[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]
NATION'S UNINSURED
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON HEALTH
OF THE
COMMITTEE ON WAYS AND MEANS
HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTH CONGRESS
FIRST SESSION
__________
APRIL 4, 2001
__________
Serial No. 107-23
__________
Printed for the use of the Committee on Ways and Means
U.S. GOVERNMENT PRINTING OFFICE
74-217 WASHINGTON : 2001
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpr.gov Phone (202) 512�091800 Fax: (202) 512�092250
Mail: Stop SSOP, Washington, DC 20402�090001
COMMITTEE ON WAYS AND MEANS
BILL THOMAS, California, Chairman
PHILIP M. CRANE, Illinois CHARLES B. RANGEL, New York
E. CLAY SHAW, Jr., Florida FORTNEY PETE STARK, California
NANCY L. JOHNSON, Connecticut ROBERT T. MATSUI, California
AMO HOUGHTON, New York WILLIAM J. COYNE, Pennsylvania
WALLY HERGER, California SANDER M. LEVIN, Michigan
JIM McCRERY, Louisiana BENJAMIN L. CARDIN, Maryland
DAVE CAMP, Michigan JIM McDERMOTT, Washington
JIM RAMSTAD, Minnesota GERALD D. KLECZKA, Wisconsin
JIM NUSSLE, Iowa JOHN LEWIS, Georgia
SAM JOHNSON, Texas RICHARD E. NEAL, Massachusetts
JENNIFER DUNN, Washington MICHAEL R. McNULTY, New York
MAC COLLINS, Georgia WILLIAM J. JEFFERSON, Louisiana
ROB PORTMAN, Ohio JOHN S. TANNER, Tennessee
PHIL ENGLISH, Pennsylvania XAVIER BECERRA, California
WES WATKINS, Oklahoma KAREN L. THURMAN, Florida
J.D. HAYWORTH, Arizona LLOYD DOGGETT, Texas
JERRY WELLER, Illinois EARL POMEROY, North Dakota
KENNY C. HULSHOF, Missouri
SCOTT McINNIS, Colorado
RON LEWIS, Kentucky
MARK FOLEY, Florida
KEVIN BRADY, Texas
PAUL RYAN, Wisconsin
Allison Giles, Chief of Staff
Janice Mays, Minority Chief Counsel
______
Subcommittee on Health
NANCY L. JOHNSON, Connecticut, Chairman
JIM McCRERY, Louisiana FORTNEY PETE STARK, California
PHILIP M. CRANE, Illinois GERALD D. KLECZKA, Wisconsin
SAM JOHNSON, Texas JOHN LEWIS, Georgia
DAVE CAMP, Michigan JIM McDERMOTT, Washington
JIM RAMSTAD, Minnesota KAREN L. THURMAN, Florida
PHIL ENGLISH, Pennsylvania
JENNIFER DUNN, Washington
Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public
hearing records of the Committee on Ways and Means are also published
in electronic form. The printed hearing record remains the official
version. Because electronic submissions are used to prepare both
printed and electronic versions of the hearing record, the process of
converting between various electronic formats may introduce
unintentional errors or omissions. Such occurrences are inherent in the
current publication process and should diminish as the process is
further refined.
C O N T E N T S
__________
Page
Advisories announcing the hearing................................ 2, 4
WITNESSES
Etheredge, Lynn, George Washington University.................... 40
Fronstin, Paul, Employee Benefit Research Institute.............. 10
Gabel, Jon R., Health Research and Educational Trust............. 20
Larsen, Steven B., Maryland Insurance Commissioner, and National
Association of Insurance Commissioners......................... 52
Pauly, Mark V., University of Pennsylvania....................... 43
Singer, Sara J., Stanford University............................. 48
______
SUBMISSIONS FOR THE RECORD
Advanced Medical Technology Association, statement............... 67
American College of Physicians--American Society of Internal
Medicine, statement............................................ 69
American Hospital Association, statement......................... 74
Blue Cross and Blue Shield Association, Employee Benefit Research
Institute, and Consumer Health Education Council, joint
statement...................................................... 75
Consumers Union, Gail Shearer, statement......................... 82
Healthcare Leadership Council, statement......................... 85
National Association of Health Underwriters, Arlington, VA, Janet
Stokes Trautwein, statement and attachments.................... 89
Washington MSA Project, Issaquah, WA, Stephen Barchet, letter.... 104
NATION'S UNINSURED
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WEDNESDAY, APRIL 4, 2001
House of Representatives,
Subcommittee on Health,
Committee on Ways and Means,
Washington, DC.
The Subcommittee met, pursuant to notice, at 10:05 a.m., in
room 1100 Longworth House Office Building, Hon. Nancy L.
Johnson [Chairwoman of the Subcommittee] presiding.
[The advisory and revised advisory announcing the hearing
follow:]
ADVISORY
FROM THE COMMITTEE ON WAYS AND MEANS
SUBCOMMITTEE ON HEALTH
CONTACT: (202) 225-3943
FOR IMMEDIATE RELEASE
March 29, 2001
No. HL-4
Johnson Announces Hearing on
the Nation's Uninsured
Congresswoman Nancy L. Johnson (R-CT), Chairman, Subcommittee on
Health of the Committee on Ways and Means, today announced that the
Subcommittee will hold a hearing on the uninsured population and
solutions for expanding health insurance coverage. The hearing will
take place on Thursday, April 5, 2001, in the main Committee hearing
room, 1100 Longworth, beginning at 10:00 a.m.
In view of the limited time available to hear witnesses, oral
testimony at this hearing will be from invited witnesses only.
Witnesses will include experts on the uninsured population and on
policies to increase health insurance coverage. However, any individual
or organization not scheduled for an oral appearance may submit a
written statement for consideration by the Committee and for inclusion
in the printed record of the hearing.
BACKGROUND:
This hearing will focus on the 42 million uninsured Americans. In
1999, for the first time in more than a decade, the percentage and
number of Americans with health insurance increased. However, one in
six Americans remains uninsured.
These uninsured Americans are a diverse group. More than four out
of five uninsured are full-time workers and their families, and one out
of five uninsured work for employers who offer coverage but choose not
to take it. The primary reason cited for these uninsured workers was
the cost of insurance premiums. Others in the uninsured category
consist of lower income individuals who are either ineligible or fail
to enroll in existing public programs.
President Bush has proposed a comprehensive plan to assist
uninsured individuals, including offering refundable tax credits to
lower and middle-income individuals. The hearing will provide a
framework for the development of legislation to begin to examine the
President's proposal and address the barriers faced in accessing health
insurance coverage.
In announcing the hearing, Chairman Johnson stated: "Addressing the
problem of the uninsured is absolutely critical because those without
health coverage often go without quality health care. There are a lot
of new and innovative ideas circulating to address this problem. This
hearing will bring those ideas forward for the Committee to evaluate
and act upon if appropriate. I look forward to working with the Bush
Administration on reducing the number of Americans without health
insurance.''
FOCUS OF THE HEARING:
The hearing begins the Subcommittee's consideration of the issues
on why many Americans lack affordable access to health insurance. The
first panel will discuss trends in health insurance coverage and
witnesses will help Members identify who has coverage and who does not.
The second panel will turn to examining potential options for
increasing coverage for the 42 million uninsured Americans, and focus
on tax relief ideas, in particular.
DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:
Any person or organization wishing to submit a written statement
for the printed record of the hearing should submit six (6) single-
spaced copies of their statement, along with an IBM compatible 3.5-inch
diskette in WordPerfect or MS Word format, with their name, address,
and hearing date noted on a label, by the close of business, Thursday,
April 19, 2001, to Allison Giles, Chief of Staff, Committee on Ways and
Means, U.S. House of Representatives, 1102 Longworth House Office
Building, Washington, D.C. 20515. If those filing written statements
wish to have their statements distributed to the press and interested
public at the hearing, they may deliver 200 additional copies for this
purpose to the Subcommittee on Health office, room 1136 Longworth House
Office Building, by close of business the day before the hearing.
FORMATTING REQUIREMENTS:
Each statement presented for printing to the Committee by a
witness, any written statement or exhibit submitted for the printed
record or any written comments in response to a request for written
comments must conform to the guidelines listed below. Any statement or
exhibit not in compliance with these guidelines will not be printed,
but will be maintained in the Committee files for review and use by the
Committee.
