if he would appear here today to share with us what's 
happening out in a small town in Western Iowa.
    Mr. Cullen, welcome and please proceed.

 STATEMENT OF ART CULLEN, EDITOR, THE STORM LAKE TIMES, STORM 
                            LAKE, IA

    Mr. Cullen. My name is Art Cullen.
    Thank you, Senator. Indeed what's going on in Western Iowa 
is it's cold and windy. And it's beautiful here today. Thank 
you for inviting me.
    As you noted my brother founded the Storm Light Times in 
1990. And at the time he was working in public relations for a 
local college, Buena Vista University. And he had a very nice 
health care plan there.
    But he missed the newspaper business terribly. And the 
existing newspaper in our town was lousy. So he wanted to start 
a good newspaper. And so we did.
    We offered health insurance to our employees. If John said 
he had to do it today, he would stick with his TIAACREF pension 
plan and health insurance that he had at the college. And he'd 
view this, speaking for him, as a real impediment to starting a 
business in health insurance. If you've got good health 
insurance you're not going to want to go out on a limb and 
start a competing newspaper in your hometown.
    I'd also note that I have two children in college. They're 
both getting their own health insurance. My daughter is getting 
hers through a very generous financial aid package at Drake 
University in Des Moines.
    I have twin sons at home who are enrolled in the SCHIP 
program because we can't make enough money in a $10-an-hour 
economy in Western Iowa at a local newspaper. So my kids get 
SCHIP. I wish I could get SCHIP.
    We had our sales manager, great worker, Mike Diercks is his 
name. And he just works like a dog. And he had to have a kidney 
transplant. And our insurance rates went up 100 percent in 2 
years between 2004 and 2005.
    Since 1992 our individual plan was $169. Now it's 626. 
That's a 270 percent increase. According to the Minneapolis Fed 
the rate of inflation during that same period was 65 percent. 
So our rates went up 270 percent versus the cost of living 
increase in the upper Midwest of 65 percent.
    So I'm not sure if I heard Senator Enzi right. But he was 
saying something about 2 percent and 1 percent. Steve Hamilton, 
a local lawyer with three lawyers and about a dozen staff 
support, their bills are going up 20 percent this year. They're 
on Wellmark BlueCross/BlueShield.
    We haven't been notified of our rate increase yet. But 
given double digit percentage increases every single year, 
including 59 percent 1 year, 28 percent in 2006, 15 percent in 
2007, 11 percent last year and we expect our rates to go up, 
probably, if they say 11 then we believe it will be 22.
    [Laughter.]
    And that basically summarizes my remarks other than I have 
two other things to say.
    One is I know that Senator Harkin has been working very 
hard on preventative measures. He talks about it at every 
single one of those conference calls, I can assure you. And I'd 
have to spend $3,000 out-of-pocket to get a colonoscopy.
    I'm 52, getting old. And I can't afford it because we have 
a $5,000 deductible. And anything that's done at a hospital 
comes out of my pocket. And so a colonoscopy is done at the 
hospital as are mammographies. Neither of which would be 
covered under our deductible. So we have to drive to Sioux City 
or Fort Dodge which are more than an hour away to get simple, 
preventative measures done.
    We have a cancer patient in our office, colon cancer. And 
if she got a shot at our local hospital, the Buena Vista County 
Hospital, it would cost her $2,500. If she drives to Sioux 
City, where it's done in a clinical setting, it would cost her 
$25. But she drives right past the Buena Vista County Hospital 
and drives all the way to Sioux City to get that shot because 
it's not covered under our health insurance plan. That's a 
deductible.
    So you know, I could go on with horror stories for an hour. 
But, I only have four words for Senator Al Franken and that is, 
Joe Mauer for Governor. I have 3 seconds left.
    The Chairman. Who?
    Mr. Cullen. Joe Mauer.
    [Laughter.]
    [The prepared statement of Mr. Cullen follows:]
                    Prepared Statement of Art Cullen
                        threat to small business
    My brother, John, founded The Storm Lake Times in June 1990 to make 
a difference in the community that reared us. He did not start the 
hometown newspaper to administer a health insurance plan and cover its 
escalating costs.
    He started the newspaper with a small inheritance from our mother 
and an extra mortgage on his house. John believed that every employee 
should have health insurance and provided it. The Times paid the 
employee cost, and the employee was responsible for the family share. 
Back then, the family package was about $200 per month. Now it is more 
than $900 per month, with greatly decreased benefits.
    The Times has grown from no circulation to about 3,300 paid 
circulation, twice a week, with 12 employees. We have our own press and 
production facilities.
    The Storm Lake Times now pays nearly $50,000 per year for health 
insurance coverage. That's almost as much as we pay for newsprint.
    Were it not for such high insurance costs we could add more 
employees and help to grow our local economy, plus publish an even 
better newspaper.
    Our rates doubled when one employee, previously bankrupted by 
medical bills, had a kidney transplant in 2005. Rates have gone up by 
double digits every year since. We cannot switch insurers because of 
employees with pre-existing conditions (cancer, diabetes, back 
surgery). And even if we could get around pre-existing conditions, one 
health insurance company controls about 85 percent of the local market.
    To cope with increasing costs, we have accepted a $5,000 deductible 
on services provided by a hospital. Therefore, a cancer patient who 
needs to have a shot has a choice: have the shot done in Storm Lake at 
the hospital and pay $2,500 out-of-pocket, or drive to Sioux City and 
pay $25 for the same shot from the same doctor--in a clinic, and not a 
hospital. The same problem arises for many routine preventative types 
of tests--mammography and colonoscopy immediately come to mind. Each 
would be covered by health insurance if offered at a clinic. If offered 
by Buena Vista Regional Medical Center, a colonoscopy would cost about 
$3,000 out-of-pocket.
    (Buena Vista County has the highest rate of fatal colorectal cancer 
in Iowa, possibly because of low screening to catch it early.)
    Health reform will help small rural critical access hospitals like 
ours. Rather than having all that money flowing to Sioux City an hour 
away, we would have our services performed right here in Storm Lake. It 
would be a revenue boon for rural hospitals.
    Wellmark, the leading insurer in Iowa, already announced an 11 
percent rate increase next year for State employees--a far larger and 
more stable pool than ours. We anticipate that our rates will rise at 
least that much. We cannot ``pass the cost'' to consumers through 
subscription or advertising rate increases. Extra costs will come out 
of our business' bottom line, or out of our employees' pockets.
    Buena Vista County has an average household income of $36,000 per 
year. The cost of most insurance plans--Cadillac by no means, more like 
a Hyundai--offered locally thus accounts for about a third of that 
household income. Hence, housing and health insurance costs consume 
about two-thirds of a working family's income in our rural, 
agricultural economy.
    We need more insurance competition in the rural marketplace by 
knocking down State cartels. We need fair compensation for rural 
physicians, who are losing ground to their urban and specialist peers 
as costs ratchet down on providers. It's tough enough to recruit local 
doctors without discounting their pay. We need to maintain federally 
subsidized Community Health Centers, an important front door to the 
health care system for workers in the meatpacking industry, which 
dominates our local economy. We need to be able to switch health 
insurance companies or agents, which we currently cannot. We need to 
provide mechanisms under which the insured can get low-cost 
preventative tests such as mammographies or colonoscopies. We need to 
know that a single health catastrophe will not bankrupt us and bring 
down everything we have worked for over the past 20 years.
    We want to invest in our business, and thus in our community with a 
thriving local newspaper that brings a community together. Rising 
health care expenses represent a significant bar to that dream.
    Thank you.

    The Chairman. Ok. Fine.
    [Laughter.]
    And now for purposes of introduction of our next witness, I 
turn to Senator Specter.

                      Statement of Senator Specter

    Senator Specter. Thank you, Mr. Chairman. I'm pleased to 
introduce Mr. Walter Rowen from Lancaster, PA. He has a company 
which employs 35 people, a glass company. Been in business for 
100 years and was faced with an increase in premiums of 128 
percent.
    I had hoped we would have his insurance company to come in 
because as we take a look at the issues on our legislation it 
would be my hope that we could find out whether the New York 
Times report was correct that the insurance companies are 
responding to Wall Street to raise their rates to show profits 
before there is legislation. And a number of companies were 
invited. And they all declined. But I'm not going to mention 
them publicly because I haven't gone into the reasons.
    But it seems to me, Mr. Chairman, that these witnesses are 
fine. But I appreciated your statement that you'd like to 
question the insurance companies about the rising costs. And my 
suggestion would be subject to the Chair, that subpoenas would 
be a good idea to bring them in.
    Why are they being raised 100 and some percent? What is the 
reason for it? We hear a lot about Wall Street greed. Well we 
ought to find out.
    This is a good start, Mr. Chairman. I thank you and the 
Ranking Member for this hearing. And I hope we will proceed it 
with some tough subpoenas to get some hard facts. So we can 
expose wrong doing, if there is wrong doing, profiteering and 
take appropriate corrective legislative action.
    Welcome, Mr. Rowen.

    STATEMENT OF WALTER ROWEN, PRESIDENT, SUSQUEHANNA GLASS 
                     COMPANY, COLUMBIA, PA

    Mr. Rowen. Thank you for that introduction, Senator 
Specter.
    And Senator Harkin, Mr. Chairman and distinguished members 
of the committee, thank you for inviting me to testify before 
you today on the rising costs of health care insurance for 
small businesses.
    Senator Specter was slightly wrong. My business will be 100 
years old in 2 months.
    [Laughter.]
    Senator Specter. That's the closest I've been in a long 
time.
    [Laughter.]
    Mr. Rowen. I do own a family business. But I run my 
business like a family. For at least 40 years we have been 
offering health insurance coverage to our full-time employees. 
We employ about 35 people of which between 20 and 24 normally 
participate in our health insurance plan.
    Many of my employees have worked for me for between 15 and 
30, 35 years. In these difficult economic times I know all of 
you would agree that small businesses like mine, companies that 
keep employees for years because we treat them with decency and 
provide fair benefits should be encouraged, if not rewarded for 
our policies. Providing health insurance coverage to those 
employees who want and need it is one of those polices we 
believe in and hope we can continue.
    Unfortunately over the past several years, securing 
affordable health insurance has become increasingly difficult. 
From the years 2006, 2007, and 2008, we faced premium increases 
if we had not changed our policies of 22, 24 and 10 percent. In 
order to deal with these increases we constantly shopped for 
new carriers and changed our policies primarily by adding 
deductibles to the plan and then steadily each year increasing 
those deductibles in order to keep the costs of the premiums in 
line.
    When we went to a deductible for the last 3 years the 
company fully funded that for our employees through an HRA 
policy. So we were paying the deductibles for our employees. 
However whatever problems we had in the last 3 to 4 years paled 
in comparison to this year.
    Our initial cost increase from our insurer, if we kept the 
same policy, with the same deductibles, was quoted at 128 
percent increase. When we shopped around the best we could find 
was a policy that increased our premiums by 43 percent. But 
this policy now carried a higher deductible than the previous 
year. The total amount of the increase in premiums alone to our 
company was a staggering $40,000 annually.
    We were suddenly faced with a terrible dilemma. How do we 
divide up the added costs between the company and our 
employees? We decided the company would absorb all of the 
premium increase. But the trade off was we could no longer pay 
for our employees deductibles. Our costs to increase the policy 
was $22,000.
    We will still beat last year's deductibles. Just to be 
clear, we paid in the neighborhood of $18,000. Now the real 
burden, unfortunately, of the deductible falls on our employees 
who will be at risk for a $2,000 individual, $4,000 family 
deductible. This will potentially put some of our employees, if 
they need to use their health insurance to any extent, at a 
financial risk that they will not be able to handle.
    In talking to our insurance agent, the broker report they 
received from last year's carrier indicated that the huge 
premium increase was justified due to the changes in three 
areas.
    First, there was a demographic or age change in my group. 
And as I've told you I've had people that have work for me for 
30 and 35 years. Our average age of employee that is carried by 
our policy went from 45 to 49. And they claimed that created an 
11 percent increase of our policy.
    There were pricing trends within both our industry and our, 
I believe, geographical area that impacted the policy by 
somewhere around 21 percent.
    But then the big one was the assessed risk of our group, 
our 20, 22 people because of some potential changes in their 
health created a 70 percent increase to our policy. Although 
this doesn't quite add up to 128 percent these were the risk 
areas and their relative percentages that were used to justify 
the 128 percent increase. When you look at my company as an 
insurance group it is abundantly clear that we will always 
struggle to get fair and affordable health insurance rates 
unless we can become part of a much larger insurance group or 
pool.
    To me there are really two separate issues that are 
interconnected when you talk about health care reform.
    The first is how do you create a better health insurance 
system that will provide affordable coverage to people? It's an 
insurance question.
    The second is how do you start to control the spiraling 
costs of health care to the American population?
    I am here today simply to bring my personal experience as a 
small business man as it relates to the insurance issue. How 
can we create a better insurance system to spread the risk for 
individuals of small businesses? To me creating a large, robust 
health insurance exchange that crosses State lines is a good 
first step toward distributing the risk.
    Requiring all individuals to have some form of health 
insurance, enacting reasonable tort reform and putting in place 
some accountability by the consumer, my employees, when getting 
health care also is required to create a good solution.
    What has surprised me as a small business owner is how long 
it has taken for any real work on health insurance reform to 
take place. As my insurance history shows we have been living 
with dramatically rising health insurance costs for the last 4 
to 5 years which is evidenced by the current system is 
unsustainable. This year's increases are now proof that that 
system is absolutely broken. And without reform small 
businesses and the foundation upon which our economic system is 
founded is in real jeopardy.
    I applaud this committee's efforts to it finally enacting 
health reform. And again, thank you for allowing me to share 
with you my company's history. Thank you.
    [The prepared statement of Mr. Rowen follows:]
                   Prepared Statement of Walter Rowen
    Mr. Chairman, distinguished members of this committee, thank you 
for inviting me to testify before you today on the rising costs of 
Health Insurance for small businesses.
    In 2 months, my company, Susquehanna Glass will be celebrating its 
100th Year in business. For at least the last 30 years, we have been 
offering health insurance coverage to our full-time employees. We 
employ about 35 people, and 20-24 of them normally participate in the 
plan.
    I own a family business, but I run my business like a family. Many 
of my employees have worked for me more than 15 years, a few more than 
30. In these difficult economic times, I know all of you would agree 
that small businesses like mine, companies that keep employees for 
years because we treat them with decency and provide fair benefits, 
should be encouraged if not rewarded for our policies. Providing health 
insurance coverage to those employees who want and need it is one of 
those policies we still believe in and hope to continue.
    Unfortunately, over the past several years, securing affordable 
health insurance has become increasingly difficult. From 2006-2008, we 
faced premium increases of 22 percent, 24 percent and 10 percent. In 
order to deal with these huge increases, we constantly shopped for new 
carriers and changed our policy, primarily by adding a deductible 
component to the plan and then steadily increasing the deductible 
amount. When we went to a deductible, the company fully funded an HRA 
for the employees for the last 3 years.
    However, whatever problems we had in previous years paled in 
comparison to this year's problems. Our initial cost increase from our 
insurer was quoted at 128 percent. When we shopped around, the best we 
could find was a policy that increased our premiums by about 43 
percent, but this policy now carries an even higher deductible than 
last year. The total amount of the increase in premiums alone is a 
staggering $40,000. We were suddenly faced with a terrible dilemma, how 
do we divide up the added costs between the company and our employees? 
We decided the company would absorb all the premium increase, but the 
tradeoff was we could no longer pay for our employee's deductibles. We 
will be paying $22,000 more without paying deductibles than our total 
spending last year when we paid all deductibles. But the real burden 
now falls on our employees who will be at risk for a $2,000 individual, 
$4,000 family deductible. This will potentially put some of our 
employees, if they need to use their health insurance to any extent, at 
a financial risk they will not be able to handle!
    In talking to our insurance agent, the Broker Report they received 
from last years carrier indicated the huge premium increase was 
justified due to changes in three areas:

    1. Demographic or Age change. The average age of our enrollee went 
from 45 to 49 years: 11.32 percent.
    2. Pricing Trends for our industry: 21.09 percent.
    3. Assessed Risk of our group: 70.29 percent.

    Although this doesn't add up to 128 percent, these were the risk 
areas and their relative percentages used to justify the rate increase. 
When you look at my company as an insurance group, it is abundantly 
clear that we will always struggle to get fair and affordable health 
insurance rates unless we can become part of a much larger insurance 
group.
    To me, there are really two separate but interconnected issues 
involved in ``Health Care Reform.''

    1. How do you create a better Health insurance system that will 
provide affordable coverage to more people?
    2. How can you start to control the spiraling cost of health care 
to the American population?

    I am here today to simply bring to you my personal experience as a 
small businessman as it relates to the insurance issue. How can we 
create a better insurance system to spread the risk for individuals and 
small businesses? To me, creating a large, robust health insurance 
exchange that crosses State lines is a good first step toward 
distributing the risk. Requiring all individuals to have some form of 
health insurance, enacting reasonable tort reform and putting in place 
some accountability by the consumer when getting health care are also 
required if a good solution is to be found.
    What has disappointed me as a small business owner is how long it 
has taken for any real work on health insurance reform to take place. 
As my insurance history shows, we have been living with dramatically 
rising health insurance costs for the last 4-5 years, which is evidence 
that the current system is unsustainable. This year's increases are now 
proof that the system is absolutely broken and without reform, small 
business and the foundation upon which our economic system is founded 
is in real jeopardy. I applaud this committee's efforts toward finally 
enacting Health Care Reform.
    Again, thank you for allowing me this opportunity to share with you 
my company's story.

    The Chairman. Well thank you very much, Mr. Rowan for that 
statement and thank you for being here today.
    Next we'll go to Commissioner Sandy Praeger who was elected 
as Kansas' 24th Commissioner of Insurance in 2002, re-elected 
in 2006. Commissioner Praeger is responsible for regulating all 
insurance sold in Kansas and overseeing the nearly 1,700 
insurance companies and 90,000 agent licenses to do business in 
the State. Commissioner Praeger is the immediate past President 
of the National Association of Insurance Commissioners. She 
serves as Chair of the Health Insurance and Managed Care 
Committee, Vice Chair of the International Insurance Relations 
Committee, Member of the Executive Committee for International 
Associations of Insurance Supervisors and a member of other 
NAIC Committees.
    So, Commissioner Praeger, again, your statement will be 
made a part of the record in its entirety.
    Senator Roberts. Mr. Chairman.
    The Chairman. Please proceed.
    Senator Roberts. Would it be appropriate that I give my 
glowing remarks on behalf of our Commissioner now or do you 
want to wait until you shut me down after 4 minutes?
    The Chairman. I think you better give them now.
    Senator Roberts. Alright.
    [Laughter.]

                      Statement of Senator Roberts

    Senator Roberts. Well, I want to truly recognize my home 
State insurance commissioner. It's not like insurance companies 
don't have oversight. They certainly do in Kansas. And they can 
do it in several ways, those who would increase premiums too 
much or those whose premiums would be so low that they would 
not benefit the company in terms of keeping in business.
    Sandy, and the reason I call her Sandy is that she's a good 
personal friend and has done an outstanding job. She's been an 
invaluable resource to me, my staff, I know other Members in 
the Congress. And I'm always very proud to have her address 
this panel.
    She has contributed significantly to efforts to educate. 
And I really think it's important to educate the American 
public about health care reform, something I wish all of Kansas 
should be grateful for. Kansas, like everybody else have the 
right to know, but they also have the right to be educated by 
professionals who can discern in regards to what the real 
effects, maybe even the law of unintended effects might mean in 
this exercise that we are now going through along the lines 
that Senator Enzi has already testified.
    So I want to thank you Sandy, so much. And thank you for 
your contributions to our State and our country. And thank you, 
Mr. Chairman.
    The Chairman. Thank you very much, Senator Roberts. 
Commissioner Praeger, welcome. Please proceed.

STATEMENT OF SANDY PRAEGER, COMMISSIONER, KANSAS DEPARTMENT OF 
                     INSURANCE, TOPEKA, KS

    Ms. Praeger. Thank you. And thank you, Senator Roberts. I 
appreciate that.
    Chairman Harkin, Ranking Member Enzi and distinguished 
members of the committee, I really appreciate the opportunity 
for being here. Thank you for holding this hearing on a very 
important subject of the rising health care costs for small 
businesses. As has been said, I am Sandy Praeger. I'm the 
elected Commissioner for the State of Kansas and Chair of the 
National Association of Insurance Commissioners, Health 
Insurance and Managed Care Committee. And I'm testifying today 
on behalf of the NAIC.
    The affordability of health insurance coverage to small 
businesses is a critically important component of health 
reform. With lower profit margins small businesses have a much 
more difficult time affording insurance coverage than their 
larger competitors. Adding to the problem small businesses 
continue to face significant premium increases while inflation 
remains low and the economy slowly recovers. Even with reforms 
State regulators share the concern of the members of this 
committee that small businesses could see higher and higher 
premiums in the coming years.
    In preparation for today's hearing the NAIC completed an 
informal survey of several States requesting information on 
recent rate filings in the small group market. Let me just give 
a sample of what requests the commissioners are receiving from 
these small group carriers.
    Washington State received requests ranging from 9 to 20 
percent.
    Maryland received rate increase requests from its largest 
carriers averaging 15 to 16 percent.
    New Mexico has received a request to decrease rates by 1 
percent and another to raise rates by 9 percent.
    Ohio has received a rate increase request ranging from 10 
to 15 percent.
    And in my home State of Kansas we've received requests 
ranging from low single digits to 13 percent.
    Of course an increase in the base premiums is only half the 
story for small businesses. In most States carriers are allowed 
to vary premiums charged to small businesses based on a variety 
of characteristics such as average age, health status, group 
size and on and on. If a single employee in a small business 
and particularly in a very small business, a micro business, 
should have significant change in their health status then the 
premium increase could be as high as an additional 15 percent 
on top of the base premium increase. If a company's work force 
decreases significantly and/or its average age rises the 
increase is compounded and the result can be what we've heard 
about already.
    It must be noted however, that when State regulators review 
rates they not only must determine whether they're excessive or 
appropriate, but also whether they're sufficient, as Senator 
Roberts pointed out. One of the most important protections 
insurance commissioners provide consumers is the assurance that 
the insurance company will have the resources to pay claims 
when they are incurred. If a State regulator chooses to deny 
appropriate rates and place the company in financial distress 
consumers may be happy in the short term, but certainly not in 
the future.
    So this, I know, begs the question are the rate increases 
being requested by carriers in the small group market 
appropriate or excessive? So for insight we asked the States 
what justifications the companies gave for their rate 
increases. And the answers were fairly consistent.
    The No. 1 driver of higher premiums is medical cost trends, 
probably no surprise. In most States medical cost inflation is 
far outstripping general inflation. Companies are also seeing 
significant increases in utilization.
    Some attribute this to the uncertainty that some have about 
their jobs and future coverage and in COBRA coverage which has 
always had a far higher medical loss ratio. Some carriers also 
point to small employers with healthier employees leaving the 
pool while others cite new Federal and State benefit mandates. 
All of these were reported in our survey.
    For the most part State insurance departments with 
authority to review the rates have agreed with the actuarial 
analysis provided by the companies and have approved the rates. 
However this is not true in every case.
    Connecticut, for example, determined that the poor claims 
experience a company was using to justify a 35 percent increase 
was an anomaly and denied the rate increase.
    Rhode Island asked companies to resubmit their requests in 
6 months or significantly reduce their request. And most of the 
companies chose to return in 6 months.
    In my State of Kansas we're negotiating with a company 
right now to minimize the impact of a rate increase on renewals 
in the individual market, but allow it for new sales.
    States have negotiated lower rates, rejected assumptions 
and threatened public hearings in their efforts to ensure 
carriers are not raising premiums unnecessarily. Most States 
also impose a minimum loss ratio to ensure premiums are not 
excessive compared to claims paid. In the end though the 
reality is that the cost of health care and the utilization of 
that health care are rising rapidly and insurance companies 
have little ability to address these issues.
    Insurance is simply a tool to finance the underlying cost 
of health care. So unless spending is brought under control 
State and Federal reforms will shift the financial burden from 
one group to another, but not really solve the underlying 
problem. The challenge moving forward will be to overhaul the 
delivery system to promote prevention, quality and results-
based care, to encourage healthy lifestyles, to eliminate waste 
and fraud in the system, providing insurers with the tools they 
need to truly manage care while protecting consumers and 
providers from some of the abuses seen in the past will also 
help bring about much-needed control to the system.
    We also need to reform the rating system eliminating the 
factors that allow for unpredictable and unaffordable rate 
spikes and create greater stability for small businesses. Some 
reforms are included in the Health Reform bills passed by this 
committee and the Senate Finance Committee and are supported by 
the NAIC. The rates being approved by State regulators are 
allowed under current law, but that doesn't mean they're 
acceptable.
    The laws do need to change. I know the committee is well 
aware of these facts. And NAIC pledges its expertise to assist 
in any way it can to help bend the curve in the future and 
create a more equitable marketplace for small businesses.
    And again, thank you for the opportunity to be here today.
    [The prepared statement of Ms. Praeger follows:]
                  Prepared Statement of Sandy Praeger
    Good afternoon Chairman Harkin, Ranking Member Enzi, and 
distinguished members of the committee. Thank you for holding this 
hearing on the very important subject of increasing health costs for 
small businesses and for the invitation to testify today. My name is 
Sandy Praeger and I am the elected Insurance Commissioner for the State 
of Kansas and Chair of the National Association of Insurance 
Commissioners' (NAIC) Health Insurance and Managed Care Committee. I am 
testifying today on behalf of the NAIC, which represents the chief 
insurance regulators from the 50 States, the District of Columbia and 
five U.S. territories, whose primary objectives are to protect 
consumers and promote healthy insurance markets.
                   problems in the small group market
    The affordability of health insurance coverage to small businesses 
is a critically important component of health reform. With lower profit 
margins, small businesses have a much more difficult time affording 
insurance coverage than their larger competitors. As a result, only 59 
percent of businesses with between 2 and 199 employees offered coverage 
to their employees. Among the smallest employers, those with between 3 
and 9 employees, only 45 percent offered coverage.\1\ For this reason, 
28.7 percent of workers in firms with fewer than 100 employees went 
uninsured in 2006.\2\ The recent economic downturn has only made 
matters worse.
---------------------------------------------------------------------------
    \1\ Kaiser Family Foundation and Health Research & Educational 
Trust, 2007.
    \2\ EBRI, October 2007.
---------------------------------------------------------------------------
    Adding to the problem, small businesses continue to face 
significant premium increases, even while inflation remains low and the 
economy slowly recovers. As efforts continue to reform the health 
insurance marketplace, State regulators share the concern of the 
members of this committee that small businesses could see higher and 
higher premiums in the coming years. Determining whether and why the 
rates are rising is the focus of this hearing.
    In preparation for today's hearing, the NAIC completed an informal 
survey of several States requesting information on recent rate filings 
in the small group market. As reported in the New York Times, States 
are receiving requests for premium increases in the small group market 
that far exceed general inflation--but not in every State, not from 
every company, and not without some justification in most cases.
    To give a sample of what requests commissioners are receiving from 
small group carriers: Washington has received requests ranging from 9 
percent to 20 percent; Maryland has received rate increase requests 
from its largest carriers averaging 15 percent to 16 percent; New 
Mexico has received a request to decrease rates by 1.2 percent and 
another to raise rates 9 percent; Ohio has received rate increase 
request of 10 percent to 15 percent; and in my home State of Kansas, we 
have received requests ranging from low single digits to 13 percent.
    The vast difference in filings depends greatly on the company's 
current situation. For example, a new company in New Hampshire was 
relying heavily on consultant data to set its current premiums that 
proved unrealistic, so they are requesting what amounts to a 30 percent 
increase in rates to match their experience. Meanwhile, a few companies 
are asking for a decrease. In Maryland, the high-deductible plans tied 
to Health Savings Accounts are asking for significant increases of 19 
percent to 25 percent.
    Of course, an increase in the base premium is only half the story 
for small businesses. In most States, carriers are allowed to vary 
premiums charged to small businesses based on a variety of 
characteristics, such as, average age, health status, claims 
experience, industry, etc. If a single employee in a small business, 
and particularly in a micro-business, should have a significant change 
in their health status, then the premium increase could be as high as 
an additional 15 percent onto the base premium increase. This is why 
the commissioners take seriously their responsibility to review rates 
and ensure that base premiums are appropriate, and why we support 
reforms that will make small employer coverage more stable.
    It must be noted, however, that when State regulators review rates 
they not only must determine whether they are excessive or appropriate, 
but also whether they are sufficient. One of the most important 
protections insurance commissioners provide consumers is the assurance 
that the insurance company will have the resources to pay claims when 
they are incurred. If a State regulator chooses to deny appropriate 
rates and place the company in financial distress, consumers may be 
happy in the short term, but certainly not in the future.
    So, this begs the question, Are the rate increases being requested 
by the carriers in the small group market appropriate or excessive? To 
retrieve some insight we asked the States what justifications the 
companies gave for their rate increases. The answers were fairly 
consistent.
    The No. 1 driver of the higher premiums is medical cost trends. In 
most States medical costs are increasing by about 10 percent per year--
far out-stripping general inflation. Companies are also seeing 
significant increases in utilization--some attribute this to the 
uncertainty some have about their jobs and future coverage--and in 
COBRA coverage, which always has had far higher medical loss ratios. 
Some carriers also point to small employers with healthier employees 
dropping coverage, impacting the health of the pool, while other cite 
new Federal and State benefit mandates.
    For the most part, State insurance departments with authority to 
review the rates have agreed with the actuarial analysis provided by 
the companies and have approved the rates. However, this is not true in 
every case. Connecticut, for example, determined that the poor claims 
experience a company was using to justify a 35 percent increase was an 
anomaly and denied the rate increase. Rhode Island asked companies to 
resubmit their requests in 6 months or significantly reduce their 
request--most of the companies chose to return in 6 months. In my State 
of Kansas we are preparing to deny a rate increase for renewals, but 
allow it for new sales.
    States have negotiated lower rates, rejected assumptions, and 
threatened public hearings in their efforts to ensure carriers are not 
raising premiums unnecessarily. Most States also impose a minimum loss 
ratio to ensure premiums are not excessive compared to claims paid. In 
the end, though, the reality is that the cost of health care and the 
utilization of that health care are rising rapidly, and insurance 
companies have little ability to address these issues. Therefore, rates 
will continue to rise.
    Insurance is simply a tool to finance the underlying cost of health 
care, so unless spending is brought under control, all State and 
Federal reforms will shift the financial burden from one group to 
another, but not solve the underlying problem. The challenge moving 
forward will be to overhaul the delivery system to promote prevention, 
quality, and results-based care, to encourage healthy lifestyles, and 
to eliminate waste and fraud in the system. Providing insurers with the 
tools they need to truly manage care, while protecting consumers and 
providers from some of the abuses seen in the past, would also help 
bring much-needed controls to the system. I know that the committee is 
well aware of this fact and the NAIC pledges its expertise to assist in 
any way it can to help ``bend the curve'' in the future. To that end, 
we encourage you to grant States continued flexibility to experiment 
and find solutions that work.
                             moving forward
    Insurance Commissioners recognize the magnitude and importance of 
the problem and have been working hard to ensure that affordable 
coverage is available to small businesses in their States. States led 
the way in requiring insurers to offer insurance to all small 
businesses in the early 1990s, and the Federal Government made 
guaranteed issue the law of the land in 1996 \3\ for all businesses 
with 2-50 employees. Federal law does not limit rating practices, but 
48 States have supplemented the guaranteed issue requirement with laws 
that limit rate variations between groups, cap rate increases, or 
impose other limitations on insurer rating practices. These rating laws 
vary significantly in response to local market conditions, but their 
common objective is to pool and spread small group risk across larger 
populations so that rates are more stable and no small group is 
vulnerable to a rate spike based on one or two expensive claims. In 
addition, most States have limited the extent to which changes in a 
business's claims experience can result in premium increases above and 
beyond the increases for all of an insurer's small group policies that 
result from medical inflation.
---------------------------------------------------------------------------
    \3\ 42 U.S.C. 300gg-12.
---------------------------------------------------------------------------
    In addition to requiring insurers to pool their small group risk, 
States continue to experiment with reinsurance, tax credits and 
subsidies, and programs to promote healthier lifestyles and manage 
diseases as they pursue the twin goals of controlling costs and 
expanding access. As always, States are the laboratories for innovative 
ideas.
    Despite our best efforts, however, we have come to recognize that 
this is a problem that the States alone cannot solve. The difficulties 
in the small group market, as in the individual market, are ultimately 
the result of medical spending that has outstripped the ability of most 
Americans to pay for it. Coupled with a voluntary insurance market 
where the healthiest tend to be the first to drop coverage, the high 
spending has resulted in volatile insurance markets with high risks of 
adverse selection. That is why we strongly support the adoption of 
Federal legislation that will help the States address this issue.
    Over the years, the NAIC and individual State Insurance 
Commissioners have worked closely with this committee and individual 
Senators, to develop legislation to make coverage more affordable in 
the small group market. In 2006, we worked closely with Senators 
Michael Enzi and Ben Nelson to develop the Health Insurance Marketplace 
Modernization Act (S. 1955). More recently, we have worked closely with 
Senators Durbin, Lincoln, Snowe, and Coleman to develop the Small 
Business Health Options Program (SHOP) Act. While we have not agreed 
with every provision of these proposals, we have worked very hard to 
provide unbiased, nonpartisan advice to Senators on both sides of the 
aisle in order to develop legislation that will work for America's 
small businesses and their employees.
    In the current push to enact comprehensive health care reform, the 
NAIC has attempted to work in this same spirit of State-Federal 
cooperation to help Congress draft legislation that will help all 
Americans purchase health coverage that is currently out of reach for 
millions of us and will make the health care system safer, more 
reliable, and more equitable.
    The NAIC applauds the hard work of both the HELP and Finance 
Committees to enact long-overdue reforms. As adopted by the committees, 
the bills would extend guaranteed issue protections to the non-group 
health insurance market, eliminate pre-existing condition exclusions 
and annual and lifetime limits, and end the practice of rating policies 
based upon gender and health. In addition, they would initiate the 
creation of State-based health insurance exchanges that could 
streamline the process of purchasing coverage and make meaningful 
comparisons of health insurance plans much easier. We are very pleased 
to see that both committee-passed bills preserve State licensing, 
solvency, consumer protection, and market conduct review laws and 
regulations and maintain State oversight of health insurers.
    However, State insurance regulators remain deeply concerned about 
adverse selection. While we strongly support making coverage available 
to everyone, we warn that implementing such a reform without an 
effective individual mandate, coupled with sufficient subsidies, will 
lead to severe adverse selection that could increase premiums further 
for individuals and small businesses. Simply, if a young or healthy 
person can choose to stay out of the pool and pay a minimal penalty, 
with the promise that he or she can purchase coverage without penalty 
when needed, then the insurance pool will be adversely affected. And, 
the tighter the rating rules, the more premiums for the young and 
healthy participants will be impacted, and the more an individual 
mandate and higher subsides are necessary to keep them in the pool. We 
do not believe the committee-passed mandates and subsidy structures 
will be effective enough and fear that the resulting adverse selection 
could undermine the overall reform effort.
                               conclusion
    Congress and the Nation have a critical opportunity to enact and 
implement comprehensive health insurance reforms that will dramatically 
improve the access to and affordability of, health coverage for small 
businesses and individuals. State regulators believe strongly that such 
reforms are far overdue and we offer our assistance to ensure passage, 
and implementation, of these reforms as soon as possible. However, we 
share the concern of this committee that those reforms may not have 
their full impact for several years, and that premiums will continue to 
rise in the interim.
    More immediate transitional steps may be necessary to significantly 
reduce premiums in the coming years. Subsidies, reinsurance, funding 
for high-risk pools, reducing cost-shifting from Federal programs and 
the uninsured, are a few things that could be considered. State 
regulators and the NAIC offer our assistance to the committee as 
options are debated.
    Again, thank you for holding this hearing, and for inviting me to 
testify here today. I look forward to your questions.

