[Senate Hearing 108-41]
[From the U.S. Government Printing Office]

                                                         S. Hrg. 108-41




                               before the

                       SPECIAL COMMITTEE ON AGING
                          UNITED STATES SENATE

                      ONE HUNDRED EIGHTH CONGRESS

                             FIRST SESSION


                             WASHINGTON, DC


                             MARCH 10, 2003


                            Serial No. 108-5

         Printed for the use of the Special Committee on Aging

                            WASHINGTON : 2003
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                       SPECIAL COMMITTEE ON AGING

                      LARRY CRAIG, Idaho, Chairman
RICHARD SHELBY, Alabama              JOHN B. BREAUX, Louisiana, Ranking 
SUSAN COLLINS, Maine                     Member
MIKE ENZI, Wyoming                   HARRY REID, Nevada
GORDON SMITH, Oregon                 HERB KOHL, Wisconsin
JAMES M. TALENT, Missouri            JAMES M. JEFFORDS, Vermont
ORRIN G. HATCH, Utah                 RON WYDEN, Oregon
ELIZABETH DOLE, North Carolina       BLANCHE L. LINCOLN, Arkansas
TED STEVENS, Pennsylvania            EVAN BAYH, Indiana
RICK SANTORUM, Pennsylvania          THOMAS R. CARPER, Delaware
                                     DEBBIE STABENOW, Michigan
                      Lupe Wissel, Staff Director
             Michelle Easton, Ranking Member Staff Director



                            C O N T E N T S

Opening Statement of Senator John Breaux.........................     1
Statement of Senator Larry E. Craig..............................     3
Statement of Senator Susan Collins...............................     3
Prepared Statement of Senator Ted Steven.........................     5

                           Panel of Witnesses

Dan Crippen, Former Director of the Congressional Budget Office, 
  Washington, DC.................................................     6
Len M. Nichols, Ph.D., Vice President, Center for Studying Health 
  System Change, Washington, DC..................................    17
Karen Davis, Ph.D., President, The Commonwealth Fund, New York, 
  NY.............................................................    30
Stuart Butler, Vice President, Domestic Policy Studies, The 
  Heritage Foundation, Washington, DC............................    68




                              ----------                              --

                         MONDAY, MARCH 10, 2003

                                       U.S. Senate,
                                Special Committee on Aging,
                                                    Washington, DC.
    The committee convened, pursuant to notice, at 2:02 p.m., 
in room SD-628, Dirksen Senate Office Building, Hon. John 
Breaux presiding.
    Present: Senators Breaux, Craig, Stevens, and Collins.


    Senator Breaux. The Committee on Aging will please come to 
order, and good afternoon, everyone. Thank you for being with 
    This week, as many of you may or may not have seen already, 
is referred to as ``Cover the Uninsured Week,'' the week of 
March 10 through 16. There are a number of organizations 
ranging from the U.S. Chamber of Commerce to the AFL-CIO, the 
Business Roundtable, a number of international unions, the 
Health Care Leadership Council, you name it. If you are 
involved in health care, they have all joined together, really, 
in an effort to try and point to America and to Congress, I am 
certain, the importance of addressing the question of the 
uninsured in dealing with health care in this country.
    So we thought it would be appropriate to use the Aging 
Committee as a forum this afternoon to have a discussion on the 
state of America's health care, and particularly emphasizing 
the uninsured in our country. Obviously, in meetings that we 
have been having, in talking to large employers, the problems 
that they have in providing insurance, particularly for their 
retired workers, the older Americans, is becoming an 
increasingly more and more difficult problem. So I think it is 
appropriate that the Aging Committee use this forum to have a 
discussion this afternoon on the overall question of the 
uninsured, and in doing so, keeping it with the Uninsured Week 
of March 10 through 16.
    If you look at the news, we find that health premiums are 
going up. The number of small businesses that offer health 
insurance is going down. The number of uninsured Americans is 
going up. The financial conditions of both Medicare and the 
Medicaid program are heading downward.
    Last year, premiums for the employer-sponsored health 
insurance increased by nearly 13 percent. The number of small 
businesses offering health insurance to their employees 
continues to decline, dropping from 67 percent down to 61 
percent just last year. Medicare, I have argued, in its current 
form is unsustainable. Medicaid, the safety net for our most 
vulnerable, is crippling State budgets and many benefits on the 
State level are being scaled back or eliminated completely.
    We depend on our coverage on health care in this country 
under what I have called the box system of health care, which 
means that if you are an older American, you are in the 
Medicare box, which spends $236 billion a year. If you are a 
veteran, you are in the VA box, where we spend $26 billion a 
year. If you are poor, you fall into the Medicaid box, which is 
$170 billion a year. If you are working and have the fortunate 
situation where your employer provides health insurance, you 
are in the employer-sponsored box, where we spend $140 billion 
a year in government subsidies. That adds up to about $1.4 
trillion that we spend on health care annually in the United 
States of America.
    Yet, there is a box that is not on that table but on the 
bottom, rather, that has 41 million Americans in it that have 
no insurance whatsoever because they don't fit in any one of 
the boxes up on top. So we have a situation where we are 
spending an incredible, large amount of money every year and 
yet we still have a relatively large percentage of our citizens 
who have no access to health care insurance whatsoever.
    It seems to me that Congress spends an inordinate amount of 
time just trying to tinker with the boxes. We are trying to 
tinker with the Medicare box this year, with adding 
prescription drug benefits, and the President has proposed a 
reform program which I think moves it in the right direction. 
We continue to tinker with the Medicaid box, trying to help the 
States. Just this week, the National Governors Association made 
that one of their priority concerns, not having enough money 
for the Medicaid program within their States. Every year, we 
try to do things for the employer-sponsored box in terms of tax 
credits or other means to allow them to do a better job and to 
stay in the program.
    So the problem is, we tinker with all the boxes, but we 
very seldom take a look at the overall problems that our health 
care delivery system has in this country in the larger picture, 
and hopefully, we can get some discussion on that this 
    We have got a good group of witnesses that are with us. 
They have been around almost as long as I have, dealing with 
these problems from different perspectives, and I think that is 
healthy. They have got different perspectives, but we are all 
going to talk about the same subject matter.
    With that, I would like to recognize our Chairman, Senator 
Craig, who has allowed me to chair this hearing. Senator Craig.


    The Chairman. Mr. Chairman, thank you very much. You have 
outlined clearly, I think, a great concern that we have here in 
the Congress as it relates health care and the insured, the 
cared for and the uninsured.
    After nearly a decade of relatively modest health care cost 
growth, we are now back into the double-digit annual increases, 
partly driven by prescription drugs and a lot of other issues 
coming together, and I think the failure of us to move with 
some degree of speed in a comprehensive way prolongs and causes 
the whole situation to worsen.
    Last month, we had the Chairman of the Federal Reserve, 
Alan Greenspan, here, not to talk about interest rates but to 
talk about another passion of his and that is the aging of the 
world and the costs of that. I think his testimony was very 
sobering. He warned us that we simply cannot afford to wait 
much longer to begin seriously tackling the long-term 
challenges of Medicare and Social Security and, of course, the 
uninsured was not mentioned, but clearly is a reality out there 
that is being brought to our attention for the balance of the 
month, coupled with these hearings.
    I think the idea of comparing and relating and looking at 
the overall impact that these programs have is an important 
part of what this committee can do and must do as we put 
together the record that the Finance Committee will ultimately 
have to deal with in working on these issues.
    I would ask unanimous consent that the balance of my 
statement become a part of the record.
    Senator Breaux. Without objection, so ordered.
    The Chairman. I look forward to the testimony of our 
    Senator Breaux. Thank you, Mr. Chairman.
    Any comments from Senator Collins?


    Senator Collins. Thank you very much, Mr. Chairman. I was 
trying to decide how I address you both. Is it Mr. Chairmen? 
Mr. Chairman and Mr. Chairman? What would work? [Laughter.]
    I want to thank you both for holding this extremely 
important hearing to focus on the problems plaguing our 
nation's health care system and the options for reform to 
ensure that more Americans--indeed, our goal should be that all 
Americans--have access to affordable health care.
    The United States health care system is experiencing 
serious problems that are driving more and more Americans into 
the ranks of the uninsured. Rising health care costs, spiraling 
health insurance premiums, coupled with the recent slowdown in 
the economy have created conditions that one commentator has 
likened to the ``perfect storm,'' a confluence of forces, each 
worrisome in itself, but together posing a lethal threat.
    One of my top priorities in the Senate has been to expand 
access to affordable health care for all Americans. There are 
far too many of our citizens without health insurance or with 
woefully inadequate coverage. Last fall, the Census Bureau told 
us the number of uninsured Americans had increased to more than 
41 million. Moreover, just last week, Families USA released a 
study that estimates that some 75 million Americans have been 
without health insurance at some point during the past 2 years.
    Health insurance matters. The simple fact is that people 
with health insurance are healthier than those without. People 
without health insurance are less likely to seek care when they 
need it and tend to forego services, such as periodic check-ups 
and preventive services. As a consequence, they are more likely 
to be hospitalized or require costly medical attention for 
conditions that could have been prevented or treated 
successfully at an early, curable stage. Not only does this put 
the health of those individuals at greater risk, but it also 
puts additional pressures on our hospitals and emergency rooms, 
many of which are already financially stressed.
    Maine, like many States, is in the midst of a health 
insurance crisis, with premiums rising at alarming rates. 
Whether I am talking to a self-employed fisherman, a displaced 
worker, the owner of a struggling small business, or the human 
resources manager of a large corporation, the soaring cost of 
health insurance is a common concern.
    Maine's employers are facing premium increases of 20, 30, 
or even 40 percent a year. This is particularly burdensome for 
our smaller businesses, which are facing a dilemma. If they 
pass on the cost of the health insurance to their employees, 
more and more of their employees will decline coverage because 
they simply cannot afford their share of the premium. On the 
other hand, the smaller businesses cannot continue to absorb 
double-digit increases in rates.
    The problem is even more acute for the many Mainers who are 
self-employed and must purchase health insurance on their own. 
What we are finding in Maine is that monthly health insurance 
premiums often exceed the family's mortgage payment. So it is 
no wonder that more than 150,000 Mainers are now uninsured.
    Earlier this year, I joined with my colleague, the other 
distinguished Senator from Louisiana, Senator Landrieu, in 
introducing a plan that combines a variety of public and 
private approaches to make quality health coverage more 
affordable and available. I also believe that we need to press 
hard to include in the administration's economic recovery 
package some fiscal relief to the States that is targeted to 
the Medicaid program. We need to increase the Medicaid match 
over the next 18 months to help preserve the health care safety 
net for our low-income families that is now in danger of being 
shredded due to State budget cuts.
    I know that the distinguished chairman for the day, Senator 
Breaux, has also introduced an important proposal, as have 
others, to lay out their vision for reform. My hope is that 
this hearing will serve as a springboard for further 
discussions to find a bipartisan solution to this pressing and 
growing problem. Thank you, Mr. Chairman.
    [The prepared statement of Senator Susan Collins follows 
along with prepared statement of Senator Ted Stevens:]