1. All statements and any accompanying exhibits for printing must
be submitted on an IBM compatible 3.5-inch diskette in WordPerfect or
MS Word format, typed in single space and may not exceed a total of 10
pages including attachments. Witnesses are advised that the Committee
will rely on electronic submissions for printing the official hearing
record.
2. Copies of whole documents submitted as exhibit material will not
be accepted for printing. Instead, exhibit material should be
referenced and quoted or paraphrased. All exhibit material not meeting
these specifications will be maintained in the Committee files for
review and use by the Committee.
3. A witness appearing at a public hearing, or submitting a
statement for the record of a public hearing, or submitting written
comments in response to a published request for comments by the
Committee, must include on his statement or submission a list of all
clients, persons, or organizations on whose behalf the witness appears.
4. A supplemental sheet must accompany each statement listing the
name, company, address, telephone and fax numbers where the witness or
the designated representative may be reached. This supplemental sheet
will not be included in the printed record.
The above restrictions and limitations apply only to material being
submitted for printing. Statements and exhibits or supplementary
material submitted solely for distribution to the Members, the press,
and the public during the course of a public hearing may be submitted
in other forms.
Note: All Committee advisories and news releases are available on
the World Wide Web at ``http://waysandmeans.house.gov''.
The Committee seeks to make its facilities accessible to persons
with disabilities. If you are in need of special accommodations, please
call 202-225-1721 or 202-226-3411 TTD/TTY in advance of the event (four
business days notice is requested). Questions with regard to special
accommodation needs in general (including availability of Committee
materials in alternative formats) may be directed to the Committee as
noted above.
NOTICE--CHANGE IN DATE
ADVISORY
FROM THE COMMITTEE ON WAYS AND MEANS
SUBCOMMITTEE ON HEALTH
CONTACT: (202) 225-3943
FOR IMMEDIATE RELEASE
March 29, 2001
No. HL-4
Change in Date for Subcommittee Hearing
on Thursday, April 5, 2001
on the Nation's Uninsured
Congresswoman Nancy L. Johnson, Chairman of the Subcommittee on
Health of the Committee on Ways and Means, today announced that the
Subcommittee hearing on the uninsured population and solutions for
expanding health insurance coverage, previously scheduled for Thursday,
April 5, 2001, will now be held on Wednesday, April 4, 2001, at 10:00
a.m., in the main Committee hearing room, 1100 Longworth House Office
Building.
All other details for the hearing remain the same. (See
Subcommittee press release No. HL-4, dated March 29, 2001.)
Chairwoman Johnson. Good morning. The hearing will convene.
Today's hearing focuses on Americans who are uninsured and
on solutions that in combination with the Commerce Committee
policy initiatives and probably with the Education Committee
actions can guarantee access to affordable insurance to every
American.
It was 2 years ago, in a similar hearing on the uninsured,
the Health Subcommittee found that a record number of Americans
were uninsured. This year, for the first time in more than a
decade, the number of Americans with health insurance has
increased. Almost 2 million more Americans no longer lack
health insurance, primarily because the economy has been strong
and unemployment low.
However, 42 million Americans, more than one in six,
remains uninsured. This is a problem that simply must be solved
because those without health coverage often go without health
care. Indeed, the uninsured are more than four times as likely
to delay care, use 40-percent fewer services than insured
individuals with similar health and experience a mortality rate
25-percent greater than insured individuals with similar
characteristics.
Moreover, without affordable insurance, these Americans run
the financial risk of catastrophic financial burdens and, in
addition, impose an increasingly unbearable burden on providers
and private payers.
The uninsured are a diverse group. More than four out of
five uninsured are full-time workers for their families, and
one out of five uninsured individuals work for employers who
offer coverage, but choose not to take it. The primary reasons
cited for these workers being uninsured was the cost of
insurance. Making insurance more affordable will clearly help
people purchase insurance.
Many of the uninsured, one-fourth of adults and two-thirds
of children, are eligible for public programs, but fail to
enroll, or there are many complex issues involved, reasons why
eligible individuals do not enroll in public programs.
According to the Commonwealth Fund, the majority of the insured
would simply prefer not to have government as the main source
of coverage.
Today, we will hear testimony from researchers at the
Employee Benefit Research Institute and the Health Research and
Education Trust on trends in health insurance coverage and who
has coverage and who does not, about who is uninsured in
America and why they are uninsured. We will also hear their
analysis about whether this favorable trend in insurance
coverage will continue.
The second panel will turn to examining potential options
for increasing coverage for the 42 million uninsured Americans
and focus on tax ideas in particular. The panelists will
discuss their evaluation of the effect of tax credits as well
as other options.
President Bush has proposed a multi-pronged strategy to
assist the uninsured, and two key components of his proposals
to reduce the uninsured for which Ways and Means has
jurisdiction are tax credits and medical savings accounts. In
this vein, we will be examining tax credit ideas in this
hearing. Second, Committee Chairman Bill Thomas will introduce
the Medical Savings Account Availability Act today.
In addition, we will be working with our colleagues and
other committees of jurisdiction to attack this problem by
seeking ways to make insurance more affordable through group
purchasing structure, improving enrollment in Children's Health
Insurance Program (CHIP) and expanding access to community
health centers and linking them more effectively with hospital
coverage.
The hearing will provide a framework for the development of
legislation to address the barriers faced in accessing health
insurance coverage by the uninsured, and I look forward to
working with the Bush administration and my Democrat colleagues
on reducing the number of Americans without health insurance. I
do consider that this Congress has a unique opportunity to
attack this problem and pass the package of bills from a
variety of Committees that are necessary to really create
access for the uninsured to affordable health insurance.
We have known what the components were now for several
years. We have talked about them. Various committees have heard
various things. Both Presidential candidates talked about this
issue, and the time to act is now. This Subcommittee is going
to do its work on the difficult issue of the role of tax policy
in helping the uninsured gain access to insurance, but that
will not be enough alone, and we are keenly aware of that.
I also want to mention that one of the reasons why we have
to deal with the issue of tax policy for the uninsured is
because not only do they not get the help they need, but they
suffer a discretionary impact that is just profoundly unfair.
It is unfair to provide a subsidy to every single person in
American who enjoys employer-provided insurance and not at
least provide the same subsidy at the same level to those who
have to buy insurance on their own.
So this is not only about access to health insurance, but
it is about fair, more even-handed tax policy, and I look
forward to the inputs of those who are going to testify before
us today.
I would like to recognize my colleague, Mr. Stark.
[The opening statement of Chairwoman Johnson follows:]
Opening Statement of the Hon. Nancy Johnson, M.C., Connecticut, and
Chairwoman, Subcommittee on Health
Today's hearing focuses on uninsured Americans and solutions for
expanding health insurance coverage. Two years ago, in a similar
hearing on the uninsured, the Health Subcommittee found that a record
number of Americans were uninsured. This year, for the first time in
more than a decade, the percentage of Americans with health insurance
has increased--almost two million more Americans no longer lack health
insurance. The main source for the decline was a strong economy and a
low unemployment rate.
However, 42 million Americans--more than1 in 6 Americans--remain
uninsured. The uninsured are a blight on the nation's health care
system. This committee understands the importance of addressing this
problem because those without health coverage often go without health
care. Indeed, the uninsured are more than four times as likely to delay
care, use 40 percent fewer services than the insured individuals with
similar health, and experience a mortality rate 25 percent greater than
insured individuals with similar characteristics. Moreover, without
affordable health insurance, these Americans run the risk of financial
catastrophe. Finally, their costs are often shifted to Medicare and
private payors, creating distortions in the market.
The uninsured are a diverse group. More than four out of five
uninsured are full time workers and their families, and one out of five
uninsured individuals work for employers who offer coverage but they
choose not to take it. The primary reason cited for these workers being
uninsured was the cost of insurance. Providing more resources to these
people will clearly help them purchase insurance.
Many of the uninsured--one-fourth of adults and \2/3\ of children--
are eligible for public programs but fail to enroll. While there are
many complex issues involved reasons why eligible individuals do not
enroll in public problems, according to the Commonwealth Fund, the
majority of the uninsured would prefer not to have government be the
main source of coverage.
Today, we will hear testimony from researchers at the Employee
Benefit Research Institute and the Health Research and Education Trust
on trends in health insurance coverage and who has coverage and who
does not; about who is uninsured in America and why they are uninsured.
We will also hear their analysis about whether the favorable trend in
insurance coverage will continue.
The second panel will turn to examining potential options for
increasing coverage for the 42 million uninsured Americans, and focus
on tax ideas, in particular. The panelists will discuss their
evaluation of the effect of tax credits as well as other options.