    The Chairman. Thank you very much, Commissioner Praeger for 
being here again before this committee.
    Now I want to turn to Mr. Holtz-Eakin, who is a Manhattan 
Institute fellow, President of DHE Consulting, and most 
recently served as Director of Domestic and Economic Policy for 
the John McCain Presidential campaign.
    He's also been senior fellow at the Peter G. Peterson 
Institute for International Economics and Director of the 
Maurice R. Greenberg Center for Geo Economic Studies and the 
Paul Volker Chair in International Economics at the Council on 
Foreign Relations. Prior to that Dr. Holtz-Eakin served as the 
sixth Director of the Congressional Budget Office where he was 
appointed for a 4-year term beginning February 4, 2003. Also 
served for 18 months as Chief Economist for the President's 
Council of Economic Advisors.
    Prior to that a Trustee Professor for Economics at the 
Maxwell School at Syracuse University. And served as Chairman 
of the Department of Economics and Associate Director of the 
Center for Policy Research. So certainly no stranger to us up 
here.
    Welcome back, Mr. Holtz-Eakin. And your statement will be 
made a part of the record. Please proceed.

 STATEMENT OF DOUGLAS HOLTZ-EAKIN, PRESIDENT, DHE CONSUTLTING, 
       LLC, AND FELLOW MANHATTAN INSTITUTE, ARLINGTON, VA

    Mr. Holtz-Eakin. Thank you, Mr. Chairman, Ranking Member 
Enzi, members of the committee. It's a pleasure to be here 
today. I believe it's broadly understood that small business 
and entrepreneurs are crucial to the economy. That they employ 
half of America's workers. That they produce about half of 
America's output.
    As a result they're about the third largest economy on this 
planet. And that they've created about 70 percent of the net 
new jobs over the past three decades. And one would hope then 
that in the policy process commensurate attention will be paid 
to the burdens and incentives for small businesses and 
entrepreneurs.
    I think it's equally well understood that the recent trends 
in health insurance costs show a troubling pattern of burden to 
be placed on this crucial sector of the economy particularly 
when we have such weakness overall in job creation and growth. 
So the most important issue that faces this committee and the 
Senate as a whole is how to go forward. And does pending 
legislation help this sector of the economy?
    And the sad reality is that it hurts more than it helps. 
The most important thing about legislation in the Senate is 
that it does not bend the cost curve, the rising trend where 
health spending per person exceeds income per capita for 
decades on end in the United States. The House produced a bill 
in which new spending for health entitlements grew at 8 percent 
a year as far as the eye could see.
    CBO Director Doug Elmendorf was asked to reply as to 
whether this legislation bent the cost curve. He said 
definitively, no.
    The Senate Finance Committee produced legislation in which 
a new health spending entitlement program grows at 8 percent as 
far as the eye can see. These bills do not bend the cost curve.
    CMS Actuary Richard Foster has said they've actually bent 
it in the wrong direction and made things worse.
    And given that higher health costs inevitably lead to 
higher health insurance premiums these bills will not help the 
basic problem facing the small businesses on this panel. I 
think it's also true that at this point in time these are 
budgetarily dangerous bills. The CBO's analysis of the most 
recent Administration budget projects that over the next 10 
years we will triple the national debt.
    We will never run a deficit below 4 percent of GDP when 
it's widely accepted that 3 percent is the line of safety. We 
will arrive in 2019 after the economy is fully recovered. 
Receipts have risen to an above average 19 percent of GDP and 
have a deficit of $1 trillion, $800 billion of which would be 
interest on previous borrowing.
    At this point in time it would be a step decisively in the 
wrong direction to set up a large new entitlement program which 
is paid for only through the most transparent of budget 
gimmicks. And that is exactly what the bills in the House and 
the Senate do. These will be burdens on future generations. 
They will send the message to the international capital markets 
that the United States is not serious about fixing its fiscal 
problems. And they will create an economic climate against 
which not even the best of these entrepreneurs can climb. It 
will be such headwinds they will inevitably be dragged down.
    More narrowly the bills are front loaded with bad news for 
the costs of health insurance. They contain higher taxes on 
insurance policies which will be shifted forward onto the 
purchasers of those policies especially those who are not self 
insured which would be the small business community. They 
contain higher taxes on insurance companies which in the same 
way will end up in the premiums that people pay.
    They contain higher fees which are in effect excise taxes 
on pharmaceutical companies, on medical device makers and on 
insurance companies again. In each case the analysis shows 
quite clearly that you're going to shift these costs forward. 
These are costs that insurance will have to cover. And we're 
going to see higher premiums as a result.
    And finally there are medical or insurance market reforms 
guaranteed issue, community rating, which when combined with 
weak mandates are going to push premiums up. Now to date 
there's been a lot of displeasure over the messenger, the 
insurance companies who pointed this out. But that doesn't mean 
the logic is wrong. And we have seen the joint community on 
taxation, the CMS actuary, the CBO and the National Association 
of Insurance Commissioners embrace the fundamental analysis. 
The only question is how big this problem will be.
    And so we've got bills which are front loaded with trouble. 
For people who have insurance, the majority of Americans, it 
will raise the premiums that they pay. The bills themselves 
will create a very unpleasant economic climate in which they 
will operate.
    And those fundamental forces, I believe, outweigh the small 
bits of good news. Tax credits which last for 2 years in the 
House which are less generous than the HELP Committee and the 
Senate Finance version. And sort of one time improvements and 
load factors and other things that cannot possibly outweigh the 
inexorable upward trend in health care costs which these bills 
do not bend, but in the end push ever upward.
    I thank you. And look forward to answering your questions.
    [The prepared statement of Mr. Holtz-Eakin follows:]
               Prepared Statement of Douglas Holtz-Eakin
                                summary
    The United States faces three important problems: health care costs 
too much, insurance costs continue to rise rapidly, and consumers 
receive too little for their money in quality of care and insurance. 
These pressing issues should be the focus of health care reform.
    Unfortunately proposals under consideration do not ameliorate these 
pressures. Instead, they fail to bend the cost curve (or bend it the 
wrong way) and raise the costs of insurance for the majority of 
Americans who have insurance.
    Fees imposed on the medical sector will result in families paying 
$200 billion in higher premiums.
    Taxes imposed on health insurance will add another $200 billion to 
premiums.
    Higher premiums will cut into the growth of wages and, for the 
lowest-wage workers, opportunities for employment.
    Insurance market reforms will not decrease costs, but rather will 
raise average premiums.
    The proposals under consideration will set up large new entitlement 
spending programs that will likely exacerbate an already-dangerous 
budgetary outlook. Small business owners will be placed at risk along 
with the rest of the economy.
                                 ______
                                 
    Chairman Harkin, Ranking Member Enzi, and members of the committee 
I am pleased to have the opportunity to appear before you today to 
discuss the important issue of health insurance costs and small 
businesses in America.
                    the importance of small business
    Small businesses and entrepreneurs are at the heart of the U.S. 
economy, although there is no single way to quantify their 
contribution. According to the National Federation of Independent 
Businesses, there were almost 29 million Federal income tax returns 
filed in 2004 with business income on them. Similarly, there were 16 
million self-employed and working in their own businesses. Ninety-nine 
percent of employing businesses are ``small'' under prevailing 
definitions. Sixty percent of all businesses that employ people other 
than the owners have 1 to 4 employees; another 20 percent have 5 to 9 
employees; and yet another 10 percent have 10 to 19 employees. 
Businesses employing fewer than 100 people (excluding the self-employed 
who employ no one but themselves) constitute 96 percent of all 
employers.
    A large concern should be the impact of policy choices on 
individuals, as these are the nascent entrepreneurs that are our next 
business leaders. Roughly 10 percent of adults are interested in 
starting a business. My own research indicates that these entrepreneurs 
are sensitive to taxes and other aspects of the policy environment.
    Finally, it is now well recognized that small business provides 
about 55 percent of all jobs in the private sector. Small business has 
created about two-thirds of the net new jobs in the United States, 
where ``net'' means the number of jobs created minus the number of jobs 
lost. In the process, these businesses also produce about one-half of 
the private-sector GDP in the United States.
                 small businesses and health insurance
    Small businesses display a lesser ability to provide health 
insurance benefits for their workers (see table):

 Percentage of Firms Offering Health Insurance Benefits by Firm Size and
                             Industry, 2008
------------------------------------------------------------------------
                                          Percentage of Firms Offering
                                          Health Benefits (In percent)
------------------------------------------------------------------------
Firm Size:
  3-9 workers........................                                49
  10-24 workers......................                                78
  25-49 workers......................                                90
  50-199 workers.....................                                94
  200-999 workers....................                                99
  1,000-4,999 workers................                              100
  5,000 or more workers..............                              100
  All Small Firms (3-199 workers)....                                62
  All Large Firms (200 or more                                       99
   workers)..........................
Industry:
  Agriculture/Mining/Construction....                                67
  Manufacturing......................                                73
  Transportation/Communications/                                     89
   Utilities.........................
  Wholesale..........................                                74
  Retail.............................                                40
  Finance............................                                81
  Service............................                                58
  State/Local Government.............                                97
  Health Care........................                                71
All Firms............................                                63
------------------------------------------------------------------------
Source: Kaiser Family Foundation, Employer Health Benefits 2008;
  excerpted from Exhibit 2.3, p. 37.

    For those who manage to provide benefits, however, the challenge is 
getting greater. Small businesses and entrepreneurs have faced rising 
costs of health insurance premiums in recent years, as evidenced by the 
table below.

  Average Annual and Growth in Premiums for Covered Workers with Family
                   Coverage,  by Firm Size, 1999-2009
------------------------------------------------------------------------
                                                    All Small
                                                    Firms  (3-  Percent
                                                       199       Change
                                                     Workers)
------------------------------------------------------------------------
1999..............................................     $5,683
2000..............................................     $6,521       14.7
2001..............................................     $6,959        6.7
2002*.............................................     $7,781       11.8
2003..............................................     $8,946       15.0
2004..............................................     $9,737        8.8
2005*.............................................    $10,587        8.7
2006..............................................    $11,306        6.8
2007..............................................    $11,835        4.7
2008*.............................................    $12,091        2.2
2009*.............................................    $12,696        5.0
------------------------------------------------------------------------
Source: Kaiser/HRET Survey of Employer-Sponsored Health Benefits, 1999-
  2009.

    These rising costs of insurance place pressure on firms to reduce 
costs in other areas of operations, reduce cash wages, and impede their 
ability to invest and expand.
          the desirability of comprehensive health care reform
    These recent experiences in rising health insurance premiums 
highlight the need for effective reforms of U.S. health care. There are 
three major problems. First, health care costs too much. In 1970, 
national health expenditures were $1,300 per person and consumed 7 
cents of every national dollar--7 percent of GDP. For the past three 
decades, health-care spending per person has grown roughly 2 percentage 
points faster every year than income per capita. That is, in the race 
between costs and resources, costs have been winning. The result is 
that health-care spending now exceeds 17 cents of every national 
dollar--and will rise to 20 percent by the end of next decade. Within 
the Federal budget, the rising cost of Medicare and Medicaid threatens 
a tsunami of red ink in the decades to come.
    A dominant characteristic of health care in the United States is 
its fragmentation and focus on acute-care episodes. This system feeds 
the growth in spending per capita above and beyond that due to the 
factors outlined above. The Medicare program itself is important in 
this regard. It has programs for ``hospital'' (Part A), for ``doctors'' 
(Part B), for ``insurance companies'' (Part C), and for ``drug 
companies'' (Part D). These compartmentalized programs are dedicated to 
ensuring that various providers receive their payments in a fee-for-
service system. Doctors and hospitals are paid for services provided to 
patients; and the more they do, the more they are paid. This system is 
focused on payments to providers, not on the health of families. This 
system is not centered on quality of care and gives scant regard to 
coordinating the decisions of the various medical providers, and it 
does not reward appropriate preventive care. Importantly, because it is 
such a dominant payer, Medicare reimbursement policies drive many of 
the inefficient practices in American medicine.
    It is hardly surprising that a medical system focused on paying for 
acute-care episodes has spawned a reward to the innovation, adoption, 
diffusion, and utilization of new technologies for these episodes. 
Because the system is not oriented toward quality outcomes--
particularly, paying for quality outcomes--a key feature of rising 
health-care spending is that it has not generated improved outcomes: 
the United States spends a greater fraction of its income on health 
care but does not have comparably superior longevity or health quality. 
The trends are most pronounced in Medicare, but the same broad 
characteristics prevail for the private system serving those younger 
than 65. Also, in both cases (but again larger for Medicare) in the 
United States, there are large regional differences in spending that do 
not lead to apparent differences in the quality of outcomes.
    Second, because health care is becoming more expensive, the cost of 
health insurance is skyrocketing. Over the last decade, insurance costs 
have increased by 120 percent--three times the growth of inflation and 
four times the growth of wages. With higher costs has come reduced 
insurance coverage. It is important to solve the first problem--rising 
costs--before committing to large-scale coverage expansions. Dealing 
with the problems in the wrong order will be prohibitively expensive 
and will likely cause the reform effort to unwind.
    Finally, health insurance and health-care systems underperform. A 
job loss typically also means loss of health insurance; workers would 
be better served by more portable options. Insurance companies would 
have better incentives if faced with life-cycle costs for a 
policyholder. Similarly, high spending has not yielded comparably high 
outcomes for infant mortality, longevity, or treatment of chronic 
disease. The delivery system can be greatly improved.
               senate legislation and health care reform
    It is useful to examine proposed legislation before the Senate in 
light of the need for reform. Unfortunately, I believe that the 
existing efforts fall far short of what is needed and, in some 
instances, take unfortunate steps in the wrong direction.
    Proposals to date do not ``bend the cost curve.'' The most 
important first steps in health care reform are delivery system reforms 
that maintain or improve quality and reduce the pace at which health 
care spending grows. Rapid health care spending growth is the root 
cause of rising insurance costs. Rapid health care spending growth is a 
key part of the dangerous U.S. fiscal outlook. The existing proposals 
do not address this problem. Indeed, to the extent that they impact 
cost growth, they make the problem worse.
    House legislation put forth earlier this year created a new health 
entitlement spending program that the Congressional Budget Office 
projected would grow 8 percent annually for the foreseeable future. CBO 
Director Douglas Elmendorf responded directly and negatively to 
questions about whether it (or HELP Committee legislation) would ``bend 
the cost curve.'' Similarly, Health and Human Services Actuary Richard 
Foster concluded that the legislation would raise national health 
expenditures--exactly the opposite of the desired result. In sum, 
creating a new entitlement spending program that grows at 8 percent 
annually is not bending the cost curve.
    The Senate Finance Committee legislation creates a new health 
entitlement spending program that grows at 8 percent annually for the 
foreseeable future. It, also, does not bend the cost curve.
    Proposals endanger the budget and risk broader economic stress. The 
Federal budget has entered dangerous territory. Under the 
Administration's proposals (as analyzed by the CBO), debt relative to 
GDP will rise from roughly 40 percent in 2008 to over 80 percent in 
2019; at which time it will be spiraling north. Deficits will not fall 
below 4 percent of GDP during the next 10 years. In 2019, the Federal 
Government will borrow roughly $1 trillion dollars with nearly $800 
billion necessary merely to pay interest on previous borrowing.
    This outlook is not merely the residue of the financial crisis and 
recession, which have demanded tremendous resources in the near term. 
Instead, they reflect conscious policy choices that persist long after 
the financial crisis is assumed to be resolved and the economy restored 
to health.
    International financial markets have long been presented with a 
U.S. fiscal picture that does not add up over the long term. Successive 
versions of the CBO's Long-Term Budget Outlook volume have documented 
the basic facts: spending that is on track to consume an ever-larger 
share of GDP and tax revenues that could never grow to match. These 
most recent policy decisions simply accelerate dramatically the 
underlying problems.
    Analysts have long worried about the potential fallout of this 
budgetary outlook. At what point do rating agencies downgrade the 
United States. When do lenders price additional risk and charge higher 
interest rates to Federal borrowing. How quickly will international 
investors flee the dollar for a new reserve currency? If so, how will 
the resulting higher interest rates, diminished dollar, higher 
inflation, and economic distress manifest itself?
    To date, one explanation of why these events have yet to transpire 
is that the same financial market analysts who understand the weak 
state of the U.S. books also believe that they will be rectified before 
serious distress arrives. Put bluntly, the United States is relying on 
the faith of others in its ability to undertake serious budgetary 
reforms.
    A large new spending program that grows at 8 percent a year--faster 
than the economy will grow; faster than tax revenues will grow--is a 
dramatic statement to financial markets that the Federal Government 
does not understand that it must get its fiscal house in order. It is a 
statement that it is content to make things worse. It would be a risky 
move at a dangerous time.
    Small businesses are a powerful economic force in the United 
States. However, they would find themselves swimming against even 
greater tides of higher borrowing costs, rising prices, and an economic 
slump. As in the current recession, many would be unable to hire, 
forced to lay off workers, or even shutter their operations. I believe 
it is a disservice to this important piece of the fabric of our economy 
to pursue legislation that puts their foundations at risk.
    The current proposals will raise costs for the majority of 
Americans who have insurance. As noted earlier, if anything these 
proposals bend the cost curve in the wrong direction. Since health care 
spending is the ultimate driver of health insurance costs, this is a 
step in the wrong direction for those who have insurance. In addition, 
some specific policies will directly raise the cost of insurance.
    Fees. A notable feature of the America's Healthy Future Act is a 
total of $13 billion in annual fees on health insurance companies ($6.7 
billion), medical device manufacturers ($4 billion) and pharmaceutical 
companies ($2.3 billion). In substance, these fees are the economic 
equivalent of excise taxes whose burden will be shifted forward onto 
consumers. Due to the non-deductibility of these fees, the impact will 
be magnified, with the end result being $200 billion of higher premium 
costs over the next 10 years.
    To see this, begin with the annual fee that applies to any U.S. 
health insurance provider. The aggregate annual fee for all U.S. health 
insurance providers is $6.7 billion, with the total fee apportioned 
among the providers based on relative market share. The fees would not 
be deductible for income tax purposes and would take effect in calendar 
year 2010.
    The fee is tantamount to an excise tax on health insurance. For any 
company, as it sells more insurance policies it will incur a greater 
market share, and thus a greater share of the $6.7 billion. That is, 
with each policy sold, the total tax liability rises; precisely the 
structure of an excise tax. As such, it is important to understand the 
difference between the statutory incidence of the excise tax--the legal 
responsibility to remit the tax to the Treasury--and the economic 
incidence--the loss in real income as a result of the tax.
    Insurance companies will have to send in the tax payments, so the 
statutory incidence is obvious. However, a basic lesson of tax policy 
is that people pay taxes; firms do not. Accordingly, the economic 
burden of the $6.7 billion tax must be borne by individuals. Which 
individuals bear the economic cost?
    The imposition of a tax will upset the cost structure of the 
insurance companies, raising costs per policy and reducing net income 
(or exacerbating losses). Some might argue that the firms will ``eat 
the tax''--that is simply accept the reduction in net income. For a 
short time, this may well be the case. Unfortunately, to make no 
changes whatsoever is tantamount to promising shareholders a 
permanently lower (risk-adjusted) rate of return. Because insurance 
companies compete for investor dollars in competitive, global capital 
markets, they will be unable to both offer a permanently lower return 
and raise the equity capital necessary to service their policyholders.
    Interestingly, a similar logic applies to not-for-profit insurers, 
who rely on retaining earnings as reserves to augment their capital 
base. Bearing the burden of the tax means lower access to these 
reserves and diminished capital.
    Accordingly, firms will seek to restructure in an attempt to 
restore profitability, with the main opportunity lying in the area of 
labor compensation costs. To the extent possible, firms will either 
reduce compensation growth, squeeze labor expansion plans (or even lay 
off workers), or both. Again, however, insurance firms will find their 
responses constrained by the realities of the market environment. 
Cutting back compensation is an invitation for the best-skilled workers 
to depart the insurance industry. Layoffs and labor squeezes make it 
difficult to attract the inputs to firm growth.
    In short, there are sharp limits on the ability of firms to shift 
the effective burden of excise taxes onto either shareholders (capital) 
or employees (labor). Moreover, their ability to do so diminishes over 
time as capital and labor seek out better market opportunities.
    The Congressional Budget Office and Joint Committee on Taxation 
revenue estimating conventions recognize these economic realities. 
Specifically, they apply a 25 percent ``offset'' to the estimated gross 
receipts of any excise tax. In terms of the discussion above, the 
convention recognizes the incentives to attempt to shift some of the 
burden of the tax in the form of lower dividends, capital gains, and 
wages. To the extent this happens, receipts of income-based taxes will 
fall; hence the need for an offset to the gross receipts of the excise 
tax.
    There are three additional points about the 25 percent offset. 
First, while it recognizes the economic incentives to shift the burden 
of excise taxes, it is only a rough approximation to the case-by-case 
reality. Depending on the nature of the market setting, more or less of 
the tax may be shifted to taxable wages or profits and those resources 
may be taxed at either higher or lower rates.
    The more important aspect of the offset is that it is not 100 
percent. That is, the non-partisan consensus-based revenue estimators 
have concluded that the vast majority of the burden of excise taxes 
will not be borne by shareholders or workers. Who, then, bears the 
burden--consumers.
    If competitive conditions make it impossible for insurers to absorb 
the economic burden of the tax, they will have no choice but to build 
the new, higher costs into the pricing structure of policies. In this 
way, the economic burden of the tax is shifted to the purchasers of 
health insurance. In particular, the more competitive are markets for 
equity capital and hired labor, the greater the fraction of the burden 
that will be borne by consumers.
    This phenomenon leads to the third aspect of the 25 percent offset. 
If health insurance is more costly, firms will be forced to offset this 
higher cost by lowering the other aspects of compensation--namely cash 
wages. Lower cash wages throughout the economy are an important burden 
to workers, and provide a second avenue for reduced personal income tax 
receipts.
    This line of reasoning is sometimes met with skepticism, and 
countered with the notion that consumers will simply be unwilling to 
accept a higher price. Evidence suggests that this is not true, but 
suppose the counter-argument is taken at face value. To the extent that 
firms accept a lower rate of return, they will be unable to attract 
capital. Similarly, to the extent they reduce employment in response to 
the tax (or cut wages and lose skilled employees to better 
opportunities), they will again suffer in their ability to raise their 
scale of operations. In short, for firms that attempt to adjust 
entirely on the cost side will be unable to maintain their operations 
at a competitive level, and will lose market share or even depart the 
industry entirely. For health insurance markets as a whole, this 
reduces competition. The bottom line for consumers is the same: higher 
prices.
    The argument thus far suggests that $1 of fees would show up as $1 
of higher health insurance premiums. Unfortunately, the Senate has 
chosen to make the fees non-deductible for purposes of computing income 
taxes.
    This non-standard tax treatment matters a lot. If a firm passes 
along $1 in higher prices and cannot deduct the cost (fee), it will pay 
another $0.35 in taxes. Accordingly the impact on the firm is $0.65 in 
net revenue minus the $1 fee. Bottom line: a loss of $0.35. (The 
problem gets worse when you consider that the $1 of additional premium 
is also subject to premium taxes and in some cases a State income tax.)
    To break even, the firm will have to raise prices by $1/(1-0.35) or 
$1.54. If it does this, the after-tax revenue is the full $1 needed to 
offset the fee. This has dramatic implications for the overall impact 
of $6.7 billion in health insurance company fees. Instead of imposing a 
burden of $67 billion in higher premiums over the next decade, the 
impact will likely be over $100 billion in additional costs on holders 
of insurance policies.
    In sum, the health insurance fee will likely, quickly and nearly 
completely, be incorporated into higher insurance premiums at a greater 
than dollar-for-dollar rate. The same considerations apply to fees on 
pharmaceutical companies and medical device manufacturers. The economic 
impact of these fees are similar in character; the fees will likely 
result in higher costs for these products and services, which will in 
turn have to be covered by higher health insurance premiums.
    These fees mean that American families, workers and small 
businesses will pay as much as $200b in higher premium costs for their 
existing health insurance policies. My personal estimate is that 
roughly 90 percent of this burden will be borne by those making under 
$200,000 per year--including small businesses and entrepreneurs.
    Taxes. The Senate Finance Committee legislation also imposes a 40 
percent excise tax on issuers of ``Cadillac'' plans (over $21,000 for a 
family; $8,000 for an individual). As with the fees discussed above, 
this tax will surely be passed to holders of insurance adding an 
additional $200 billion in premium costs over the next decade. Again, a 
fraction over 80 percent will be borne by those making less than 
$200,000.
    It should be noted that this excise tax represents the notable 
feature of the proposed legislation that could contribute to bending 
the cost curve. I am among those who have argued that capping the open-
ended tax subsidy to health insurance is a sensible part of 
comprehensive reform. Unfortunately, the inclusion of this provision 
appears to be a case of ``too-little, too-late.'' The cost curve has 
not been bent and the resulting higher premiums will not be offset by a 
generally improved health care cost climate.
    Insurance Market Reform. Finally, proposed legislation would 
include insurance market reforms--guaranteed issues, community rating/
rating bands, restrictions on rating factors--that would raise 
insurance premiums on average.
    I believe it is non-controversial that the combination of 
guaranteed issue and community rating would raise average premiums. 
Guaranteed issue invites the most costly of the uninsured to get 
insurance and community rating ensures that they will be charged less 
than their share of the increased costs. The remainder of the insurance 
pool--existing policyholders--must bear the additional cost. This is 
straightforward.
    What apparently has been controversial is that insurance companies 
have been the carriers of this message. I urge Members to look past the 
industry's obvious self interest and recognize that there are now a 
handful of increasingly detailed and careful studies documenting the 
forces for higher premiums--often double-digit percentage rises in 
costs. In addition, it is useful to note that non-partisan analysts 
such as the CBO, JCT, CMS, and NAIC have recognized these forces, even 
if they have not yet done a comparable analysis of the impact on 
premiums.
    A second issue in this area is the role of mandates. For some, a 
mandate ``solves'' the problem with these insurance reforms by forcing 
healthier, low-costs individuals into the insurance pool, where they 
would pay far more than their share of the health care costs.
    While opinions vary, I believe this is a mistake. Forcing 
individuals to participate in a system that is already broken and will 
be getting more expensive is not reform. Guaranteeing insurance 
companies additional business without commensurate efforts on their 
part in the areas of pricing, quality of service, and product 
innovation is at odds with the basic recipe for economic success. I 
would urge Congress to instead undertake genuine, effective reforms 
that address the cost of care. These reforms would translate into lower 
insurance costs and greater take-up of insurance in the United States.
    Thank you. I look forward to answering any questions you may have.