              Prepared Statement of Senator Susan Collins

    Mr. Chairman, I want to thank both you and the Ranking 
Member of the Aging Committee for holding this hearing to 
examine the problems plaguing our nation's health care system 
and the options for reform to ensure that all Americans have 
access to affordable health care.
    The U.S. health care system is experiencing serious 
problems that are driving more and more Americans into the 
ranks of the uninsured. Rising health care costs and health 
insurance premiums, coupled with the recent slowdown in the 
economy have created conditions that a recent David Broder 
column likened to ``The Perfect Storm: a confluence of forces, 
each worrisome in itself, but together posing a lethal 
    One of my top priorities in the Senate is to expand access 
to affordable health care for all Americans. There are far too 
many Americans without health insurance or with woefully 
inadequate coverage. Last fall, the Census Bureau announced 
that the number of uninsured Americans increased to more than 
41 million in 2002. Moreover, just last week, Families USA 
released a study that estimates that 75 million Americans have 
been without health insurance at some point during the last two 
    Health insurance matters. The simple fact is that people 
with health insurance are healthier than those who are 
uninsured. People without health insurance are less likely to 
seek care when they need it, and to forgo services such as 
periodic check-ups and preventive services. As a consequence, 
they are more likely to be hospitalized or require costly 
medical attention for conditions that could have been prevented 
or treated at a curable stage. Not only does this put the 
health of these individuals at greater risk, but it also puts 
additional pressure on our hospitals and emergency rooms, many 
of which are already financially challenged.
    Maine, like many states, is in the midst of a growing 
health insurance crisis, with premiums rising at alarming 
rates. Whether I am talking to a self-employed fisherman, a 
displaced worker, the owner of a struggling small business, or 
the human resource manager of a large company, the soaring 
costs of health insurance is a common concern.
    Maine's employers are currently facing premium increases of 
as much as 40 percent a year. These premium increases have been 
particularly burdensome for small businesses, the backbone of 
the Maine economy. Many small business owners are caught in a 
cost-squeeze: they know that if they pass on the premium 
increases to their employees, more of them will decline 
coverage. Yet, these small businesses simply cannot afford to 
absorb double-digit increases of 20, 30 or 40 percent, year 
after year.
    The problem of rising costs is even more acute for 
individuals and families who must purchase health insurance on 
their own. Monthly health premiums in Maine often exceed a 
family's mortgage payment. It is no wonder that more than 
150,000 Mainers are now uninsured. Clearly, we must do more to 
make our health care system more efficient and health insurance 
more available and affordable.
    Earlier this year, I joined my colleague from Louisiana, 
Senator Mary Landrieu, in introducing the Access to Affordable 
Health Care Act, a seven-point plan that combines a variety of 
public and private approaches to make quality health care 
coverage more affordable and available. Our bill will bring 
millions more Americans into the health system by providing tax 
credits for small businesses that offer health insurance to 
their employees. It would strengthen the health care safety net 
by increasing funding for Community Health Centers, and it 
would address inequities in the Medicare system that hurt rural 
states like Maine.
    Mr. Chairman, I know that Senator Breaux and others have 
also introduced proposals that lay out their visions for 
reform. This hearing will serve as a springboard to further 
discussions, and I look forward to working with my colleagues 
to find a bipartisan solution to this pressing and growing 

               Prepared Statement of Senator Ted Stevens

    Thank you, Mr. Chairman. I'm pleased to be here today to 
discuss ways in which our American health care system might be 
changed to make sure that more people get health coverage at a 
cost our society can afford.
    Our employer-based health care system has served us well 
for many decades now, but there are new pressures on that 
system--and on our public health programs like Medicare and 
Medicaid--that are causing large holes in the system that leave 
many with no coverage, or with coverage that doesn't provide 
basic necessities like prescription drugs.
    In Alaska we have many small businesses for which the cost 
of providing health benefits to their employees is very high. 
Alaska thus has a higher rate of uninsured than does the rest 
of the country.
    I'm also, however, concerned about access to care for those 
who do have health insurance.
    The Medicare program, for example, in Alaska, pays doctors 
less than 40 percent of the cost of seeing Alaska seniors. As a 
result, many physicians are unable to accept new Medicare 
patients, leaving those patients with few options for getting 
needed care.
    Some of these patients end up using costly services in 
hospital emergency rooms because they can't find a physician.
    We're also finding it harder to recruit new doctors to 
Alaska because of the extremely low payment rates compared to 
the cost of seeing patients. Yet, more than 50 percent of our 
primary care doctors in my State are over 50 years old and are 
looking to retirement.
    The fast rising costs of malpractice insurance, due in some 
part to extremely large jury awards to patients for ``pain and 
suffering'' are also contributors to fast rising health costs 
as well as to decreased access to services like those needed by 
pregnant women.
    These access issues must also be considered as we proceed 
with this debate.
    I look forward to hearing from our panel.

    Senator Breaux. Thank you, Senator Collins, for that 
excellent statement.
    I would like to welcome our witnesses, and under the rule, 
the last shall be first. We will start left to right from the 
chair with Mr. Dan Crippen. Dan, of course, served as our 
Director of the Congressional Budget Office from February 1999 
until January of this year. He has also served in senior 
positions in the White House and the U.S. Senate and has done a 
great deal of work on the Federal budget as it relates to the 
issue of health care and retirement and we are delighted to 
have him this afternoon. Dan, welcome to the committee.