President Bush has proposed a multi-prong strategy to assist the
uninsured. Two key components of his proposals to reduce the uninsured,
for which Ways and Means has jurisdiction, are tax credits and medical
savings accounts. In that vein, we will be examining tax credit ideas
in this hearing. Secondly, Committee Chairman Bill Thomas will
introduce the Medical Savings Account Availability Act today.
In addition, we will be working with our colleagues on other
committees of jurisdiction to attack this problem, by seeking ways to
make insurance more affordable through group purchasing structures,
improving the enrollment in S-CHIP and expanding access to community
health centers.
The hearing will provide a framework for the development of
legislation to address the barriers faced in accessing health insurance
coverage by the uninsured. And I look forward to working with the Bush
Administration and our Democratic colleagues on reducing the number of
Americans without health insurance.
Mr. Stark. Thank you, Madam Chair, and thank you for
today's hearing. I hope that we will be the first of many on
this issue.
As is my staff's suggestion, I have a long, wordy opening
statement, which is more than you want to hear, and I would ask
unanimous consent that I be allowed to place that priceless
tome in the record in its entirety.
Chairwoman Johnson. In its entirety.
Mr. Stark. I also have, I think, a very useful article in a
set of charts from the Center on Budget and Policy Priorities
dealing with tax credits for individuals buying health
insurance, and I would ask that that be made a part of the
record.
Chairwoman Johnson. So----
Mr. Stark. Thank you.
Having said that, let me summarize, that had I had
unlimited time, what I might have wanted to read to you.
We have the disgraceful distinction of being the sole
industrialized nation in the world that does not assure or
ensure access to health insurance for all its citizens, and we
still, in spite of yesterday's stock market, are probably the
richest nation in the world. The uninsured are a problem that
has been with us as long as certainly I have been involved in
health care legislation.
It has gone up and it has gone down, but it has been
hovering sadly around 40 to 42 million people. The number also
depends on whether you count people who are insured all the
time or only part of the time during the year. But a majority
of uninsured are low-income, and while 80 percent of them are
workers, more than 70 percent of those uninsured workers lack
access to a job-based coverage which is where most Americans
below the age of 65 get their health insurance.
The good news is that this idea of expanding health care or
access to health insurance is back on our agenda, right up
there with pharmaceutical coverage, and that is good. But the
bad news is that even carefully constructed Tax Code proposals
will not achieve the goal of increased coverage in the absence
of significant financial resources being applied to this
problem and some, if you will pardon the expression, stringent
regulations.
I don't believe that just throwing a couple or even a few
thousand dollars at this problem for each person will solve it.
We could construct a refundable tax credit that would result in
increasing health care coverage, but, if we are not careful,
using the Tax Code could result only in our paying lip service
to the issue while spending billions of dollars on tax breaks
for those who already have insurance.
I think there are four elements that we have to keep in
mind. The tax credits must be refundable to get to the people
who most need them. The tax credit has to be large enough to
subsidize a significant portion of the cost of a meaningful
policy.
Sure, you can buy a policy for a thousand bucks a year, but
it is not worth anything. It gives you 30 bucks a day if you
get cancer in the hospital or something like that, but to get
basic coverage that is at least as good as Medicare or
Medicaid, you are going to need to spend a lot more than that.
My guess is that the individual policies are around$2,500 and
around $6,500 for a family policy, and a couple of thousand dollars
toward that for a family with income of less-than-$30,000 doesn't get
there.
There must be a mechanism to deliver the credit directly to
the insurer and make sure that the funds are there consistently
during the year. There is also going to have to be some
definition--call it regulation, if you will--of the health
insurance marketplace.
The tax credit would be worthless if the marketplace will
not allow somebody to purchase a policy or if the insurers just
raise the price to soak up that additional money.
I have not seen a proposal this year from either side of
the aisle that meets all of these criteria, but our job is to
see if we can make comprehensive insurance affordable and
accessible, and subsidize it for those who can't afford it.
I have often said that in this country, there is only a
very small group of Americans, a small percentage, that have a
constitutional right to health insurance, and I will bet even
the chairlady doesn't know who they are, but under Article IV,
they are prisoners. I have always said what is good enough for
Haldeman, Erlichman, and Rostenkowski is good enough for me.
Therefore, I would like to see us move toward a right for every
American to have health care coverage under the Constitution.
Thank you.
[The opening statements of Mr. Stark and Mr. Ramstad
follow:]
Opening Statement of the Hon. Fortney Pete Stark, M.C., California
Madam Chairwoman, thank you for having today's hearing. I hope it
is the first of many on this important issue.
We hold the disgraceful distinction of being the sole
industrialized country that fails to assure access to health insurance
for all its citizens. With record surpluses at our disposal, it is
inexcusable to not make a major down-payment toward health insurance
for all.
The majority of the uninsured have incomes under 200 percent of the
federal poverty level ($17,180 for an individual, $35,300 for a family
of four). While approximately 80 percent of the uninsured are either
workers or dependents of workers, more than 70 percent of uninsured
workers lack access to job-based coverage. According to a 1999
Commonwealth Fund study on workers' health, most uninsured employees
work for an employer that does not offer insurance or they are
ineligible for the insurance that is offered, often because they work
part-time or have not worked at the firm long enough. Just 12 percent
of eligible uninsured workers actually decline coverage.
The combination of income and workplace variables is particularly
harmful to low-wage workers. For example, only 55 percent of low-wage
workers who earn $7 or less per hour are even offered coverage,
compared to 96 percent of workers who earn more than $15 per hour. In
the age of incrementalism, successful efforts to increase health
insurance rates must take all of these issues--and more--into
consideration.
There has been a lot of discussion in the past few years about
using tax credits to expand access to health insurance. It seems to be
particularly attractive in certain circles this year. The good news is
that expanding access to health insurance is back on the national
agenda. I welcome the discussion. The bad news is that even carefully
constructed tax code proposals will fail to achieve the goal of
increased coverage in the absence of significant financial resources
and stringent government regulation. I believe expanding existing
public programs would bring the biggest bang for the taxpayer's buck.
Don't get me wrong. We can theoretically construct a refundable tax
credit proposal that would result in a meaningful increase in health
insurance coverage. But, if we are not careful, using the tax code to
try to improve access to health insurance could result in Congress
paying lip service to the issue of the uninsured while spending
billions of dollars on tax breaks for those who already have insurance.
As I have mentioned, using tax credits to improve health insurance
coverage is not cheap and it requires heavy government regulation to be
effective. There are at least four required elements of an effective
health insurance tax credit proposal, and I would argue that no plan
introduced to date meets all the criteria.
1. First, tax credits must be refundable. More than half of the
uninsured either pay no taxes or have tax liabilities below the levels
proposed by most tax credit proponents. If the credit isn't refundable,
it's simply a hollow promise for these individuals. President Bush
campaigned on a refundable tax credit, and Republicans and Democrats
alike in Congress have sponsored legislation that use refundable tax
credits.
2. Second, the tax credit must be large enough to subsidize a
significant portion of the cost of a meaningful policy. A typical
individual policy can cost $2,400 and the average family policy in 2000
was nearly $6,400. Last year, the average employer contribution was 74
percent of the premium. Even at this level, many low-wage workers are
unable to afford coverage for which they are eligible. Thus, in order
to put coverage within reach of the targeted population--low-income
families who must balance competing needs with limited funds--the tax
credit should cover at least 75 percent of the cost. Indeed, some
research has shown that a subsidy in excess of 80 or 90 percent is
needed to induce low-income families to participate. A tax credit of
$2,000 or even $3,000 does little to put a $6,400 policy within reach
of a family living on $30,000 a year. Finally, it is important that the
coverage be comprehensive. Using an inadequate tax credit to buy an
inadequate high-deductible policy simply moves individuals and families
from the uninsured column to the under-insured column. This will
exacerbate an undesirable trend already percolating.
3. Third, there must be a mechanism to deliver the tax credit
directly to the insurer or make sure that the funds are available more
consistently than once a year. The costs of purchasing insurance are
generally incurred on a monthly basis. Lower income families will not
be able to front the cost of the full premium throughout the year with
the promise of a refund the following April. However, fewer than one
percent of individuals eligible for a monthly EITC option participate
because they fear unpredictable income fluctuations will result in
their owing the government at the end of the year. In addition, it is
administratively cumbersome for a beneficiary to receive the credit and
pass it on. The policy should allow for the credit to be transmitted
directly to the insurer or employer.