    The Chairman. Right on the mark. Thank you very much, Mr. 
Holtz-Eakin. And thank you for being here.
    Next we'll turn to Ms. Karen Bender, principal and 
consulting actuary in the Oliver Wyman Actuarial Consulting 
practice, works out of the Milwaukee office. Ms. Bender has 
over 35 years of experience in the health insurance market in 
general, has focused extensively on the small group market 
throughout her entire career. Twenty of these years were spent 
working for insurance organizations and the last 15 years spent 
as a consultant.
    Her clients include government agencies, insurance 
companies, HMOs, provider groups and industry associations, has 
participated in many research projects surrounding health 
reforms over the years, has co-authored numerous papers, and is 
a frequent speaker at professional meetings.
    Ms. Bender, welcome to the committee. Please proceed.

  STATEMENT OF KAREN BENDER, FCA, ASA, MAAA, ACTUARY, OLIVER 
                      WYMAN, MILWAUKEE, WI

    Ms. Bender. Thank you for giving me the opportunity to 
testify today on the potential impact of health reform 
legislation on the small business community. My testimony is 
going to focus on three major areas.
    First the challenges that are facing the small employer 
market pertaining to premiums.
    Second, the need to bend the cost curve to make coverage 
more affordable to everyone.
    And third, a review of proposed policy changes that will 
impact small employers.
    The first point I will discuss is the challenges that are 
facing the small group market.
    Historically small employers had two main challenges in 
obtaining health insurance, access and affordability. The 
access issue was primarily resolved in the 1990s via HIPAA. 
Federal legislation which required guarantee issue and 
guarantee renewability for small employers.
    Similarly the States passed laws to address affordability 
issues for high cost employers by limiting the extent to which 
these groups premiums could vary based upon their health 
status. It also limited, as the Commissioner has previously 
indicated, the annual increase that can be charged to any 
single employer group because of change in health status which 
we often refer to as morbidity.
    While these reforms make coverage more accessible to high 
cost firms. There is no doubt that they probably exerted upward 
pressure to all small employers to the total small employer 
market. Now I'm not going to defend the actions of the carrier 
to increase the small employer's premium by 70 percent in a 
single year due to a change in morbidity.
    I would note that this is not permissible in 47 States and 
is also not permissible to the Blue plans in Pennsylvania. So 
it is definitely, and thank goodness, the exception rather than 
the rule. Nonetheless affordability does remain a central 
challenge for small employers given that health care costs 
continue to rise at a rate much higher than inflation.
    However, a recent Kaiser Family Foundation report shows 
escalating premiums are not limited to small employers. This is 
an issue for large employers and individuals as well as small 
employers.
    The second point I'm going to talk about is the need to 
bend the cost curve to make coverage more affordable for 
everyone. If we want to bend the cost curve for health 
insurance premium we need to bend the cost curve on health--on 
medical costs. Recent premium increases in the small group 
market are primarily driven by increases in the cost of medical 
care.
    While the reform bills before Congress do take steps to try 
to bend the cost curve. This is likely a long-term endeavor. In 
order to be effective, insurance reforms must be coupled with 
concurrent effective changes in how medical care is delivered, 
liability reforms to reduce defensive medical costs, and 
efforts to improve wellness and health lifestyles if we are to 
make small employer coverage more affordable and coverage 
affordable in general.
    My last point that I'm going to talk about is a review of 
proposed policy changes that will impact small employers. Last 
month Oliver Wyman released a report commissioned by the 
BlueCross/BlueShield Association on the impact of the Senate 
Finance Committee's recently approved health reform 
legislation. This legislation included what we believe is a 
weak individual mandate.
    Now our analysis concluded the following.
    First, average premiums for small employers will increase. 
And the increase will be up to 19 percent higher by year 5 of 
the reform. And this is above and beyond medical inflation.
    Second, overall the number of small employers offering 
coverage will decrease. And as a result of that the number of 
members enrolled in small groups will decline by $2.5 million. 
Tax credits will help firms with low-wage workers. However, 
many small employers will not see these savings from the 
premium tax credits because they won't qualify and will face 
the full cost of any premium increases.
    And finally, exchanges can provide value in helping small 
employers shop for coverage. But based upon my experience with 
State purchasing arrangements and what we used to call HIPEX it 
is unlikely that these exchanges will provide significant 
premium savings.
    Once again, I want to thank you for giving me this 
opportunity to talk to you today.
    [The prepared statement of Ms. Bender follows:]
           Prepared Statement of Karen Bender, FCA, ASA, MAAA
                                summary
    My testimony addresses three key issues:

     Challenges facing the small employer market. 
Traditionally, small employers faced two major challenges in purchasing 
health insurance: access and affordability. During the 1990s, the 
States and the Federal Government enacted reforms to ensure access 
(guaranteed issue and renewability) for all small employers. Similarly, 
the States passed laws to address affordability for high-cost firms by 
limiting the extent to which small employer premiums could vary based 
on factors such as health status.
    Nonetheless, affordability remains the central challenge for small 
employers given that health care costs continue to grow at a rate much 
higher than inflation. However, as a recent Kaiser Family Foundation 
report shows, escalating premiums are not limited to small employers. 
In fact, average family premiums for covered workers in small firms 
have grown more slowly than those in large firms since 2004.
     The need to ``bend the cost curve'' to make coverage more 
affordable for everyone. To address the fundamental reason why small 
employer costs have increased over the past decade--growth in medical 
expenses--we must find a way to ``bend the cost curve'' in our health 
care system. While the reform bills before Congress do take steps to 
try to bend the cost curve, this is likely a long-term endeavor. 
Insurance reforms must be coupled with concurrent effective changes in 
how medical care is delivered, liability reform to reduce defensive 
medicine costs, and efforts to improve wellness and healthy lifestyles 
if we are to make small employer coverage more affordable.
     A review of proposed policy changes that will impact small 
employers. Last month, Oliver Wyman released a report commissioned by 
the BlueCross/BlueShield Association on the impact of the Senate 
Finance Committee's recently approved health reform legislation, which 
included a weak individual mandate. Our analysis concluded that fewer 
small employers would offer coverage due to higher premiums, 
notwithstanding new small employer subsidies.

          Average premiums for small employers will increase. 
        As a result of the new modified community rating reforms and 
        higher minimum benefit requirements, small employers purchasing 
        policies in the reformed market will experience premiums that 
        are up to 19 percent higher in Year 5 of reform (not including 
        medical inflation). Proposed rating requirements will cause 
        premiums to increase for low-cost small firms, causing some of 
        them to exit the insurance pool and increasing overall costs. 
        About 9.5 million small group employees who have coverage today 
        will stay covered under the ``grand fathered'' block in the 
        initial post-reform years, but will face premium increases when 
        the grandfathering phases out.
          Overall, the number of small employers offering 
        coverage will decline. After accounting for small employer tax 
        credits, we estimate that 2.5 million fewer members will be 
        insured through small employer policies as a result of premium 
        increases, exchanges, and other factors.
          Tax credits will help firms with low-wage workers. 
        The bills before Congress should be commended for including tax 
        credits to help small firms with low-wage workers purchase 
        health insurance. While these tax credits may increase coverage 
        among those firms that are eligible, many small employers will 
        not see savings from premium tax credits and would face the 
        full cost of any premium increases.
          Exchanges can provide value in helping small 
        employers shop for coverage. Based on my previous research on 
        State purchasing arrangements, it is unlikely that exchanges 
        will provide significant premium savings if they adopt a 
        similar model where they negotiate with a limited number of 
        health plans. However, exchanges can provide value by providing 
        small employers with a new source of information on product 
        options and prices.
                                 ______
                                 
                              introduction
    Thank you for the opportunity to testify today on the potential 
impact of health reform legislation on the small business community.
    I am testifying today on behalf of Oliver Wyman Actuarial 
Consulting. I am a credentialed actuary who has specialized in small 
employer health insurance issues for more than 35 years. My comments 
today are based on my experience in actually working for and advising 
health plans, State governments and other clients on the implications 
of proposed public policy changes at the State and Federal level.
    The focus of today's hearing--increasing health costs facing small 
business--underscores the need for reforms that expand coverage and 
improve affordability for small employers. With those goals in mind, my 
testimony today addresses the following issues:

     The challenges facing the small employer market, including 
a discussion of the factors that contribute to small employer premiums, 
and how those premiums are set;
     The need to ``bend the cost curve'' to make coverage more 
affordable for everyone; and
     A review of proposed policy changes that will impact small 
employers: specifically, insurance reforms, health insurance exchanges, 
and proposed taxes on insurance premiums.
      challenges facing the small employer health insurance market
    Research has consistently shown that a significant percentage of 
uninsured workers are either self-employed or working for firms with 
fewer than 100 employees. To understand the challenges that small 
employers face when purchasing health insurance, it is important to 
understand how this market functions and how it is regulated.
    Traditionally, small employers faced two major challenges in 
purchasing health insurance: access and affordability. The issue of 
access has been addressed as a result of a combination of the enactment 
of State small employer health insurance reform laws in the 1990s and 
by HIPAA at the Federal level. Today, State and Federal law requires 
insurers to offer coverage to all small businesses (2-50 workers) 
regardless of their employees' health status. In all 50 States, small 
businesses cannot have their coverage turned down or cancelled if their 
employees become sick. Thus, small employers that can afford coverage 
are guaranteed access to coverage today.
    The premiums that insurers charge small employers are now highly 
regulated. In all but three States (Hawaii, Pennsylvania and 
Virginia),\1\ State laws limit the extent to which premiums can vary 
for individual small employers based on a variety of factors, including 
health status or claims experience. States typically prohibit health 
plans from charging premiums to small employers with high-cost workers 
that are no more than 25 percent-35 percent higher than the midpoint 
rates. States also limit rate increases at renewal due to changes in 
morbidity to no more than 10-15 percent if one or more employees become 
seriously ill during the year. Furthermore, a minority of States do not 
allow health status to be used at all in setting initial or renewal 
rates.
---------------------------------------------------------------------------
    \1\ In Pennsylvania, BlueCross/BlueShield companies and health 
maintenance organizations are subject to strict rate limitations in the 
small group market. However, these regulations do not apply to other 
insurers. In Virginia, rating rules apply to certain standardized 
policies. However, most small employers purchase other policies not 
subject to these rules.
---------------------------------------------------------------------------
    These reforms spread the medical costs of all small employers more 
evenly to generate more affordable premiums for employers with less-
healthy members by requiring that small group experience be pooled 
together. However, this results in higher premiums for the employers 
with healthier members than otherwise would be justified based on 
actuarially supported risk classifications. Conversely, the employers 
with members that consume greater health care resources are enjoying 
lower premiums than they would absent the existing rating regulations. 
These groups are being subsidized by the first group, those employers 
whose premiums are artificially higher due to reforms. In order for the 
small employer pool to stay viable and generate sufficient premiums to 
fund claims and expenses, it is critical that enough of the lower-cost 
groups providing the subsidies remain. Otherwise, overall premiums for 
all participating employers increase.
    These State rules are designed to improve access and fairness for 
small employers. This is an important objective, but these reforms may 
actually increase the average cost of health insurance. As an actuary 
with substantial experience in the small employer market, I have seen 
that some of the smallest employers make rational economic decisions 
about when to purchase insurance by taking advantage of these rules. 
The smallest firms make decisions much like individual purchasers. The 
National Association of Insurance Commissioners' (NAIC) rating manual 
states that ``Individuals and small groups tend to select against an 
insurer when purchasing medical coverage. The purchaser generally knows 
the needs for insurance for each employee in very small groups and can 
select coverage in line with those individuals' needs.'' \2\ This 
explains to some extent why small employer coverage can be more costly 
than coverage for other employers. In an environment where small 
employers can purchase any level of coverage at any time, there is an 
incentive to purchase the lowest level until such time they are aware 
of the need for medical services and then purchase increased coverage 
on a guaranteed issue basis.
---------------------------------------------------------------------------
    \2\ NAIC: Guidance Manual in the Evaluation of Rating Manuals and 
Filings Concerning Small Employer and Individual Health Insurance, 
2003.
---------------------------------------------------------------------------
    Affordability is the central remaining challenge in the small 
employer market today. Since 1999, average health insurance premiums 
for family coverage for small employers have more than doubled from 
$5,683 to $13,375 in 2009, according to the 2009 Kaiser Family 
Foundation/HRET employer health benefits survey. As health care cost 
increases continue to outpace inflation, small firms have found it more 
and more difficult to provide or maintain coverage.
    However, as the Kaiser Family Foundation report demonstrates, 
escalating premiums are not limited to small employers. In fact, 
average family premiums for covered workers in small firms have grown 
more slowly than those in large firms since 2004 (30 percent in small 
firms vs. 36 percent in large firms) and since 1999 (123 percent in 
small firms vs. 134 percent in large firms), according to the same 
survey. These premium increases are due to substantial growth in the 
underlying cost of medical care that impact premiums for all 
employers--large and small.
    The causes for premium increases are due to many factors, 
including:

     The price of medical services. Price reflects the payment 
rates that health insurers negotiate with hospitals, physicians, 
pharmacies and other health care providers. Price also includes the 
increasing cost of purchasing prescription drugs, durable medical 
equipment, and other items. It is important to realize that insurers 
use their bargaining leverage to obtain the same price discounts for 
all of their customers--large employers, small employers, and 
individuals, so small employer and individuals do have access to the 
same provider reimbursement levels as large employers.
     Utilization. Utilization refers to the volume of medical 
goods and services that people use. Medical advances are continuously 
being introduced to improve care and outcomes. For example, a decade 
ago few people received a knee or hip replacement. Today, the 
procedures are commonplace. As new treatments are developed, 
manufacturers and providers advertise these new options, and consumers 
increasingly seek more care and have higher expectations regarding 
outcomes.
     Intensity. Intensity is when a treatment or procedure is 
replaced by a more expensive treatment. For example, magnetic resonance 
images (MRIs) are frequently used instead of less expensive X-rays, 
thereby increasing costs.
     Aging of the population. As we get older, we have greater 
health care needs and there is a greater demand for services. While 
this has the greatest impact on the Medicare program, it also impacts 
the under 65 population as well.
     Government actions. Many Federal and State Government 
actions also add to costs. These include mandated benefit levels, 
premium taxes, and regulatory requirements. Cost-shifting from 
government programs that provide below-cost reimbursement to providers 
also increase premiums for small employers. According to a recent 
report by Milliman, Inc., annual health care spending for an average 
family of four is nearly $1,800 higher than it would be if Medicare and 
Medicaid paid hospitals and physicians rates that were comparable to 
those paid by private plans. Expansion of the number of people on 
Medicaid and reductions in Medicare reimbursement may exacerbate this 
cost-shifting. Cost-shifting from the uninsured is similarly 
problematic.
     Personal behavior. Health care costs are also influenced 
by personal behaviors such as poor diet and nutrition, lack of 
exercise, alcohol and substance abuse, smoking, avoidable injuries, and 
failure to obtain proper vaccines or follow prescribed medication 
regiments.
    According to the Congressional Budget Office (CBO), the bulk of 
rising health care costs over the past four decades can be attributed 
to our Nation's use of medical services made possible by technological 
advances (2008). In fact, CBO found that approximately one-half of all 
growth in health care spending during this time is associated with the 
emergence of new medical technologies and services and their adoption 
and widespread diffusion by the U.S. healthcare system.
                       ii. bending the cost curve
    To address the fundamental reason why small employer health 
insurance cost have increased over the past decade--growth in medical 
expenses--we must find a way to ``bend the cost curve'' in our health 
care system. Policymakers, researchers, and industry experts alike have 
acknowledged that our current system includes misaligned incentives 
that drive increased health care costs, without regard to quality of 
care or outcomes. One result is unwarranted variation in medical 
practice that cannot be explained by patient demographics or severity 
of illness. This variation can be due to the underuse of tests and 
treatment known to be effective, the overuse of tests and treatments 
that may not have significant clinical value, and the misuse of tests 
and treatments that contribute to medical errors. The use of tests 
solely for the purpose of defending against the possibility of a 
lawsuit, commonly referred to as defensive medicine, also exerts upward 
pressure on health care costs.
    To truly bend the cost curve, we must change processes and 
incentives in our current health care system to advance the best 
possible care, not just drive the use of more services. Properly 
aligned incentives can reinforce the adoption of evidence-based 
practice standards, which will facilitate the availability of 
transparent quality information for consumers to make informed choices 
about their care.
    The bills before Congress do take steps to bend the cost curve over 
the long term. However, more emphasis must be put on changing the way 
that medical care is practiced to bring spending under control while 
improving quality for all. Insurance reform must be coupled with 
effective changes in how medical care is paid for, liability reform to 
reduce defensive medicine costs, and efforts to improve wellness and 
healthy lifestyles if we are to bend the cost curve in a substantial 
way.
     iii. proposed policy changes that will impact small employers
Insurance Reforms
    The key health reform bills before Congress include significant 
reforms to health insurance industry practices in the small group 
market. Last month, Oliver Wyman released a report commissioned by the 
BlueCross BlueShield Association on the impact of the Senate Finance 
Committee's recently approved health reform legislation on the 
individual and small employer health insurance markets. While the 
report did not specifically address this committee's reform 
legislation, its findings are still instructive. Our analysis concluded 
that under such reforms, small employers will face higher premiums, and 
that these higher premiums, coupled with a weak individual mandate will 
result in fewer small employers offering coverage.
    All of the health care reform bills before Congress compress the 
rating factors that health insurers will be permitted to use in pricing 
products for small employers. The Senate Finance Committee bill would 
prohibit the use of health status in pricing products for small 
employers, limit the use of age to a 4:1 band, eliminate rating based 
on gender, restrict the use of group size as a rating factor, and limit 
use of family composition. Rate reform in the small employer market 
would be phased in over a 5-year period.
    The rating reforms in the Senate Finance Committee bills will 
compress rates for firms with younger, healthier workers and firms with 
older, sicker workers. As a result, some younger and healthier firms 
will experience increases in premiums and older, sicker firms will 
experience rate decreases. The purchase of group insurance is a two-
phase process. First, the employer must view the purchase as being of 
economical value and elect to offer insurance. The employer generally 
contributes a portion of the premium, requiring the employee to 
contribute the balance. So the second purchase is by the individual 
employee who must decide if his/her monetary contribution is of 
economic value. This is often referenced as the ``take up rate.''
    As a result of the proposed premium compressions, groups with 
lower-than-average risks who today are enjoying lower than average 
premiums, may not perceive as much economic value in purchasing health 
insurance after reforms. The more restrictive the rating rules, the 
greater the subsidies required from the healthier groups, which means 
the higher the premium compared to current levels and the less 
attractive health insurance is for the exact market segment critical to 
creating a viable pool. While it is true that the higher cost groups 
will enjoy lower premiums, groups in the small employer market are not 
distributed equally between low-cost and high-cost entities. The 
distribution of employer groups by morbidity levels does not follow a 
bell-shaped curve. Rather, the distribution is skewed toward lower-cost 
groups, meaning that there are more employers that enjoy premium 
discounts than employers that pay higher rates. Therefore, the 
elimination of morbidity as a rating factor will cause a greater number 
of employers to experience premium increases than will enjoy premium 
reductions. Rate compression will cause some lower cost firms to drop 
health insurance coverage and/or cause some employees currently 
purchasing health insurance to no longer participate, causing the 
average morbidity to increase, and therefore raise costs for all firms 
that continue to provide insurance (and their participating employees). 
The absence of a strong individual mandate coupled with guaranteed 
issue with no pre-existing limitation will only exacerbate the 
incentive for individual employees who are lower cost to defer the 
purchase of insurance until they are aware of a health condition that 
will necessitate access to services that they can reasonably expect 
will cost more than the monthly premiums.
    The Senate Finance Committee bill also includes certain minimum 
benefit requirements that apply to small employer coverage. The 
legislation would establish four defined levels of coverage, with the 
lowest level ``Bronze'' plan required to have an actuarial value of at 
least 65 percent. New coverage sold to small employers must provide 
certain minimum benefits, including some categories of services that 
are less commonly purchased among small employers today. New coverage 
would include specified limits on out-of-pocket costs and no annual and 
lifetime caps. Based on a review of products commonly purchased by 
small employers today, we expect that coverage for small employers 
would be 3 percent more expensive as a result of the minimum actuarial 
value requirements on average. However, many small employers buy 
coverage that is significantly below-cost the required actuarial value 
levels and would face much higher increases when they replace their 
current coverage.
    We estimate that small employers purchasing new policies in the 
reformed market will experience premiums that are up to 19 percent 
higher 5 years after reforms become more effective than they are today, 
not including the impact of medical inflation. While some smaller, low-
wage firms will be eligible for tax credits that may offset the cost of 
these changes, the majority of firms that continue to provide health 
insurance will face higher premiums directly as a result of the 
proposed reforms. The government will also see its share of the costs 
for these reforms increase by having to provide higher subsidies per 
covered individual because of these higher premiums.
    The legislation contains ``grandfathering'' provisions which allow 
currently insured small employers to keep the benefits they have today. 
Our model estimates that about 9.5 million small group employees (out 
of a total of 28 million small group employees) who have coverage today 
will stay covered under the ``grand fathered'' block in the initial 
post-reform years. These firms will avoid some of the cost increases as 
a result of reforms, but will face premium increases when the 
grandfathering phases-out. We can expect the firms whose grand fathered 
premiums are less than the post-reform premiums to remain under these 
plans until such time as these premiums are equal to or greater than 
the post-reform premiums due to the phase in, since groups whose 
premiums are higher will have economic incentives to purchase in the 
new post-reforms pools and take advantage of the lower rates.
    The Senate Finance Committee bill will also create health insurance 
exchanges that will provide an alternative source of subsidized 
insurance coverage for employees of firms that chose to terminate 
health insurance coverage. The bill does not compel small employers to 
provide health benefits and exempts them from the ``free rider'' 
assessment that applies to larger firms that do not offer coverage. The 
combination of the exchange and new insurance rules that apply to the 
individual health insurance market may make it easier for small firms 
to drop coverage when faced with premium increases because they will 
know that their employees can obtain coverage--in some cases subsidized 
by the government--through the exchanges.
    The absence of an effective individual mandate will also contribute 
to a reduction in the number of workers who obtain insurance in the 
small employer market. The individual mandate in the bill approved by 
the Senate Finance Committee was severely weakened. It does not include 
any penalty for individuals who do not purchase insurance in the first 
year of reform and then phases in nominal penalties that reach a 
maximum of only $750 per adult in 2017--15 percent of their expected 
premium. As a result, fewer low-cost individuals are likely to opt into 
employer coverage than would otherwise have done so if a strong 
individual coverage requirement were included in the legislation. 
However, high-cost individuals will have enhanced economic incentives 
to join, because their premiums may be significantly lower than current 
levels and/or benefits may be significantly richer. These are the 
individuals whose premiums do not totally fund claims. This combination 
of economic incentives--encouragement of higher cost individuals to 
join at premium levels less than sufficient to fund claims and the 
unintended economic encouragement of low-cost individuals to defer 
coverage until services are required, exerts significant upward 
pressure on premiums in the post-reform individual market.
    The bills before Congress should be commended for including tax 
credits to help small firms with low-wage workers purchase health 
insurance. Small firms with low-wage workers have the lowest coverage 
rates of any segment of the employer sponsored health insurance market. 
While these tax credits may increase coverage among those firms that 
are eligible, many small employers will not see savings from premium 
tax credits and would face the full cost of the premium increases they 
are likely to experience as a result of health care reform.
    Overall, the number of small employers offering coverage is likely 
to decline after reform. We estimate that even accounting for small 
employer tax credits, premium increases in the small group market will 
result in 2.5 million fewer members being insured through small 
employer policies 5 years after reforms become effective. These losses 
would have been higher had the legislation not included small employer 
tax credits.
Exchanges
    The key health bills under consideration would establish health 
insurance exchanges that would be open to both individuals and small 
employers. Some proponents of these exchanges believe that they could 
lower the cost of health insurance by reducing administrative costs, 
``pooling'' small employers to gain economies of scale similar to 
larger employers, and spurring competition among health plans.
    As the author of several reports on State purchasing cooperatives 
and other purchasing arrangements for small employers, I have studied 
health insurance cooperatives extensively, and have found little 
evidence that previous models have reduced premiums and have in fact 
identified some situations where their presence actually resulted in 
higher administrative costs. However, if properly structured, an 
exchange could potentially reduce distribution costs and increase 
competition by making it easier for consumers to compare products, 
although the savings would likely be limited by a number of factors I 
describe below.
    While pooling of risks is an essential function of insurance, 
assembling many small groups or individuals into an exchange ``pool'' 
will not automatically reduce costs. While some think that health 
insurance costs can be lowered if purchased in bulk, like commodities 
or consumer goods, the economic and actuarial realities affecting the 
cost of health insurance are fundamentally different.
    There are significant differences between a pool of many small 
employer groups and a large employer pool. For example, a single 
employer with 999 employees is not the same as 333 groups with 3 
employees each. Similarly, an exchange will not be one big pool, like a 
large employer, but rather a collection of many small firms that must 
each be serviced separately and each of which are making insurance 
decisions separately. Insurers participating in an exchange will retain 
all of the health insurance risk of the groups they enroll; thus, the 
pooling of risk actually occurs at the insurer level, not at the level 
of the exchange. I have made these distinctions at several Capitol Hill 
briefings on behalf of the American Academy of Actuaries.
    Exchanges will also have limited ability to reduce administrative 
costs. Many of the non-subsidy related functions they will perform will 
duplicate functions performed by the State insurance department, health 
plans, or insurance agents or brokers. When an exchange takes on 
enrollment functions, insurers must continue their own enrollment 
functions to assure appropriate services, claims payment, etc. Thus, 
while an exchange may assume certain administrative functions, it may 
not eliminate these functions or their related costs. While it has been 
argued that exchanges would save money by eliminating costs related to 
underwriting, any reduction in this area will be a function of changes 
in insurance rating and underwriting rules and not due to the exchange. 
Moreover, the costs attributed to underwriting are likely in the range 
of 1 percent of premiums in the small employer market.
    One area where an exchange can provide value is in helping small 
employers shop for coverage and providing information on competing 
plans. Exchanges proposed by current health reform bills would provide 
small employers with information on prices and other important plan 
features on all health plans in the market.
New Taxes
    The Finance Committee bill includes a number of fees and taxes on 
the health industry to help finance the proposal. These include a $6.7 
billion annual assessment on insurers, as well as assessments on device 
and drug manufacturers that are likely to be included in the prices 
that insurers and their members pay. The bill also imposes an excise 
tax on high-cost benefit plans offered in the employer marketplace.
    Our recent analysis did not include the impact of these fees and 
taxes on cost and coverage in the individual and small employer 
markets. However, it is important to note that the $6.7 billion annual 
insurer fee is likely to disproportionately impact individuals and 
small employers. Insurers will have little choice but to pass these 
fees on to their customers in light of statutory reserve limits. Larger 
employers that self-fund their benefits are not subject to the insurer 
assessment. Thus, the design of the insurer fee provision is likely to 
cause more employers to self-fund, causing small employers and 
individuals to shoulder an increasing burden from these fees over time.
    Few small employers may have benefit costs that exceed the 
threshold for the excise tax on high-cost benefit plans today. However, 
because premiums have historically grown at a rate that exceeds the 
indexing formula in the bill (growth in CPI + 1 percent), more small 
employer plans are likely to become subject to the tax on high-cost 
plans over time.
    Some have argued that the high-cost plan tax will cause small 
employers to purchase less expensive benefit plans to avoid the tax, 
thereby mitigating its impact. However, factors such as the worsening 
of the overall cost of the small employer pool after rating reforms, 
geographic cost differences (which may push plans in certain areas into 
the tax sooner than others), and the restrictions on benefit plan 
design in the bill may limit behavioral responses to avoid the tax.
                               conclusion
    Small employers are likely to judge the success of health care 
reform based on whether it improves affordability in the marketplace. 
While proposed insurance reforms may reduce costs for some firms, they 
will tend to increase costs in the aggregate by encouraging firms with 
low morbidity to exit the market in response to premium increases. The 
imposition of insurer fees and other assessments will also erode 
affordability.
    As Congress considers health care reform proposals, it must 
carefully evaluate provisions of legislation that may have unintended 
impacts that result in increased premiums for small employers. Adequate 
rating flexibility will be important to assuring a balanced risk pool 
participates in the insurance pool to assure overall affordability. 
Congress should also consider the impact of assessments and fees that 
may disproportionately impact small employers and reduce affordability.
    Thank you for the opportunity to testify today on the important 
subject of assuring affordable health insurance for small businesses.