    Mr. Crippen. Mr. Chairman, Senator Collins, first, let me 
apologize for my tardiness. It has been 4 years since I have 
had to look for a parking place on the Senate side. [Laughter.]
    It is not as easy as it used to be.
    Mr. Chairman, as you observed on many occasions and just a 
few minutes ago, we have developed an array of health care 
delivery systems in this country which result in a disparate 
treatment in payments, unequal quality of care, substantial 
numbers of people who may not be receiving adequate care, all 
the while spending more than any other nation. Further, our 
attempts to fix parts of this system, our so-called incremental 
reforms, well intentioned as they may have been, have often 
caused as many problems as they have solved.
    I am reminded though, Mr. Chairman, at the outset of this 
hearing, as in many other gatherings like this, of a friend of 
mine who I don't think I have told you about. He is a tunneling 
engineer. After he graduated from college, he took a qualifying 
exam, I guess to be a tunneling engineer, and he failed it, and 
it, needless to say, irritated him a great deal. So he studied 
a lot for the second chance, and as he was taking the exam, he 
finished, he looked up, he had an hour left. So he turned over 
his test booklet and he wrote on the back side, ``These things 
I also know.'' [Laughter.]
    Very often, we find ourselves with such a broad topic 
before us that we wander into the very tempting position of 
talking about all the things we happen to know. I am going to 
try to avoid that today and speaking only for a few minutes, I 
want to propose to focus on one thing. We ought to know the 
nature of the problem before we try to fix it.
    That sounds pretty straightforward, and I have 
characterized that in the past, Mr. Chairman. You have heard me 
talk about Moynihan's several laws. Well, the first Moynihan 
law that I think is appropriate here is, if you don't ask the 
right questions, you are not likely to get the right answers. 
The second Moynihan law, also appropriate here, is before you 
can solve a problem, you have to be able to measure it, to size 
it correctly.
    I will use two quick examples today, but two issues that 
are very much in the forefront of your concerns in the Senate 
to hopefully make this point. Since, as you said, this is the 
``Week of the Uninsured,'' I will start there.
    Ask almost anyone in this room, as we have already heard, 
how many uninsured Americans there are and the answer is likely 
to be the one you have in your chart, 40 million, plus or 
minus, thereabouts. Inquire further about the nature of these 
40 million and most people will say that these are folks who 
have extended periods of uninsurance, who you might say are 
chronically uninsured.
    The truth is, the number of chronically uninsured--for this 
purpose, I will use 12 months or more without insurance--is 
substantially lower than 40 million, perhaps as much as 20 
million lower than 40 million when you examine other surveys on 
this issue. How can that be, because headline after headline, 
newspaper and television advertisements all use the number 40 
    Well, the 40 million may be uninsured today as we sit here 
for a given day, but it turns out that about half of the 40 
million people are temporarily between coverage of some kind, 
between employers, between spousal coverage, between public 
programs, so much so that the average period of uninsurance for 
the 40 million in the CPS survey is less than 7 months. Only 40 
percent of this 40 million are uninsured for less than 4 
    This perspective, I would suggest, deals a much different 
picture and one that likely suggests different policies. A tax 
credit, for example, may be unnecessary and ineffective for 
filling short gaps. A policy along the lines of COBRA coverage 
might be more suited.
    As for those who are without insurance for 12 months or 
more, we might want to look even more closely at them before 
deciding on the right policy. Of these, one-quarter are 
families with incomes over 200 percent of poverty. Another 20 
percent, likely the younger of this group, say they have no 
need for insurance. Some number, perhaps a very substantial 
number, are eligible for Medicaid, but either unaware they are 
eligible or don't yet need medical care.
    Mr. Chairman, there is an underlying metaphysical question 
here, of course, with public programs. If you are eligible for 
Medicaid but haven't used it, are you uninsured? I strongly 
believe the answer is no. I think you are insured, because the 
first time anyone eligible shows up at a hospital, they will be 
enrolled, and the 3 months' prior expenditures will be 
reimbursed, as well. To say otherwise is akin to saying that 
anyone who is privately insured should be counted as uninsured 
until they make a claim.
    Similarly, as you know better than I, there are many 
veterans who rely on VA for health care and do not buy 
insurance. Are they really uninsured as well?
    Let me hasten to add at this point, I am not trying to 
downplay the important problem making sure citizens get health 
care. Even if there are only 15 to 20 million chronically 
uninsured in this country, that is a potentially big problem 
and certainly deserving the attention of government. What I am 
saying is that until the nature of the problem is clear, the 
solutions we devise may be ineffective and unnecessarily 
    With your indulgence, Mr. Chairman, I want to quickly turn 
to another issue before the Congress and the country, that of 
providing pharmaceutical benefits for Medicare beneficiaries, 
something you have all been very involved in, Senator Collins 
in particular, and you, Senator Breaux, as well. The debate 
thus far is largely predicated, in my view, on the need to 
prescribe prescription medicines to the elderly. The truth is, 
Mr. Chairman, three-quarter of the elderly already have 
insurance of one kind or another that covers some drug 
spending, maybe not enough, maybe with hardship, maybe with 
deprivation. But again, it is not that we have 40 million 
seniors without any drug coverage.
    If you look behind this, those 30 million beneficiaries 
with insurance fill about 32 prescriptions a year at an average 
cost of $45. Importantly, the quarter of the Medicare 
population that has no insurance for pharmaceuticals fills 25 
prescriptions a year at an average cost of $37. It may well be 
that this gap of seven prescriptions per year is important, 
critical, necessary, to put a word on it, but the perfectly 
targeted policy if you are worried about access could be 
ensuring access for these seven prescriptions for the 25 
percent of the population that aren't insured, and the cost of 
that would maybe be around $3 billion a year, not 30, not 300, 
but three.
    The issue, I would suggest, is not necessarily access. What 
is really at issue, and we are not debating it in these terms, 
I understand, but what is really at issue is the financing of 
drug benefits. Drugs are being supplied now. The question is, 
who should pay? There may be very good and compelling reasons 
to change the financing from what exists today and place it in 
the Federal budget and on current workers, but that reason is 
not access.
    I will conclude, Mr. Chairman, by saying everyone at this 
table and many in this room have spoken eloquently, certainly 
more eloquently than I am able, about the need for Medicare 
reform and the desirability of adding drugs to that benefit. 
Mr. Chairman, I would suggest until we are clear-eyed about the 
nature of the problem, until we understand better than we do 
today the current system, hodgepodge and inefficient as it is, 
until we understand what kind and quality of health care we are 
buying in programs like Medicare, it is very hard to see how we 
might productively reform them. As Senator Moynihan would say 
if he were here, if we don't take the time to ask the right 
question, we aren't likely to get the right answer.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Crippen follows:]

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    The Chairman. Thank you, Mr. Crippen, very much. Dan, would 
you give me, just before we move to the next witness, what were 
the numbers you had, the 32 prescriptions at $45 a year versus 
what, 47 prescriptions at what?
    Mr. Crippen. I want to be precise. I looked it up just this 
morning. Thirty-two prescriptions a year for those who have 
insurance at a cost of $45 per prescription. Those who are 
uninsured fill 25 prescriptions a year, on average, at a cost 
of $37 per prescription. The lower cost, it is assumed, because 
of more use of generics.
    The Chairman. OK, thank you.
    Our next witness will be Mr. Len Nichols. Mr. Nichols 
joined the Urban Institute's Health Policy Center in November 
1994, but prior to that, he was a Senior Advisor for Health 
Policy at OMB, where he managed and coordinated the cost and 
revenue estimates for President Clinton's Health Security Act 
and the Congressional successors. We thank him for being with 
us this afternoon.


    Mr. Nichols. Thank you, Mr. Chairman, Mr. Chairman, and 
Senator Collins. My name is Len Nichols. I am the Vice 
President of the Center for Studying Health System Change, 
which is a nonpartisan health policy research organization 
exclusively funded by the Robert Wood Johnson Foundation, and I 
will try to address the question of the hearing, is our health 
care system in a crisis, in the 4\1/2\ minutes I have left.
    I think our health care system looks like it is in a crisis 
from a number of different vantage points, but our health care 
system also performs amazing feats every day and it serves most 
of us very well most of the time. But we do have three key 
interrelated problems. I will label them waste, uneven quality, 
and uneven access to care, and these problems add great stress 
to our system every day. We cannot solve any of these problems 
without attacking them all simultaneously, and systemwide 
reform, as you yourselves know quite well, will require Federal 
leadership, and I will come back to that in a moment.
    On waste, you probably know we spend substantially more on 
health care than any nation on earth, yet we rank 28th in 
infant mortality, right below Cuba, Ireland, and Portugal, 
countries that usually beat us at soccer, but not at health 
care, and 26th in life expectancy after 60. One way to 
interpret these numbers is we perform much costly unnecessary 
care. Rates of excess care vary inexplicably across the nation. 
One major consequence of waste is that an increasing fraction 
of our workforce cannot afford comprehensive health insurance. 
Growth in per capita health care cost has outstripped earnings 
growth by 260 percent since 1980.
    On uneven quality, it is unambiguously true we have many of 
the best doctors, nurses, and hospitals in the world, but our 
Institute of Medicine tells us that between 50,000 and 100,000 
people each year die in our hospitals due to medical errors. 
The biggest quality gaps stem from not doing what we know 
should be done, that is to say, for example, providing routine 
medication after heart attacks and performing certain tests 
regularly for diabetics. The most spectacular quality failures, 
as the recent transplants at Duke indicate, result from 
endemically poor communication among different parts of our 
incredibly talented health care system.
    Finally, but by no means least, we suffer from uneven 
access to care. As you know and as will be pointed out later, 
the uninsured are disproportionately low-income and minority, 
especially Latino. The uninsured are less likely to access 
care, and delayed access often leads to unnecessarily poor 
outcomes and even death. All of us could become uninsured as a 
result of bad luck, as all of us know. Even controlling for 
insurance and income, et cetera, minority death rates are 
higher than whites for a large number of diseases. We are a 
long way from color-blind equality in our health care system.
    Now, most recently, it is true, as Senator Collins pointed 
out, our three key problems of waste, uneven quality, and 
uneven access have been intensified by a reacceleration of 
health care cost growth, which is, in my view, has been ignited 
by a wholesale retreat from effective but unpopular techniques 
of managed care. As a result, our three major problems are, 
indeed, deeply connected. Waste and poor quality raise costs, 
which creates more uninsured, especially among low-income 
working families, and the cost of paying for universal coverage 
in our current system seems so daunting that policy is easily 
    The market return to investing in the quality enhancing 
infrastructure, which are primarily measurement and 
communications tools, has been low because most patients are 
not aware of our health care system's quality problems and 
because knowledgeable payers fear they are too small to make a 
difference. Profound fear of malpractice claims and economic 
loss generally have retarded provider engagement in quality-
enhancing and error-reducing efforts, which keeps costs high, 
and this is how the dysfunctional set of interactions continues 
to stress our health care system.
    Therefore, in my view, we have to attack all these problems 
simultaneously and Federal leadership will be necessary and 
this will require substantial new resources to be committed.
    But before I outline specific roles for Federal leadership, 
I would like to take just a second and celebrate the fact that 
we are entering into a new national conversation. Senator 
Breaux has recently laid out a vision for system reform that 
includes a new kind of social contract between individual 
responsibility and our collective obligation to make group 
health insurance affordable and available to every American. 
His vision, in my view, can serve as a cohesive and catalytic 
springboard for ongoing discussions by this committee, Members 
of Congress, Presidential candidates, the Secretary of HHS, and 
the President himself.
    Indeed, this might be a good time to remind ourselves of 
some key lessons from the last national conversation we had 
about health care reform in the 1993-94 period under the 
leadership of President Clinton, and my written testimony lays 
a number of these out. I will focus on the one that I think is 
the key analytic one today.
    The Clinton proposal at its core assumed that the health 
plan is the key unit in our health care system, as the agent 
that would solve all problems. It is becoming increasingly 
clear to me that the key unit in our health care system is 
actually the patient-provider interaction. We must get 
incentives right at that level. If we do, much else will take 
care of itself. If we do not, no matter what else we do, we 
will fail to reduce waste and improve quality and thus will 
never feel able to afford more equal access for all.
    Now, what kind of system is most likely to get these 
incentives right? A system that pays for good quality health 
care and good health outcomes and does not pay for failure to 
provide quality care. This kind of system will require public 
investment in information infrastructure so that providers and 
patients will find it easier to jointly produce good health 
care and the best health outcomes possible.
    Current efforts underway at IOM, AHRQ, and CMS are a good 
start, but they need your unwavering and continued support. 
This kind of system will also require group purchasing. 
Information economies of scale are simply too great to expect 
comparable efficiencies from individual health care consumers 
acting with their own knowledge alone. Our major Federal 
purchasing agencies, CMS and OPM, if equipped with the tools 
and the power and discretion to use quality data to guide 
choices, can provide essential and catalytic leadership in this 
    Finally, the system will have to extend access to all 
Americans, which will require Federal subsidies, else will 
always suffer too many inequities to solve our uneven quality 
    In the long run, I think research is very clear. Technology 
drives cost growth. Our decentralized health care financing 
system, however, is biased in favor of paying for virtually 
everything the medical industrial complex offers us, regardless 
of its effectiveness for many types of patients.
    So my plea to you is and my claim is, we have to learn how 
to buy health services and technologies now so that we can 
reduce waste, improve quality, and learn how to decide which 
future technologies we will pay for together and which we will 
leave to individuals on their own. As we become better buyers, 
we will be better able to afford quality health care for all 
Americans. Thank you very much.
    Senator Breaux. Thank you very much, Mr. Nichols, for a 
very detailed statement.
    [The prepared statement of Mr. Nichols follows:]