4. Fourth, there must be significant regulation of the health
insurance marketplace. Any size tax credit is still worthless if the
marketplace won't allow someone to purchase a policy. Without creating
a marketplace that assures the offering of community-rated policies
without any medical underwriting, millions of uninsured individuals
with pre-existing health conditions will remain locked out of the
private marketplace even with a sizeable tax credit in their pocket.
This is a vital, but often overlooked component.
These are the tools by which I will measure tax credit proposals. I
have yet to see a proposal this year that meets the test. I urge my
colleagues to use extreme caution when considering tax credit proposals
as a real means to expand health insurance coverage. We need solutions,
not lip service.
Our job is to make comprehensive insurance more affordable and
accessible to every uninsured individual and family. An argument can be
made for increasing the equity of our current tax subsidies, but with
the surplus fading fast, we cannot afford to focus scarce resources on
those who are already covered. Our efforts should focus on methods
proven to help low-income populations obtain insurance. Expansion of
public programs, and mechanisms to improve beneficiary outreach,
enrollment and retention are key approaches that deserve at least as
much consideration and funding as changes to the tax code.
Opening Statement of the Hon. Jim Ramstad, M.C., Minnesota
Madam Chairwoman, thank you for calling this important hearing
today to examine the issue of the uninsured.
Our health care system is the finest in the world, with the highest
quality of care found anywhere. However, we still suffer today and
incur increased costs to our healthcare system because 42 million
Americans do not have health insurance.
Uninsured Americans are a diverse group with more than four out of
five employed full--time. One out of five of these workers choose not
to purchase the coverage offered by their employers, citing the high
cost of the insurance premiums. Others in the uninsured category are
lower income individuals who are either ineligible or fail to enroll in
existing public programs.
As we consider reforming and modernizing health care, I strongly
believe that adding a host of new federal mandates will have the effect
of increasing premiums and ultimately reducing the number of people
with coverage.
Instead, I support reforms to the insurance market that expand
access to health care and take steps to stem the rise in costs, while
preserving our existing high-quality delivery system.
I believe the best way to help families afford insurance is to
reduce the cost of health care services and insurance policies through
market-oriented alternatives. To this end, I believe we need to give
individuals and the self-employed the same health-insurance tax
benefits enjoyed by corporations. This way, individuals can afford to
shop the marketplace for the highest quality at the best price.
I also strongly support expanding Medical Savings Accounts (MSAs)
so more uninsured people are covered and have incentives to
``comparison shop.'' Lastly, I believe we must look at reforming the
medical malpractice regime to reduce, if not eliminate, the wasteful
practice of ``defensive medicine.''
Madam Chairwoman, thanks again for calling this hearing. I look
forward to hearing from today's witnesses on how we can best address
this critical issue.
Chairwoman Johnson. I would like to call the first panel
now. Paul Fronstin, senior research associate, the Employee
Benefit Research Institute; and Jon Gabel, the vice president
of Health System Studies at the Health Research and Education
Trust.
Dr. Fronstin, we have had a vote called, and my intention
is to hear from Dr. Fronstin. We may have time to also hear
from Mr. Gabel within the five minutes--I am not sure--and then
come back for questions. Otherwise, we will have to break
between the two speakers.
Dr. Fronstin.
STATEMENT OF PAUL FRONSTIN, PH.D., SENIOR RESEARCH ASSOCIATE,
AND DIRECTOR, HEALTH SECURITY AND QUALITY RESEARCH PROGRAM,
EMPLOYEE BENEFIT RESEARCH INSTITUTE
Dr. Fronstin. Thank you.
Chairwoman Johnson. You have to talk right into the mic,
and be sure it is on.
Dr. Fronstin. OK, thank you. Thank you, Madam Chairwoman
and Members of the Committee. I do appreciate the opportunity
to be here before you today.
My name is Paul Fronstin. I am a senior research associate
at the Employee Benefit Research Institute. EBRI is a private,
non-profit, non-partisan public policy research organization
based in Washington, D.C.
Data from the Census Bureau show that for the first time
since at least 1987, the number of Americans without health
insurance coverage recently declined.
In 1998, the number of uninsured Americans under age 65 had
reached 43.9 million. By 1999, the number of uninsured declined
to 42.1 million. The percentage of non-elderly Americans, those
under age 65, without health insurance declined from 18.4
percent in 1998 to 17.5 percent in 1999.
The main reason for the decline in the number of uninsured
was a strong economy and low unemployment. As a result, more
workers and their dependents were covered by employment-based
health insurance. The likelihood that a worker was covered by
employment-based health insurance increased from 72.8 percent
in 1998 to over 73 percent in 1999. The likelihood that a
worker was uninsured declined from over 18 percent in 1998 to
17.5 percent in 1999. The likelihood that a child was covered
by employment-based health insurance increased from 60 percent
in 1998 to 61.5 percent in 1999, and between 1998 and 1999, the
percentage of children without insurance coverage declined
dramatically, from nearly 15.5 percent down to 13.9 percent.
Simply providing access to public programs, even free
programs, does not guarantee that individuals will leave the
ranks of the uninsured. Prior research based on family
circumstances and income has found that over 25 percent of all
uninsured adults and nearly two-thirds of uninsured children
appear to be eligible for some type of public coverage. This
accounts for about 15 million of the uninsured.
It is notable that the decline in the uninsured occurred at
the time when health benefit costs were going up. When health
benefit costs increase, the percentage of Americans covered by
employment-based health benefits is expected to decline, but as
I already mentioned, more workers and their dependents were
covered by employment-based health benefits in 1999 than in
1998.
Despite rising health benefit costs, small employers are
increasingly offering health benefits to workers, and as Jon
Gabel will show in his testimony.
According to a survey conducted by EBRI, the Consumer
Health Education Council, and the Blue Cross/Blue Shield
Association last year, most small employers report that
offering health benefits helps with recruitment and retention
and keeps workers healthy, which ultimately reduces absenteeism
and increases productivity. Clearly, many employers realize
there is real business value in providing health benefits to
their workers.
As long as health benefit costs continue to increase,
employers will seek ways to reduce those costs. However, as
long as unemployment remains low, employers likely will be
unable to modify existing health benefit programs. With low
unemployment, the cost of not providing health benefits, such
as the cost of recruiting and retaining employees, often
outweighs the cost savings that can be attributed to cutting
back on health benefits.
Whether the slowing economy will have an impact on
employment-based health benefits depends on a number of
factors. Massive layoffs have yet to have a substantial impact
on the unemployment rate, which is still at 4.2 percent.
However, the combination of a slowing economy, rising health
benefit costs, and worker uncertainty about the future may make
it easier for employers to modify health benefit programs. Even
with low unemployment, if employees feared that they could lose
their job or would have difficulty finding other jobs,
employers may have more flexibility to reduce health benefits.
The release of the March 2001 CPS this fall may add to the
confusion over the impact of rising health benefit costs on the
uninsured. When those findings are released, the data for 2000
are expected to show that the number of uninsured Americans
continued to decline. The combination of more employers adding
health benefits and more children being covered by the CHIP
program in 2000 likely resulted in continued expansion of
health insurance coverage.
More than 42 million Americans were uninsured in 1999. Even
if the number drops again later this year when the 2000 data
are released, it is likely that 40 million Americans will still
be uninsured. As long as the economy is strong and unemployment
is low, employment-based health insurance coverage will expand
and the uninsured will decline. However, if the economy
continues to weaken and health benefit costs continue to
increase, the uninsured will start to increase again.
For example, if the downturn in the economy was severe and
the uninsured represented 25 percent of the non-elderly
population, there would be 63 million uninsured just 4 years
from now.
Thank you, again, Madam Chairwoman and Members of the
Committee for the opportunity to appear before you today. My
colleagues and I at EBRI look forward to working with you in
the future on this important issue.
Thank you.
[The prepared statement of Dr. Fronstin follows:]
Statement of Paul Fronstin,* Ph.D., Senior Research Associate, and
Director, Health Security and Quality Research Program, Employee
Benefit Research Institute
Madam Chairwoman, and members of the Committee, I am pleased to
appear before you today to discuss uninsured Americans. My name is Paul
Fronstin. I am a senior research associate and director of the Health
Security and Quality Research Program at the Employee Benefit Research
Institute (EBRI), a private, nonprofit, nonpartisan, public policy
research organization based in Washington, DC. EBRI has been committed,
since its founding in 1978, to the accurate statistical analysis of
economic security issues. Through our research we strive to contribute
to the formulation of effective and responsible health and retirement
policies. Consistent with our mission, we do not lobby or advocate
specific policy solutions.