    The Chairman. Well, Ms. Bender, thank you very much. Thank 
you for being here and for your testimony.
    Now we'll turn to Dr. Jonathan Gruber, Professor of 
Economics at the Massachusetts Institute of Technology where he 
has taught since 1992. He's also Director of the Health Care 
Program at the National Bureau of Economic Research. Dr. Gruber 
received his BS in Economics from MIT and his Ph.D. in 
Economics from Harvard.
    He was also 1 of 15 scientists nationwide to receive the 
Presidential Faculty Fellow Award from the National Science 
Foundation in 1995. He also received the Kenneth Arrow Award 
for the best paper in Health Economics. Dr. Gruber was elected 
to the Institute of Medicine in 2005.
    And in 2006, he received the American Society of Health 
Economists Inaugural Medal for the Best Health Economist in the 
Nation aged 40 and under. Dr. Gruber's research focuses on the 
areas of public finance and health economics, published more 
than 125 research articles, edited six research volumes and is 
the author of Public Finance in Public Policy, an undergraduate 
text. He was also, I am told, a key architect of the 
Massachusetts ambitious health reform effort and became an 
inaugural member of the Health Connector Board the main 
implementing body for that effort.
    Dr. Gruber, welcome back to the committee. Thank you for 
being here. Your testimony will be made a part of the record in 
its entirety and please proceed.

     STATEMENT OF JONATHAN GRUBER, PROFESSOR OF ECONOMICS, 
MASSACHUSETTS INSTITUTE OF TECHNOLOGY, DEPARTMENT OF ECONOMICS, 
                         CAMBRIDGE, MA

    Dr. Gruber. Thank you, Senator, for the kind introduction. 
And thanks for inviting me to testify today.
    The House and the Senate stand on the verge of passing the 
most comprehensive health reform legislation in decades. And 
let me be clear and I'll try to make clear in my 5 minutes, 
this legislation is a clear winner for small businesses in 
America.
    What I want to do in my testimony is talk about the 
problems faced by small businesses in America.
    Why they're solved by this legislation.
    And why Christensen's legislation really missed the mark.
    I want to highlight four problems today.
    The first is what I call entrepreneur deterrence. That is 
individuals who are afraid to start new small businesses 
because of the high and variable costs of health insurance. 
Consider the 50-year-old engineer at a large firm who has a 
great idea for a startup, who has a wife who is a cancer 
survivor, and is afraid of giving up his quality health 
insurance at that firm to start a new business. That individual 
may not go start that new business and society loses from not 
having that source of dynamic job growth. Economic studies have 
confirmed the importance of this phenomenon suggesting, that as 
much, that reduction that individuals are reduced in their 
transitions of self employment by as much as a third because of 
fear of losing health insurance.
    The second impediment is high loading factors. Small 
businesses pay as much as 20 percent more than large businesses 
for the same insurance products because of high broker 
commissions, administrative costs and the resource expend by 
insurance companies to make sure that they're not getting the 
sick employees and giving away the healthy ones.
    The third problem is unpredictable premiums. One survey 
that was done, we've heard a lot of data today. But one survey 
that was done in 2008 found that 28 percent of small firms 
reported a premium increase of 20 percent or more.
    If small firms don't know whether the costs of insurance is 
going to go down by 1 percent or up by 20 percent next year, 
they can't provide health insurance. That's too uncertain an 
environment for them to do that.
    And then finally a key issue is the limited choices faced 
by employees in small businesses. Only 12 percent of firms with 
fewer than 200 employees offer their employees a choice of more 
than one insurance plan in contrast to 43 percent of firms with 
more than 5,000 employees.
    How does reform help these problems?
    Well, first of all, reform will help through reformed 
insurance markets with an individual mandate. Insurance markets 
will be reformed so that prices depend only on enrollee age and 
not health. And the pre-existing conditions cannot be excluded 
from coverage.
    This resolves the entrepreneur deterrence effect because 
the engineer will now be free to be certain that he can get 
insurance for his wife if he wants to start that new company. 
It mitigates the enormous year to year swings in premiums 
because they're in a more predictable insurance environment. 
And prices fall because individuals are brought in to buy 
health insurance both healthy and sick and so insurers can be 
sure that they'll get a good distribution of risk when they 
offer that insurance.
    Second, these bills introduce insurance exchanges as a 
medium for purchasing insurance. This will further address many 
of these problems. Small businesses will now be able to 
directly enroll their employees into the kind of marketplace 
that's enjoyed only by large businesses today.
    This will substantially mitigate the 20 percent excess 
loading factors. They won't have to use brokers necessarily 
which is 4 to 11 percent of costs. Insurance companies will not 
be expending enormous resources trying to pick out just the 
healthiest firms because they'll be enrolling everybody for 
this exchange. So it will be a huge reduction in costs, as well 
as a huge improvement in the set of choices available to 
employees at small businesses whom instead of only facing one 
choice will now have a number of choices.
    Finally, it's been mentioned about a small business tax 
credit which will reimburse up to 50 percent of the cost of 
health insurance for small businesses, offsetting their costs.
    I also want to spend a minute debunking the claims that 
reform will hurt small businesses. For example, some people 
have claimed that insurance reform will raise costs. That 
ignores the fact that there's going to be an individual mandate 
that's going to help improve the risk of health pools and lower 
health care costs.
    Some have claimed the benefit mandates will raise the costs 
of health insurance, in particular the level of minimum 
credible coverage that's put in these bills. The level of 
coverage that's in the Senate Finance Committee--for example, 
that's the minimum--is less generous than only about 10 percent 
of firms offer today. So very few firms will be forced to buy 
up.
    Some have claimed that excise taxes will raise the costs 
faced by small businesses. But here the CBO has spoken. And CBO 
has reported that these excise fees in the Senate Finance bill 
will raise premiums by less than 1 percent. So that's really a 
red herring.
    And then finally, we can--there's lots of studies that have 
talked about the effect on premiums. But we have authoritative 
evidence from the Congressional Budget Office. They've not 
spoken on small groups.
    We're still waiting for that. But they have spoken on the 
premium effect for the individual/nongroup market. And unlike 
reports by Oliver Wyman and others which suggest that premiums 
in the nongroup market will go up by 50 percent or more.
    The Congressional Budget Office estimates that under these 
exchanges premium in the nongroup market will fall by 30 
percent by 2016 because of reform. So while we don't have 
numbers for small businesses, it's clear where it's going for 
individuals.
    Let me conclude with some modeling results. I have a model 
that has been widely used by members on both sides of the aisle 
to look at analyzing various policies they want to consider. 
And I've used this model to analyze the effect of the status 
quo of no reform verses the alternative the Senate Finance 
Committee bill.
    What I found is that the Senate Finance Committee bill will 
imply an enormous reduction in the health insurance spending of 
small firms. I estimate that in 2019, absent reform, small 
businesses will spend about $300 billion a year on insurance 
premiums. I estimate that with this reform that number will 
fall by 25 percent to about $225 billion a year. That has real 
consequences for small businesses and their employees. I 
estimate that by 2019 workers in small businesses will see 
their take home pay increase by $30 billion a year because of 
these reforms. And about 80,000 jobs will be saved in the small 
business sector.
    So, in conclusion, let me highlight that small businesses 
have little to fear and much to gain under health reform. A 
reform market with efficient exchanges will both lower health 
insurance costs and offer the premium stability that is so 
critical to those who want to start new small businesses. And 
employees will be free to move from job to job and to start the 
business without fear of getting their coverage stripped away 
should they get sick and with having a larger array of choices.
    Thank you very much.
    [The prepared statement of Dr. Gruber follows:]
                 Prepared Statement of Jonathan Gruber
    The health reform legislation making its way through both Houses of 
Congress currently will benefit many different groups in society. One 
of the major winners from this legislation will be small businesses and 
their employees. Small businesses suffer in our current insurance 
system from high and unpredictable insurance prices; premiums can rise 
rapidly with little notice. The reformed system envisioned by Senate 
and House legislation would provide a more predictable and less 
expensive environment in which small businesses could purchase quality 
health insurance. This will promote small business formation and growth 
by removing this enormous source of uncertainty. Moreover, the 
legislation would allow small business employees to benefit from the 
broad range of choices now unavailable to them. In this testimony I 
will describe in more detail the gains to small businesses and their 
employees.
                 small business health insurance today
    Small businesses and their employees face four major impediments in 
the employment-based system of health insurance in the United States.
Entrepreneur Deterrence
    First, individuals are afraid to start small businesses, or to join 
new businesses, because of a fear of losing health insurance. Consider 
the 50-year-old engineer at a large firm who has a great idea for a new 
start-up company, but also has a wife who is a cancer survivor who now 
benefits from the high quality insurance at that large firm. This 
engineer may be unwilling to start that new company because of fear of 
being unable to obtain insurance coverage--or to obtain it only with 
pre-
existing conditions exclusions that would exclude coverage for his 
wife's cancer. As a result, the engineer will not start the new 
company, reducing a dynamic source of job growth for the United States.
    Economic studies have confirmed the role of job lock in dissuading 
entrepreneurship. A number of studies over the past 15 years have shown 
that those who have access to health insurance outside their employment 
setting are more likely to start new businesses. For example, one 
recent study found that not having spousal insurance available, 
relative to those who do have such insurance, lowers the rate of 
transition to self-employment by 18-34 percent.\1\ That same study as 
well as another recent study find that the reduction in the price of 
insurance for the self-employed led to a significant rise in 
transitions to self-employment, with the latter study finding that tax 
subsidies to the self-employed raised the probability of entering self-
employment by 24 percent and reduced the rate of exit from self-
employment by 16 percent.\2\
---------------------------------------------------------------------------
    \1\ Gumus, Gulcin, and Tracy Regan (2009). ``Self-Employment and 
the Role of Health Insurance,'' Working Paper, University of Miami.
    \2\ Heim, Bradley and Ithai Lurie (2009). ``The Effect of Health 
Insurance Premium Subsidies on Entry Into and Exit from Self-
Employment,'' mimeo, U.S. Department of the Treasury.
---------------------------------------------------------------------------
High Loading
    The second major impediment faced by small businesses is the much 
higher loading factors that they must pay on their insurance, leading 
to higher costs and less purchase of coverage. Data on this point are 
hard to come by, but the best available data suggest that smallest 
firms pay as much as 20 percent more than large firms for the same 
insurance coverage.\3\ These higher loads result from broker 
commissions (which can run from 4 to 11 percent of premiums), other 
fixed costs of administering and selling insurance that raise, per 
person, premiums more for smaller firms, and from resources expended by 
insurance companies in today's environment to try to screen and avoid 
the sickest firms.
---------------------------------------------------------------------------
    \3\ Chu, Rose and Gordon Trapnell (2003). ``Study of the 
Administrative Costs and Actuarial Values of Small Health Plans,'' 
Small Business Research Summary #224, SBA Office of Advocacy, 
Washington, DC.
---------------------------------------------------------------------------
Unpredictable Premiums
    The third impediment is the unpredictable nature of those costs, 
which makes it difficult for small businesses to commit to offering 
insurance to their employees. For example, one survey found that in 
2008, 28 percent of small firms reported a premium increase of 20 
percent or more.\4\ If small firms can anticipate the rate of premium 
increase, they can account for that in any business growth planning in 
deciding whether they can afford to offer health insurance. But if they 
cannot know whether costs will go up by 5 percent or 30 percent the 
next year, they will shy away from providing insurance in the first 
place.
---------------------------------------------------------------------------
    \4\ National Small Business Association (2009). ``Health Care 
Survey of Small Businesses.''
---------------------------------------------------------------------------
Limited Choice
    Most small firms in the United States do not offer their employees 
a choice of health plans: only 12 percent of firms with fewer than 200 
employees allow their employees two plans to choose from, and only 1 
percent of firms in that size range offer three or more choices. In 
contrast, among firms of over 5,000 or more employees, 43 percent offer 
two choices and another 29 percent offer three or more choices.\5\ This 
reflects the fact that insurers do not want to insure small firms with 
segmented risk pools, and the higher administrative costs of small 
firms that want to offer an array of health plan choices.
---------------------------------------------------------------------------
    \5\ Data from the Kaiser Family Foundation available at http://
ehbs.kff.org/?page=charts&id=
2&sn=19&ch=1048.
---------------------------------------------------------------------------
                         how does reform help?
    The types of reforms now making their way through Congress would 
help with all four of these major impediments to small businesses, 
through several key features.
Reformed Insurance Markets With Individual Mandate
    Insurance markets will be reformed so that prices depend only on 
enrollee age and not health, and so that pre-existing conditions cannot 
be excluded from coverage. This resolves the entrepreneur deterrence 
effect because the engineer will now be certain that he can get 
insurance to cover his wife's cancer if necessary, freeing him up to 
start that new business. This legislation therefore removes an 
important deterrent to business formation and growth that will increase 
the productivity of the U.S. workforce.
    Insurance market reforms also mitigate the enormous year-to-year 
swings in insurance premiums that are so common for small businesses 
and interfere with their ability to offer insurance. Moreover, the 
individual mandate ensures that prices in these new exchanges will be 
low because there will be a mix of both healthy and less healthy 
enrollees. This will allow insurance companies to issue insurance at 
the same cost, removing the need for screening on health and its 
associated administrative load.
The Exchange as a Medium of Insurance Purchase
    Many of these problems will be addressed further through the 
ability of small businesses to use the new exchange as a medium for 
insurance purchase. Small businesses will be able to directly enroll 
their employees into a marketplace that provides a wide variety of 
choices over plan design and insurance company. This will substantially 
mitigate the high loading costs facing small businesses today because 
they will not be required to use brokers, because they will not face 
the administrative burdens imposed by focusing on their particular 
group for insurance sale, and because there will not be resources 
wasted on health screening. As noted earlier, small businesses pay up 
to 20 percent more for insurance today. There is no reason that figure 
couldn't be cut substantially in an exchange environment.
    Moreover, the exchange will provide small business employees with 
the wide variety of choices that large businesses now provide their 
employees. This will make it more attractive for small businesses to 
offer coverage by making it more appealing to their employees. And it 
will allow small business employees to choose the plan that most 
appeals to them, rather than being forced into the plan that suits 
their employer's preferences.
Small Business Tax Credit
    Health insurance is expensive in the United States, and even under 
these reform bills that will not change right away. As a result, all of 
the legislative proposals include a sizeable tax credit to help our 
Nation's smallest businesses afford coverage. This credit will offset 
up to 50 percent of the premium cost for the smallest and lowest wage 
businesses that are having the most trouble providing coverage today.
                           does reform hurt?
    Those who argue that reform will hurt small businesses rely on 
several arguments, all of which are either incorrect or overstated.
Insurance Reform Will Raise Costs
    The first claim that is made is that insurance reform will raise 
costs to small businesses--particularly if there is not a strong 
mandate in place. In a generic sense, this statement is true--market 
reform without a mandate can raise premiums. We have seen in a number 
of States that imposing community rating on the non-group market 
without a mandate has caused a spike in premiums. But this has not 
proven to be a major problem to date in the small group market, where 
State reforms to market rating in the early 1990s did not much increase 
premiums.\6\
---------------------------------------------------------------------------
    \6\ Simon, Kosali (2005). ``Adverse Selection in Health Insurance 
Markets? Evidence from State Small Group Health Insurance Reforms'' 
Journal of Public Economics, 89, 1865-1877.
---------------------------------------------------------------------------
    Moreover, there is a very strong mandate in place in legislation 
proposed by HELP and the House--and a reasonably strong mandate in the 
SFC legislation as well. This will offset any rate shock from community 
rating by bringing younger and healthier workers into the risk pool. 
Finally, the grandfathering provisions in these proposals will protect 
any small firms that would potentially suffer a rate shock from reform.
Benefit Mandates Will Raise the Cost of Insurance
    While the details differ, the legislative proposals before Congress 
would add a series of requirements to ensure that insurance is 
providing real protection to consumers. Most notably, they would impose 
a ``minimum actuarial value'' that would require coverage at a certain 
level of benefits by small businesses. Yet the minimum actuarial 
contemplated by the Senate legislation, which would require that 
insurance cover 65 percent of expected medical costs, are not onerous 
relative to coverage among today's small businesses. Recent analysis by 
the Engelberg Center for Health Care Reform at the Brookings 
Institution finds that fewer than 10 percent of small firms in the 
United States today offer benefits packages less generous than this 
level.
    The plans would also impose other restrictions on insurance 
coverage, such as no annual or lifetime limits and mandated preventive 
care. But once again these are not burdensome mandates for the vast 
majority of small firms. For those small firms who would have to change 
their benefits packages to meet the mandate, they can simply adjust 
other aspects of the package to stay at similar premium level.
Excise Taxes and Fees Will Raise Costs
    These legislative proposals would impose a set of excise charges on 
both medical providers and the insurance industry. The final form of 
these excise charges is currently under debate. But to the extent they 
follow the form of the Senate Finance Committee proposal evaluated by 
CBO on September 22d, they will have a trivial effect on premiums; CBO 
reports that the excise fees will add up to less than 1 percent of 
insurance premiums.\7\
---------------------------------------------------------------------------
    \7\ Letter from CBO Director Douglas Elmendorf to Senate Finance 
Committee Chairman Max Baucus on September 22, 2009.
---------------------------------------------------------------------------
Employer Responsibility Requirements Will Hurt Small Business
    The legislation being considered would include some financial 
consequences for businesses that do not offer insurance coverage. But 
these assessments would not hit the smallest businesses. The free rider 
assessment in the Senate Finance Committee bill, for example, would 
apply only to firms above 50 employees. Even past that point, the 
requirement would be quite modest, at most $400 per full-time employee. 
This is only about a 1 percent rise in the cost of compensation.
           objective evidence that reform will lower premiums
    Reports sponsored by the insurance industry have argued that reform 
will lead to higher premiums for small firms.\8\ Unfortunately, I am 
aware of no objective party which has presented an analysis of the 
impact of reform on small business premiums. But there is some guidance 
as to the validity of existing analyses from CBO analysis of the impact 
of reform on the non-group market. The same reports that claim that 
reform will dramatically increase small group premiums have made the 
claim even more strongly with respect to non-group premiums, with 
estimated increases from reform of 50 percent or more. But the 
objective CBO analysis shows that these claims are clearly wrong--
reform will lower, not increase, non-group insurance costs.
---------------------------------------------------------------------------
    \8\ Oliver Wyman, ``Insurance Reforms Must Include a Strong 
Individual Mandate and Other Key Provisions to Ensure Affordability''; 
PriceWaterhouseCoopers, ``Potential Impact of Health Reform on the Cost 
of Private Health Insurance Coverage.''
---------------------------------------------------------------------------
    In their September 22d letter, the Congressional Budget Office 
reported that they estimated the cost of an individual low-cost 
``silver'' plan in the exchange to be $4,700 in 2016 (this was later 
updated to $5,000). This is a plan with an ``actuarial value'' 
(roughly, the share of expenses for a given population covered by 
insurance) of 70 percent. In the same letter, the CBO projected that, 
absent reform, the cost of an individual policy in the non-group market 
would be $6,000 for a plan with an actuarial value of 60 percent. This 
implies that the same plan that cost $6,000 without reform would cost 
$4,300 with reform, or almost 30 percent less.
    The CBO has not reported many of the details of their analysis, 
such as the age distribution of individuals in the non-group market or 
in the exchange. So these data do not provide a strictly apples-to-
apples comparison of premiums for the same individual in the exchange 
and in the no-reform non-group market. Moreover, CBO's conclusion may 
change as legislation moves forward. But the key point is that, as of 
now, the most authoritative objective voice in this debate suggests 
that reform will significantly reduce, not increase, non-group 
premiums. This is in stark contrast to the critical reports from the 
insurance industry--and suggests a potential bias to their conclusions 
for small firms as well.
      the prospects for small businesses with and without reform: 
                            modeling results
    I recently provided background research for a study by the Small 
Business Majority of the impacts of reform options on small 
businesses.\9\ I have undertaken similar calculations for this 
testimony for the Senate Finance legislation. These results draw on the 
Gruber Microsimulation Model (GMSIM), which has been widely used for 
policy analysis at both the State and Federal level. This model 
parallels the type of model used by the Congressional Budget Office in 
their analyses of health reform proposals.
---------------------------------------------------------------------------
    \9\ Small Business Majority (2009). ``The Economic Impact of Health 
Reform on Small Businesses,'' June 11, 2009.
---------------------------------------------------------------------------
    I have used this model to project two scenarios for small 
businesses (with fewer than 100 employees): no reform (the ``status 
quo'') and the Senate Finance Legislation (``reform''). I 
conservatively assume that in both scenarios the underlying premium 
growth rate for small businesses will be 6 percent/year, which is below 
the recent trends, and which gives no credit to the reform for lowering 
the rate of health insurance cost growth. I do assume that reform 
lowers costs to small businesses by 5 percent on average through the 
set of policies I described above.
    My modeling results show an enormous reduction in small business 
spending through health care reform. I estimate that in 2019, absent 
reform, small businesses will spend roughly $290 billion/year in health 
insurance premiums. Under reform, I see that number falling by about 25 
percent to $225 billion/year.
    This lower spending has real consequences for small businesses and 
their workers. I estimate that under reform, workers in small 
businesses will see an increase in their take-home pay of almost $30 
billion/year, and that reform would save about 80,000 jobs in the small 
business sector by 2019.
    These are only estimates based on a highly uncertain future. But 
the assumptions about cost growth in the small business sector are 
conservative so the gains could be even larger.
                               conclusion
    As this testimony makes clear, small business has little to fear, 
and much to gain, from health reform. A reformed insurance market with 
efficient exchanges will offer both lower health insurance costs and 
more premium stability for small firms. And employees will be free to 
move from job to job and start new small businesses, as well as to 
benefit from a much greater choice of health care plans in the small 
businesses in which they work.

    The Chairman. Dr. Gruber, thank you very much for your 
testimony, for being here. And we'll now start a round of 5-
minute questions.
    First I'll start with you, Mr. Cullen. You stated that 
under your policy routine preventative care such as a 
colonoscopy would cost about $3,000 out-of-pocket in the local 
hospital. In fact we have figures that show that in Iowa 36 
percent of men who are aged 50 have never had a colorectal 
cancer screening.
    The Senate legislation that we are anticipating bringing up 
will require coverage of recommended preventative care with no 
charge at all. Do you think that this might reduce the high 
rate of fatal colorectal cancer in Buena Vista County that you 
mentioned in your testimony and the rest of Iowa?
    Mr. Cullen. Yes, for the benefit of others in this room who 
haven't seen the written testimony, Buena Vista County has the 
highest rate of colorectal fatalities in the State of Iowa. And 
they believe it's because of a lack of screening, according to 
the University of Iowa epidemiologists. So I could hope that 
more screening would prevent these fatalities, but I'm not a 
doctor. I don't know.
    One point I would like to make and it's not directly in 
response to your question. That is, I don't know where it's 
written that the Storm Light Times is required to provide 
insurance to its employees. It seems to me like our function is 
to put out a newspaper.
    And we don't want to be health care plan administrators. We 
don't want to be dealing with our employee's bills. Did you 
send that bill back to the hospital? Did you do this? Did you 
do that? That should be for health insurance companies to do.
    So I would ask the Senate to get health care off the backs 
of small businesses. And I would think that preventative care, 
as you're talking about would reduce incidence. But again, I'm 
not an epidemiologist.
    The Chairman. Well, I think all the figures that we have, 
from NIH and CDC and everyone else, shows that colorectal 
cancer can be one of the most fatal. It can also be one of the 
most curable if it's detected earlier in that screening.
    That is one of the preventative measures recommended by the 
U.S. Preventive Services Task Force.
    Mr. Cullen. May I add, Senator, that the woman who works 
next to me, our Associate Editor, Tina Donath, who has worked 
for us for about 15 years, I think, is suffering from colon 
cancer right now. And she's the one who needed the $2,500 shot. 
And she had never had screening because our insurance didn't 
cover it.
    The Chairman. Yes, well, I think that's the point.
    Mr. Cullen. She's also about 60, I believe.
    The Chairman. One other thing. I remember when you were 
telling me about your insurance and what was happening. And I 
said, well, why don't you get another carrier?
    Mr. Cullen. Hah.
    The Chairman. And what was your response?
    Mr. Cullen. Well we can either have BlueCross or BlueCross.
    The Chairman. So you only have one carrier?
    Mr. Cullen. Yes, we can't go anywhere. And with a kidney 
transplant, colon cancer, my wife just had back surgery and I'm 
apparently insane. Nobody would take us.
    [Laughter.]
    The Chairman. That's what caught me was the fact that I----
    Mr. Cullen. That I'm insane?
    [Laughter.]
    The Chairman. No.
    Mr. Cullen. Good.
    The Chairman. Mr. Rowen, you discussed a report you 
received from your insurance company explaining its offer of a 
128 percent premium increase. Do you think the full 128 percent 
increase can be explained by the factors the company cited?
    Mr. Rowen. That's almost impossible for me to get a handle 
on. One of the reasons is we don't have access to all the 
health records of our employees. We're a small family business. 
So we know everybody. We, if somebody is having major surgery, 
we know about it.
    I can tell you that there were no major surgeries. There 
was no major, major procedures from last year. What I don't 
know is if any of our employees have had some procedures that 
would indicate some type of major surgery is pending in the 
next year.
    So I have no way of knowing that. I do know that our 
average age has increased somewhat. But our employees are 
stable. It's the same group of people that has been in the 
plan, essentially the same group of people, for the last 4 or 5 
years.
    The Chairman. Do you think that a requirement to have 
health insurance is important in making the health insurance 
pool as big as possible?
    Mr. Rowen. I do believe that, yes. I know for a fact that, 
by example, there are a fair amount of younger people, when 
they come into our company, who choose not to buy health 
insurance. Our policy right now, I think our latest one is 
something like $350 a month for the employee of which we share. 
But it is expensive.
    A lot of young people choose not to participate because 
there's a risk. I mean, they choose not to. If it was quite a 
bit less expensive for them, I think they would.
    The Chairman. Thank you very much, Mr. Rowen.
    Senator Enzi.
    Senator Enzi. Thank you, Mr. Chairman. I want to thank 
everybody for their testimony. That's been very helpful.
    I know in the 5 minutes we have we won't get to ask 
questions of everybody or even all of the questions we'd like 
to ask of anybody. So I hope that all of you will agree to 
doing some written answers to some of the things. And some of 
which might be a little more technical. But I do appreciate 
what you shared with us.
    Mr. Rowen, you mentioned that you've been contributing to 
the health savings accounts for your employees. And I assume 
those are the kind that the money that's not spent can roll 
over next year or is that----
    Mr. Rowen. That's not exactly true, Senator, because I 
don't think we set up specific HRA policies. Essentially what 
we were doing was that the company was reimbursing our 
employees for the full cost of whatever deductible they 
incurred. We did it a couple different ways in the 3 years that 
we were doing it.
    It wasn't as if our employees were putting or that the 
company was putting funds into an account we drew down from. 
All that we did was take, in any given year--we said that if 
our health insurance is going to increase by say 20 percent. 
That's going to cost us X amount of dollars.
    So, instead of increasing, we increased the deductible, 
took that at-risk money and put it toward paying those 
deductibles and most of the time that worked out for us.
    Senator Enzi. OK, I appreciate that. I've always encouraged 
people to take a look at the regular health savings account and 
if that helps in some small businesses.
    Commissioner Praeger, you mentioned that a part of your job 
is to see that the minimum loss ratio is available to 
companies. And you have some capability, I understand, on how 
much they can increase premiums. Are there some other tools 
that you need to be able to do the job that would help keep 
down health care costs?
    Ms. Praeger. Well, Senator, getting rid of pre-existing 
condition exclusions would go a long way toward assisting 
people in getting affordable coverage. But we know coupled with 
that you need to have everyone in the pool so the young healthy 
folks are buying as well and sharing in the risk with others.
    We don't have specifically in Kansas the tools that--I 
don't have the authority to just deny a rate increase because I 
think it's too much. If the company can demonstrate that it's 
based on medical trend, the base amount and then the other 
factors age, the demographic status of the company, the various 
other health statistics, we really--most State's hands are tied 
in terms of determining that the rate can't be administered.
    Senator Enzi. Thank you. Thank you. Question for Mr. Holtz-
Eakin.
    Dr. Gruber, in his testimony said that CBO has said excise 
taxes in the bills will have a trivial impact on premiums. I 
wasn't aware that CBO had done a comprehensive analysis of how 
that bill will increase premiums. Is that your understanding?
    Mr. Holtz-Eakin. That is right for the three major bills, 
the Senate Finance bill, the HELP bill and the blended bill in 
the House. There's been no comprehensive analysis from CBO on 
the impact on group, small group and individual premiums.
    Senator Enzi. And formally having done that kind of work, I 
think you said that these bills could increase premiums by $200 
billion. Do you think that the impact of the excise taxes in 
the Finance bill will have a significant impact on premiums?
    Mr. Holtz-Eakin. Yes, I do. I think the analysis of both 
the Cadillac excise tax and the de facto excise taxes on 
medical devices and other medical providers are going to raise 
premiums.
    Senator Enzi. And I've always concluded that that would be 
passed on to the workers. I'd be interested in whether that's 
your opinion as well. And how many families making less than 
$100,000 a year do you think will wind up paying that tax?
    Mr. Holtz-Eakin. Well we know from the work that's been 
done so far by the Joint Committee that about half will be paid 
by those making less than $100,000. And that some of the impact 
will be to shift people to lower wages and, you know, the 
incidence occurs that way.
    Senator Enzi. I thank you. And Ms. Bender, you wrote in 
your testimony that groups in the small employer market are not 
distributed equally between low-cost and high-cost entities. 
Under the bills before Congress does this mean that while some 
high-cost groups could see slightly lower premiums and the 
majority of small businesses would see their premiums go up?
    Ms. Bender. That's exactly correct. What we call the 
distribution of small groups by morbidity is skewed meaning 
that currently more small employers are enjoying discounts than 
those that are facing surcharges. So when you eliminate the 
morbidity rating factor it will benefit some. And it will 
benefit the higher cost employers. But there's going to be many 
more small employers who receive increases than those who enjoy 
lower rates.
    Senator Enzi. Thank you and my time is up. I will submit 
some other questions to you. You've been a very helpful panel. 
Thank you.
    The Chairman. I intend to have another round after we 
finish this one.
    Senator Merkley.