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    Senator Breaux. Our next witness will be Ms. Karen Davis. 
Welcome. Ms. Davis is currently the President of The 
Commonwealth Fund, which is a national philanthropy that does 
independent research on both health and social policy issues. 
Before joining The Commonwealth Fund, she served as Chairman of 
the Department of Health Policy and Management at Johns Hopkins 
School of Hygiene and Public Health, where she is also a 
professor of economics and currently one of the promoters of an 
annual conference on health care that brings together some real 
experts, and we thank her for that participation. Ms. Davis, 
thank you very much.

                       FUND, NEW YORK, NY

    Ms. Davis. Thank you, Mr. Chairman, Mr. Chairman, Senator 
Collins, Senator Stevens, for this opportunity to be with you 
    We have entered the 21st century encumbered by a health 
system that is not up to the challenge of ensuring a healthy 
and productive nation. It was really set in motion over 50 
years ago, after World War II, and it has resulted in a system 
that is costly, complex, and confusing. Most important, it is 
failing to meet the twin objectives of health insurance, to 
ensure that people have access to needed medical care and to 
protect them from the financial burdens of costly medical 
    Today, I would like to focus on five types of costs that 
are inflicted by our fragmented health insurance system. First 
of all, we have already heard today about the costs of the 
growing number of uninsured. I include in my testimony a number 
of charts at the end that demonstrate, for example, in Chart 1, 
that we are not making any progress in reducing the numbers of 
uninsured. They have gone up steadily since the mid-1970's and 
we do have 41 million Americans today that, as Senator Breaux 
reminded us, fall between the boxes of our American health care 
system because they are not lucky enough to be covered by 
employer-based coverage, Medicare, Medicaid, or the Children's 
Health Insurance Plan.
    We also know that coverage is eroding dramatically for 
retirees. Senator Breaux mentioned the situation of retiree 
health insurance coverage. In Chart 11, I note that it has 
dropped from 66 percent of large firms in 1988 that provided 
retiree coverage to 34 percent today, and only 3 percent of 
small firms provide retiree coverage. We know that Medicare is 
not enough on its own, that people need prescription drug 
coverage, and yet there are a fourth of Medicare beneficiaries 
who do not have such coverage.
    I think it is important to know that there are both health 
and economic consequences of the gaps in health insurance 
coverage. The Institute of Medicine released a study last year, 
which I have shown in Chart 16, indicating that there are 
18,000 deaths of adults ages 25 to 64 that occur each year as a 
direct consequence of the absence of health insurance coverage. 
If you look at deaths of those non-elderly adults, it makes 
uninsurance the sixth leading cause of deaths in this age 
group, greater than the number of deaths from HIV/AIDS or from 
    At The Commonwealth Fund, we have supported numerous 
studies that look at those who do not have health insurance 
coverage, either part-year or full-year, and we find that 
whether you are a long-term uninsured or a short-term 
uninsured, you have greater difficulty getting needed care, 
greater difficulty getting preventive services, and you incur 
much greater financial problems as a consequence of that 
    We also know that the cost shifting that occurs in a 
fragmented financing system, especially as health care costs 
accelerate, as Senator Collins mentioned, creates inefficiency 
in the system.
    There are 70 million American workers who are covered by 
their own employer. There are 20 million more workers who are 
covered under a family member's coverage, typically a spouse's, 
and there are 30 million workers who are not covered at all. So 
we really have a ``pass the buck'' system of health insurance, 
where we are perpetually shifting costs from one party to 
    Those large employers that cover their workers cover that 
cost as well as the cost of dependents whose own employer is 
not picking them up, and they also pick up the costs of the 
uninsured that are reflected in higher rates charged by 
hospitals, and some physicians, that result in higher health 
insurance premiums. Employers, in turn, try to shift more cost 
to workers in the form of higher premiums or cost sharing.
    States allege that the Federal Government shifts costs to 
them by not picking up all of the costs of Medicare 
beneficiaries. I give one example in Chart 23, where State 
Medicaid prescription drug spending for dual-eligibles that are 
covered by both Medicare and Medicaid comes to $6.8 billion a 
year, and I have indicated how that breaks down across the 
various States.
    In addition, hospitals shift costs from one to the other. 
Those hospitals that are willing to serve the uninsured are 
much more financially fragile than those who do not provide 
care to the uninsured, and care is increasingly concentrated in 
a limited number of safety net and teaching hospitals.
    But my basic point is that far more energy goes to shifting 
costs than to enhancing efficiency or quality of health care. 
Insurance companies are profitable because they attract 
favorable risk and drop unfavorable risk, not necessarily 
because they provide innovative incentives to improve quality 
and efficiency.
    There also is the cost of churning in health insurance 
coverage as people's economic and personal circumstances 
change. Mr. Crippen pointed to the fact that about half of 
people who are uninsured at some point during the year, 62 
million people, were uninsured all year long. About half were 
insured part of the year, and about, as Senator Collins noted, 
75 million people were uninsured over a 2-year period.
    But as this churning occurs, these people are at risk for 
not getting care when needed and they face unaffordable medical 
bills when care could be incurred. But I think most 
importantly, we pay a high price in high administrative costs. 
Every time somebody enrolls, disenrolls, reenrolls, it is 
administrative cost to the insurance company or the public 
program. It is also an administrative cost to the health care 
providers that have to change their records, perhaps forward 
medical records to another provider.
    As I show in Chart 29, the U.S. spent $111 billion in 2002 
on private insurance or government program administrative 
costs, and that doesn't include the administrative cost that is 
incurred by hospitals and other health care providers or by 
individuals as they enroll, disenroll, and reenroll, changing 
insurance coverage and plan.
    The final point I want to make is simply the cost of 
complexity from a pluralistic system of health insurance 
without an integrating framework and consensus on basic 
principles. As I show in Chart 31, Professor Reinhardt has 
developed a chart that he uses to explain the U.S. health care 
system, and it is a Mondrian diagram of cuts that are on the 
basis of whether you are a child, an adult, or an elderly, 
whether you are poor, near-poor, working income, middle class, 
or rich, and there are separate ways in which you get covered 
depending upon which of those categories you fall in.
    But I also provide in Chart 32 at the very back of the 
testimony an example of the complexity of different benefit 
packages. This is just in our Medicare+Choice program in Tampa, 
where there are eight different plans available, but they each 
have their own set of premiums, cost sharing requirements, drug 
formularies. It is really impossible for either the beneficiary 
or a family member or a consumer advocacy group to explain 
which plan best fits the circumstances of those individuals.
    Thus complexity leads to the costs of large numbers of 
people who are eligible but not enrolled. It leads to costs of 
lost productivity, and lost resources wasted on administration. 
It also leads to the cost of inefficient and low-quality care. 
Senator Collins mentioned the high costs in emergency rooms for 
preventable conditions and for hospitalizations and the costs 
of different standards of care that depend on insurance status. 
In fact, the U.S. spends twice as much per capita on health 
care as other industrialized nations, and yet is the only one 
to fail to cover everyone.
    There simply has to be a better way to go about providing 
coverage, and that should include automatic and affordable 
coverage for all, a balance between choice, flexibility, and 
innovation, and between simplicity, efficient administration, 
and standardization that facilitates informed choice; shared 
responsibility for financing coverage, including, I would 
argue, contributions from employers, both the insured and the 
uninsured, health care providers, Federal, State and local 
government; a commitment to quality improvement and greater 
efficiency in care and in insurance administration using modern 
information technology. Finally, we need to set the goal of 
high-quality health care for all as the top national policy 
priority essential to a strong and healthy and productive 
nation. Thank you.
    The Chairman. Thank you very much, Ms. Davis.
    [The prepared statement of Ms. Davis follows:]

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    Senator Breaux. Next, we will hear from Mr. Stuart Butler, 
who is from the Heritage Foundation. He is currently the Vice 
President of Domestic and Economic Policy Studies there and he 
has argued for a long time for a health care system based on 
consumer choice and also market competition and we are 
delighted to have him with us. Mr. Butler.