---------------------------------------------------------------------------
* The views expressed in this statement are solely those of the
author and should not be attributed to the Employee Benefit Research
Institute, its officers, trustees, sponsors, or other staff. The
Employee Benefit Research Institute is a nonprofit, nonpartisan, public
policy research organization.
---------------------------------------------------------------------------
Health Insurance Coverage
Data from the Census Bureau collected in March 2000, shows that for
the first time since at least 1987, the number of Americans without
health insurance coverage has declined. In 1998, the number of
uninsured (nonelderly) Americans had reached 43.9 million (chart 1). In
1999, the number of nonelderly Americans without health insurance
coverage declined to 42.1 million. The percentage of nonelderly
Americans without health insurance coverage declined from 18.4 percent
in 1998 to 17.5 percent in 1999 (chart 2).
The main reason for the decline in the number of uninsured
Americans was the strong economy and low unemployment. Since
employment-based health insurance benefits are by far the most common
source of health coverage in the United States, it is not surprising
that the low rate of unemployment translated into lower rates of
uninsured. As a result of the strong economy, more workers and their
dependents were covered by employment-based health insurance benefits:
Between 1998 and 1999 the percentage of nonelderly Americans covered by
employment-based health insurance increased from 64.9 percent to 65.8
percent (chart 3).
Employment-based health insurance coverage increased substantially
for adult workers between 1998 and 1999. In 1998, 72.8 percent of
workers were covered by an employment-based health plan (chart 4). By
1999, 73.3 percent were covered. The likelihood that an adult worker
was uninsured declined from 18.1 percent in 1998 to 17.5 percent in
1999 (chart 5). Even nonworking adults experienced an increase in the
likelihood of having employment-based health insurance coverage,
increasing from 40.5 percent in 1998 to 41.7 percent in 1999 (chart 6).
The likelihood that a child is covered by employment-based health
insurance has been increasing since 1994 (chart 7). In 1994, 58.1
percent of children were covered by employment-based health insurance.
By 1999, 61.5 percent were covered. Because of declining enrollment in
Medicaid (chart 8), the percentage of children without health insurance
coverage has actually been growing over most of this period. However,
between 1998 and 1999, the percentage of children without health
insurance coverage declined dramatically from 15.4 percent to 13.9
percent (chart 9).
Despite the State Children's Health Insurance Program (S-CHIP),
public health insurance coverage did not increase during this time
period. Between 1998 and 1999 the percentage of nonelderly Americans
covered by Medicaid and other government-sponsored health insurance
coverage did not change (chart 10)-- remaining at 10.4 percent in 1999.
While the Census Bureau's March Current Population Survey (CPS) does
not allow researchers to count the number of children enrolled in S-
CHIP, it does appear that some children benefited from expansions in
government-funded programs. Findings from the CPS indicate that the
percentage of children in families just above the poverty level without
health insurance coverage declined dramatically, from 27.2 percent
uninsured in 1998 to 19.7 percent uninsured in 1999. Some of the
decline can be attributed to expansions in Medicaid and S-CHIP. Between
1998 and 1999, the percentage of near-poor children covered by these
programs increased from 39.3 percent to 40.5 percent. However, it
appears that expansions in employment-based health insurance had an
even larger effect. Specifically, the percentage of near-poor children
covered by an employment-based health insurance plan increased from
30.5 percent to 34.5 percent.1
---------------------------------------------------------------------------
\1\ The CPS (and most other surveys) are well known for under-
reporting Medicaid coverage and coverage from other government
programs. In the case of the CPS, it may not be picking up all Medicaid
recipients because some states do not call the program Medicaid. In
fact, there is strong evidence that the CPS under-reports Medicaid
coverage, based on comparisons of these data with enrollment and
participation data provided by the Health Care Financing Administration
(HCFA), the federal agency primarily responsible for administering
Medicaid. See Paul Fronstin, ``Counting the Uninsured: A Comparison of
National Surveys,'' EBRI Issue Brief no. 225, Employee Benefit Research
Institute, September 2000, for more information.
---------------------------------------------------------------------------
Health Insurance Costs and Benefits
It is notable that the decline in the uninsured occurred at a time
when health insurance benefit costs were going up. Since 1998, health
insurance cost inflation has been increasing. According to data from a
recent study (Gabel et al., 2000), health insurance costs increased 8.3
percent for all firms between spring 1999 and spring 2000, and they
increased 10.3 percent for smaller firms (with between three and 199
workers). When health care costs increase, the percentage of Americans
covered by an employment-based health insurance plan is expected to
decline, with employers shifting the cost of coverage onto workers, or
even dropping coverage completely. But as shown above, more workers and
their dependents were covered by employment-based health insurance
coverage in 1999 than in 1998. Employers have not been shifting the
cost onto workers. An annual survey by William M. Mercer indicates
thatthe worker share of the premium has been unchanged since 1993
(William M. Mercer, 2001). In contrast, an annual survey by the Kaiser
Family Foundation and the Health Research and Educational Trust found
that there was a slight reduction between 1996 and 2000 in the
percentage of the premium workers were required to pay (Gabel et al.,
2000).
Despite rising health insurance costs, employers have been
increasingly offering health benefits to workers. Between 1998 and
2000, the percentage of small firms offering health benefits increased
from 54 percent to 67 percent, with much of that increase occurring
among the smallest of the small firms. Most small employers report that
offering health benefits helps with recruitment and retention, and
keeps workers healthy, which ultimately reduces absenteeism and
increases productivity (Fronstin and Helman, 2000). Clearly, many
employers realize there is real business value in providing health care
coverage to their workers.
Also worth mentioning is that American workers clearly identify
health insurance coverage as far and away the single most valued work-
place benefit. When asked to rank the importance of all employee
benefits, health benefits are by far the benefit most valued by workers
and their families. Sixty-five percent of workers responding to a
recent EBRI survey rated health benefits as the most important employee
benefit (Salisbury and Ostuw, 2000).
Outlook
As long as health benefit costs continue to increase, employers
will seek ways to reduce those costs. However, as long as unemployment
remains low, employers will likely be unable to modify existing health
benefit programs. With low unemployment, the cost of not providing
health benefits, such as the cost of recruiting and retaining
employees, often outweigh the cost savings that can be attributed to
cutting back on health benefits.
Whether the slowing economy has an impact on employment-based
health benefits depends on a number of factors. First, massive layoffs
have yet to have a substantial impact on the unemployment rate. While
the unemployment rate has jumped from a 30-year low of 3.9 percent in
October 2000 to 4.2 percent in January 2001, it has remained at 4.2
percent in February and 4.2 percent is still a very low level of
unemployment for the nation. Second, the combination of a slowing
economy, rising health care costs, and worker uncertainty about the
future may make it easier for employers to modify health benefit
programs. Even with low unemployment, if employees feared that they
could lose their job, employers may have more flexibility to reduce
health benefits (and other components of total compensation) in order
to control costs in a slowing economy.
Adding to the confusion over the impact of rising health benefits
costs on employment-based health benefits may be the release of the
March 2001 CPS in the Fall 2001. When those findings are released, the
data for 2000 are expected to show that the number of uninsured
Americans continued to decline. The drop may even be larger than the
1.7 million decline experienced between 1998 and 1999. As mentioned
above, between 1998 and 2000, the percentage of firms with three to 199
employees offering health benefits increased (Gabel et al., 2000). In
addition, S-CHIP will continue to expand health insurance coverage.
This combination of more employers adding health benefits, along with
more children covered by S-CHIP, will result in continued expansion of
health insurance coverage. However, it should be noted that the delay
in collecting and reporting data often adds to the confusion on health
coverage and the uninsured: The data are often misinterpreted as
applying towards the current time period, rather than the nearly two-
year period prior to the release of the data, when it was collected.