                      Statement of Senator Merkley

    Senator Merkley. Thank you very much, Mr. Chair. And thank 
you to the panel for your testimony.
    Mr. Cullen, I wanted to start with you. I gathered from 
your testimony that your rates doubled because an employee had 
a kidney transplant in 2005.
    Mr. Cullen. Certainly coincidental.
    Senator Merkley. And that certainly is exactly what happens 
with small employers where the health of every individual is 
analyzed by the insurance companies. So would it benefit your 
company to be able to join a pool of hundreds of thousands of 
individuals so that you're not being rated just by the risks in 
your small group of employees?
    Mr. Cullen. You know it sounds attractive. But I honestly 
don't know. I don't know if it will be the same screwball 
insurance companies we're dealing with now.
    Senator Merkley. OK.
    [Laughter.]
    Thank you. Well, your point does show.
    Mr. Cullen. I've grown jaded and cynical on the topic. And 
I don't know that it will help. I hope it will.
    But my point is pretty to the point. And that is get it off 
our backs. If that means a public option, fine. If that means 
an insurance exchange of some sort, fine. But give us a way to 
get out from underneath this albatross.
    It's become expected that small businesses will provide 
insurance even if they can't afford it. And we cannot afford 
it. Ours is a $10-an-hour economy. I'm telling you. It's a meat 
packing town. It's a tough town.
    Senator Roberts knows full well about how these economies 
are structured. And there are a lot of people in Storm Lake 
running around without insurance or woefully underinsured like 
myself.
    Senator Merkley. And the additional amounts you've had to 
pay for health coverage I assume either take away from hiring 
additional employees or being able to pay your existing 
employees' rates.
    Mr. Cullen. Because of health care increases we did not 
give anybody pay increases this year. And I would also note 
that our economy is a lot better off than the rest of the 
country. Our unemployment rate is just below 6 percent. The 
meat packing plants are running strong as I'm sure they are in 
Kansas and Minnesota as well.
    And so we've been doing fairly well. But we cannot give a 
raise this year because it's all been eaten up by health care 
costs. And we would like to hire another employee and we can't.
    It's costing us 50 grand a year. We spend as much on health 
insurance as we do on newsprint.
    Senator Merkley. Yes. Well, Mr. Rowen, let me turn to you 
and your small company. You note you have increases over the 
last 3 years, 2006 through 2008, 22 percent, 24 percent, 10 
percent. And initial cost increases this year, as quoted, at 
128 percent.
    Mr. Rowen. That's correct.
    Senator Merkley. I'm trying to picture you opening that 
letter or that e-mail and falling flat on the floor.
    Mr. Rowen. Yes, I had a real bump on my head from that one, 
I can tell you.
    Senator Merkley. I would imagine. So do you feel like if we 
are able to set up exchanges where every small business can 
join a pool of hundreds of thousands of others and not be rated 
just on its immediate employees and not just be kind of at the 
mercy of the higher premiums charged to the smallest companies, 
do you think that would benefit your company?
    Mr. Rowen. Well, again, I'm not a health insurance expert, 
but what I do know is what I've been told. What my experience 
has been is when the insurance industry says that the average 
rate increases have been in the 10 percent range and then every 
small business I know is looking at 25 and 35 percent 
increases. There's something happening to small businesses.
    The only thing I can conclude is that our pools are too 
small. And then when I look at the broker report that we 
received this year for the justification of the 128 percent, it 
was a 70 percent portion that was allocated toward the health 
of the future situation of our small group. So I can't conclude 
anything other than what you just said which is if we could be 
in a bigger pool our rates should be lower.
    Senator Merkley. Have health care expenses had direct 
impacts on your ability to hire additional employees or to pay 
your employees more?
    Mr. Rowen. I think most small businesses hire employees 
because their business is doing well. And they lay off people 
or cut back because their business is not doing well. I've 
never been a believer that we hire because there's a better tax 
situation or that there are better government benefits that 
come to us.
    When the economy does well, we do well. And when we do 
well, we hire more people. It is absolutely true, though, that 
if my expenses--something say in health care--or my expenses go 
up than I am not passing on increased wages to my employees. 
That is absolutely, directly true.
    Senator Merkley. Thank you. Thank you. Do I have time or am 
I--I'm out?
    Thank you very much. And thank you, Mr. Chair.
    The Chairman. Thank you.
    Senator McCain.

                      Statement of Senator McCain

    Senator McCain. Thank you, Mr. Chairman. I thank the 
witnesses. Dr. Gruber and Mr. Holtz-Eakin obviously present 
starkly different views of this legislation. So maybe beginning 
with you, Mr. Gruber, you could give us a minute or two on your 
disagreement with Mr. Holtz-Eakin. And then I'd like to have 
him respond and then if whatever time is remaining.
    Dr. Gruber. All right. Well, that will be fun. So basically 
I think there are lots of theoretical disagreements about what 
insurance market reform will do? How effective exchanges will 
be in lowering costs? I think that's really just the difference 
in perspective.
    I think we should try to stick with the facts which is what 
CBO has told us. What they have said explicitly. They haven't, 
Doug is right. CBO has yet to tell us the answer we'd like for 
this hearing which is what will reforms do to small group 
premiums.
    They've told us two things.
    First of all they said the excise fees will raise premiums 
by less than 1 percent. They called out that one element. And 
they said that one element will raise premiums by less than 1 
percent. That's in CBO letter.
    Second they've said for nongroup plans, not for small 
groups unfortunately, but for nongroups, premiums will be about 
25 to 30 percent lower in 2016 than they would be without this 
reform. Those are the facts----
    Senator McCain. All right. Why do you disagree with Dr. 
Holtz-Eakin that the curve will not be bent up or down?
    Dr. Gruber. I think, you know, Doug raised an excellent 
point about ultimately we really need to bend this curve. I 
think this legislation starts us down that path. But I don't 
think this legislation by itself, fundamentally, is going to 
bend the curve.
    I think it starts us down that path. And I think the 
alternative is--what's the alternative? The alternative is 
doing nothing like we've done for 50 years and the curve 
continuing upward.
    Senator McCain. OK. Could I? I'd like to go back and forth 
one time in my 5 minutes.
    Dr. Gruber. OK. You bet.
    Senator McCain. Go ahead.
    Mr. Holtz-Eakin. So I think the fundamental disagreements 
are No. 1, a lot of John's analysis relies on an individual 
mandate that's very strong. And that's not what we've got. The 
Senate Finance Committee mandate got it completely.
    I mean there's no penalty the first year. It's $400 the 
second year, $750 max. Anybody looking at this is going to pay 
the penalty and not buy insurance. House is similar.
    So the sort of dynamics that come out of a world with 
guaranteed issue community rating and no mandate are the 
reality of these bills. And the theory of a strong mandate is 
missing.
    The second thing is a lot of what would be benefited from 
exchanges and things, loading factors, things like that are 
one-time events. So suppose exchanges get rid of the 20 percent 
increase in loading factors in the small group market? Well at 
80 percent a year growth, 3 years down the line that benefit 
will be gone and we're stuck with the same growth in costs, the 
same rising premiums and we're having another hearing in this 
room.
    So the bills don't solve the problem.
    Senator McCain. Mr. Gruber.
    Dr. Gruber. I think Doug's got an excellent point. I think 
the point is you have to contrast it with what would happen 
without the bill. It is truth that 3 years later that gross 8 
percent premiums will be up. But they'll still be 20 percent 
lower than they would be without the bill.
    I think you can't compare it to the ideal which is, ``gee, 
it would be great if premiums didn't grow.'' Just because this 
bill won't solve all the problems doesn't mean it won't take us 
a long way toward solving some of the problems that we face. I 
think holding it to the standard of saying, ``unless this bill 
ends cost growth it's not worth passing,'' is just the wrong 
standard to have.
    Mr. Holtz-Eakin. And I think the Congress set out this year 
to do fundamental health care reform which had two pieces. One 
is enhanced coverage. But the second was deliver quality care 
in America for lower cost. That's an achievable goal.
    These bills don't do it. So to say that it's this or 
nothing, misses the point. Let's enact a genuine reform that 
changes the delivery system, slows the growth in costs, takes 
pressure off rising insurance premiums and delivers on the 
promise of health care reform.
    There's no reason to say it's this or nothing. Let's do 
something good. You could extend protections to individuals who 
already had employer coverage by simply saying they don't have 
to be on COBRA until it's exhausted.
    That's a simple reform. Doesn't take 3,000 pages. It 
doesn't cost a million dollars a page. Let's do things like 
that.
    Senator McCain. Am I out of time?
    Mr. Gruber.
    Dr. Gruber. Yes, I think that, you know, Doug and I just 
have a fundamental disagreement about whether we should 
accomplish what we can accomplish or whether we should let the 
perfect be the enemy of the good. I agree. I'd love to have a 
bill which would end cost growth inflation in America with 
health care costs. We've tried for 50 years and never gotten 
it.
    This is a bill which will cover the uninsured and which 
will lower the cost that individuals have to pay for health 
insurance and small groups have to pay for health insurance. I 
don't think we should because it won't achieve some, I believe, 
unachievable goal right now and we should kill the bill.
    Mr. Holtz-Eakin. I would say again this bill is dangerous 
to our economy. We are literally asking the Chinese to have 
forbearance against our fiscal malpractice. This sends the 
message that they will own a greater ability to control our 
future.
    That is exactly the wrong thing to do at this time. It is 
larger than health care. It is about the track on which this 
Federal Government budget is going.
    We cannot, because we're worried about the history of 
health care reform, do something which is fiscal malpractice at 
this moment. That is a mistake.
    Dr. Gruber. But I guess I don't see how you can call it 
fiscal malpractice when this bill is paid for the first 10 
years.
    Mr. Holtz-Eakin. It's not.
    Dr. Gruber. And the CBO reports that will lower the deficit 
over the second 10 years as well.
    Mr. Holtz-Eakin. Mr. Chairman, I apologize for 
interrupting. But I hope at some point in this hearing there is 
a fair discussion of whether this budget balances or not. This 
does not, over any horizon, really balance the budget.
    Senator McCain. Mr. Chairman, you've been more than 
generous with the time. I think it's an excellent exchange. And 
it's been very helpful. And I appreciate all the witnesses 
being here--thank you, Mr. Chairman.
    Dr. Gruber. In my experience he likes fights.
    [Laughter.]
    The Chairman. Senator Franken.

                      Statement of Senator Franken

    Senator Franken. Last week I met Linda Batterson from 
Bloomington, MN. She's got three daughters. She owns her own 
business. And her husband, Bud is a realtor.
    The Batterson's have some relatively minor health problems, 
asthma, allergies, back problems. But even so their only health 
care option is Minnesota's high risk pool. And this year 
they're paying nearly $21,000 for health care. Neither the 
Batterson's business nor their family can sustain the cost.
    Now in your testimony, Mr. Holtz-Eakin, states--and this is 
in the written testimony. And I think we just saw a discussion 
about this. But in your written testimony you say there's 
noncontroversial agreement that health reform will raise 
average premiums for families like the Battersons.
    I'd like to ask Mr. Gruber, I think it's actually on the 
face, evident, that there is controversy, isn't there?
    Just the fact that you disagree would be kind of 
controversial, wouldn't it?
    Dr. Gruber. Yes. Doug and I are actually friends despite 
the exchange. And there's clearly disagreement about that. I 
think once again, in the face of disagreement economists need 
to turn to empirical evidence. And the best evidence we have at 
this point is what the Congressional Budget Office has said.
    Senator Franken. But to put in your testimony that it's 
noncontroversial agreement is not accurate. And I wonder why 
I'm reading this kind of testimony.
    Ms. Praeger.
    Mr. Holtz-Eakin. May I respond?
    Senator Franken. I only have a little bit of time. Maybe on 
the next round, ok. It just seems that it's controversial to 
me.
    Ms. Praeger, Dr. Gruber talked about what he called 
entrepreneur deterrents which is job lock, right?
    Ms. Praeger. Right.
    Senator Franken. Ok. Andrea Merkle spoke to a joint session 
of Congress today. She's the Chancellor of Germany. She was 
born in East Germany.
    She said that while she was a kid people would smuggle in 
books and movies about America, from America. And she said in 
her speech that what most inspired her about those books and 
about those American movies was the American dream.
    I met with a constituent who wants to do a small business 
as bad as anything. His wife has got cystic fibrosis. So she 
has a pre-existing condition. So he can't form a small 
business.
    We're deferring the American dream for these folks until we 
get rid of pre-existing conditions. How would health care 
reform, that we're talking about now, help make the American 
dream alive for people like this constituent of mine?
    Ms. Praeger. Well, I think you've articulated that in your 
question, Senator. I think I do believe there probably is some 
entrepreneurial job lock. There's job lock in folks moving from 
company to company and not sure that the new company will offer 
the same level of benefits because those are----
    Senator Franken. But if you have a pre-existing condition--
one of the things that this health care reform would do, is say 
that an insurance company can't charge you more because you 
have pre-existing conditions. So then you can start a business 
knowing that because your wife or your kid or you have a pre-
existing condition you're not going to be charged more for it, 
right?
    Ms. Praeger. Right. Correct.
    Senator Franken. So that's a benefit of this reform. And 
yet when Mr. Holtz-Eakin talked about the meager benefits of 
this health care reform he didn't mention that at all. And he 
didn't mention eliminating the annual caps or the lifetime 
caps.
    And it seems to me that if--ok, so, that's valuable. That's 
really valuable. And my question to you is, if we're spending 8 
percent more, as he said, CBO said on--I'm not sure, is that 
the current plan or is that a plan that's an old plan. Is that 
from an old plan?
    Mr. Holtz-Eakin. Both the current proposals in the House 
and Senate would have new spending programs to----
    Senator Franken. But that's not an 8 percent increase in 
premiums, is it?
    Mr. Holtz-Eakin. No, it's the new spending.
    Senator Franken. Yes, but you kind of imply that it was an 
8 percent, that it was a growth in the premiums. Now if you're 
insuring so many more people. If you're insuring 30 million 
more people, which is 10 percent of our population, it seems to 
me that an 8 percent growth is pretty good considering what we 
have now.
    When you were economic advisor to the President, to Bush, 
during those years, how much did premiums go up?
    Mr. Holtz-Eakin. I don't know exactly. But they certainly 
were rising far too fast.
    Senator Franken. They were, I think, during your time going 
up 15, 16 percent. And you were the economic--so I just want to 
make this clear that I think there are tremendous benefits to 
health care reform that weren't mentioned when you were talking 
about what you kind of call the meager benefits.
    I'm out of time. I'm sorry, sir. Sorry, Mr. Chairman. Thank 
you. And thank you for calling this hearing. I know we'll have 
another round. I'll try--I'm sorry, to get you to respond. 
Thank you.
    [The prepared statement of Senator Franken follows:]

                 Prepared Statement of Senator Franken

    Thank you, Mr. Chairman. I appreciate the opportunity to 
participate in today's hearing, which touches on a topic that 
is crucial to the economic health and the public health of my 
State and our country. As others have already mentioned, small 
businesses are the engine of our economy. We have more than 
120,000 small business owners in Minnesota and another 390,000 
Minnesotans who are self-employed. These are people who make 
our State a great place to live, and they're the reason we're a 
hub for innovation and creativity.
    The problem we're facing today is that our current health 
system is stifling small businesses in this country. I hear 
from Minnesotans all the time who want to strike out on their 
own and start a new business. But they're scared. They're not 
scared that their idea isn't worthy, or that they won't be able 
to get the capital they need to get started. They're scared 
that they won't be able to afford health care for their 
workers, or their own family.
    And their fear isn't unfounded. Last Wednesday, at my 
weekly breakfast with Minnesotans, I met Linda Batterson. 
Linda's got three daughters. She owns her own business and her 
husband, Budd, is a realtor. They're an active family, but like 
most people, they've got a few health problems. He has back 
injuries, she's been in a car crash, and their daughters have 
allergies and asthma.
    The Battersons' only health care option is Minnesota's high 
risk pool, also known as the ``insurance of last resort'' 
because it's so expensive. The Battersons are paying nearly 
$21,000 for health care this year. That's $21,000--and these 
costs keep going up. Neither the Battersons' businesses, nor 
their family, can sustain these costs.
    We are an entrepreneurial society. But right now, we're 
putting small businesses at a serious disadvantage and stifling 
this entrepreneurial spirit. Right now, if you're self-
employed, or have a small number of workers, you don't have any 
leverage with insurance companies, so you pay higher costs.
    But with national health reform, we have the opportunity to 
make a real difference in the lives of millions of small 
business owners and their workers. After health reform, small 
businesses and self-employed individuals will be able to come 
together and leverage this power in the ``exchange.''
    The exchange will be a new marketplace where small 
businesses can shop for affordable coverage and compare plans. 
There will be no annual and lifetime caps, so families like the 
Battersons won't be at risk of losing their business. Small 
businesses will also be eligible for tax credits so they can 
purchase more affordable insurance for their workers. In 
Minnesota alone, there will be more than 72,000 businesses 
eligible for these credits. Health reform will put small 
business owners on a level playing field--able to offer 
affordable coverage so they can attract the most qualified 
workers.
    As our witnesses will describe today, small businesses are 
the foundation of a healthy economy. We must pass health reform 
this year so that small business owners and aspiring 
entrepreneurs can focus on innovation, and stop worrying about 
health care.
    Thank you, Mr. Chairman.

    The Chairman. Thank you.
    Senator Coburn.

                      Statement of Senator Coburn

    Senator Coburn. Thank you, Mr. Chairman. I apologize to not 
being here to hear all of your testimony. I want to go back to 
Mr. Doug Holtz-Eakin.
    Is it not true that one of the reasons why CBO says this 
bill is deficit neutral is because it assumes a 25 percent cut 
to doctors under the SGR?
    Mr. Holtz-Eakin. That's correct.
    Senator Coburn. And it never assumes that that will be 
repaired?
    Mr. Holtz-Eakin. That's correct.
    Senator Coburn. Ok. That's No. 1. It also assumes that 
those cuts will be maintained.
    Mr. Holtz-Eakin. Yes.
    Senator Coburn. Alright. In your experience at CBO have you 
ever seen that those cuts would be maintained under the history 
of Congress since SGR was developed?
    Mr. Holtz-Eakin. No.
    Senator Coburn. Never has happened, has it?
    Mr. Holtz-Eakin. No.
    Senator Coburn. So the first thing we know is the CBO is 
highly inaccurate in its estimate. Do you know of any other 
time that CBO got spending right on health care, within 15 
percent?
    Mr. Holtz-Eakin. They're either too high or----
    Senator Coburn. One time in the history of CBO?
    Mr. Holtz-Eakin. They're usually too high or they're 
usually too low. They've only been too high on the drug bill.
    Senator Coburn. Yes. And why were they too high? Because 
they failed to consider what market forces would do when we 
competitively bid the purchases of drugs.
    CBO also, I'd note for the record, just revised its 
estimated savings for medical malpractice caps. They were off 
by a factor of 10.
    Look, we all know what the problem is. We don't have true 
indemnification in this country. We haven't spread the risk 
among everybody. And the fight is about how you get that done.
    I want to go to Dr. Gruber for a moment. You've been very 
involved in the Massachusetts experiment in health care. I 
would like for you to tell me whether my facts are wrong. I'm 
going to read some facts and then I'd like you to comment on 
them.
    First, the Commonwealth Fund reports Massachusetts premiums 
for an average family was the highest in the Nation, almost 
$1,500 higher than the national average. And that health 
insurance premiums have risen significantly faster than the 
national average.
    Second, 8 in 10 people remaining uninsured in Massachusetts 
find cost to be the most significant impediment to purchasing 
insurance.
    Third, the Boston Globe reports that of the individuals 
covered since the 2006 change, four out of five citizens of 
Massachusetts depend on taxpayer subsidies for their coverage.
    Fourth, emergency department outpatient visits increased by 
8 percent from 2005 to 2008, increased by 2 million people.
    Fifth, overall only half the primary care doctors are 
accepting new patients. The average wait by a new patient for 
an appointment with an intern has rose to 52 days in 2007. 
That's up from 33 days in 2006.
    So, the question is, since the majority of these bills in 
Congress envision many of the same grade in insurance changes 
as Massachusetts, can you truly predict that Americans would 
not see some of these same troubling dynamics under the reforms 
that are in front of us?
    Dr. Gruber. Thank you. Thank you, Senator for bringing up 
the case of Massachusetts because I think in many ways it can 
serve as a model. Let me, you know, you certainly picked a 
particular set of facts and let me----
    Senator Coburn. Well, I'd like for you to answer those 
facts and then make any comments.
    Dr. Gruber. Great. Perfect.
    So the first fact. Massachusetts has very high health 
insurance costs. We always have. We did before this reform. We 
do after this reform.
    The reform in Massachusetts was even less about bending the 
cost curve than these bills are. These bills have a number of 
things in them to set up comparative effectiveness commissions 
to try accountable care organizations. In Massachusetts we 
completely punted on cost control. It was unapologetically a 
bill about coverage.
    That said, we do know that for individuals buying health 
insurance on their own premiums have fallen by 50 percent 
relative to the rest of the Nation since 2006.
    Senator Coburn. And what percentage of that is the people 
in Massachusetts that are purchasing insurance on their own?
    Dr. Gruber. Basically what we see is of--this has come to 
your second fact. The increase has actually been half public 
and half private in health insurance coverage.
    Senator Coburn. But what percentage of the people in 
Massachusetts that are purchasing----
    Dr. Gruber. Right.
    Senator Coburn [continuing]. Insurance, what is the 
percentage of people in Massachusetts that are singularly 
purchasing insurance that have benefited from that decline 
verses the----
    Dr. Gruber. From that decline it's about 80,000 people.
    Senator Coburn. Out of how many people insured?
    Dr. Gruber. Out of how many people insured, maybe 4 
million. So it's, you know, on the order of half of 1.5 
percent.
    Senator Coburn. So 2 percent.
    Dr. Gruber. So basically----
    Senator Coburn. So 2 percent of the people had a decline 
while 98 percent had an increase?
    Dr. Gruber. No. Once again, sir, in terms of the firms, 
large firms and small firms, they were not affected by our 
health care reform. There was nothing in our health care reform 
that affected them. We left them alone. There was not an 
employer responsibility component effectively.
    This was just about reforming the nongroup market, making 
nongroup health insurance more affordable and covering the 
uninsured. And for that population, the one we try to touch 
with our law we saw an enormous reduction in premiums.
    Senator Coburn. Well, why did they just recently throw 
30,000 legal aliens out of the plan?
    Dr. Gruber. We recently had to throw 30,000 people off our 
plan who were called aliens with special status. With a State 
fiscal crisis, which is a drop in 25 percent in State tax 
revenues, calling for across the board cuts in every program in 
the State. The legislature decided that our program, one of the 
biggest in the State--the way to cut it was to throw these 
people off because they were purely State-funded instead of 
shared between the Federal and State Government.
    Senator Coburn. Ok. How about the wait for an internist?
    Dr. Gruber. The wait for an internist has actually not gone 
up. It's very high. But it was actually high beforehand. If you 
look at the studies----
    Senator Coburn. It's actually gone up, according to my 
statistics. I'd be happy to give you the reference. It's gone 
up from 33 days in 2006 to 52 days.
    Dr. Gruber. If you actually--I notice how you're referring. 
If you look at the set of doctors in that study overall, some 
categories have gone up, some categories have gone down.
    Senator Coburn. But I specifically meant for internists?
    Dr. Gruber. Specifically for internists that does show them 
going up. And it shows those other specialties going down. 
Other studies show no change.
    Senator Coburn. Whoa, whoa, whoa. Internist is not a 
specialty. They're a primary care doctor.
    Dr. Gruber. Right.
    Senator Coburn. So the wait for primary care doctors has 
gone up 24 days, 23 days in Massachusetts in 1 year, in 1 year, 
under the Massachusetts plan. I would put forward to you that 
care delayed, is care denied.
    Because if, in fact, you can't get into a doctor for 52 
days and you have a condition that is time dependent, then what 
you in fact have done, you've increased it. I know that the 
access to specialists is probably better under that because you 
probably have less utilization. And that's one of the reasons 
you're seeing a slowdown in primary care, why you're seeing an 
increase in primary is because you're decreasing utilization of 
subspecialists.
    So tell me why you would see, as an economist, that this 
would have resulted in this kind of an increase in delay? 
What's the factor behind that?
    Dr. Gruber. Once again, Senator, there's been two studies 
both financed by and supported by physician's organizations. 
One found no change. Yours found the 19-day change over a 2-
year period.
    The reason for that is because we've insured 430,000 new 
people in the State of Massachusetts, about a 5 percent 
increase in the base of uninsured in the State and given 
existing set of primary care arrangements that is going to put 
more pressure on the primary care system. That's why as far, 
I'm not an expert in this area, but I know legislation 
addresses primary care shortages. But the thing--emphasizes 
that's a problem today. Under one study it got worse in 
Massachusetts on another study it didn't.
    But I agree, if we're going to cover 30 million new people 
in America, we are going to have to try to increase use of 
primary care access. I completely agree with that.
    Senator Coburn. Do you think that's the reason why we saw 
the emergency room visits go up as well?
    Dr. Gruber. The emergency room visits did not fall. I don't 
know if that's on the rising. And that's partly because we've 
been slow in changing people's pattern of use of care.
    Senator Coburn. Alright. I went way over my time. Mr. 
Chairman, I'm sorry. Thank you.
    The Chairman. Senator Bennet.