    Mr. Butler. Thank you, Mr. Chairman and Senators. All of us 
in this room want to see an America in which everyone can count 
on a decent basic level of health care, but we need to make 
sure we reach that goal in a manner that is affordable, 
efficient, fair, and as seamless as possible. Our current 
system has none of these features.
    As you mentioned, Mr. Chairman, and others have done on 
this panel, millions of Americans currently have no regular 
coverage at all, and most with coverage move over time from one 
program or plan to another, each with different benefits and 
eligibility rules depending on the person's situation at that 
time. For instance, an American faces totally different health 
care coverage depending on whether he or she currently is 
employed in a small firm, a large firm, has changed jobs, is 
unemployed, is unemployed because of the impact of trade, is a 
veteran, is poor and on welfare, is poor but not on welfare, is 
retired and age 64, is retired and age 66, or is a member of 
this committee. Everyone is different.
    Not only is there a fragmented patchwork of programs, but 
also, these programs or plans are run on totally different 
operational principles with wide variations in Federal 
subsidies that defy logic. Some, like the VA, are run directly 
by the government. In Medicare, by contrast, the government 
contracts out the delivery of services,  but  Congress  fixes  
the  benefits. Elsewhere,  employers basically decide whether a 
sick child will or will not see a specialist. Meanwhile, the 
Federal Government gives Bill Gates thousands of dollars each 
year in tax breaks to help him because he no doubt struggles to 
afford his dental check-ups, yet gives little or nothing to 
help the busboy down the street pay for minimal medical care 
for his family.
    Mr. Chairman, we will never achieve universal coverage 
simply by adding here and there to this mishmash of programs 
and this indefensible method of subsidizing people. Moving 
toward a fairer and more rational system will, of course, be 
difficult, but the best way to do so would be to take some 
steps consistent with four strategies that I discuss in my 
written testimony.
    First, I agree with others on the panel and with you that 
we should commit ourselves to a social contract on health care 
that is explicit and fair. In a rich country like America, we 
should declare that it is the obligation of society to assure 
that all residents will have affordable access to at least a 
basic level of health care. But a contract is a two-way 
process. Residents should also have the legal obligation to use 
a reasonable level of their finances to contribute to the cost 
of basic coverage so that others in society are not needlessly 
called upon to help.
    Second, tax breaks or other subsidies to help people afford 
coverage should not vary significantly because of the 
particular piece of the patchwork people happen to be in, or 
very significantly, if they move from one piece to another. 
This implies such things as delinking the eligibility of tax 
relief from employment status. It also means gradually 
redesigning the method of tax relief so that help is focused 
where it is really needed. For Medicare, it means that 
assistance toward the cost of such things as Part B premiums or 
new benefits, such as a drug benefit, should be focused on 
those who need that help the most.
    Third, the place of work should function more as a 
clearinghouse for choosing and enrolling in health coverage and 
less as the place where an employer decides what your coverage 
will be. The place of work is a convenient place today for 
people to pay their taxes through the withholding system, yet 
employers do not sponsor the tax system. They do not decide 
what taxes their employees will pay. It should be the same in 
health care. In the case of workers in small firms especially, 
the health subsidy reforms I have suggested would permit 
employees to sign up at the place of work for coverage that 
they want rather than coverage decided by their employer.
    Fourth, Mr. Chairman, there remains the obvious question of 
how do we move from a patchwork with many holes to a more 
consistent and complete tapestry. To be sure, there are deep 
disagreements about what a reform system should look like, and 
you will hear disagreements on this panel. There is also 
uncertainty about what will actually happen on the ground when 
certain policy changes are made.
    Recognizing this, I suggest that the Federal Government, 
with the States, should embark on a systematic strategy of 
creative federalism to test comprehensive approaches to 
achieving universal coverage. To do this, the Federal 
Government should establish the goals and dedicate some 
funding. Congress should also enact a menu of policy tools that 
would be available to States, but not imposed upon them. These 
tools might include such things as association plans, as 
opening up the FEHBP, or modifying Medicare and SCHIP. A State 
could then propose a covenant combining State actions with 
selections from the Federal menu designed to test an approach 
to achieving universal coverage. Rather than arguing endlessly 
about what the end result should look like, let us instead 
learn systematically what really works.
    Mr. Chairman, thank you for the opportunity to testify.
    [The prepared statement of Mr. Butler follows:]