It is also worth noting that while the uninsured declined between
1998 and 1999, it did not drop by 44 million. More than 42 million
Americans continue to be uninsured. Even if the number drops again
later this year, when the 2000 data are released, it is likely that 40
million Americans will still be uninsured--more than 15 percent of the
population. As long as the economy is strong and unemployment is low,
employment-based health insurance coverage will expand and the
uninsured will gradually decline. However, even if the United States
experienced five more years of declines in the uninsured similar to
that which occurred between 1998 and 1999, 34 million Americans would
still be uninsured in 2005 (chart 11). In contrast, if the economy
continues to weaken and health benefit costs continue to increase, the
uninsured would quickly start to increase again. Even for those who
keep their jobs, small employers would likely drop health benefits, and
large employers would likely shift the cost of coverage onto workers,
resulting in fewer workers accepting coverage. If the uninsured
returned to its 1999 level of 17.5 percent of the nonelderly
population, 38 million Americans would be uninsured in 2005. In
contrast, if the downturn in the economy was severe and the uninsured
represented 25 percent of the nonelderly population, 63 million
Americans would be uninsured.
Madam Chairwoman, this concludes my statement. It has been my
pleasure to appear before the Committee today. I offer the Committee
the assistance of the Employee Benefit Research Institute as you
continue your work, which is vital to the economic security of all
Americans.
Bibliography
Fronstin, Paul. ``Children Without Health Insurance: An Analysis of
the Increase in Uninsured Children Between 1992 and 1993.'' Inquiry.
Vol. 32, no. 3 (Fall 1995): 353-359.
----------------. ``Trends in Health Insurance Coverage.'' EBRI
Issue Brief no. 185 (Employee Benefit Research Institute, May 1997).
----------------. ``Employment-Based Health Insurance: A Look at
Tax Issues and Public Opinion.'' EBRI Issue Brief no. 211 (Employee
Benefit Research Institute, July 1999).
----------------. ``Employment-Based Health Insurance: A Look at
Who is Offered Coverage and Who Takes It.'' EBRI Issue Brief no. 213
(Employee Benefit Research Institute, September 1999).
----------------. ``Employment-Based Health Insurance For Children:
Why Did Coverage Increase In the Mid-1990s?'' Health Affairs. Vol. 18,
no. 5 (September/October 1999): 131-136.
----------------. ``The Working Uninsured: Who They Are, How They
Have Changed, and the Consequences of Being Uninsured.'' EBRI Issue
Brief no. 224 (Employee Benefit Research Institute, August 2000).
----------------. ``Health Insurance Coverage and the Job Market in
California.'' EBRI Special Report no. 36 (Employee Benefit Research
Institute, September 2000).
---------------- ``Counting the Uninsured: A Comparison of National
Surveys.'' EBRI Issue Brief no. 225 (Employee Benefit Research
Institute, September 2000).
----------------. ``Sources of Health Insurance Coverage and
Characteristics of the Uninsured: Analysis of the March 2000 Current
Population Survey.'' EBRI Issue Brief no. 228 (Employee Benefit
Research Institute, December 2000).
Fronstin, Paul, and Rachel Christensen. ``The Relationship Between
Income and the Uninsured.'' EBRI Notes, no. 3 (Employee Benefit
Research Institute, March 2000): 1-4.
Fronstin, Paul, and Lawrence G. Goldberg, and Philip K. Robins.
``Differences in Private Health Insurance Coverage for Working Male
Hispanics.'' Inquiry. Vol. 34, no. 2 (Summer 1997): 171-180.
Fronstin, Paul, Lawrence G. Goldberg, and Philip K. Robins. ``An
Analysis of Trends in Private Health Insurance Coverage, 1988-1992.''
Social Science Quarterly. Vol. 78, no. 1 (March 1997).
Fronstin, Paul, and Ruth Helman. ``Small Employers and Health
Benefits: Findings from the 2000 Small Employer Health Benefits
Survey.'' EBRI Issue Brief no. 226 (Employee Benefit Research
Institute, October 2000).
Fronstin, Paul, and Sarah C. Snider. ``An Examination of the
Decline in Employment-Based Health Insurance Between 1988 and 1993.''
Inquiry. Vol. 33, no. 4 (Winter 1996/97): 317-325.
Gabel, Jon, et al. ``Job-Based Health Insurance In 2000: Premiums
Rise Sharply While Coverage Grows.'' Health Affairs. Vol. 19, no. 3
(September/October 2000): 144-151.
Health Care Financing Administration (HCFA). The State Children's
Health Insurance Program Annual Enrollment Report (October 1, 1998-
September 30, 1999).
Salisbury, Dallas L., and Pamela Ostuw. ``Value of Benefits
Constant in a Changing Job Environment: The 1999 WorldatWork/EBRI Value
of Benefits Survey.'' EBRI Notes, no. 6 (Employee Benefit Research
Institute, June 2000): 5-6.
William M. Mercer. Mercer/Foster Higgins National Survey of
Employer-sponsored Health Plans. 2000. New York, NY: William M. Mercer,
Inc., 2001.
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Chairwoman Johnson. Mr. Gabel, if you would proceed,
please.
STATEMENT OF JON R. GABEL, VICE PRESIDENT, HEALTH RESEARCH AND
EDUCATIONAL TRUST
Mr. Gabel. Thank you, Madam Chairman and Members of the
Committee.
I am Jon Gabel, vice president of Health Research and
Educational Trust. The trust is a non-profit research
organization sponsored by the American Hospital Association.
The views I express today are mine alone.
Let me begin with my overall conclusion. I believe job-
based insurance will cover a smaller share of working families
in the future.
Public opinion studies suggest the public has two major
misconceptions about the uninsured. First, the public is
unaware of the close link between employment benefits and
uninsurance. They are unaware that 80 percent of the uninsured
are from working families. The uninsured are cab drivers,
retail clerks, waters and waitresses, construction workers and
hotel workers.
The second misconception of the public is this: the
uninsured get the same care as everyone else. This is utterly
wrong.
The uninsured are four times as likely to delay care. The
uninsured use 40-percent fewer services than comparable people
with insurance. When admitted to the hospital, they are sicker.
While in the hospital, they get fewer high-tech services. They
are more likely to die in the hospital, and they have a 25-
percent higher mortality rate than similar insured individuals.
About one-half of the uninsured work for firms with 25 or
fewer workers. These same firms only employ 15 percent of the
work force.
Recently, there has been an increase in coverage, and this
coverage was driven by the robust economy of the 1990's. Which
small employers don't offer coverage? I refer to Exhibit 1 and
Exhibit 2.
Earning of the work force largely determine whether a firm
will offer coverage. This stresses that benefits are part of
the total benefit package.
A key element in understanding the uninsured is the
employer exclusion. I do not pay taxes on my employer
contributions for health insurance. If my employer contributes
$6,000 per year and my marginal tax rate, including State,
Federal, and local government is 50 percent, then I receive a
subsidy of $3,000.
Turning to Exhibit 3, we show that our employer-based
system today is highly regressive. We give the greatest
financial help to those who need the least assistance and the
least help to those who need the most assistance.
A family earning less than $15,000 a year gets a tax
subsidy of $71. Those making over $100,000 get nearly $2,500.
When we ask employers why they do not offer insurance, year
after year, the overwhelming reason is it costs too much. I
refer to Exhibit 4.
The implication is that employers would buy lower-priced
bare-bones policies. The real-world experience of these
policies is they do not sell.
Now let me turn to short-run forces. We have two adverse
developments. The first is the return of health care inflation.
I refer to Exhibit 4.
Premiums have increased by 8.3 percent last year, the
highest increase since 1993, and the situation looks worse for
the future. Higher prices mean fewer small employers will
purchase coverage.
Second is the slowing of the overall economy. Over the past
5 years, a tight labor market has shielded American workers
from rising health care cost. A slowing economy will enable
employers to pass on higher costs to workers. Higher
contributions will induce more low-income workers to decline
coverage.
Now let me turn to long-term forces. Please refer to
Exhibit 8. Job-based health insurance covers a smaller
percentage of working Americans today than in 1977. The decline
in coverage is concentrated among those Americans least able to
compete in a global information-based economy.
Note, there was no decline in coverage among families with
college graduates, but among families headed by individuals
without a high school diploma, coverage fell from 52 to 34
percent.
I see globalization and the information revolution bringing
about greater disparities in health coverage in the future.
Madam Chairman and Members of the Committee, I welcome your
questions. Thank you.
[The prepared statement of Mr. Gabel follows:]
Statement of Jon R. Gabel, Vice President, Health Research and
Educational Trust
Thank you Madam Chairman and committee members for inviting me to
testify about trends in uninsurance. I am Jon Gabel, Vice President of
the Health Research and Education Trust (HRET). HRET is a non-profit
501(c)(3) research organization affiliated with the American Hospital
Association (AHA) and funded largely by grants from charitable
foundations and government research agencies. Today, I speak to you as
an independent analyst who has conducted an annual survey of employer-
sponsored health benefits since 1986.1 The views expressed
are my own. In my testimony, I examine current and long run changes in
job-based insurance. The evidence presented suggests that job-based
insurance will provide benefits to a smaller share of American workers
in the future.