                      Statement of Senator Bennet

    Senator Bennet. Thank you, Mr. Chairman. Thank you for 
holding the hearing and the panel, thanks very much for being 
here.
    To our small business people everything that you've said 
are things that I've heard in Colorado over the last months as 
people have, even before this recession started, grappled with 
the question of how to cover people in what are often family 
businesses. People have relationships with one another. And 
desperately would like to provide insurance.
    Mr. Rowen, one of the things that struck me in your answer 
to the Chairman's question was that you said you really didn't 
know why the premium was going up by 128 percent. Is that 
right?
    Mr. Rowen. What I meant, if I said that, was that I didn't 
know based on the current pool of people that we insure, based 
upon what their history was, utilizing health insurance doctors 
over the previous year. And knowing to a limited degree what 
they might be facing in the next year, why that overall 
understanding interpreted to 128 percent increase or why I 
interpreted it to a 70 percent increase in the health risk of 
our pool itself.
    Senator Bennet. Were you able to get other bids on the 
policy that might have explained what the deferential was?
    Mr. Rowen. Well we were----
    Senator Bennet. Or suggested the reason why?
    Mr. Rowen. Over the last, say, 10 years, we've probably had 
eight different health care carriers. I think we've only had 2 
years where we were able to carry the same carrier for the 
second year. So what has happened to us is that absolutely 
every year, virtually, we go out and try to rebid our health 
care.
    This year we were able to. We ended up with a policy that 
essentially is costing us about 43 percent increase rather than 
the 128 percent increase. I think part of it was that the 
health insurance, which is the policy that we had last year, 
knew what our group was.
    I don't know that our group went through the audit process. 
I think they simply just took our age group and everything and 
gave us a new policy.
    Senator Bennet. I've had people in Colorado refer to it as 
a game of musical chairs that rolls around once a year when 
people have to rebid this. And my hope is that we're going to 
have a much more transparent marketplace for small businesses 
going forward than the one we have.
    Mr. Rowen. We did have underwriting though with our rebid 
and the 43 percent. And it was under it by the new insurance 
company.
    Senator Bennet. Thank you.
    Mr. Holtz-Eakin, I wondered. You had a list of things that 
you said would be real reform that we should make sure we 
attend to. And on that list you talked about the reform of the 
delivery system.
    I do believe that the most important thing we should be 
doing here is figuring out how to lower costs for everybody no 
matter, or at least reduce the rise in cost no matter where you 
come down on various other choices here that's what's 
strangling our working families and small businesses in the 
country and defeating coverage. And I wonder if you could just, 
on that subject alone--the delivery system--in your view, what 
is it that you'd like to see that's not in the legislation?
    And then I'm going to ask Dr. Gruber the same question.
    Mr. Holtz-Eakin. I'd like to see that be a primary focus of 
the legislation so that when these reforms are undertaken the 
Congress looks to see if they work. If they do, we will see 
Medicare/Medicaid rise more slowly. Resources will be freed up 
in the Federal and in the State budgets, quite frankly.
    And coverage expansions can be followed along in a fiscally 
responsible fashion. So one is simply sequencing.
    The second is what do you do? I would urge you to do things 
that are in bills, but do them more aggressively. One of the 
primary drivers of bad medicine and expensive care in America 
is the Medicare payment system which has four siloed payments 
to make sure that hospitals get their money, doctors get their 
money, insurance companies get their money and drug companies 
get their money and the beneficiaries know we're in there.
    There's no coordination. There's no emphasis on paying for 
quality outcomes or making sure people are well to begin with. 
The Federal Government pays half America's health care bills. 
And that system drives a lot of bad medicine.
    We pay doctors more to do more. We pay hospitals, fix them 
out because they do less. Doctors practice in hospitals. It's 
utterly schizophrenic.
    Senator Bennet. Right.
    Mr. Holtz-Eakin. So I would start there. I know you're 
running out of time.
    Senator Bennet. I'm sorry. And I am. I wanted Dr. Gruber, 
who I think made an interesting point that you No. 1, don't 
want to let the perfect be the enemy of the good here. But if, 
in your judgment, you are looking for improvements in the parts 
of the bills that deal with delivery system reform, what would 
you be looking for?
    Dr. Gruber. I mean, I think that what Doug's laid out is 
exactly right. And there's a lot of people out there that know 
that that's what we need to do. The promise is not a lot of 
people out there are willing to put that in legislative 
language.
    And the issue is, basically, if we wait for that to be in 
legislative language we won't get reform. Basically, what we 
have now is a reform that will do what we can do today. And I 
think actually does a lot of things that starts us down the 
road toward those reforms.
    There are pilots of the kind of cannibal-care organizations 
Doug advocates and I think are very smart. There's a 
comparative effectiveness institute to study what works and 
what doesn't. There is sort of a Med PAC on steroids committee 
to try to take a look at our physician reimbursements.
    I agree with Doug. I'd like to go further. I just haven't 
seen those ideas on paper to go further. I don't believe we 
should kill this bill which CBO says is deficit improving over 
the next 20 years because those ideas haven't yet been written 
down.
    Senator Bennet. Thank you, Mr. Chairman.
    The Chairman [off mic]. Thank you.
    Mr. Roberts.
    Senator Roberts. Thank you, Mr. Chairman. I belong to that 
special fraternity; if you look in the bios it says Roberts, 
Journalist, that is an unemployed newspaper man.
    Mr. Cullen. It's a high fallutin word.
    Senator Roberts. It's a high fallutin word. You're right, 
Art.
    You don't look insane to me?
    [Laughter.]
    Mr. Cullen. I certainly feel it.
    Senator Roberts. Well, you're wearing a nice coat and that 
bow tie matches. And you look a lot like Sam Clemons. And you 
know, he's got the bottom of the point.
    Mr. Cullen. If only I could write like him.
    Senator Roberts. My time, not yours.
    Mr. Cullen. Alright.
    [Laughter.]
    Don't knock the bow tie. My wife made it, alright?
    Senator Roberts. There you go.
    Mr. Cullen. Thanks. It's lovely.
    Senator Roberts. I need her and don't tell my wife.
    [Laughter.]
    Your brother John, founded the Storm Lake Times in June 
1990 to make a difference in the community. That regardless, he 
didn't start the hometown newspaper to administer health 
insurance plans and cover its escalating costs. Amen, to that.
    In 1856, John Wesley Roberts came to Kansas. He had a flat 
bed press, a team of oxen, a Bible and a six gun. And he was 
fighting for the cause between Kansas being a free State or a 
slave State. I don't think he even considered health insurance. 
And if he did, he didn't think it was an entitlement. He 
thought he probably ought to provide it or just put it in the 
cash drawer in case somebody needed it.
    Well times have changed. I'm struck between the testimony 
because as Senator Enzi pointed out right at the start, in a 
letter to Chairman Baucus, the CBO has stated that the premiums 
in the new insurance exchanges would tend to be higher than the 
average premiums in the current market.
    Now we've got other nonpartisan entities, the Joint 
Committee on Taxation to the CMS Office to the Actuary of the 
National Association of Insurance Commissioners have all come 
to the same conclusion. The Health Care Reform bills, as 
currently before Congress, will actually result in higher 
premiums and higher cost for small businesses and individuals. 
This is additional to the cost that we are going through now.
    So I have a question for Ms. Bender, who helped author the 
Oliver Wyman Actuarial firms premium impact study which is the 
only study, as I understand it so far, to try to estimate the 
impact on premiums at the State level, i.e. small business. And 
my question for Ms. Bender is--as compared to the current law--
will the Health Care Reform bills currently before Congress 
likely make insurance premiums for small business like Kansas 
more or less expensive? We're in cluster four. I think we're 
No. 2 in less regulation which probably tells you a lot and 
also the work of Sandy Praeger.
    Ms. Bender. The short answer is yes.
    Senator Roberts. I'm sorry?
    Ms. Bender. The short answer is yes. It will make it more, 
for small employers in the type of State that Kansas is that 
has implemented what we call the NAAC model.
    Senator Roberts. I like the short answer.
    Ms. Bender. OK. Yes. It will.
    [Laughter.]
    Senator Roberts. The estimates project that Kansas small 
businesses could see increased premiums all the way up to 28 
percent over 10 years. As you are aware both the HELP and 
Finance Committee bills provide limited tax credits for small 
businesses to help them provide coverage for their employees. 
But they are very limited.
    The HELP Committee bill provides credits on a sliding scale 
to small businesses with 50 or fewer employees with an average 
wage of no more than $50,000.
    While the Finance Committee bill limits its credits to 
small business with 25 or fewer employees with an average wage 
of no more than $40,000.
    Kansas has a lot of small businesses, 60,000 in fact, 
probably 10,000 under Iowa there. But at any rate a major 
driver of the Kansas economy. But under these health care 
reform bills I believe most small businesses in Kansas will be 
saddled with a higher premium cost, possibly without having the 
benefit of the tax credits.
    Ms. Bender, have you estimated what percentage of small 
businesses will be able to take advantage of these credits?
    Ms. Bender. We did, as you indicated, by clusters so we 
can--I can state what it is for the cluster that you're in, of 
which Kansas is in, which is about 11 percent. Now it could 
vary with any----
    Senator Roberts. Eleven percent?
    Ms. Bender. Eleven percent.
    Senator Roberts. Eleven percent on the tax credits and yet 
most people are testifying that the costs go up. Well how much 
more affordable will these credits really make the premiums? 
And how many years will they be available?
    Ms. Bender. I'm sorry?
    Senator Roberts. I said how much more affordable will these 
credits really make premiums? And how many years will they be 
available?
    Ms. Bender. The premium credits, I'd have to look at the 
technicalities of all the bills. But I think they go from 25 
percent to 50 percent.
    Senator Roberts. Yes, that's correct.
    Ms. Bender. And I believe now some of the bills like are 
from 2 years, 3 years.
    Senator Roberts. It's 2 to 3 years, right. That's so we 
just hope for the best after that. They will not cover 100 
percent or a substantial percentage of the premium cost for 
many businesses who do qualify. Their credits are only for 2 to 
3 years as I've indicated and as you had stated.
    Could the wage limitations adversely affect workers 
earnings by creating a disincentive to raise wages?
    Ms. Bender. Yes, it could. I mean, we didn't say this in 
our report. And we did not model this in our report. I don't 
want to lead anyone to believe that this was part of our 
report.
    I want to clarify that. But it could almost put a purpose 
incentive in order to keep the tax credit, that you might want 
to keep your eligibility for the tax credit, that you would 
want to keep your average employee wage below whatever the 
trigger point is.
    Senator Roberts. I'm about a minute over, Mr. Chairman. 
Thank you.
    The Chairman. Thank you, Senator Roberts.
    Senator Specter.
    Senator Specter. Thank you, Mr. Chairman for scheduling the 
hearing. And I thank the witnesses.
    Mr. Rowan, the New York Times featured your situation in 
the article 9 days ago. And the Times points out that the high 
rates are--no question the insurers are under pressure from 
Wall Street and the threat of an overhaul may be part of the 
reason. And one of the expert brokers said that he was 
mystified by the size of the increases.
    Now you've testified by a number of factors, demographics, 
price trends, excess risks of the group. Would you like to see 
your insurance company, by the way they declined to come in 
along with the other insurance companies contacted by the 
committee with excuses. Would you like to see them come in and 
produce their books and justify their reason for the 128 
percent increase that they asked you for?
    Mr. Rowen. As I testified earlier everything that I can see 
relative to the history that I know about my employees and our 
health care usage in no way gives us the sense that 128 percent 
increase would seem to be appropriate.
    Senator Specter. Commissioner Praeger, I understand that 
you have some views on the subject as to the rise in premiums 
occasioned by the likelihood of some legislation to be enacted 
soon.
    Ms. Praeger. We, through our surveys that we've done and 
talking with other commissioners around the country, we know 
that, and this is, stating the obvious. Health insurance 
premiums are going up. I think they are the result of probably 
several factors.
    But most of----
    Senator Specter. Do you think the likelihood of legislation 
is a factor?
    Ms. Praeger. There may be some companies that are trying to 
get out ahead of the curve. But I do think health care costs 
are probably the big driver. We would look, I mean part of our 
review is we do have the authority--if we think a rate that is 
coming into us is excessive, we do have the ability to deny it.
    Senator Specter. When you testified that they asked for 
increases based on medical trends based on demographics, that 
you really can't challenge them.
    Ms. Praeger. Right.
    Senator Specter. If you had evidence at the same time that 
the rates were being increased because Wall Street is putting 
pressure on insurance companies for more profits in 
anticipation of legislation. Would that give you a little bit 
more----
    Ms. Praeger. I would be----
    Senator Specter. Excuse me, the question is not finished. 
Would that give you a little more basis for saying no rate 
increases?
    Ms. Praeger [continuing]. We would call that company in. 
And we would look very closely at what was driving their--what 
was their motivation behind that rate increase.
    Senator Specter. Would you like to see this committee get 
to the bottom of that question with use of the subpoena power?
    Ms. Praeger. Yes.
    Senator Specter. Well, that's a good, concise answer. The 
issue of regulation is very uneven. Pennsylvania and Hawaii for 
example are the only two States that do not have a review for 
small market insurance plans. And in my State there are no 
rating restrictions for health insurance plans at all.
    And it may be that the States ought to be looking at more 
regulation to have more authority. One of the issues which the 
Congress is considering is to repeal the McCarran-Ferguson Act 
to eliminate the added trust exemption and another proposition 
looking for the possibility of insurance companies doing 
business in more than one State. I'd like your view as to 
whether you think McCarran-Ferguson has outlived its usefulness 
and be good to have more weapons available for people who 
collude to raise rates.
    Ms. Praeger. Well, Senator, I've heard the discussion about 
McCarran-Ferguson. And we, as regulators, don't believe we've 
seen collusion among companies. But certainly having some 
additional tools in terms of the kinds of information----
    Senator Specter. You don't see the collusion, but are you 
equipped to investigate for it?
    Ms. Praeger. Yes, we can now.
    Senator Specter. Have you?
    Ms. Praeger. And we would not. I mean, if we had evidence 
that companies were coming together and colluding to set rates 
we would. We have the authority now to stop that practice. And 
we would take action.
    Senator Specter. Thank you very much. Thank you, Mr. 
Chairman.
    The Chairman. Thank you, Senator Specter. If it's alright, 
I'll begin my second round. I'm sorry that Mr. Coburn had to 
leave but regarding his exchange with you, Dr. Gruber, I think 
one thing I would like to point out is that in our bill we 
include a strong workforce title.
    We all know that we lack primary care practitioners 
throughout this country whether they're physicians or PAs or 
nurse practitioners. We lack a number of community health 
centers that we need more of in this country also. Now 
Massachusetts doesn't have the ability by itself to do that. We 
do.
    Obviously, it's going to take some time. But we do have a 
strong program in the bill--scholarship programs to get more 
people through and primary care to address rural areas and 
places that have a lack of primary care people, programs to 
train more faculty members so we can get more nurses and nurse 
practitioners. Again, this is going to help, I hope, address 
that waiting period to see doctors. But that's something that 
Massachusetts didn't have. And that's something that we're 
doing in our bill.
    Ms. Bender, the findings in your testimony, if I'm not 
mistaken came from a report that was paid for by the BlueCross/
BlueShield Association. Is that true?
    Ms. Bender. That's true.
    The Chairman. In the interest of transparency would you be 
willing to share with this committee the underlying data on 
which you base the study so that it can be independently 
analyzed by objective actuaries and economists? Would you be 
willing to share with us the underlying data and provide that 
to this committee?
    Ms. Bender. That data is considered proprietary by each of 
the companies that were willing to participate in the study. 
That was one of the conditions, where we signed confidentiality 
agreements with each of them. In fact, I don't even have the 
data.
    The Chairman. So what you're asking this committee to do 
then is just take the word of BlueCross/BlueShield that the 
data are reliable and sound. Is that what you're asking us to 
do?
    Ms. Bender. No. I guess I'm asking you to take the word of 
credentialed actuary that they would, that the modeling that we 
have done is in conformance to----
    The Chairman. But how can we rely on something when the 
data is kept secret? We need the data. We've got to look at it.
    All the studies that Dr. Gruber does, they're out there. We 
can look at it. We can take apart every little bit.
    Why should we just take their word for it?
    Ms. Bender. I don't believe that, as we've heard here from 
others, that our study is necessarily inconsistent with other 
ones that have been done. But the data that we based it on is 
considered proprietary and----
    The Chairman. Well, I'm sorry. I won't accept it until we 
can have the data analyzed.
    In your written testimony you state that the small group 
market is highly regulated. There was a little bit of exchange 
going on with Commissioner Praeger about that. Could you please 
explain to Mr. Cullen and Mr. Rowen how current regulations are 
working well for them and their employees?
    Ms. Bender. As I said in my opening statement, I'm not 
going to defend the actions that occurred in Pennsylvania. And 
unfortunately Pennsylvania is one of the minority States that 
does not have enabling legislation to allow and prevent exactly 
those kinds of abuses. And I certainly am not going to defend 
that.
    The Chairman. Well, obviously they're not well regulated 
when they can have those kinds of price spikes.
    Dr. Holtz-Eakin, in your testimony you state that we should 
look to the insurance industry studies since CBO has not done 
an analysis of the impact of reform on premiums. Well, I looked 
it up. In fact, it has.
    CBO estimated that a single policy in the current 
individual market will cost $6,000 in 2016. By contrast, CBO 
estimated that a policy in an exchange, like we're setting up, 
will cost only $4,700 in 2016. And the exchange policy would be 
even more generous. That means that the reform will save at 
least $1,300 even before the tax credits.
    So my question is this. Should our standard be the CBO, the 
agency you used to head, and not the studies bought and paid 
for by the insurance industry?
    Mr. Holtz-Eakin. I certainly would prefer to have the CBO 
do a comprehensive analysis on each of the market groups, small 
group, individual, in the context of the reform bills that are 
currently before the Congress. That is information that I think 
is central to this debate. And as I said in my written 
testimony I don't think you should view industry paid studies 
with anything but the appropriate skepticism. I mean, there's 
an obvious self interest there.
    The point is simply that those in the National Association 
of Insurance Commissioners, the Joint Committee, CMS Actuaries, 
CBO, myself, agree on the fundamental logic of what goes on if 
you have these kinds of reforms in the absence of a strong 
mandate. And the question now is how big will they be? I 
encourage you to get the CBO to answer that question.
    The Chairman. Well, the CBO did.
    Mr. Holtz-Eakin. They didn't answer the question for the 
bills currently in front of the Congress what would be the 
comprehensive impacts of all the provisions on those three 
different markets because the individual and small group 
markets often don't move the same way. I think that's very 
important for people to understand and for the CBO to analyze.
    The Chairman. Mr. Gruber.
    Dr. Gruber. I think that Doug is absolutely right. The CBO 
has not opined on the effect on small group premiums. What the 
CBO has done is given us some guidance to the reliability to 
the industry studies because the CBO has said for nongroup 
markets where industry studies have said premiums will go up by 
50 percent or more. CBO says they'll go down exactly you've 
cited the facts there.
    So I think Doug is absolutely right. And I think we're in 
absolute agreement. We hope that CBO will come out and talk 
about each market.
    CBO is pretty busy now with a lot of stuff. So I think we 
have to rely on what they've given us so far.
    The Chairman. Senator Enzi.
    Senator Enzi. Thank you, Mr. Chairman. Going back to Ms. 
Bender, the data that was evaluated for that study, wouldn't 
that involve medical claims information?
    Ms. Bender. Oh, definitely.
    Senator Enzi. And isn't it true that public disclosure of 
claims data would violate privacy protections in HIPPA?
    Ms. Bender. Well, you know, I am not an attorney. So I will 
defer that to the attorneys.
    Senator Enzi. Ok.
    Ms. Bender. There could be some cause of concern. But I 
can't legally speak about that.
    Senator Enzi. Well that's usually why somebody hires 
another firm to go into this and sign this privacy information. 
One of the biggest concerns for me, as I travel Wyoming and 
other parts of the country, is that we have given people the 
impression that with this Health Care Reform that they're not 
only going to have their costs go down. I'm surprised at how 
many people think it's going to be free.
    I mean I have businessmen come up to me and say, ``Well 
when this Health Care Reform goes into effect I'm going to have 
a lot more money to spend because I'm not going to have to pay 
those insurance things.'' It's incredible to me that 
businessmen would do that. But that's an impression that we, as 
Congress, have given. And it's really, really wrong.
    There are parts of this--Senator Franken mentioned the 
lifetime caps being lifted and the pre-existing conditions. It 
seems to me like the insurers are going to charge a higher 
price premiums to cover those costs of benefits. Ms. Praeger, 
would you think that that would be the case?
    Ms. Praeger. Well, if we can get rid of--they'll be 
charging based on currently as the bills stand, an age rating 
of somewhere between 2 to 1 or 4 to 1, depending on which of 
the bills you're looking at and some geography. But other than 
that, the rating will have to and the premium charge will have 
to be pretty consistent. That's where you get into some of the 
issues with the small group market because some younger, 
healthier groups will pay more. And older, sicker groups will 
pay less.
    And the thought is over time, there will be rate stability 
that will come into play so you won't have experiences like Mr. 
Rowen had where a couple of people getting sick in a small 
group can really dramatically impact the rates. So they'll be 
some rate stability. And I think that will be a good thing.
    Senator Enzi. I'm familiar with how that works because my 
own small businesses had been through the trials and 
tribulations that Mr. Rowen has been through with wanting to 
provide insurance and seeing the prices go up and up and up 
because we have a small group, because some of the people are 
older in that group. The rating would effect that a little bit. 
But a lot of how that would affect it is that the price for the 
younger ones is going to go up.
    The older ones have come down, the younger ones will go up. 
So it, I guess, encourages you to hire older, sicker people.
    [Laughter.]
    Mr. Rowen. Unfortunately now we have an encouragement to 
hire younger, healthy people.
    Senator Enzi. Absolutely. And you have to look at the 
potential of some costs from fines for not providing under the 
HELP bill, it's 60 percent of the insurance for your employees. 
And then there's a fine that kicks in after you have 25 
employees.
    So one of the things that concerns me is this bill is so 
comprehensive.
    It doesn't just bite off small business and solve some 
small business problems.
    It doesn't bite off the individual market and solve the 
individual.
    It doesn't bite off Medicare and solve Medicare problems. 
That piece alone would give seniors a little bit more 
confidence that what we were doing was actually going to help 
them out instead of being all nervous about what's going to 
happen.
    But as I've spent time on the HELP Committee and as I spent 
time on the gang of six and as I spent time going through the 
Finance Committee the biggest thing was the number of ``Oh, 
wow, is that really how it works,'' that we had to do because 
we were biting off so much. And I think that's a problem that 
CBO has as well, which is trying to take a look at so much. And 
under the HELP bill there's 214 references where we weren't 
willing to go into the details. So we just said, don't worry, 
the Secretary of Health and Human Services will cover that.
    I don't know if the Secretary can cover 214 areas of doing 
regulation all at the same time, even if she had until 2013 to 
do it, when a lot of this kicks in. So again, I really 
appreciate all of the information that you shared with us today 
on the small business health plans. I think if those went in 
where people could group together across State lines so that 
they could have these bigger pools, that it would bring down 
the cost significantly.
    Again, what I rely on of that is the Ohio experience 
because they came to me. They wanted to make sure that they 
weren't going to be excluded from any kind of a small business 
health plan. They found some significant benefits.
    The piece that we didn't have worked out was the mandate 
piece. Every disease group out there is interested in making 
sure that their--all the tests, as well as any treatments are 
covered under every mandate that you can think of. And the 
number of mandates varies from Wyoming with I think, 23 
mandates to some States that have 1,200 mandates that these 
small businesses have to pay the insurance on.
    We had a way of working that out, but we never were able to 
get to that amendment. And I ask the Ohio folks, ``how do the 
mandates work?'' They said, ``Well, it's mandates. But we've 
been able to save enough money that we don't just cover those. 
We've added ones that the State doesn't even require,'' which I 
thought was very admirable.
    I do hope that somewhere in the legislation we'll take a 
look at the small business health plans. There's a slight 
version of it in the co-ops. That, of course, gets government 
funded. And none of these small business health plans had to be 
government funded.
    So, I don't think that started with my time.
    [Laughter.]
    I think it just continued on from your time, I hope. So, 
but at any rate, I'll submit some questions that I need a 
little bit more specific information on than what you might 
have with you or that would be interesting.
    I was at a hearing once with every living accountant with 
the FCC, Head Accountant at the FCC. And I was asking him 
accounting questions because I'm the only accountant in the 
Senate. And my staff was watching on television and laughing 
because behind each person there's a wedge of people that are 
on TV and they're all asleep.
    So I'll submit them in writing. Appreciate your answers.
    The Chairman. Sorry about the clock.
    Senator Franken.
    Senator Franken. Thank you, Mr. Chairman. And I think 
that's a good strategy. I'm going to submit some questions in 
writing too because I have to go to the floor and deliver a 
speech pretty soon.
    Ms. Praeger, we all know that small businesses that try to 
do the right thing and provide health care for their workers 
are sharing a big part of the burden or shouldering a big 
burden now. So it's really no surprise that a lot of small 
businesses have questions about how this bill will affect them. 
And I was recently in touch with Jennifer Brigham, President of 
the Minnesota Chapter of the National Association of Women 
Business Owners. And Jennifer had gotten these questions from 
her fellow small business owners on what health care would mean 
to them.
    We know that this Health Reform bill will invest 
unprecedented resources in small businesses so that they can 
affordably cover their workers. And do it with less 
administrative burden. But since small businesses don't have 
big human resources departments how can we make sure that 
they're able to access the new resources to help them and their 
workers?
    Ms. Praeger. Senator, I think the exchange really can 
provide that function. It will take on some of the 
administrative burden. I think Mr. Cullen mentioned that.
    It is frustrating for the small businesses. Large companies 
have built in human resource departments that can negotiate. A 
small business is, you know, lucky to find one company that is 
willing to write them especially if they have an older, sicker 
workforce.
    I think the exchange is an opportunity for companies to put 
their products on a side-by-side comparison. And that small 
business owner will have an opportunity to go to that exchange 
and make some good comparisons.
    Senator Franken. So, and the exchange will allow you to be 
covered or be part of a larger risk group and spread the risk 
over?
    Ms. Praeger. Well, no. The exchange--you're still buying 
for your individual company. But if you get rid of some of 
these rating restrictions that are currently in place, everyone 
will be rated on the same characteristics. So you, in a sense, 
have that benefit.
    You'll no longer be rated higher because of the age. Well, 
except for the age rating that is currently in the proposals. 
But you won't be rated higher based on the other.
    Senator Franken. It won't be as far a spread, right.
    Ms. Praeger. And health status and all of the other rating 
factors, so that being able to buy in a larger pool is really 
much less important.
    Senator Franken. Mr. Holtz-Eakin, I have to agree with you 
completely on the need to bring down, well to deliver health 
care in a more efficient way. I don't think any of us are 
arguing this. Now when I heard both you and Mr. Gruber talk 
about this I didn't hear any reference to the value index that 
Senator Cantwell presented in the Finance Committee.
    Minnesota is a State that I think gets a little over $6,000 
per Medicare patient compared to Texas that gets something like 
$8,000 to $10,000 or something. We actually get punished for 
delivering high quality care at a low cost. So it seems to me 
that this is something that neither of you mentioned, but is 
really important.
    I'm hoping that it ends up in the final bill because what 
this will basically do is change Medicare reimbursements and 
change them to reflect the value which is the quality over the 
cost that plans are giving. For example, there was the famous 
article in the New Yorker where Mayo does it for a third of the 
cost that McAllen, TX does. Now McAllen has a different 
demographic, but El Paso is the same demographic as McAllen and 
is doing it at almost just about half the cost. I just want to 
make sure that everyone understands that this is actually in a 
bill. And it's in this bill.
    I don't think that it's wrong to try to do both things at 
the same time which is make sure that people get covered.
    Make sure that people with pre-existing conditions can 
start a new business.
    Make sure that people don't go bankrupt if they get sick.
    At the same time attack the way we deliver health care in 
this country so that we do it more efficiently and reward good 
care and penalize bad care and couldn't have agreed with you 
more. I will submit some written questions. I'm sorry that my 
time has run out. But, I want to thank all of you for being 
here today.
    The Chairman. Ms. Bender, I'm told that if you de-identify 
the data that that will meet the HIPAA requirements. So why 
can't we get the data and de-identify it?
    Ms. Bender. I don't think that the issue of keeping the 
data confidential was necessarily associated with HIPPA. I said 
I am not a HIPPA lawyer. In order for us to obtain the data we 
had to sign confidentiality agreements with all the different 
companies. There is proprietary data included in this regarding 
rating and that would be very advantageous to competitors.
    Let me emphasize that, the strength of the data is that 
it's based upon real groups. That is very important and 
critical when we're trying to model the impacts of proposed 
legislation to really look at what is going to happen to real, 
live groups.
    The Chairman. Well, Ms. Bender, I hope you excuse me, but I 
am simply going to be highly skeptical of any findings that 
come out and we can't have transparency on the data. I'm sorry, 
I'd just be highly, highly skeptical. That leads to another 
point of course. And that is transparency, you know.
    Again, I'd ask Commissioner Praeger. I haven't asked you a 
question, but should there be a little bit more transparency in 
the provisions of how insurance companies arrive at premiums? 
How they base those premiums? And what the data is that they 
use on which they maybe implement premium increases? Should 
that all be transparent?
    Ms. Praeger. I think any information that can help 
purchasers of health insurance make a good decision is valuable 
information. So I, perhaps through the exchanges, that will be 
a way of making more of that information available and 
transparent so that people can make good, informed decisions. 
If we want a robust marketplace you have to have people 
competing on good information.
    The Chairman. I'd like to know from insurance companies, I 
mean, how much of this is for meeting Wall Street's needs for 
profits? How much to meet new buildings? How much to meet CEO 
pay and all the other kinds of stuff, administrative costs? I'd 
like to know, why.
    What goes into those factors that raise those premiums? I 
think which raises another point that I hadn't gone over with 
any of you.
    We haven't talked about the public option that would be 
available to all small businesses in this country and the self 
employed. And what that might do for competition. And what that 
might do to help people like Mr. Cullen or Mr. Rowen. They may 
want to take it, but they may not. But at least it may be an 
option.
    And I just wondered if any of you have any views on that?
    Mr. Cullen. We need it. We need the public option, period.
    The Chairman. Alright.
    Mr. Cullen. Because then that will get health insurance and 
all that administration and all that stuff off our backs. We 
can go say, look to all our good employees we can, with 
complete piece of mind, say here's the solution to all these 
problems that we list.
    The Chairman. Commissioner Praeger.
    Ms. Praeger. As long as the public option competes fairly 
in the marketplace and I think the bills, at least two of them, 
do allow for a level playing field negotiating for rates, 
charging premiums sufficient to pay claims, having solvency 
standards that are the same. It would add another element of 
competition. But I think it's important that it's fair 
competition and that it not be using the Federal Government as 
a backstop, especially in terms of premium rates and solvency 
standards.
    The Chairman. Right.
    Mr. Holtz-Eakin, you said in your testimony, I believe it 
is noncontroversial that the combination of guaranteed issue 
and community rating would raise average premiums--well, but 
for the individual mandate.
    Are you for or against the individual mandate? I'm just 
curious.
    Mr. Holtz-Eakin. I personally don't favor the individual 
mandate. It's one of the more difficult calls that people make 
in this area. I understand those who, having gone down the 
route of guarantee issue and community rating, feel they have 
to have that mandate to make sure you don't get the spiral that 
I believe is non-controversial in the absence of it.
    The bottom line is I don't believe we should guarantee the 
insurance existence in America business by making me buy their 
product. I want them to earn my business. And so, I would 
prefer to not have an individual mandate, but to have reforms 
that force insurers to compete on the basis of price, quality 
of product and service to consumers, as they do elsewhere. I 
don't see that in the current marketplace, not too wild about 
what I see out there. And I'm certainly not in favor of having 
them guarantee my business by fiat.
    If I could say about the public option, I believe, you 
know, there's lots of politics. And let's just acknowledge 
that. But from a substantive point of view the public option is 
a red herring.
    If it does Medicare reimbursements, it's a bad thing 
because Medicare reimbursements are a problem in our health 
care system. And spreading them more widely will only spread 
that problem.
    If it is something that competes on a level playing field 
with private insurers, genuinely, and that's hard to construct, 
I would argue. It raises the question, why don't we have 
genuine competition now? We should be looking at what is wrong 
with our insurance markets that doesn't generate sufficient 
competition because if there's not good competition, adding 
another noncompetitive level playing field isn't going to help.
    So I'm sympathetic to the idea that people should have good 
choices. I'm sympathetic to the fact there should be strong 
competition. I'm unconvinced the public option brings anything 
to the table in that regard.
    The Chairman. I have a response to that, but I see Mr. 
Gruber also has a response.
    Dr. Gruber. Well, actually in some sense, I want to agree 
with what Doug is saying in the following sense which is I 
think for the public option to really have the biggest effect, 
we need to set up an exchange that's strong. I think what's 
ironic about the current debate is people talk about the public 
option providing competition. But they don't talk, as Doug 
mentioned, about setting up a competitive environment which 
allows the public competition to maximize its potential.
    That's why, based on our experience in Massachusetts, I 
believe we need strong exchanges that can selectively contract 
with private insurers and the public option to provide real 
competition among insurers to provide products to individuals 
and not just a yellow book exchange where anybody can sign up. 
And I think in some sense I'm surprised that issue hasn't been 
raised more. We need strong exchanges to make a public option 
really realize its potential.
    The Chairman. Well I would respond to both of you that we 
do have in our bill very strong exchanges either State or 
regional. They can form regional exchanges which have a lot of 
authority and will have power. And I believe that will be in 
the final bill.
    But the idea of a public option is that since we have it in 
our bill, in the HELP bill, we had it not based on Medicare. 
But we had it based on the Secretary negotiating reimbursements 
and rates.
    As the Secretary then figures out how to set premiums, the 
Secretary doesn't have to take into account paying a CEO $12 
million a year. They don't have to take into account responding 
to Wall Street's demands for profits to answer its 
shareholders. The Secretary doesn't have to respond to the 
needs for new buildings and nice accoutrements and all of that 
that goes into all of the administrative overhead.
    So that provides, I think, pretty darn good competition.
    Yes, sir?
    Mr. Holtz-Eakin. And I hear you at that. And I, you know, I 
can visualize a world where that might occur. But in the world 
that I've experienced working with the Congress it's also true 
that that same public option is going to hear from the hospital 
that didn't get their business and was given to another 
hospital in the local area.
    My experience in Congress is, that will matter. And the 
administrator of that public option will have to be responsive 
to that and split the book between the two hospitals, thereby 
limiting their ability to negotiate effectively. And in a 
million other ways I am concerned that the public option will 
be subject to the same kinds of pressures that have riddled 
Medicare with special carve outs and favors and have diminished 
its ability to be a health insurance product.
    So there's a world that I can write down on paper and you 
and I can sketch out where effective competition is enhanced. 
But there's also a serious downside risk that that public 
option will be handicapped in its mission by the dynamics of 
regular politics.
    The Chairman. Well, I suppose that's always a danger 
looking down the road and saying that we're going to respond to 
all these different needs and stuff. But I think if we 
structured it correctly and we have these strong exchanges and 
we make the system more transparent which I keep harping on, 
then we can find out those hospitals that aren't very 
effective, that aren't very cost-effective.
    The last thing I would just say is that I think, Ms. Bender 
you and I agree on this. You talked a lot in your statement 
about wellness and prevention. You talked about that. And I 
think you're right on target right there.
    CBO, now this is where I disagree with CBO. They can't give 
us a score on it on savings. They say it just costs money.
    So I said to them why don't you talk to Pitney Bowes. Why 
don't you talk to Safeway? Why don't you talk to a lot of 
private businesses out there that have implemented good, solid, 
preventative wellness programs and their bottom line is they 
save money. They can prove it.
    But CBO won't look at that. The more that we put into 
prevention, up front prevention and coverage, the better. And 
that's why in our bill we have no co-pays and no deductibles 
for screenings, annual physicals, vaccinations, things like 
that. No co-pays for deductibles for anything that the U.S. 
Preventive Services Task Force says is rated an A or a B 
because we want to incentivize people to take advantage of 
that.
    And then we have a trust fund that we're going to have, I 
hope, a lot of money in that will go to encourage more 
prevention and more wellness programs. Tax breaks for small 
businesses to be able to have wellness and prevention programs.
    You can talk all you want about bending the cost curve. 
There's only one way you're going to bend the cost curve. And 
that's getting ahead of it. By keeping people healthy in the 
first place and cutting down on the number of doctor's visits, 
the number of hospitalizations in this country.
    Other countries have done it. It's not a secret. Other 
countries have done that. Do it much better than we do.
    I'm going on too long. I know you've got to go. And you've 
been very kind to be here this long. And I'll stop with Mr. 
Rowen.
    Mr. Rowen. If I could say one final thing when you talk 
about cost prevention or cost, trying to keep the costs down, 
one of the things we believe about our company and our 
employees is that although we're very, very concerned that with 
a $2,000 and $4,000 deductible some of our people are not going 
to be able to make it through the year.
    The flip side of that is that our experience showed that as 
we paid the full deductible for our employees the usage 
increased every year.
    The Chairman. Sure.
    Mr. Rowen. Which meant that more and more people were 
seeking health, you know, going to the doctors, but not 
necessarily for the right things. So we believe that you need 
to have some participation by all users in the cost system. If 
you just give somebody a complete, free ride, yes, they will go 
to prevention which is the good side of it. But they 
potentially will also go to overuse.
    The Chairman. Well, the co-pay--when I mentioned about no 
co-pays and deductibles it's only for prevention.
    Mr. Rowen. I understand that. And I think some of those 
areas are very appropriate. Absolutely.
    The Chairman. Obviously I agree. People ought to have some 
skin in the game. Absolutely.
    Anybody else have any views or thoughts or suggestions or 
comments before I close this up?
    Commissioner.
    Ms. Praeger. I would just like to say I applaud the work 
that's been done. I think it's still, there's still a lot of 
work to do. I do believe it is about health care costs.
    And while reforming the market is going to help. And I know 
you understand that. It is about changing the incentives from a 
system that pays for volume verses value and quantity verses 
quality.
    The Chairman. Yes.
    Ms. Praeger. Every chance I get I want to mention that 
because I think that's a key element to really changing the 
health care system in this country.
    The Chairman. I thank you for that. As someone once said, 
if you reimburse on the basis of quantity, you get quantity. If 
you reimburse on the basis of quality, you'll get quality. And 
that's where I think we've got to be headed.
    Ok, Mr. Cullen, since you're my constituent, I'll close 
with you.
    Mr. Cullen. I appreciate that. Well, everybody here is 
talking about being fair to the insurance companies. When have 
they been fair to us? And why do we have to provide a level 
playing field when they've obviously, by our rate history been 
screwing us for the last 20 years?
    Why do we have to be fair to them? It just incenses me when 
people talk that way. These people are legal thieves with anti-
trust protection and we want to treat them with kid gloves. It 
drives me nuts. And that's all I've got to say.
    The Chairman. Well, on that note, I will request that the 
record remain open for 10 days for submission of statements for 
the record. I thank you all very much for being here and being 
so patient in answering our questions.
    The committee will stand adjourned.
    [Additional material follows.]