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    Senator Breaux. Well, thank you, Mr. Butler, and thanks to 
all the members of the panel for your comments and thoughts and 
suggestions. I think they are very, very important.
    Let me ask each one of you if you could just maybe comment. 
The only question I have is to the point of looking at all the 
boxes. As I have said, and you have all heard me say it, that 
this boxed area of getting health care just cannot continue. We 
try to put band-aids on each one of the boxes and each one of 
the boxes is a huge bureaucracy with red tape and regulations 
and fraud, waste, and abuse, and what I have suggested, that in 
the long term, what we ought to do is guarantee that Americans 
get health care, not because they fit into one of the boxes but 
because they, in fact, are an American citizen, which means I 
am talking about an individual mandate that people buy health 
insurance in this country which would be subsidized by the 
Federal Government for low-income individuals.
    I would involve the States in sort of the role that OPM 
provides for those of us who are Federal workers, to create the 
pooling arrangements to allow for purchasing and group rates as 
opposed to individual rates. That is the concept I think most 
of you are fairly familiar with.
    Can you give me a short comment, and we will start the 
opposite way, Mr. Butler, and work back to Dan.
    Mr. Butler. I strongly agree with that approach. I believe 
that it is important to try to gradually move toward 
consistency in the system for the very reasons that you mention 
and to make sure that if we do require people to obtain at 
least basic coverage, coverage that protects the rest of us 
from unnecessary expense, then we have to give that subsidy in 
a form that is far more rational than it is today. I think the 
best way forward is to experiment with States, but also, as we 
begin to move forward, to rationalize the subsidy system so 
that it becomes easier for these different boxes right now to 
begin to function in a similar manner.
    For example, in the Medicare program, let us look at 
premium support approaches that recognize that we have got to 
help people in certain situations get assistance, such as the 
SLIMBY and QUIMBY case that Karen Davis mentioned. This 
recognizes that lower-income people need a lot more help to 
afford what is even available in Medicare today. We need to 
begin to start fixing that particular inequity will help all of 
these boxes in the first instance to start functioning in a 
rather more similar way than they do today.
    Then simultaneously, we have got to look at the 
infrastructure of information that others have mentioned so 
people can navigate the system that they currently are in. So I 
think if----
    Senator Breaux. You hit upon a thought that I hadn't really 
thought about. We have got this box theory, but each one of the 
boxes is actually, in most cases, a different type of delivery 
    Mr. Butler. Absolutely. Absolutely.
    Senator Breaux. You are in a box because of whether you are 
old or whether you are poor or whether you are a veteran, but 
not only are you in the box that is supposed to be for you, 
each box is sort of a different delivery system on top of it.
    Mr. Butler. Right.
    Senator Breaux. Ms. Davis.
    Ms. Davis. Mr. Chairman, I think you are to be 
congratulated for really calling for making comprehensive 
health insurance for all a top priority. I think until we are 
serious about really committing the resources that it takes to 
make coverage automatic and affordable for everyone, we are 
going to continue to suffer both the health and the economic 
consequences of our current system.
    So I think trying to set up a simpler system where coverage 
is automatic is key. It can go as far as an individual mandate 
or simply just making it so easy for people and so affordable 
that you get virtually everybody covered.
    I think looking at the experience of the Federal Employees 
Health Plan makes a lot of sense. I think that works well for 
Federal employees, and works well for Members of Congress. I 
don't think one wants to add new groups into that plan 
specifically, but instead use it as a model, for something that 
I call the Congressional Health Plan that would cover Members 
of Congress, small businesses, and individuals. But link the 
two by requiring any plan providing coverage through the 
Federal employees plan to also provide coverage through this 
new pool.
    I think having premium assistance that is income-related 
makes a lot of sense. I think building on the income tax 
system, makes a lot of sense because that is one thing that we 
do verify and it is an administrative system that is out there. 
I think there is a way of really checking people's insurance 
status at tax time and then referring people who are uninsured 
to something like a Congressional Health Plan pool. So I like 
all of those ideas.
    I think the ones that I think need to be looked at fairly 
carefully and are very difficult to look at is the employer-
based health insurance system that we have now. There are about 
160 million people covered under employer plans. Employers put 
up $335 billion a year for that coverage, so I don't think we 
want to risk moving backwards and eroding that coverage. I 
think that is going to require looking at a fair contribution 
from all employers, everybody contributing at least something 
toward coverage, whether they provide coverage to their workers 
or their workers wind up getting covered through something like 
the Congressional Health Plan.
    Finally, we have to think about the role of public 
programs. I think that Medicaid and Medicare are very important 
programs. They cover the sickest and the poorest of all 
beneficiaries and these are beneficiaries that are, for the 
most part, not attractive to private insurance firms. Medicaid, 
for example, covers the homeless, people with HIV/AIDS, people 
with very serious physical and mental problems, children with 
special health care needs, quadriplegics. So there are subsets 
of the Medicaid population, that represent a large portion of 
Medicaid dollars and that really need this coverage. We are 
going to need to turn to public programs to cover the sickest 
and poorest, but perhaps we can offer people choices of other 
options, as well.
    So I think the broad framework that you have set forward is 
critical and the commitment of resources is also very 
important, to begin thinking about moving from where we are 
today to getting to such a system is the major challenge.
    Senator Breaux. Mr. Nichols.
    Mr. Nichols. Mr. Chairman, when I think about your theory 
of the boxes and how your proposal attempts to create a 
framework where everyone would have a home, I have to applaud. 
I think there are five major goals we want to achieve here and 
I keep coming back to something like the group purchasing 
arrangement as the best way to achieve those goals. We have to 
have a system that is efficient. We have to be good both at 
enrolling people--we can only get low administrative costs 
through group enrollment. At the same time, all the quality 
issues and waste issues I talked about in my testimony, I 
think, can only be addressed in a big group purchasing kind of 
    We want to have good risk pooling so that people of 
different risks can be pooled together so that you are not held 
accountable for being unlucky in life. At the same time, you 
want to make sure that those who are healthy don't pay premiums 
that are way out of balance with what they are expected to 
cost. You have to have some compression there.
    You have to have a choice. I think Stuart's point about how 
most individuals today in the employer system really don't have 
much choice because they basically end up with the one choice 
their employer makes for them. Maybe it is best for some group 
of workers, but it is surely not best for all workers. So we 
want to make sure we have more choices.
    We want to have subsidies tied to the circumstances of 
individuals. I am very impressed with the notion that the 
individuals who most need subsidies in our country tend to 
float in and out of different kinds of employment arrangements. 
That is why they are sometimes uninsured and sometimes not. 
That is why that is the common circumstance. The notion that 
one subsidy will be right for them at all times is probably not 
true. Therefore, we want to have a system that follows 
individuals and not other kinds of circumstances.
    Finally, we want seamless. We want a system where when they 
have a life change, they don't have to change their health care 
system or have to change their providers who they know and, our 
surveys at least show, they trust, and that is the good news 
about our health care system today.
    To me, the way you accomplish all of that is to make one 
big box, that is to say, to make a box where everyone has a 
right to go. As you know, I have argued that you don't want to 
force people into that box. You want to leave people with 
choices outside the box if, indeed, they think they can do 
better on their own. But it is perfectly consistent with my 
view of what we want here and what we all agree on to enforce 
an individual mandate to buy coverage, but you can choose to 
get it where you want. In my view, most people will, as Karen 
said, drift to the bigger box over time. If you create it, they 
will come, but you don't want to force them all to come the 
first day.
    Senator Breaux. Thank you, Mr. Nichols. Dan.
    Mr. Crippen. Mr. Chairman, a couple of kind of disparate 
comments, but, I think, saving the most important for the last.
    Looking at Federal programs, of course, we can often find 
what we are looking for and ignore some of the more obvious 
points. The FEHB works well in large measure because it is 72 
percent subsidized. If we had other health care systems that 
were as heavily subsidized, they would work better, too, but it 
is not that we probably can't afford them.
    Similarly with Medicare, while, as Len says, central 
purchasing may give you some efficiencies, we only spend 3 
percent on administrative costs on Medicare. At the same time, 
Medicare, since 1965, on a per capita basis, has increased in 
cost more than any other system we know of, more than other 
public programs, more than private, more than private premiums 
plus cost sharing, and substantially faster than the economy 
itself, inherently, by definition, unsustainable.
    So we can point to some aspects that are advantageous, but 
taken as a whole, it is not clear these systems are 
sustainable. What we do think we know--that is a real 
statement, we do think we know---- [Laughter.]
    The economists tend to believe, at least, that incentives 
matter and that if you develop a system in which individuals at 
least have some responsibility for making the decisions and 
paying in part for their own care, whether it is small amounts, 
and whether they are subsidized or not, that that is important.
    For example, we believe that the existence of Medigap, 
because it very often provides first dollar coverage, results 
in the average Medicare beneficiary spending $2,000 to $3,000 a 
year more than they would otherwise. Now, they may have better 
health care because of it. I don't want to interpret that 
otherwise. But the point is that first dollar coverage incents 
people to use a lot more health care, and so as we have 
discovered in things like pharmaceuticals, where we have 
multiple or tiered copays, other things, those kinds of 
incentives work if individuals are faced with those choices. So 
any system you develop needs, I think, to keep that very 
clearly in mind.
    Senator Breaux. Thank you all for that comment. I have some 
additional questions, but I want to recognize Senator Collins.
    Senator Collins. Thanks very much, Mr. Chairman, and let me 
commend you for putting together a truly extraordinary and 
balanced panel. Your testimony has been excellent and very 
thought provoking and I really appreciate your taking the time 
to be with us.
    When I approach the issue of the uninsured, I start with 
the fact, and I think one of you, maybe Ms. Davis, said it 
today, that 82 percent of uninsured Americans are part of 
households where at least one person works. This is contrary to 
what most people think of when they think of the uninsured. 
They believe that uninsured individuals are unemployed 
individuals, yet the majority of them are in households where 
someone is working.
    Of those who are uninsured and working, 60 percent of 
uninsured workers are employed by small firms. If we could 
figure out how to make insurance more affordable to those small 
employers so that population, that 60 percent, had access to 
affordable health insurance, we could go a significant way 
toward lessening the number of uninsured. We would bring 
literally millions into the system.
    The legislation that I have introduced tries to take a 
variety of approaches. It would provide tax credits for small 
employers. It would allow them to form purchasing coalitions to 
increase their bargaining power. What it would not do, however, 
is authorize, as the administration has proposed to deal with 
this problem, association health plans. Having supervised the 
Bureau of Insurance in the State of Maine for 5 years, I have a 
lot of reservations and concerns about association health plans 
because I think they will lead to cherry picking. I also don't 
like the idea of such plans being preempted from State 
regulation, which I think is problematic.
    I would like to get your views on the merits of association 
health plans now that I have told you my bias against them. So, 
Mr. Nichols, I am going to start with you in the hopes that I 