---------------------------------------------------------------------------
\1\ From 1986-1990, the Health Insurance Association of America
sponsored the annual survey. From 1991-1998, KPMG Peat Marwick was the
sponsor, and today the survey is sponsored by the Kaiser Family
Foundation and Health Research and Educational Trust.
---------------------------------------------------------------------------
Misconceptions about the Uninsured
Employee health benefits and uninsurance are closely intertwined.
Unfortunately, public opinion polls indicate that the majority of
American voters are unaware of this close link. The American public,
particularly those who are college graduates and enjoy higher levels of
income, are subject to two major misconceptions about the uninsured.
First, the public is unaware that roughly 80 percent of the uninsured
come from working families.2 The uninsured include cab
drivers, retail clerks, waiters and waitresses, construction laborers,
and hotel workers.
---------------------------------------------------------------------------
\2\ Kaiser Family Foundation and Lehrer Newshour, www.pbs.org/
Newshour/Health/Uninsured/highlights.pdf.
---------------------------------------------------------------------------
Second, according to public opinion polls, the majority of
Americans believe that the uninsured get similar care as everyone
else.3 In fact, an overwhelming body of scientific research
published in leading medical journals, such as the New England Journal
of Medicine and the Journal of the American Medical Association, says
this is utterly wrong. The uninsured are four times as likely to delay
care,4 use 40 percent fewer services than insured
individuals in similar health,5 have more avoidable
hospitalizations,6 enter the hospital sicker, receive fewer
high cost discretionary services, are discharged from the hospital
sooner, are more likely to die in the hospital,7 and
experience a mortality rate 25 percent greater than insured individuals
with similar characteristics.8
---------------------------------------------------------------------------
\3\ R.J. Blendon, J.T. Young, and C.M. DesRoches, ``The Uninsured,
the Working Uninsured, and the Public,'' Health Affairs, November/
December 1999, Vol. 18, No. 6, pp. 203-211.
\4\ K. Donelan, R. Blendon, C. Hill, C. Hoffman, D. Rowland, M.
Frankel and D. Altman, ``What Happened to the Health Insurance Crisis
in the United States?: Voices from a National Survey,'' Journal of the
American Medical Association, Vol. 276(16), October 23/30, 1996, pp.
1346-1350.
\5\ S. Long and S. Marquis, ``The Uninsured Access Gap and the Cost
of Universal Coverage,'' Health Affairs, Supplement 1994, 13:2, pp.
211-220.
\6\ J. Weissman, C. Gatsonis, and A. Epstein, ``Rates of Avoidable
Hospitalization by Insurance Status in Massachusetts and Maryland,''
Journal of the American Medical Association, November 4, 1992, 268:17,
pp. 2388-2394.
\7\ K. Davis, ``The Uninsured in an Era of Managed Care,'' Health
Services Research, February 1997, pp. 641-649; J. Hadley, E. Steinberg,
and J. Feder, ``Comparison of Uninsured and Privately Insured Hospital
Patients: Condition on Admission, Resource Use, and Outcome,'' Journal
of the American Medical Association, Volume 265, No. 3, January 16,
1991, pp. 374-379.
\8\ P. Franks, C. Clancey, and M. Gold, ``Health Insurance and
Mortality: Evidence from a National Cohort,'' Journal of the American
Medical Association, August 11, 1993, 270, pp. 737-741.
---------------------------------------------------------------------------
Who Offers Coverage and the Employer Exclusion
About 50 percent of the uninsured are from families where the head
of household works for a firm employing 25 or fewer
workers.9 Due to the robust economic expansion of the 1990s
and the resulting tight labor market, the percentage of small firms
(firms with fewer than 200 workers) offering health benefits increased
from 54 percent to 67 percent from 1998 to 2000. (Exhibit 1)
---------------------------------------------------------------------------
\9\ P. Fronstin, ``The Working Uninsured: Who They Are, How They
Have Changed, and the Consequences of Being Uninsured--with
Presidential Candidate Proposals Outlined,'' EBRI Issue Brief, August
2000, 224, pp. 1-23.
---------------------------------------------------------------------------
Exhibit 1
Percentage of Firms Offering Health Benefits, by Firm Size: 1996, 1998-
2000
[GRAPHIC] [TIFF OMITTED] T4217A.012
Source: Kaiser/HRET Survey of Employer-Sponsored Health Benefits,
1999, 2000; KPMG Survey of Employer Sponsored Health Benefits, 1996;
1998.
With even unskilled workers in short supply in some labor markets,
many small firms offered health benefits to attract scare workers. The
earnings of workers at the company largely predict whether or not a
small firm offers health benefits to its workers. Exhibit 2 shows that
among firms where fewer than 35 percent of workers earn less than $10
per hour (or $20,000 per year), 85 percent of such small firms offer
health benefits. When more than 35 percent of workers earn less than
$10 per hour, only 35 percent of small firms offer coverage.
Exhibit 2
Percentage of Small Firms (3-199 Workers) in Which Workers Are Offered
Health Insurance, by Percentage of Workforce that is Low Income, 2000
[GRAPHIC] [TIFF OMITTED] T4217A.013
Source: Kaiser/HRET Survey of Employer-Sponsored Health Benefits, 2000
These statistics demonstrate that health benefits are part of the
overall compensation package, and that employer contributions for the
cost of health benefits represent compensation that could have been
dedicated to wages.
The preceding statement is subject to an important caveat.
Employees do not pay taxes on employers' contributions for health
benefits. ``This employer exclusion,'' grew not from any legislative
act but from rulings by the executive and judicial branches of
government to shore up labor shortages during World War II. If my
employer contributes $6000 per year for my insurance, and my marginal
tax rate (including state and local government) is 50 percent, then I
receive a tax subsidy of $3000 per year. In so doing, the United States
has created an ``accidental system'' that is highly regressive, giving
the greatest assistance to those who need the least financial help, and
the least assistance to those who need the most financial assistance.
Exhibit 3 displays the average tax subsidy in 1998 for employer-based
insurance according to family income. Families earning less than
$15,000 per year received an average subsidy of $71 whereas families
with income above $100,000 received about $2400.10
---------------------------------------------------------------------------
\10\ J. Shiels and P. Hogan, ``Cost of Tax-Exempt Health Benefits
in 1998,'' Health Affairs, March/April 1999, Vol. 18, No. 2, pp. 176-
181.
---------------------------------------------------------------------------
Exhibit 3
Average Federal Health Benefit Tax Subsidy for Job-Based Insurance, Per
Household, by Income, 1998
[GRAPHIC] [TIFF OMITTED] T4217A.014
Source: J. Shiels, Health Affairs
Among firms who offer health benefits, about 79 percent of workers
are eligible to participate in the company plan; of those eligible to
participate, about 84 percent take-up coverage, and hence, about 65
percent of company workers are enrolled in the firm's health plan. In
1988, 73 percent of workers were enrolled in the company plan. Thus,
since 1988, employer-based coverage has declined, not because fewer
firms offer coverage, but because fewer employees in firms offering
coverage participate in the company health plan.11
---------------------------------------------------------------------------
\11\ P. Ginsburg, J. Gabel and K. Hunt, ``Tracking Small Firm
Coverage, 1989-1996,'' Health Affairs, January/February 1998, Vol. 16,
No. 7, pp. 167-171; B.S. Schone and P.F. Cooper, ``More offers, fewer
takers for employment-based health insurance: 1987 and 1996,'' Health
Affairs, November/December 1997, Vol. 16, No. 6, pp. 142-149.
---------------------------------------------------------------------------
In our national survey of employers, we have asked employers not
offering coverage why they don't provide health benefits. Consistently,
employers answer that health insurance costs too much. (Exhibit 4)
Exhibit 4
21
Small Firms' Reasons For Not Offering Health Insurance, 2000
----------------------------------------------------------------------------------------------------------------
Very Somewhat Not Too Not At All
Important Important Important Important Don't Know
----------------------------------------------------------------------------------------------------------------
High Premiums.................................. 76% 12% 0% 11% 0%
High Turnover.................................. 29 9 12 41 9
Employees Covered Elsewhere.................... 34 12 24 26 4
Administrative Hassle.......................... 17 13 22 42 7
Obtain Good Employees Without Offering A Health 22 22 17 23 15
Plan..........................................