                          ADDITIONAL MATERIAL

                   Prepared Statement of Senator Dodd

    I'd like to thank our distinguished Chairman for convening 
this hearing, and our witnesses for joining us.
    Some have argued that, with our economy still hurting, it's 
the wrong time to tackle health care reform. I hope today's 
discussion can serve as proof positive that there has never 
been a more urgent time to reform our broken health care 
system.
    Small businesses are the best job creators we have. When 
our economy finally begins to pick up momentum again and gets 
back on the track towards prosperity, it will be small 
businesses driving the locomotive. If you're concerned about 
unemployment, and in my State of Connecticut we are extremely 
concerned about unemployment, then freeing small businesses to 
grow and expand is a critical priority. In fact, from 2004 to 
2005, small businesses created 100 percent of Connecticut's net 
new jobs.
    We will hear it in living color from our witnesses today--
but the black and white facts make it clear that rising health 
care costs are disproportionately burdening small businesses.
    On average, small businesses pay as much as 18 percent more 
than larger businesses for the exact same health insurance 
policy. Administrative costs are three to four times as high. 
In Connecticut, the variance in premiums among businesses with 
10 or fewer employees is so great that one might pay up to four 
times as much as another, similar firm of the same size. As a 
result, fewer and fewer businesses are able to offer health 
insurance to their employees, with nearly three in four small 
businesses that forgo benefits doing so because it just costs 
too much.
    Someone who works at a small business is 50 percent more 
likely to lose job-based coverage than an employee at a larger 
business. And young adults, who are more likely to be employees 
of small businesses, are being hit extra hard. One in four 
young adults at a small business lost their employer-based 
coverage in the last 2 years.
    Small businesses have special relationships with their 
employees. They're like family. Sometimes they ARE family. And 
good-guy employers are being forced to choose between laying 
off workers and cutting benefits.
    One constituent of mine is self-employed and has a small 
group policy. He was told that his premiums will be going up 21 
percent for the exact same policy--but with higher deductibles. 
He'll be paying more for less. That's life as a small business 
owner.
    Health care reform is one of the most important things we 
can do for small business.
    By creating health insurance exchanges, small businesses 
will be able to pool together, increasing competition and 
cutting premiums--according to the Congressional Budget Office, 
by as much as 25 to 30 percent. It will also cut administrative 
costs by making it easier for employers and employees to shop 
for the plan that works best for them.
    On top of those savings, health care reform will include a 
generous tax credit for 3.6 million small businesses to make it 
easier to cover their employees. In Connecticut, up to 37,611 
small businesses would be potentially eligible for the small 
business tax credits in health reform.
    We'll also outlaw insurance discrimination based on health 
status, so that small businesses won't see their premiums 
jacked up if just one employee gets sick.
    And by expanding insurance coverage to every American, 
we'll eliminate the ``hidden tax'' of more than $1,000 that 
everyone pays to cover the cost of caring for the uninsured.
    All of these steps will allow small businesses to put their 
money where it belongs--creating jobs and growing our economy--
rather than wasting it on an inefficient and unfair health care 
system.
    If you're an employee of a small business, reform will help 
you, too.
    If you have insurance through your job, that insurance will 
be more stable--insurance you can be sure of. It'll cost less, 
too, because you'll be able to comparison shop to get the right 
deal for your family.
    And even if you lose that job, or change your job, or move 
to another State, or retire, you'll still be able to find 
affordable insurance.
    If you're a young adult, you'll be able to stay on your 
parents' insurance until you turn 26, giving your family even 
more choice and security.
    And no matter who you are or where you work, no insurance 
company will ever be able to cut off your coverage or deny it 
to you altogether because of a pre-existing condition.
    There are more than 37,000 small businesses in my home 
State of Connecticut. I am counting on them to lead the charge 
to create more jobs and grow our economy. And they are counting 
on us to pass health care reform this year so that they can do 
so without being strangled by the skyrocketing cost of health 
care.
    Thank you.

                   Prepared Statement of Senator Burr

    Good morning. I want to thank Chairman Harkin for chairing 
this morning's hearing. I also want to thank each of our 
witnesses for traveling to be with us today to discuss the 
importance of lowering health care costs for small businesses 
and Americans across North Carolina and our Nation. I hope this 
morning's roundtable hearing can be a frank and honest 
discussion about meaningful solutions to ensure self-employed 
Americans and small businesses across our country have access 
to quality and affordable health care.
    As I have said many times before, I agree that we need 
meaningful health care reform. I was proud to join Senator Tom 
Coburn earlier this year to introduce the Patients' Choice Act, 
comprehensive legislation to fundamentally reform our 
healthcare system. The status quo is unsustainable and, 
unfortunately, nobody knows this better than the small business 
men and women across our Nation that have felt the brunt of 
rising health care costs for far too long. For over 20 years, 
small businesses have cited health insurance costs as their No. 
1 concern. A recent survey by the National Small Business 
Association found that 67 percent of small businesses surveyed 
expect premium increases of more than 10 percent in the coming 
year. This survey only reaffirms what each of us knows all too 
well from meeting with constituents across our States: for 
years individuals and small businesses have demanded reforms 
that will drive health costs down and make health insurance 
more affordable. Unfortunately, I fear that Congress is pursing 
the wrong reforms that will actually drive up health care 
costs. My concerns have only been reinforced by the 
Congressional Budget Office, the Joint Committee on Taxation, 
the Centers for Medicare and Medicaid Services Office of the 
Actuary, and the National Association of Insurance 
Commissioners' recent conclusions that the Democrats' bills 
will drive costs up.
    Over the past week we have learned that the Majority 
intends to pursue government-run health care in both the Senate 
and the House. As I have said before, I believe there is a 
better way forward that avoids this one-size-fits-all approach 
and offers real solutions to advance the goal of making health 
insurance more accessible and affordable. The Patients' Choice 
Act puts affordable coverage and choice within reach for all 
Americans regardless of their income or employment by providing 
tax credits to individuals and families to purchase the health 
insurance that fits their needs and the needs of their 
families. Under our bill, Americans are empowered with 
flexibility to move or change jobs without risking losing their 
health care. Our bill also creates State Health Insurance 
Exchanges that give Americans a one-stop marketplace to compare 
different health insurance policies and the ability to select 
the one that meets their unique health needs.
    Small businesses are our Nation's economic engine. We need 
to pursue policies that help these entrepreneurs thrive, 
including legislation that will actually make health care more 
affordable and accessible. Pursuing misguided policies that 
lower worker wages, eliminate jobs, and make the tough economic 
environment even worse are not the solution. I look forward to 
continuing to work with my colleagues on health reform to 
ensure that individuals and small businesses across North 
Carolina and our Nation have access to quality and affordable 
health care.
    I thank the Chair.
       Response to Questions of Senator Enzi and Senator Coburn 
                            by Sandy Praeger
                              senator enzi
    Question 1. Ms. Praeger, what is the primary factor driving premium 
increases for small employers? Are insurers simply trying to increase 
their profits in anticipation of health care reform, as some Democrats 
have suggested?
    Answer 1. According to our survey of the States, the primary factor 
driving premium increases is medical trend. This includes medical 
inflation, increased utilization, increased risk of the pool and other 
factors. States have not seen major changes in medical loss ratios, 
which means roughly the same amount of premium is going to medical 
costs. There is no indication at this point that profits are rising due 
to the increase premiums.

    Question 2. Ms. Praeger, what do you think the impact of an 
exchange will be on the small employer market? Will some firms drop 
coverage entirely given that their employees could obtain subsidies 
through the exchange?
    Answer 2. The experience in States that have developed purchasing 
cooperatives in the small group market in the past is that they 
increase choice and provide more comparative information to small 
businesses. However, they have not been effective in reducing premiums 
or significantly increasing the number of small employers offering 
insurance. Of course, past State efforts (except Massachusetts) have 
not included an individual market cooperative through which subsidies 
are available. This could create an opportunity for small employers to 
forego providing health benefits altogether. However, it is also true 
that it would provide a real opportunity for small businesses to 
provide a cash subsidy for individuals to purchase their own coverage. 
While this would provide a greater degree of choice to individual small 
business employees, Senators should also bear in mind that such an 
arrangement would mean that each employee would be charged a different 
premium based upon their characteristics and choice of insurer and 
plan.

    Question 3. The Senate HELP Committee-passed health care reform 
bill includes a government-run health insurance plan that would be 
offered through the State exchanges. What State laws would not apply to 
the government-run plan? Who would enforce consumer protections and 
assist consumers who choose the government-run plan?
    Answer 3. According to the language adopted by the HELP Committee, 
the government plan would be required to comply with State consumer 
protections and meet solvency standards that are consistent with State 
laws. However, since the plan is not licensed in the States, the States 
would have no authority to enforce any laws. Enforcement would be the 
sole responsibility of the Federal officials. Consumers would be 
required to file complaints and submit questions to the Federal agency, 
much like Medicare and Medicare Advantage plans, or ERISA self-insured 
plans.

    Question 4. What do you think the impact of the bills before 
Congress would be on small employer premiums in States that have 
adopted reforms recommended by the NAIC in the past?
    Answer 4. Most States currently allow rating based on health 
status, within rating bands, and actuarially justified rating based on 
age, geography, industry, class of business, and other factors. The 
modified community rate rules envisioned in the current congressional 
proposals would increase premiums for those small businesses with 
relatively healthy and young employees, and decrease premiums for those 
with relatively sick and older employees. The grandfathering 
provisions, along with subsidies, could help limit premium shock, but 
rates will increase for some small businesses.
    On the positive side, the new rules will also limit rate increases 
for individual employers in the future. Under current rules, a negative 
change in health status, average age, or gender mix, combined with 
medical trend, can result in annual premium increases of over 100 
percent. Removing many of these factors, and limiting age rating, will 
limit such increases in the future.

    Question 5. Do you see anything in the bills that could cause 
premiums for small employers to decline by the 25 percent that Dr. 
Gruber suggests?
    Answer 5. No, we see no justification for such a prediction. We 
foresee no influx of healthy groups into the marketplace or significant 
cost containment that would result in overall premiums decreasing by 
such an amount.
                             senator coburn

    Question 6. The majority's health bills would (a) impose federally 
defined minimal benefit packages, (b) dictate that every American 
purchase health insurance or be taxed, (c) tax companies to provide 
health insurance, (d) tax insurers, (e) tax insurance plans, and tax 
medical devices.
    Wouldn't Federal mandates which define health insurance, determine 
the essential benefit package, make coverage determinations and set 
rating rules effectively neuter the roles of State Insurance 
Commissioners and State Legislatures?
    Answer 6. The legislation under consideration would preserve State 
consumer protections and benefit mandates (though a State may be 
required to reimburse the Federal Government for subsidies that are 
attributable to State mandates beyond the essential benefits package), 
and require all plans--other than the government plan--to be licensed 
in the States and meet State solvency standards. However, the 
legislation does impose minimum standards for State access and rating 
rules which would require State legislatures and governors to modify 
State laws or face preemption.

    Question 7. Oklahoma's Insurance Commissioner, a Democrat, Kim 
Holland, said: ``I think we need to focus on those things that are 
broken and leave alone those things that are working in our State-based 
regulatory system . . . State regulators across the board are on the 
ground in their States responding immediately when consumers call.''
    What is the National Association of Insurance Commissioners doing 
to promote better State regulation which will lower costs to consumers?
    Answer 7. The NAIC continues to develop model regulations and 
``best practices'' guidelines to help States implement regulations that 
protect consumers but do not place unnecessary and costly burdens on 
carriers. For example, the NAIC has developed a uniform rate and form 
filing process that is used by most States and has developed uniform 
models for external review that we are hopeful States will adopt, 
reducing administrative costs to multi-state carriers. In addition, 
States coordinate market conduct reviews and solvency regulation 
through the NAIC to enhance State effectiveness and curtail costs.

    Question 8. You mentioned in your testimony that medical costs are 
the primary factor driving premium increases for small employers.
    What has been your experience with insurers--are they really just 
trying to increase their profits in anticipation of health care reform?
    Answer 8. That has not been my experience or the experience of the 
other States surveyed by the NAIC. Some rate increases have been 
challenged by commissioners and some have been reduced. However, for 
the most part, rate increases are consistent with medical trend and 
medical loss ratios remain consistent.

    Question 9. What do you think the impact of an exchange--as 
currently proposed by the majority's bills in Congress--will be on the 
small employer market?
    Will some firms drop coverage entirely given that their employees 
could obtain subsidies through the exchange?
    Answer 9. The existence of an individual market exchange, combined 
with the new access and rating rules and the subsidies, could create an 
opportunity for small employers to forego a health benefit altogether. 
However, it is also true that it could provide a real opportunity for 
small businesses to provide a cash subsidy for individuals to purchase 
their own coverage. Competitively, there will remain a desire on the 
part of small businesses to provide some assistance, especially if 
there is a real individual mandate. More small employers may, however, 
decide not to be the direct conduit of coverage, preferring to just 
provide subsidies.

    Question 10. If consumers in a State with numerous State mandates 
or constrictive rating rules like Massachusetts or New York were 
allowed to purchase health insurance in States with relatively few 
mandates like Oklahoma or Wyoming, would their health insurance costs 
be significantly lower?
    Answer 10. Young and healthy individuals could find cheaper 
coverage. However, if they need medical assistance there may be no 
network for them to access and nobody to help them if they have a 
complaint. And, when their age or health status change, their rates 
would skyrocket and they would be forced back into their own market, 
which would be devastated by the loss of healthy and young 
participants.

    Question 11. If every American had a generous tax credit which 
could only be used for purchasing health insurance and/or medical care, 
and a State could develop and utilize auto-enrollment mechanisms to 
enroll Americans in a State pool of some kind (allowing for an 
individual op-out provision)--what do you estimate the impact of such 
an arrangement would be on covering the uninsured?
    Answer 11. It would be effective, but could also be very costly if 
the sick and aged are placed in a separate pool with a government plan, 
like high-risk pools. It could also result in adverse selection and 
inferior care and coverage for those who are most at risk. We would 
need more information on this proposal to determine the total impact.

    Question 12. What is your estimate as to the single greatest factor 
which plays the largest role in Americans choosing to not purchase 
health insurance? Cost, pre-existing conditions, or the opportunity to 
purchase coverage?
    Answer 12. Most surveys point to cost of coverage as the primary 
reason a person does not purchase coverage. This is particularly the 
case for those who have no subsidy from the government or an employer 
and for the young and healthy, who place less value on health insurance 
coverage. Of course, if the person waits until they are sick to decide 
that coverage is now affordable it may be too late as they may be 
excluded due to a pre-existing condition.

    Question 13. What is NAIC's position on using auto-enrollment and 
risk adjustment mechanisms at a State level--potentially with a high 
risk pool or a reinsurance mechanism--to create and manage a stable 
risk pool?
    Answer 13. The NAIC has taken no position on such proposals.
      Response to Questions of Senator Franken and Senator Coburn 
                         by Douglas Holtz-Eakin
                            senator franken
    Question 1. As I mentioned at the hearing, your written testimony 
stated that there is ``non-controversial'' agreement that premiums 
would go up under the Senate health reform bill. However, Dr. Gruber 
testified that, for small businesses, premiums would go down under 
health reform. This seems to suggest that there is some controversy on 
this issue. At the hearing, time limitations did not permit you to 
provide a response to this seeming contradiction of your testimony. 
Please provide a response to this comment.
    Answer 1. My testimony says ``I believe it is non-controversial 
that the combination of guaranteed issue and community rating would 
raise average premiums.'' My concern is that the Senate bill comes 
close to this situation because of the extremely weak enforcement of 
the individual mandate.
    In contrast, Dr. Gruber stated that he felt that the mandate was 
strong, which clearly leads him to a different analysis. I respectfully 
cannot agree that a mandate with no penalty in the first year and a 
maximum penalty of $750 is ``strong.''
    His testimony seems to rely as well on an incomplete reading of a 
CBO letter. He says:

          ``In their September 22d letter, the Congressional Budget 
        Office reported that they estimated the cost of an individual 
        low-cost `silver' plan in the exchange to be $4,700 in 2016 
        (this was later updated to $5,000). This is a plan with an 
        `actuarial value' (roughly, the share of expenses for a given 
        population covered by insurance) of 70 percent. In the same 
        letter, the CBO projected that, absent reform, the cost of an 
        individual policy in the non-group market would be $6,000 for a 
        plan with an actuarial value of 60 percent. This implies that 
        the same plan that cost $6,000 without reform would cost $4,300 
        with reform, or almost 30 percent less.''

    However, in the very same CBO table it indicates that family 
premiums will be substantially higher after reform--about 30 percent 
higher ($11,000 under current law, but $14,700 under proposed reforms). 
It strikes me as difficult to come to the generic conclusion that 
premiums are lower. Moreover, CBO cautioned that they hadn't estimated 
the all of the different factors that would impact on premiums:

          ``In light of those complexities, quantifying the net effects 
        of the Chairman's proposal on the amounts paid by individuals 
        and families to obtain health care is very difficult. CBO has 
        not modeled all of those factors and is unable to quantify them 
        or calculate the net effects at this time.''

    Most significantly, CBO did not estimate the impact of guaranteed 
issue and modified community rating, two of the key factors that 
potentially lead to higher premiums.

    Question 2. In your testimony, you asserted that the excise tax on 
insurance companies will be passed on to the consumer in increased 
premiums. However, you did not mention the Congressional Budget figures 
that estimate insurance companies will receive approximately 30 million 
new customers under health reform. Please comment on whether the 
revenue from these new beneficiaries (much of it paid by taxpayers in 
the form of Federal subsidies) could offset the excise tax for 
insurance companies in such a way that they will not pass the tax on to 
consumers?
    Answer 2. Adding additional customers (which I believe total only 
15 million under Senator Reid's version) does not change the basic 
insights. It will still be the case that the additional costs must 
ultimately be borne by workers at the affected companies, the 
shareholders of the companies, or the customers of the companies. As I 
noted in my testimony (and the Joint Committee on Taxation supports), 
there is good reason to believe that it will be less feasible to shift 
the excises to workers and shareholders. Accordingly, one would expect 
it to be shifted to consumers, albeit spread across a larger customer 
base.

    Question 3. Do you anticipate any benefit for small businesses from 
participation in the exchange? If so, can you please provide an 
assessment of the potential benefits and drawbacks of the exchange for 
small businesses?
    Answer 3. Properly designed exchanges offer the potential for 
improved price transparency, easier comparison shopping, cross-state 
purchases and pooling, and stronger competition. That is, exchanges 
could provide small employers with information on their health 
insurance coverage options; provide a mechanism for consumers to 
compare, choose, and enroll into a health insurance policy that meets 
their unique needs; provide a State-established uniform online 
application for all insurers; and provide real-time estimated and final 
premium quotes.

    Question 4. As you know, Americans who are over 50 years of age, 
women and those with pre-existing conditions pay more for health 
insurance on the small group and individual market. Do you believe that 
a small business that employs a higher proportion of older workers and/
or women should pay more for their health insurance?
    Answer 4. I believe that comprehensive health care reform should 
include genuine reforms of the delivery system so as to lower the pace 
of health spending growth, with corresponding reduction in the upward 
pace of premiums for those in the small group market and others. In 
addition, reforms to improve competition among insurers, broaden risk 
pools, and strengthen high-risk pools could serve to further reduce 
premiums among these groups.
                             senator coburn
    Question 5. Many small business owners may question how raising 
taxes and cutting budgets to generate a trillion dollars and then 
spending a trillion dollars is budget neutral. Yet, this is exactly 
what CBO has said about the Baucus bill. As a former CBO Director, can 
you help us understand the assumptions behind CBO's estimate that the 
Baucus bill will be deficit neutral, as well as your personal 
perspective on the validity of those assumptions?
    Answer 5. The key to understanding the CBO estimate is that they 
are required to estimate the Federal budgetary (and only the Federal 
budgetary) impact of the legislation as written. Thus, for example, the 
CBO must take at face value the Baucus bill provision that permits the 
sustainable growth rate mechanism to cut physician reimbursements in 
Medicare by over 20 percent. It must take at face value provisions that 
cut other providers by over $400 billion. It must do its calculations 
within the conventional budget framework in which up-front tax 
increases are permitted to offset out-year spending to reach balance 
over the 10-year window. In short, CBO must accept at face value the 
wide array of budget gimmicks that are used to deliver the appearance 
budget balance in the Baucus bill.
    As a corollary, CBO is not permitted to anticipate the actions of a 
future Congress. However, after years of working with and for the 
Congress I believe it is beyond implausible that Medicare physicians 
will experience the proposed cut. As I write this answer, the House has 
already passed a deficit-financed bill of over $200 billion to avoid 
the cut. The Senate will likely do the same. It is equally unlikely 
that the $400 billion in other provider cuts will come to fruition. 
There are not substantive changes in delivery systems for business 
models that would permit such cuts, so Congress will inevitably reverse 
them.
    My judgment is that the Baucus bill will significantly worsen a 
fiscal situation that is already dangerously dark.

    Question 6. Some would point to subsidies in the Senate Baucus bill 
as the key to offset for rising costs. Yet, in your written testimony, 
you said that Senate proposals ``do not `bend the cost curve' '' and 
``will raise costs for the majority of Americans who have insurance.'' 
Are you saying that premium costs and Federal expenditures will 
increase--despite subsidies?
    Answer 6. Yes. It is the judgment of the CBO and the CMS Actuary 
Richard Foster that the House bill did not ``bend the cost curve.'' Mr. 
Foster's analysis actually suggests it was bent up (worse). The Senate 
bill's entitlement spending growth (8 percent annually for 20 years in 
CBO's judgment) is identical to the House. The Senate bill, too, does 
not on balance bend the cost curve.
    If health care costs continue to rise, there will be unremitting 
upward pressure on premiums. A decade of growth at an 8 percent rate 
will increase a $14,000 policy to $30,224. The scale of these increases 
will vastly outweigh any subsidies contemplated by the Senate.

    Question 7. Are the majority's health bills financially sustainable 
in the short or long term? Why, or why not?
    Answer 7. No. They create two new entitlement spending programs 
(the coverage subsidies and the CLASS Act) financed largely by debt 
issuance. This burden would add to the existing shortfalls in Social 
Security and Medicare and the legacy of the financial bailout and 
stimulus efforts. At a time when every effort should be made to 
reassure international capital markets regarding the budget outlook, 
these bills send the immediate signal that the United States is willing 
to move further out of balance and raises the ultimate costs of getting 
our house in order.

    Question 8. There are now six different independent studies which 
show the Democrats' health bills will increase premium costs to 
Americans. What amount of time, and what other information, would CBO 
need to make its own assessment about increasing premiums?
    Answer 8. I am unable to judge the time or resources that would 
provide CBO with the capacity to draw a judgment on this issue. 
However, as a general practice CBO takes advantage of the broad 
research literature in developing its basis for estimates, including 
supplementary information such as the impact on premiums. There is an 
increasing number of studies showing that the proposed legislation 
would raise premiums, which will presumably assist CBO in this valuable 
effort.

    Question 9. You said in your written testimony that there are 
``sharp limits on the ability of [companies] to shift the effective 
burden of excise taxes onto either shareholders or employees.'' You 
also said that ``firms will reduce compensation growth, squeeze labor 
expansion plans, or even lay off workers, or [all three].'' When 
unemployment is over 10 percent, can you elaborate on what you think 
the job impacts of the current health bills in Congress would be for 
small businesses?
    Answer 9. The bills under consideration in Congress share certain 
features. First, through the combination of industry fees, taxes, and 
insurance market reforms, they will place upward pressure on insurance 
premiums. This increase in labor costs will force cutbacks in the offer 
of insurance, other compensation, the number of employees, or some 
combination of all three.
    Second, some legislation imposes employer mandates requiring the 
provision of insurance. Provisions of this type raise costs and 
restrict the ability of firms to adjust compensation packages, with 
detrimental impacts on the number of jobs.
    Third, both the House and the Senate envision partial financing 
through a surtax on incomes or payrolls above a particular threshold. 
In both cases, the threshold is not indexed for inflation. Thus, over 
time both bills would subject an increasing number of small businesses 
and entrepreneurs (many of whom are organized as pass-thru entities) to 
higher taxes, leading to fewer jobs.
    Fourth, none of the bills under consideration reduce the growth of 
national health care spending; indeed, it may even rise. Thus, there 
will be continued cost pressures that will harm the ability of small 
businesses to expand hiring.
    Finally, by expanding the already-significant budget deficits in 
the next decade, the bills raise the probability of significantly 
higher interest rates. The upward movement in borrowing costs would 
harm the ability of small businesses to grow and expand.

    Question 10. As a former director of the Congressional Budget 
Office and student of congressional budgetary history, how likely do 
you think it is that the proposed package of taxes and cuts in the 
majority's health bills hold together as a coherent whole, and thus not 
add a single dime to the deficits.
    Answer 10. I have no faith at all that these bills are deficit-
neutral in either the near-term or the longer-term. The shared fiction 
that doctors will receive a double-digit reduction in their Medicare 
reimbursements is an immediate indictment of their near-term deficit 
neutrality. The bills simply exclude inconvenient spending that will 
total at least $250 billion over the next 10 years. Over the longer 
terms, the bills rely on reducing the growth of traditional Medicare by 
25 percent (from 8 percent annual growth to 6 percent annual growth) by 
the stroke of a pen. There are no reforms present that will support 
this lower growth of spending and the long-term deficit will be 
increased.

    Question 11. What is your professional estimate of the reasonable 
likelihood of what the majority's health bills will do to Americans' 
premiums?
    Answer 11. I expect premiums to increase markedly compared to the 
path under current law. Depending on the source of insurance--employer-
provided, small-group, or individual market--and the age of the 
purchasers, there will be double-digit increases that may be as much as 
20 to 30 percent.