am starting with someone who might agree with my opinion before 
I move on to the other panelists. [Laughter.]
    Mr. Nichols.
    Mr. Nichols. Well, I am impressed you picked me out of a 
    You may have heard I testified before your Senator from 
Maine about a month ago on precisely this issue and I would 
just say you are right in spades on this matter. There is no 
question that a number of us are very concerned about small 
business's ability to offer health insurance. I think the one 
thing that I think all of us hope is that we can find a way for 
them to find the cheapest possible coverage available.
    What association health plans would like do, as the 
legislation that was introduced in the House last session and 
as legislation introduced by Senator Snowe a few days ago, I am 
afraid, would permit, or would indeed encourage a situation 
where the healthiest would join those association health plans, 
where those who wanted to join and couldn't would be the less 
healthy, and, thus, it would serve to destabilize the existing 
risk pools, which as you know in Maine are already fragile 
enough in that small group market and, therefore, would make 
kind of a bad situation worse, except for the few who got the 
good coverage in the short run.
    The problem would be some of them who were the healthiest 
would always want to peel off from the existing group, and so 
it would introduce instability, which brings you back to the 
point about regulation. Exempting them from solvency 
requirements that are serious, exempting them from oversight on 
the part of people who actually know how solvency matters, what 
guarantee funds are all about, would leave a lot of workers at 
great risk.
    I will say the problem of small business offering insurance 
needs to be thought about, I think, in a context of the way 
labor markets work. What most of us observe who study these 
markets carefully is that there are kind of two kinds of labor 
markets. There are markets where most of us have lived most of 
our lives, and that is where jobs have health insurance 
attached because the productivity of workers is high enough to 
merit and to pay for that in the marketplace.
    Then there is a set of jobs, they are not as many jobs, but 
there is a set of jobs where health insurance is never 
attached, and in fact, those workers tend to have lower 
productivity, lower human capital. It is not fair, but it is 
the way it is. In those firms that need those kinds of workers 
exclusively, there is just not enough surplus there to pay for 
health insurance. The workers who get those jobs have low 
wages. They are not willing to pay out of their own wages. The 
employers who employ them don't make enough money to make it 
something they can just give away.
    Firms do what they do to compete for labor and margins are 
driven down to those competitive edges. So I am afraid for some 
class of workers in some firms, we are never going to get them 
to offer unless we can offer two things, serious subsidies to 
defray the costs so they can afford it, just like other low-
income people are sometimes eligible for public programs they 
are not, as well as a home.
    I come back to Senator Breaux's idea. There is going to 
have to be a home where they can buy. In my view, the place to 
do that is building on existing pools. State employee plans are 
a natural experiment. I love Stuart's idea of allowing States 
to do this in lots of different ways. I would climb onto that 
this afternoon or this morning or whenever it is we can sign.
    Mr. Butler. I will sign you up.
    Mr. Nichols. That is the way to go. Let people buy into 
existing pools that are large and not create a new 
destabilizing force, and you can refer to my testimony for 
details if you would like.
    Senator Collins. You raise a really good point that I want 
to emphasize. The small employers in my State that don't 
provide health insurance don't provide it because they can't 
afford it. They don't even have it for themselves in most 
cases. It is not only their employees. They can't afford the 
coverage for themselves.
    Mr. Crippen, any comments or thoughts on how we expand 
access to health insurance for this critical group?
    Mr. Crippen. I think it is important to recognize, Senator, 
that without attributing motives, the reason insurers or 
companies or associations are trying to change the nature of 
the pools they are dealing with is they are not looking so much 
for least risk as they are looking for something like average 
risk or stable risk. In fact, least-risk pools may be very 
unprofitable in some ways. So by trying to eliminate or cordon 
off or deal with a more knowable risk pool, they come up with 
an average risk that is easier to underwrite, easier to manage, 
all those kinds of things.
    Clearly, the smaller the pools, the harder it is to do 
that, and if the result of policy is to make smaller and 
smaller pools, it is going to be harder and harder to get 
something that has average risk.
    I am more familiar with public programs, of course, given 
my last 4 years, and I can tell you that for Medicare, we have 
done a lot of simulations that suggest you need about 100,000 
elderly in any given risk pool to have average risk. Now, the 
distribution of expenditures by the elderly are a little more 
skewed than they are for a non-elderly population, but it is 
still a very skewed distribution. High-cost individuals drive 
the average, and those are a relative handful compared to the 
    So one needs to be concerned about size of the pool, how 
average risks are determined, but there are many ways to adjust 
risk, many that we haven't thought about, frankly, particularly 
in public programs. Medicare, for example, you could look at 
high-cost individuals and see if there were a way to compensate 
for them perhaps differently. If they were removed from a risk 
pool, then the average risk would be much more stable and 
    So the same phenomenon applies to non-elderly, as well, 
whether it is State risk pools, as I think Len was talking 
about, other ways to say risk or insure catastrophic cost, the 
high cost, the extreme costs, would then give you a much more 
manageable risk pool with much lower cost and, therefore, lower 
premiums. So you might think about reinsurance or State pools 
for catastrophic ways to manage the high cost risk that will 
then allow more normal risk to permeate the rest of the pool.
    Senator Collins. Ms. Davis.
    Ms. Davis. I agree with many of the points that Mr. Nichols 
made. I think you are right, based on your experience at the 
Bureau of Insurance in Maine, to be concerned about association 
health plans. I think what we need is broad risk pooling, not 
risk segmentation, because risk segmentation would just 
accelerate the deterioration of the better risk sorting out 
into certain plans, leaving the worst risk for others. So I 
also am attracted to the notion of either something like a 
State public employees' health plan as a pool or an analog to 
the Federal Employees Health Plan as an option.
    I, too, support the notion of State demonstrations. I was a 
member of the Institute of Medicine committee that issued a 
report last November called ``Fostering Rapid Advances in 
Health Care'' that called for Federal funding of the 
incremental cost of providing universal coverage in three to 
five States and testing either a tax credit, private insurance 
approach, or expansion of public programs or a combination of 
those. So I do think that we need to move forward. State 
demonstrations with Federal funding, because I don't think 
States are in a situation to do this with their own money, is a 
good first stop.
    I also believe the deck is stacked against small 
businesses. They pay much higher premiums than large business. 
Administrative costs for a very small firm can run 30 percent, 
contrasted with 10 to 15 percent in large firms. Large firms 
are more likely to have plans available to them with large 
provider price discounts, physician fees, hospital rates. So 
large firms, ironically, can get coverage cheaper than small 
firms and that is why I think we do need pools, larger pools 
available at either the State level or the national level, 
available to small businesses.
    You mentioned tax credits for businesses, and Len talked 
about the money following the worker. I tend to favor the money 
following the worker and to have tax credits for workers to 
make sure they can afford the coverage that employers offer to 
them and have premium assistance that would pick up a big 
portion of the premium in excess of, say, 5 percent of income 
of a low-wage worker.
    I personally am an outlier in that I think every firm ought 
to contribute something. I think we will find an erosion and a 
deterioration of the coverage that employers now provide if 
there is assistance for firms that don't provide, since they 
would get left holding the bill. So it can be modest, whether 
it is a dollar an hour or 5 percent of earnings, but I think 
every firm ought to contribute something into a pool to finance 
this coverage.
    Mr. Crippen mentioned reinsurance. I do think that looking 
at adding a publicly subsidized reinsurance to something like a 
Federal Employees Health Plan is important, but I also think we 
need to keep the worst risk in public programs, Medicare 
covering the disabled, Medicaid covering many of the sickest 
and the poorest, and that those programs have the effect of 
helping private insurance markets work by pulling the worst 
risk out. We know that if you take the 1 percent of the people 
with the most serious health problems and take them out of the 
individual market or out of the small business market, it will 
reduce premiums by 28 percent.
    So certainly covering all of the disabled, not having a 2-
year waiting period for coverage under Medicare, and opening up 
Medicaid to everyone below a certain income level with a 
serious problem, are ways in which we can help the private 
market to work better. Thank you.
    Senator Collins. Thank you. Mr. Butler.
    Mr. Butler. Senator, I have wrestled with the whole idea of 
employment-based coverage for many years, trying to think about 
what is the proper role and appropriate function of employer-
sponsored coverage. It is interesting that I believe this is 
the only country in the world, certainly the only large country 
in the world, that has an employment-based system. You could 
say maybe Germany does, but that is more of an industry-based 
    That is an interesting point to just bear in mind, because 
when you look at the employment-based system in this country, 
you do see a spectrum of effectiveness. If you work for the 
Federal Government, or if you work for General Motors you have 
lots of choices. If you intend to work for either of those for 
all of your life, it is a pretty good, stable system.
    When you get down to the other extreme, however, such as 
the ones you mentioned in Maine of the small firm in the 
fishing industry or something like that, or a restaurant, where 
the people who are working for you next year may not even be 
the same people who are working for you this year, it begs the 
question. Is this really the best place to help people organize 
their health care?
    I have come to the conclusion that the more you go down the 
employment system, to smaller firms, to low-paid firms, 
particularly in firms with people moving in and out of the 
workforce, the less and less that makes sense as the basic 
method to get coverage. Therefore, I am leery of approaches, 
that say, ``Well, let us help people get coverage, but let us 
do it via the employer.'' When you have got employers that may 
be facing 30 percent more of overhead costs for getting 
coverage, and may not know anything about insurance, or may 
have three different people working for them, one is 18, one is 
65, and one has got a major heart problem, how can they 
possibly figure out and organize insurance?
    I think that leads you into starting to think about pooling 
arrangements, whether it be association plans or whatever, and 
you almost get to the stage eventually where you say, ``Well, 
if we do all these things, in what sense is this an employer-
based system anymore?'' The place of employment ends up being 
really where you sign up and where you become eligible for a 
    So that is why I am very interested in looking at 
approaches that say, ``Let us use the place of employment, 
particularly in the case of smaller firms, as a convenient 
place to sign up.'' But let us make the subsidy system, and the 
kind of plans available to you in the system you are in, not 
connected to your place of work for these people.
    Let me just go on to talk about specifically association 
plans. I am really open-minded on that particular approach. I 
do agree with the others on the panel that we must look at 
people who work for these small firms, people who do move in 
and out of the workforce for different employers, and try to 
group them in a different way. Maybe the way you do it in Maine 
is not the right way in Texas or in Alaska, Senator Stevens.
    That is why I think it is important to say to States, well, 
we are not going to tell you to put an association plan in 
place or open up the FEHBP, as Karen Davis suggested, but let 
us make that available and if you think in your State that that 
is something you think might be part of the equation, well, 
then that is available to you. I think that is the way to look 
at these things.
    Quite frankly, I am sure Len and others would be hard-
pressed to say that they were 100 percent certain in their 
views of any of these approaches and how they would work, and 
therefore I think the Federal Government should not impose them 