    Question 12. What is your professional estimate of the relative 
incentive the majority's health bills would give for relatively healthy 
Americans without chronic/ongoing conditions to drop coverage and only 
purchase health insurance when they are already sick or injured?
    Answer 12. The incentives will be overwhelmingly in favor of this 
strategy. The combination of guaranteed issue and modified community 
rating ensures immediate access to insurance upon onset of a serious 
medical condition. Prior to that, individuals can choose to pay the 
modest fine (maximum of $750 in the Senate) instead of purchasing 
thousands of dollars of insurance.
       Response to Questions of Senator Enzi and Senator Coburn 
                            by Karen Bender
                              senator enzi
    Question 1. Ms. Bender, the Senate Finance legislation requires 
small employers to only offer plans that have deductibles of less than 
$2,000 for individuals and $4,000 for families. I regrettably note that 
Mr. Rowan would have to buy a more expensive plan to meet this new 
requirement. Additionally, I am curious, of the employers who currently 
offer more than one plan, do you know how many employees pick plans 
with deductibles higher than $2,000 or $4,000 for family coverage? Do 
you have a sense of how this new requirement will impact prices for 
insurance premiums?
    Answer 1. The deductible limitations would limit the availability 
of more affordable coverage with higher deductibles for small 
employers. Based on data from a survey from America's Health Insurance 
Plans (AHIP), over 20 percent of the coverage sold in the small 
employer market in 2008 already had a deductible of $2,000 or above. 
Limiting the deductible at this level will only increase cost for small 
employers purchasing higher deductible plans. Generally in the small 
group market, employees are not offered more than one plan. The 
exception is when a federally qualified high deductible plan (HDHP) is 
offered. Then, (according to same AHIP survey referenced in the 
preceding paragraph) about one-third of employers offered another plan. 
When an HDHP was offered along side a more traditional plan, over 40 
percent of employees in the small employer groups elected the HDHP. 
Sixty-nine percent of those electing HDHPs had deductibles equal to or 
exceeding $2,000 deductible for single coverage.\1\
---------------------------------------------------------------------------
    \1\ AHIP Small Group Health Insurance in 2008, AHIP Centers for 
Policy Research, March 2009. http://www.ahipresearch.org/pdfs/
smallgroupsurvey.pdf. Accessed November 20, 2009.
---------------------------------------------------------------------------
    Another survey by AHIP that focuses only on federally qualified 
HDHPs shows that there are over 2.4 million lives enrolled in small 
employer HDHP products as of January 2009 and that the deductibles for 
the best selling plans were slightly greater than $2,000 for single 
coverage and slightly under $4,000 for family coverage.\2\ These two 
surveys show that there are currently many employees of small employers 
and their dependents enrolled in these types of plans. Further more, 
the same AHIP HDHP survey shows that enrollment in the small employer 
HDHP market had increased by 34 percent between 2008 and 2009.
---------------------------------------------------------------------------
    \2\ AHIP, January 2009 Census Shows 8 Million People Covered by 
HSAs/High-Deductible Health Plans, AHIP Centers for Policy Research, 
May 2009. http://www.ahipresearch.org/pdfs/2009hsacensus.pdf. Accessed 
November 22, 2009.
---------------------------------------------------------------------------
    Based upon our proprietary rating model using national average 
premiums, this deductible would not meet the minimum actuarial value of 
0.65. The actual value will vary by carrier and geography. Premium 
increases in the 5 percent to 10 percent range to meet the standard 
under the Senate Finance bill would not be unexpected.

    Question 2. Ms. Bender, what are the advantages and disadvantages 
of an exchange for small employers? Can the exchange substantially 
lower costs?
    Answer 2. The creation of an exchange is not likely to lower health 
insurance costs for small employers. There have been numerous studies 
researching the premium levels for State purchasing groups that are 
similar to exchanges, including the health insurance purchasing 
corporations (HIPCs) popular in the mid-1990s through mid-2000s, 
including a paper I co-authored in 2008.\3\
---------------------------------------------------------------------------
    \3\ Karen Bender, FCA, ASA, MAAA and Beth Fritchen FSA, MAAA, 
``Government-Sponsored Health Insurance Purchasing Arrangements: Do 
They Reduce Costs or Expand Coverage of Individuals and Small 
Employers?'' 2008. http://www.blueadvocacy.org/uploads/health-
insurance-purchasing-arrangements-report.pdf.
---------------------------------------------------------------------------
    More than a dozen States have enacted State-sponsored purchasing 
entities, generally referred to as Health Insurance Purchasing 
Cooperatives (HIPCS) during the 1990s. These HIPCs contracted with 
multiple insurers to offer benefit plans to employees of small 
employers. The HIPCs performed a number of administrative functions, 
such as contracting with insurers, marketing, and enrollment. It is 
well-established that HIPCs failed to offer premiums lower than 
premiums employers could obtain outside of the purchasing 
arrangement.\4\
---------------------------------------------------------------------------
    \4\ Long and Marquis, 1999; Long and Marquis, 2001; Wicks, et al., 
2000; Yegian, et al., 2000.
---------------------------------------------------------------------------
    Most of these purchasing arrangements never achieved a significant 
market presence because they failed to offer better rates, the key 
factor influencing purchasing decisions in the price-sensitive small 
employer market. For example, one study found that among employers that 
offered coverage in three States, only 2 percent to 6 percent of 
eligible employers purchased coverage through a purchasing pool.\5\ As 
a result, most government-sponsored HIPCs were disbanded.
---------------------------------------------------------------------------
    \5\ Long and Marquis, 2001.
---------------------------------------------------------------------------
    The Massachusetts Connector has served as a model for health reform 
in Washington. However, little is known about the impact on small 
employers premiums because small employers are just now being enrolled 
in the Connector under a small pilot. Premiums for individuals have 
increased 16 percent for unsubsidized plans offered in the bronze 
coverage tier inside the Connector since 1997, according to the 
Massachusetts Division of Health Care Finance and Policy. The 
Massachusetts reforms, in total, were actually likely to increase the 
premiums for small employers as a result of a provision that required 
the costly Massachusetts individual market to be pooled with the less 
expensive small employer market.
    There are several reasons why purchasing pools have failed to lower 
premiums: inability to lower aggregate administrative costs; inability 
to lower provider reimbursement levels; and inability to expand pooling 
of risk. One area where an exchange can provide value is in helping 
small employers shop for coverage and providing information on 
competing plans. Exchanges proposed by current health reform bills 
would provide small employers with information on prices and other 
important plan features on all health plans in the market. However, if 
an exchange is set up in a regulatory fashion, as in the proposed 
Senate bill, it will be unlikely to stimulate market competition or 
reduce costs for small employers.

    Question 3. Ms. Bender, will an exchange provide the same economies 
of scale that major U.S. corporations enjoy when purchasing health 
insurance?
    Answer 3. No, an exchange--as a collection of many independent 
small employers and individual purchasers--will never be able to 
achieve economies of scale similar to major corporations today. One of 
the underlying assumptions behind various purchasing arrangements is 
that bringing many small groups together to purchase health insurance 
will increase their purchasing power, giving them the same ability to 
negotiate lower health insurance premiums that large employer groups 
enjoy. However, there are significant differences between a pool of 
many small employer groups and a large employer pool.
    The American Academy of Actuaries stated this principle well: ``A 
single employer with 999 employees is not the same as 333 groups with 3 
employees each.'' \6\ The NAIC used the following analogy: grouping 
many small employers does not create the equivalent of a large employer 
any more than grouping three 12-year-olds creates a 36-year-old.\7\
---------------------------------------------------------------------------
    \6\ Bender, Karen, et al., ``Wading Through Medical Insurance 
Pools: A Primer.'' American Academy of Actuaries Issue Brief, American 
Academy of Actuaries, September 2006.
    \7\ Testimony of Joel Ario, Acting Commissioner of Insurance, 
Commonwealth of Pennsylvania, representing the National Association of 
Insurance Commissions before the U.S. Senate Committee on Finance on 
``Small Business Health Insurance: Building a Gateway to Coverage.'' 
October 25, 2007.
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    An insurance company is still going to have to bill the 333 
individual groups of 3 as opposed to generating a single bill for a 
group of 999. While the employer with 999 may offer two or three 
benefit options, the benefit portfolio for small groups as a whole is 
very broad, to meet the various needs of a very diverse market. Thus 
there are many more products to maintain, forms to file, more products 
for customer service associates to learn, more products to be 
adjudicated, etc. Also, in some States, health plans are required to 
submit rate filings for small groups, which requires time and 
resources. This is not necessary for large groups. So the economies of 
scale will always be different for small employers as long as there are 
many product options and no employer mandate.
    Moreover, the large employer acts as the ``glue'' that holds the 
group together. Small employer groups are some of the most price-
sensitive purchasers of health insurance. As such, these groups tend to 
move in and out of small group pools, by either switching carriers or 
dropping insurance, on a regular basis. This ability to enter and exit 
the insurance market makes the pool less cohesive than large group 
pools, which makes the small group market one of the most volatile 
health insurance markets. Since none of the Senate bills apply any 
penalty for a small employer for not offering coverage, this ability to 
enter and exit the insurance pool still remains.
    Generally, the smaller the group, the higher the claims per member, 
because smaller groups tend to behave more like individuals. That is, 
among the smallest groups, those who have a greater need for health 
insurance (because of a known health risk) are more likely to purchase 
coverage while those with the lowest expected need for health insurance 
are less likely to obtain coverage. As such, the risk of adverse 
selection is very high in the small employer market.
    Since States require pooling of risk in the small employer market, 
higher-risk or less healthy groups enjoy some level of premium 
subsidies from groups with lower-than-average health care costs. 
However, healthier groups with lower-than-average risks may not 
perceive an economic value in health insurance because they are 
required to provide subsidies to these higher-risk groups. The more 
restrictive the rating rules, the greater the subsidies required from 
the healthier groups, and the less attractive health insurance is for 
the exact market segment critical to creating a viable pool, the 
healthy groups.
    In order for any pool to be viable in the long run it must be self-
supporting. Therefore, there must be enough healthy individuals to 
subsidize the medical costs associated with less-healthy individuals. 
This is generally not a problem for the large employer since the 
``glue'' holding the pool together is independent of health insurance 
decisions. However, this is not the case for the 333 independent small 
groups in our previous example. Therefore, it is critical to have 
rating flexibility to ensure there are sufficient numbers of healthy 
groups to provide subsidies for the sicker groups.

    Question 4. Most States today permit health plans to vary premiums 
based on the characteristics of each small employer with certain 
limitations. Some have suggested that using community rating, which is 
required in a smaller number of States today, would lower costs for 
small employers. Based on your experience, which States have more 
affordable premiums for small employers, those with community rating or 
those without?
    Answer 4. Community rating will increase average premiums for small 
employers. In 2008 there were 12 States that did not allow for any 
variation in small group rates for morbidity \8\: Colorado, 
Connecticut, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, 
New York, Oregon, Rhode Island, Vermont and Washington.
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    \8\ National Association of Health Underwriters, State Level 
Individual and Small Group Market Health Insurance Reforms. February 
2009. http://www.nahu.org/legislative/charts/
market_reforms_chart_state.pdf. Accessed November 20, 2009.
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    According to the AHIP study of small employer premiums for 2008, 
the following States had the highest small employer premiums in the 
country&A\9\: Alaska, Massachusetts, Rhode Island, New Hampshire, 
Maryland, Wyoming, West Virginia, New York, New Jersey, Utah. Of these 
top 10, 6 States do not allow any variation in premium for morbidity. 
So half of the States that do not allow any variation for morbidity are 
in the top 10 when it comes to premium levels. This would appear to 
support the theory that allowing for variation in premium levels for 
morbidity results in lower average premiums for the market in any given 
area.
---------------------------------------------------------------------------
    \9\ Small Group Health Insurance in 2008.
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    These results are consistent with a 2001 U.S. General Accounting 
Office (GAO) study which found that even after adjusting for geographic 
cost differences, average annual premiums for fully insured small 
employer plans were about 6 percent higher for single coverage and 
about 7 percent higher for family coverage in States that prohibited 
premium variation in the small employer market due to health status. 
This same study found that these differences were not attributable to a 
greater concentration of higher-risked groups in those States that 
disallowed health status.\10\
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    \10\ U.S. General Accounting Office, ``Private Health Insurance 
Small Employers Continue to Face Challenges in Providing Coverage.'' 
U.S. General Accounting Office. October 2001. http://www.gao.gov/
new.items/d028.pdf.

    Question 5. Can you explain why the data Oliver Wyman used in its 
analysis cannot be made public?
    Answer 5. Oliver Wyman is unable to disclose the data used in the 
study because it is owned by the BlueCross/BlueShield companies that 
contributed it for that purpose and Oliver Wyman is bound by 
confidentiality commitments. Furthermore, the data is commercially 
valuable and contains sensitive competitive information about premiums, 
claims, and demographics that is proprietary to these companies. In our 
experience with actuarial studies, insurers typically retain their 
ownership rights and the underlying data is kept confidential by those 
involved, even when such work is performed under contract with State 
insurance departments.
    As an independent firm, one of the important roles that Oliver 
Wyman performed in this study was determining whether the data is 
credible and representative--which we believe it is. The study's 
database has information on 6 million insured members in the individual 
and small-employer markets, almost one-eighth of all members covered by 
all insurers in the individual and small employer markets. The database 
includes information from 12 States and covers four distinct geographic 
rating rule clusters. Data from at least two States were included for 
each geographic rating cluster. Overall, we believe that these data are 
representative, or even conservative, relative to the benefit plans and 
rating practices of the rest of the health insurance industry.
    We also note that the use of actual policyholder data is a unique, 
distinguishing feature of our study--in contrast to other health reform 
models that lack access to such real-world information and instead use 
population survey data to create artificial individual and small 
employer purchasers for their economic simulations.

    Question 6. Ms. Bender according to the Oliver Wyman study, what 
will happen to small group premiums if the current health reform bills 
are enacted?
    Answer 6. Our study of the Senate Finance bill shows that the 
average increase, before any consideration of medical trend will be 19 
percent, of which 16 percent is attributable to changing rating and 
underwriting rules and 3 percent is attributable to increasing the 
minimum actuarial value of the policies being purchased.
                             senator coburn
    Question 7. Senator Harkin expressed concern that the data and/or 
methodology of the Oliver Wyman analysis referenced in your 
congressional testimony. Did the proprietary insurance data or the 
study's methodology differ significantly from the majority of other 
studies Oliver Wyman and other actuarial firms have conducted? If so, 
how? If not, please explain.
    Answer 7. The best way of measuring the impacts on small group 
premiums attributable to the proposed reforms is to use a database 
comprised of actual small groups that are currently purchasing 
insurance. Given the scope of the proposed reforms, detailed rating 
criteria on a group level needed to be available in order to measure 
the impact on premiums of either modifying or eliminating certain 
rating factors. Any study that does not consider actual small groups 
and insurance rating factors could significantly understate the upward 
pressure on premiums that will result from insurance reform.
    I have the advantage of years of experience in the small employer 
health market. I remember in the 1990s, when health reforms were being 
seriously considered at the national level as well as among the States. 
Many studies were done using ``simulated groups.'' By ``simulated 
groups'' I mean that data for a large group population would be used to 
randomly assign members to simulate groups of various sizes. These 
studies consistently understated the ``tails'' at each end of the risk 
spectrum when compared to actual small group experience. In retrospect, 
this should not be surprising since these simulated groups were formed 
using random assignment techniques. In the real world, groups are not 
formed randomly. Selection is very real. Also, in the small group 
market, the distribution of groups by morbidity (i.e., aggregate health 
status of the group's insured members) is not the bell shape curve most 
of us are familiar with through our experience with basic statistics. 
In the real world, the distribution of groups by morbidity is skewed 
toward healthier groups, which means in those States that currently 
provide for premiums to vary from the midpoint rate due to morbidity, 
there are more groups enjoying discounts from the midpoint rate than 
groups paying surcharges. Any modeling that does not reflect these 
types of distributions will be, in my opinion, fatally flawed.
    There is wide variation among the States regarding the amount that 
small group rates can vary from a midpoint rate which in turn, drives 
differences in the distribution of groups by morbidity. Any study that 
does not consider these differences at some level, could significantly 
understate the upward pressure on premiums that will result from 
insurance reform.
    So while the data that Oliver Wyman used to model the impacts of 
the proposed reforms is proprietary, we strongly believe that the 
advantages of being able to start with real, live groups and having 
access to the underlying rating factors that are currently being used 
to develop existing premiums and therefore being able to directly 
measure the impact of eliminating/modifying these rating factors, far 
outweigh any disadvantages of not being able to release to the public 
the actual underlying database.

    Question 8. The Senate Finance legislation requires small employers 
to only offer plans that have deductibles of less than $2,000 for 
individuals and $4,000 for families. This would effectively eliminate 
HSAs and Walter Rowan (glassblower business owner, witness) would have 
to buy a more expensive plan to meet this new requirement. I am 
curious, of the employers who currently offer more than one plan, do 
you know how many employees pick plans with deductibles higher than 
$2,000 or $4,000 for family coverage? Do you have a sense of how this 
new requirement will impact prices for insurance premiums?
    Answer 8. The deductible limitations would limit the availability 
of more affordable coverage with higher deductibles for small 
employers. Based on data from a survey from America's Health Insurance 
Plans (AHIP), over 20 percent of the coverage sold in the small 
employer market in 2008 already had a deductible of $2,000 or above. 
Limiting the deductible at this level will only increase the cost for 
small employers purchasing higher deductible plans. Generally in the 
small group market, employees are not offered more than one plan. The 
exception is when a federally qualified high deductible plan (HDHP) is 
offered. Then, according to America's Health Insurance Plans (AHIP), 
about one-third of employers offered another plan. When an HDHP was 
offered along side a more traditional plan, over 40 percent of 
employees in the small employer groups elected the HDHP. Sixty-nine 
percent of those electing HDHPs had deductibles equal to or exceeding 
$2,000 deductible for single coverage.

    Question 9. What are the advantages and disadvantages of an 
exchange, as currently proposed in the majority's legislation, for 
small employers? Will the exchange substantially lower costs? Will an 
exchange provide the same economies of scale that major U.S. 
corporations enjoy when purchasing health insurance?
    Answer 9. The creation of an exchange is not likely to lower health 
insurance costs for small employers. There have been numerous studies 
researching the premium levels for State purchasing groups that are 
similar to exchanges, including the health insurance purchasing 
corporations (HIPCs) popular in the mid-1990s through mid-2000s 
including a paper I co-authored in 2008.\11\ More than a dozen States 
have enacted State-sponsored purchasing entities, generally referred to 
as Health Insurance Purchasing Cooperatives (HIPCS) during the 1990s. 
These HIPCs contracted with multiple insurers to offer benefit plans to 
employees of small employers. The HIPCs performed a number of 
administrative functions, such as contracting with insurers, marketing, 
and enrollment. It is well-established that HIPCs failed to offer 
premiums lower than premiums employers could obtain outside of the 
purchasing arrangement.\12\
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    \11\ Karen Bender, FCA, ASA, MAAA and Beth Fritchen FSA, MAAA, 
``Government-Sponsored Health Insurance Purchasing Arrangements: Do 
They Reduce Costs or Expand Coverage of Individuals and Small 
Employers? '' 2008. http://www.blueadvocacy.org/uploads/health-
insurance-purchasing-arrangements-report.pdf.
    \12\ Long and Marquis, 1999; Long and Marquis, 2001; Wicks, et al., 
2000; Yegian, et al., 2000.

    Question 10. For more than 20 years, small-business owners have 
listed health costs as their No. 1 concern. But leading ``reform'' 
bills would make things worse. In fact, the head of the National 
Federation of Independent Business, Dan Danner, said the reform bill's 
huge cost ``will ultimately come out of small business owners' pockets 
and prohibit them from growing, investing in their business and hiring 
new employees.'' As an expert with 35 years of experience in the health 
care industry, experience as an actuary, and someone who has studied 
these issues closely, do you think this is an accurate statement?
    Answer 10. As a health actuary, my expertise is focused on the 
impacts health care reforms will have on health insurance premiums. Our 
modeling shows that the average increase on small employer premiums 
will be 19 percent, before consideration of trend. [Please remember 
this is an average increase. Some employers will experience higher 
increases and some will experience lower increases as well as potential 
decreases.] We could not identify anything in the various Senate bills 
that would have any material downward pressure on trend. On the 
contrary, we could identify several factors that could have the 
opposite effect. However, we have not included any of these in our 
modeling to date. Obviously, if premiums increase at this magnitude and 
then are further compounded by trend increases, the cost will have to 
ultimately be paid by small businesses, since the premium subsidies are 
only temporary. If the subsidies are extended, then the cost of the 
bill will exert upward pressure on the country's deficit, which has not 
been incorporated into the scoring of the bill. While I cannot assert 
as a health actuary whether or not the additional premiums will 
prohibit small employers from growing, investing in their businesses 
and hiring new employees, it seems like only common sense that if funds 
that otherwise would be available for innovation, growth and expansion 
are being diverted to fund health premiums, then there will be less 
innovation, growth and expanded employment.
       Response to Questions of Senator Enzi and Senator Coburn 
                           by Jonathan Gruber
                              senator enzi
    Question 1. In your testimony, you state that small business costs 
would decline relative to what they would be in 2016. However, this 
appears to be based on an assumption that medical cost inflation would 
be more than cut in half--from an assumed 9 percent to 4 percent--in 
the first year after reform. Both CBO and the CMS office of the actuary 
have been skeptical of the ability of current reform proposals to bend 
the ``curve'' of national health expenditures. What assumptions did you 
include in your analysis that led to your conclusion on medical cost 
inflation which appears to differ significantly from the statements of 
both the CBO and the CMS actuary?
    Answer 1. My analysis is conservative in that I assume no impacts 
on health care cost growth. I simply assumed that in the first year 
after reform there would be a 5 percent savings for small firms as a 
result of the efficiencies of purchasing through the exchange in a 
reformed market. That has the effect of making growth rates 4 percent 
rather than 9 percent in that year, but really it isn't a growth rate 
assumption--it is just an assumption about savings levels.

    Question 2. You assert that small employers could save 25 percent 
based on CBO data. However, an examination of CBO reports indicates 
that CBO has NOT suggested reform will reduce premiums. To the 
contrary, the same CBO letter of September 22d referenced in your 
testimony states that premiums in the new insurance exchanges would 
tend to be higher than the average premiums in the current-law 
individual market. Isn't it correct that CBO has not issued a 
comprehensive report on premiums and the selective use of certain 
quotes does not reflect CBO's full view on premiums which may be 
impacted by many different factors?
    Answer 2. I never asserted in my testimony that small employers 
would save 25 percent. I simply pointed out that the CBO analysis 
implies that the cost of an insurance plan in the exchange would be 25 
percent lower than the average cost of a plan in the non-group market 
with the same actuarial value.
    The CBO letter does not say that premiums would tend to be higher 
in the non-group market--that is a misleading citation of just one 
point of several where they discuss forces that would tend to move the 
nongroup premium up or down. They don't draw a bottom line conclusion, 
but they do provide numbers that allow one to do so, as I did in my 
testimony. But it is true that CBO has not issued a comprehensive 
report on non-group premiums, nor have they spoken at all about the 
impact on group premiums.

    Question 3a. Your testimony before the Senate HELP Committee 
stated,

          ``In their September 22d letter, the Congressional Budget 
        Office reported that they estimated the cost of an individual 
        low-cost `silver' plan in the exchange to be $4,700 in 2016 
        (this was later updated to $5,000). This is a plan with an 
        `actuarial value' of 70 percent. In the same letter, the CBO 
        projected that, absent reform, the cost of an individual policy 
        in the non-group market would be $6,000 for a plan with an 
        actuarial value of 60 percent. This implies that the same plan 
        that cost $6,000 without reform would cost $4,300 with reform, 
        or almost 30 percent less.''

    'Can you please explain your conclusion that a plan that costs 
$6,000 without reform would cost $4,300 with reform? Does the plan you 
assume will cost $4,300 meet all of the requirements mandated in 
Senator Baucus' bill?
    Answer 3a. I simply used the fact that the $5,000 estimate refers 
to a silver plan, which has an AV of 0.7. To compare to a 0.6 non-group 
plan costing $6,000, I multiply the $5,000 by (0.6/0.7) to get $4,300.

    Question 3b. CBO has not estimated the cost of a bronze plan. Have 
you estimated the cost of a bronze plan? If so, what is your estimate?
    Answer 3b. I have not estimated the cost of a bronze plan but I 
assume it would be the $5,000 silver premium multiplied by (0.65/0.7), 
or $4,640.

    Question 3c. Additionally, can you confirm what CBO stated in the 
same letter that the cost for a family purchasing coverage in the non-
group market in 2016 will be $11,000 without reform and $14,700 with 
reform? Can you confirm this is a 34 percent increase in the cost of 
coverage for a family if the Baucus bill becomes law?
    Answer 3c. This is not a valid comparison because the types of 
families in the non-group market and the exchange must be dramatically 
different--otherwise it is implausible that a family premium could be 
less than twice the single premium. CBO hasn't spoken clearly to this, 
but I assume families in the non-group market are mostly couples, while 
in the exchange it would be a mix of couples and families with 
children.

    Question 4. Dr. Gruber, your testimony mentions ``there is a very 
strong mandate in place in legislation proposed by HELP and the House--
and a reasonably strong mandate in the SFC legislation, as well.'' Can 
you please explain what you mean by a ``reasonably strong mandate?'' Do 
you think the SFC legislation will bring enough younger and healthier 
workers into the risk pool?
    Answer 4. The strength of a mandate is related to two features: the 
strictness of the penalty and the ability of individuals to be exempt 
from the mandate. The House has a stronger mandate because there 
exemption level is higher (12 percent of income rather than 8 percent 
of income in SFC) and the penalties are larger. Nevertheless, even the 
SFC mandate will have a real impact on individual behavior and bring 
millions of young healthy consumers into the exchange.
                             senator coburn
    Question 5. Today the average family of four pays an additional 
$1,800 each year in health premiums, due to the cost-shift from 
Medicare and Medicaid, according to a 2008 Milliman study. Since the 
majority's health bills in Congress envision hundreds of billions of 
Medicare cuts during a decade when the population of Medicare is 
projected to increase by a third (from 45 million to 65 million), and 
roughly half of the uninsured are put in Medicaid, what do you project 
will be the increased cost shifts which will burden the average 
American family with higher costs?
    Answer 5. I am not familiar with the Milliman study and so cannot 
validate that result. But it is not proper to discuss cost shifting 
without also considering the reduced cost shifting that will result 
from less hospital spending on the uninsured. Hospital uncompensated 
care amounts to more than $40 billion/year, and that would be greatly 
reduced under either the Senate or House legislation. I do not know on 
net whether there will be an increase or decrease in cost shifting 
under this legislation, or the magnitude of those shifts.

    Question 6. What clause or article in the Constitution gives the 
Federal Government the right to legally require that all Americans have 
health insurance?
    Answer 6. I am not a constitutional scholar so I don't have a basis 
for answering this question.

    Question 7. Do you believe that an individual mandate for health 
insurance is analogous to requiring drivers to carry auto insurance?
    Answer 7. In many ways it is analogous, as it is a government 
requirement designed to improve the functioning of insurance markets. 
In other ways, it is not, because the product and the population 
mandated are quite different. In addition, all of the bills under 
consideration have some exemption mechanism from the mandate, whereas 
this is not true for auto insurance.

    Question 8. You have been very involved in Massachusetts' 
experiment in health care. You acknowledged at the hearing that 
Massachusetts has experienced an increase in waiting times to see 
physicians--primary care and specialists. The 2009 Massachusetts 
Medical Society Physician Workforce Study and numerous Boston Globe 
reports confirm this. Since the majority's bills in Congress envision 
many similar rating and insurance ``reforms'' as Massachusetts, can you 
predict that Americans would not see increased waiting times to see a 
physician under the majority's reforms?
    Answer 8. The change in waiting times in Massachusetts has varied 
by type of provider. Using the 2009 report and comparing pre-reform 
(2005) to the most recent data (2009), we find that waiting times have 
fallen for internal medicine, gastroenterology and orthopedic surgery, 
and risen for ob/gyn. It is unclear whether the reaction would be the 
same nationwide--I imagine it would vary by market conditions 
initially. But I agree that boosting primary care should be an 
important goal of reform.

    Question 9. You said last September (07/31/08) before the Finance 
Committee:

          ``The tax exclusion of employer expenditures from individual 
        taxation . . . is a regressive entitlement, since higher income 
        families with higher tax rates get a bigger tax break . . . 
        this tax subsidy makes health insurance, which is bought with 
        tax-sheltered dollars, artificially cheap relative to other 
        goods bought with taxed dollars, leading to over-insurance for 
        most Americans.''

    Are you convinced that the bills being considered in Congress 
effectively transform and improve this regressive tax system?
    Answer 9. The bill before the Senate takes the most important step 
of the past 60 years to deal with this problem, which is to impose an 
offsetting tax on high cost insurance plans. Your question highlights 
that this ``Cadillac tax'' is not in fact a tax but just an offset to 
the existing tax bias in our system.

    Question 10. Your testimony focuses heavily on your interpretation 
of CBO's analysis of premium costs. What is your estimation of the 
cumulative additional tax increases and cost-shifts which individual 
Americans and American families would experience under the bills?
    Answer 10. I have not estimated these.

    Question 11. A National Journal article on October 24th says:

          ``One worried expert is Jonathan Gruber, a Massachusetts 
        Institute of Technology health economist frequently consulted 
        by Democrats. Gruber has calculated that the Schumer-Snowe 
        approach will reduce the number of uninsured people the bill 
        covers by about 3 million--and raise premiums for those it does 
        cover by 10 percent. `You'll lose the 35-year-old who doesn't 
        go to the doctor,' Gruber frets.''

    The individual mandate in the Senate Finance Committee bill is 
significantly weaker than in the House bill. What impact will a weaker 
individual mandate have on younger, healthier Americans leaving the 
market?
    Answer 11. The strength of a mandate is related to two features: 
the strictness of the penalty and the ability of individuals to be 
exempt from the mandate. The House has a stronger mandate because their 
exemption level is higher (12 percent of income rather than 8 percent 
of income in SFC) and the penalties are larger. Nevertheless, even the 
SFC mandate will have a real impact on individual behavior and bring 
millions of young healthy consumers into the exchange.

    Question 12. Massachusetts does not have a public plan/full-blown 
State-run government health insurance company. In their score of the 
House bill, CBO said that the government plan would ``typically have 
premiums that are somewhat higher than the average premiums for the 
private plans in the exchanges.'' Do you think a public plan is 
necessary for real health reform?
    Answer 12. I do not believe that a public plan is necessary for 
real health reform, but it can be an important part of reform if 
designed and implemented appropriately.

    Question 13. What is your professional estimate of the reasonable 
likelihood of what the majority's health bills will do to Americans' 
premiums?
    Answer 13. I think it is most likely that the Senate bill will 
lower the premiums paid by Americans for their health insurance.

    Question 14. What is your professional estimate of the relative 
incentive the majority's health bills would give for relatively healthy 
Americans without chronic/ongoing conditions to drop coverage and only 
purchase health insurance when they are already sick or injured?
    Answer 14. I don't see the incentives for this behavior being very 
strong. First of all, the Senate bill includes an annual open 
enrollment period, so individuals could not simply purchase insurance 
when they are sick. Second, the bills include an individual mandate 
penalty which will penalize those who wait to buy insurance.

    Question 15. Six independent studies and four government studies 
have each reported that the majority's health bills will increase 
premium costs. Do you disagree with these studies? If so, why? Will 
premiums increase under any of the majority's bills proposed thus far?
    Answer 15. I am not aware of all these studies. The only ones of 
which I am aware that suggest the Democratic health care bills will 
raise costs are those funded by the insurance industry, and therefore I 
would not treat them as fully independent. The only objective evidence 
of which I am aware is the CBO analysis that shows that premiums in the 
exchange will be lower than they would be in the non-group market 
absent reform.

    [Whereupon, at 5:10 p.m. the hearing was adjourned.]