on anybody. We should make them an available menu to be tried 
in these different places, and that is why I favor going down 
that road.
    Senator Collins. Thank you.
    Senator Breaux. I thank the panel. Let me just ask one 
other question with regard to the concept of the individual 
mandate. We have tried the employer mandate in the first 
Clinton Administration and we saw the problems that that 
brought up and the intense political opposition that that had. 
If we had an individual mandate, two questions--I mean, there 
are a million questions, but two of them that we are still 
wrestling with.
    First how do you enforce it? I think there are ways to do 
that. I mean, obviously, we have an individual mandate that 
people buy liability insurance before they drive a car in this 
country and people have sort of accepted that and there are 
penalties if you don't do that. But the question is, how do you 
enforce an individual mandate, and second, how do you enforce--
or maybe I should say it this way--how do you continue to have 
the participation by employers, which are very, very important 
if any system is going to work? There is some fear that if we 
went to an individual mandate, that employers would just bail 
out of their participation in the system and we can't have that 
happen, at least not initially, because of the huge amount of 
costs that would be associated if their contributions were not 
    So can I have anybody talk about either one of those or 
both of those, enforcement of an individual mandate, and 
second, how do we guarantee the continued participation of 
employers who are currently providing employer-sponsored health 
insurance? Anybody?
    Mr. Butler. Well, maybe I can take a crack at it first. 
First of all, I think it would be unjust to require somebody, 
to put a mandate on somebody to do something if they do not 
have the capabilities of discharging that mandate. I mean, in 
the case of automobiles, we do that, and if you can't afford 
it, you don't have a car. But obviously if you say you have got 
to have health insurance and so on and it is is illegal if you 
don't, if you have to have this and you can't afford it, you 
are in a problem. So I think that does require you----
    Senator Breaux. Although the concept, obviously, is in the 
context of a subsidy for those who would be low-income.
    Mr. Butler. Right. I do think that there are various forms 
of enforcement that you can consider. You can have something 
that is called hard enforcement or a soft enforcement. You can 
say, ``It is illegal, and if you don't do it we put you in 
jail.'' That would be hard enforcement. I certainly wouldn't 
recommend that.
    But you can also say that there are certain things you 
can't avail yourself of if you don't do this. For example, 
certain tax benefits could be contingent on that. You can also 
say to a State, ``Well, if certain people don't sign up, rather 
than sending the State police out to find them, maybe at the 
Federal level we will compensate the State in some way in the 
amount these people would have gotten in tax subsidies had they 
actually signed up so the State, at least, is not left holding 
the bag on people who don't take part in that enforcement.''
    As far as how to keep employers involved, I do think it is 
important to recognize that employers today are not under any 
obligation to provide health insurance to people. There is no 
law that says you must, as an employer, do this. They do it for 
certain very sound economic reasons. They do it because of the 
labor market, because employees expect this. So I don't think 
for a moment that if you said, ``Well, we will help your 
employees to obtain coverage, then somehow that will then mean 
suddenly the whole logic of providing health insurance to 
employees suddenly disappears.''
    It might in certain parts of the market, where an employer 
may say, ``Look, I have got four employees, and may have four 
different people next year.'' It really makes more sense for me 
to add a little bit to your wages, take your subsidy and then 
go and join a plan that is far better than anything I can find 
for you. I don't find that such a problem.
    I think within that range, you can look at approaches that 
have requirements on employers to continue coverage for a 
period if they already provide it, such as maintenance of 
effort approaches. Under these if they do for whatever reason 
eliminate their coverage, then they must compensate the 
employee, at least in the first year, to the equivalent cash 
amounts. There are all kinds of ways, I think, to minimize a 
kind of change in the approach of employers that you want to 
avoid. But if some employers decide to drop coverage, give 
cash, and allow that person to join an FEHBP-type plan that is, 
in fact, far better in the current situation and should not be 
    Senator Breaux. Any other comments?
    Ms. Davis. Well, I have given a little bit of thought to 
how one might enforce an individual mandate or something just 
short of that that I call an automatic enrollment with opt-out, 
but it is basically using the income tax system. So, first of 
all, each year there is insurance verification, so just like 
you submit forms from your employer saying what your earnings 
were, you get a form saying you had health insurance coverage 
or Medicare, SCHIP provides the documentation of coverage.
    But if you don't have coverage, then you are automatically 
enrolled in what I call the Congressional Health Plan and you 
are charged a premium which you pay through the income tax 
system. So if you are filing in April, you pay a premium that 
is roughly 5 percent of your income in the lower tax brackets 
or 10 percent in the higher brackets for coverage that starts 
on July 1 and you get the packet just as Federal employees get 
a packet of insurance choices and then there is a default 
mechanism that assigns you to a plan.
    So I think there is a way to enforce it by having the 
enrollment happen through the income tax system, through an 
OPM-like administrative structure, but assessing a premium and 
giving people effectively a tax credit for any portion of the 
premium over 5 percent of income.
    Senator Breaux. It has been suggested on that point--sorry 
to interrupt you, but that if a person during the year went to 
an emergency room, for instance, for health care and did not 
have insurance, they could be enrolled at that point, as well.
    Ms. Davis. Absolutely. So you would also, and again, this 
was part of the Institute of Medicine recommendation, have an 
electronic insurance clearinghouse, so once you get this up and 
running, you know at tax time what people's coverage is, and if 
anybody goes to a provider at any point during the year and 
they are uninsured, the provider says, ``These are your 
circumstances, you qualify for this and you are signed up and 
you start paying a premium through the tax system that is based 
on your income over a year's period.''
    In this particular scheme that I have had modeled and some 
cost estimates done, for it also gives people below 150 percent 
of poverty the right to go into a Medicaid or a SCHIP family 
health insurance plan. That would be done without premiums, so 
you have got that option, 5 percent of income in the lower tax 
brackets, 10 percent of income in the higher tax brackets.
    So I certainly agree with Stuart that you need to make it 
affordable and people may have different amounts that they 
consider affordable, but that is what I have looked at.
    Your second question was how to have employers continue to 
make contributions toward coverage. Obviously, as Stuart says, 
they do it voluntarily now, so many will continue. But I am 
concerned that many might drop if they felt like their workers 
can always get this coverage in an affordable way through the 
Congressional Health Plan. So I have leaned towards something 
that was called ``play or pay.'' If you don't provide coverage 
to your workers, you have to contribute something.
    In this particular model, employers are contributing a 
dollar per hour up to 5 percent of earnings, and the estimates 
are that if you did that, you would keep roughly the same mix 
of public-private coverage that you have now. About two-thirds 
of the population under age 65 would be covered under private 
insurance. About a third would continue to be covered under 
public programs, Medicare.
    Now, some small businesses would shift from the coverage 
that they now buy to buying coverage through the Congressional 
Health Plan because they would be getting better premiums, so 
they would move their workers in there, but would still have 
the private plan coverage like that available to Federal 
    Mr. Nichols. Mr. Chairman, I would just add on the 
individual mandate piece that the one thing I would be sure of, 
to speak back to Stuart's point, is that we are never going to 
get 100 percent of Americans signed up for anything, but that 
is kind of OK, because, in fact, the ones you would miss 
through all the nets that others have talked about, so I won't 
belabor the point, are healthy. So they're not sort of the 
problem. I mean, the problem would be contributing money, and 
you would certainly want to catch them, but you could catch 
them, I think, in lots of these nets. But most of them, if they 
are going to need to go to the services, the providers will 
sign them up just like they do Medicaid now and that problem 
will take care of itself, coupled with the tax incentive.
    Senator Breaux. But the question is, I mean, for those that 
do not have insurance today, they tell me the largest 
percentage of the 40 million, or whatever they are, are between 
18 and 41 years of age and basically in fairly good health. We 
want those people in an insurance plan.
    Mr. Nichols. Yes, sir, we do, and over half of them go to 
the doctor every year and a fair number of them know exactly 
how tenuous their situation is, and so I think the ones that 
are sort of not 22 and immortal are going to think hard about 
signing up for something that is going to be basically free for 
    So I think the problem you would have, as you are always 
going to have, is on that margin where people have to pay 
something out of pocket because we can't afford to do better 
and it is perceived to be relatively high compared to what they 
used to have to pay because they used to get their care for 
free. Those folks are going to be the margin you have got to 
worry about, but, therefore, what you want to do is not destroy 
the safety net but keep that safety net there so they can have 
access and we can get them signed up. So on that front, I am 
less worried.
    On the employer side, I think it is a very interesting kind 
of analytical question. My view is, as you know, is that a lot 
of employers offer today because they have to in the labor 
market. That compulsion will not go away once this kind of 
system would be in place. If they didn't continue to make a 
contribution toward my health insurance, they would have to 
give me wages or I would switch employers. So I am not worried 
about that.
    Karen is right. There is a class of firms who are on the 
cusp. They tend to be those smaller firms who are trying to 
offer now and are finding it increasingly difficult. Those 
firms may very well find an incentive to pull out, and I think 
the way to deal with that is a 1-year maintenance of effort 
kind of requirement, where you say if you contributed to health 
insurance last year and you drop, then you have to give workers 
the wages equal to what you contributed last year. Then from 
that moment on, those workers' compensation has been raised 
equivalent to what the premium would have been. In a sense, 
they are made whole from what they were, but they have relieved 
the firm from the fear of having these premium increases over 
    Senator Breaux. Mr. Crippen.
    Mr. Crippen. I think, Mr. Chairman, as Len just said, 
``While it may be possible in a transition to force employers 
to do something they wouldn't otherwise do, it is probably 
ephemeral and temporary, and there is a lot of evidence that it 
doesn't matter.'' That is, as Len just said, ``If, as the 
evidence shows, fringe benefits are an alternative to wages, if 
fringe benefits change, wages will change to compensate the 
other way.'' So trying to force companies to do something or 
other probably is unproductive and unnecessary.
    Equally importantly, I mean, it depends on what the plan is 
that you are mandating, obviously, and you have thought a lot 
more about this than I have, and if it is a mandatory 
catastrophic kind of coverage, then there is certainly a lot of 
insurable risk left for employers and others to give as fringe 
benefits or to work with at individual markets, as well. So it 
really depends on the nature of the package that you are 
    Senator Breaux. I think this has been very helpful, Senator 
Collins. I think that it has been a good discussion. You all 
are experts in this area. You have been very helpful up to this 
point and we would encourage you to continue your involvement 
with all of us who are looking at these issues.
    The question of uninsured and the question of these boxes 
that are up there are not going to go away in any short-term 
venue. It is going to be an ongoing battle to come up with 
answers. I mean, I just happen to think it is time to think 
outside of the boxes, so to speak, and think in a broader 
picture about where we are going to be down the road in this 
country when it comes to health insurance and that people 
should get it because they are an American citizen, not because 
they fit into one of the boxes.
    We thank you very much, and that will conclude this 
    [Whereupon, at 3:26 p.m., the committee was adjourned.]