Company Can't Qualify For Group Rates.......... 25 32 11 26 6
Firm Too Newly Established..................... 3 0 9 88 0
----------------------------------------------------------------------------------------------------------------
Source: Kaiser/HRET Survey of Employer-Sponsored Health Benefits, 2000.
In 2000 76 percent of firms not offering coverage cited costs as a
``very important'' reason, far outpacing any other reason. By
implication, if insurers could offer bare bones, low-priced coverage,
many more small firms would provide health benefits. Unfortunately,
that has not been the real-world experience. For example, the State of
Illinois enacted legislation allowing bare-bones policies. When the
legislation was repealed in 1997, only 20 employers had purchased bare-
bones products.12
---------------------------------------------------------------------------
\12\ State of Illinois Grant Proposal to the Health Resources and
Systems Agency, 2000.
---------------------------------------------------------------------------
Short-Term Trends
Two unfavorable developments suggest that the recent expansion over
the past two years in employer-based coverage will come to an end.
First, inflation in the cost of health insurance has returned (Exhibit
5).
Exhibit 5
Premium Increases Compared to Other Indicators, 1988-2000
[GRAPHIC] [TIFF OMITTED] T4217A.015
Source: Kaiser/HRET Survey of Employer-Sponsored Health Benefits,
1999, 2000; KPMG Survey of Employer-Sponsored Health Benefits: 1988,
1993, 1996, 1998; Bureau of Labor Statistics, 2000.
From spring 1999 to spring 2000, the cost of job-based insurance
increased 8.3 percent, the highest increase since 1993. In 2000, the
average monthly cost of single coverage was $202, and the average cost
for family coverage was $529 (Exhibit 6).13
---------------------------------------------------------------------------
\13\ J. Gabel, ``Job-Based Health Insurance in 2000: Premiums Rise
Sharply While Coverage Grows,'' Health Affairs, September/October 2000,
Vol. 19, No. 5, pp 144-151.
---------------------------------------------------------------------------
Exhibit 6
Average Monthly Premium Costs for Covered Workers, Single and Family
Coverage, 2000
[GRAPHIC] [TIFF OMITTED] T4217A.016
Source: Kaiser/HRET Survey of Employer-Sponsored Health Benefits,
2000.
All indications are that premium increases will be even higher in
2001. From 1994-1998, America enjoyed the lowest premium increases
since we have been keeping statistics on job-based insurance. The
return of inflation is due not merely to the health insurance
underwriting cycle,14 but to a surge in underlying health
care costs, driven by prescription drug expenses. The surge in
underlying health care claims expenses suggests, unlike the insurance
cycle, that the problem will not correct itself. Higher premiums mean
fewer small employers can afford coverage, that some of the costs will
be shifted to workers, and more workers, especially low-earning workers
will decline coverage.
---------------------------------------------------------------------------
\14\ The ``insurance cycle'' is the historic pattern of
profitability and pricing in the health insurance industry. When
insurers are earning underwriting profits (profits before investment
income), then insurers fight for market share through fierce price
competition. Claims expenses rise faster than premiums, and eventually,
most insurers realize underwriting losses. By 1996, about three-
quarters of insurers had underwriting losses. Many insurers then exited
from local markets. The insurance industry next enters a phase of
catch-up pricing, where the objective is to restore profitability
rather than gain market share. Currently the industry is in the catch-
up phase of the underwriting cycle.
---------------------------------------------------------------------------
The second unfavorable development is the slowing of the overall
economy. Over the past four years, record low unemployment has shielded
workers from rising costs. In fact, today workers contribute less in
monthly nominal dollars for single coverage than they did in 1996
(Exhibit 7).15
---------------------------------------------------------------------------
\15\ Ibid., p. 147.
---------------------------------------------------------------------------
Exhibit 7
Average Monthly Worker Contribution for Single and Family Coverage,
1988-2000
[GRAPHIC] [TIFF OMITTED] T4217A.017
Percentage of Premiums Paid by Covered Workers for Single and Family
Coverage, 1988-2000
[GRAPHIC] [TIFF OMITTED] T4217A.018
Source: Kaiser/HRET Survey of Employer-Sponsored Health Benefits,
1999, 2000; KPMG Survey of Employer-Sponsored Health Benefits: 1988,
1993, 1996, 1998
Low-paid workers are highly sensitive to the cost of health
insurance. A softening of the labor market will enable employers to
pass on rising costs to workers, and as a result, more workers will
decline coverage.
Long-Term Developments
Even after nine years of economic expansion, the employer-based
health system covers a lower percentage of the U.S. population today
than it did in 1977 (70.5 vs. 66 percent). The decline in coverage is
concentrated among those segments of our population least able to
compete in a global, information-based economy. The percentage of
college graduates with job-sponsored coverage remained statistically
unchanged (79 to 80 percent) while coverage fell among high school
graduates from 68 to 63 percent (Exhibit 8).
Exhibit 8
Percentage of Persons Under Age 65 with Employer-Based Health
Insurance, by Education Level, 1977-1996
[GRAPHIC] [TIFF OMITTED] T4217A.019
The most dramatic decline occurred among Americans without high
school diplomas, where coverage fell from 52 percent in 1977 to 34
percent in 1996. It is noteworthy that real hourly wages for non-
graduates fell 17 percent from 1973 while real wages increased 18
percent for college graduates. Hence, the twin forces of economic
globalization and the information revolution are likely to bring about
not only great economic wealth, but also greater disparities in future
income and health benefits.16
---------------------------------------------------------------------------
\16\ J. Gabel, ``Job-Based Health Insurance, 1977-1998: The
Accidental System under Scrutiny,'' Health Affairs, November/December
1999, pp. 62-74.
---------------------------------------------------------------------------
Madam Chairman and members of the Ways and Means Committee, I thank
you for the opportunity to discuss the uninsured, and welcome any
questions you may have.
Chairwoman Johnson. Thank you very much.
Mr. Gabel, do you have any information about the number of
employers that provide only partial of premium coverage?
In my district, I run across a lot of employers that
provide only 50 percent of the premium cost, and those people
in particular are very interested in the tax subsidy to help
them stay in the plan. Although the kinds of employments that
you point to in your testimony, I understand are uninsured, but
there are many others out there. For instance, the examples in
my district are small manufacturers, and they are doing their
best to provide coverage, but it does require the employee to
provide 50 percent of the premium and that is unaffordable to
many of the workers industry.
Do we know much about this? Do we know much about what
percentage of the employers do cover only 50 percent of the
premium? Because I think whether or not tax credits keep people
in and bring them in depends a lot on the vitality of that
particular type of plan.
Mr. Gabel. Yes, we do have such data. In fact, the data
goes all the way back to 1988. I know for each employer how
much the employer contributes for each plan.
We have also analyzed how the out-of-pocket contribution
for the employee affects the take-up rate. We find that if a
firm has many higher-income workers, the contribution
requirement does not reduce the take-up rate. If there are many
low-income workers--and by that, I mean workers making less
than $20,000 a year--these workers are very sensitive to the
out-of-pocket contribution.
Chairwoman Johnson. Could you look at your data and get
back to me on what the cyclical impact of rising and falling
premiums has on that type of employer plan and whether that
shows any difference, movement in and out, you know, employers
dropping it earlier or later than more costly plans, if you can
determine that. Thank you.
Mr. Stark.
[No response.]
Chairwoman Johnson. Mr. McCrery.
Mr. McCrery. I would like to ask both of you what you think
the outlook is for employer-provided health insurance coverage.
Do you think more employers in the future will be offering
health insurance, or do you think fewer employers?
Dr. Fronstin. I think it depends. It depends on a lot of
factors.
Mr. McCrery. Like what?
Dr. Fronstin. One, if we have a recession and unemployment
does go up--it has not yet, despite the fact that we have
slowed down considerably--if unemployment goes up, employees
will be able to cut back, I think it will take two forms. One,
I think we will see small employers dropping coverage.
Because of the rate at which premiums have been going up
for those employers, as Jon Gabel shows in his study, he
mentioned about 8.3 percent in 2000. It was actually higher. It
was over 10 percent in 2000 for small employers, and that is
expected to continue.
I think we will see large employers not necessarily drop
coverage. Just about all of them offer it today, and just about
all of them have always offered it, but you will see them
change the benefits package around. You will see them ask their
employees to pick up a greater share of the premium.
The one thing that small employers do not always have
flexibility on is how much of the premium they can ask their
employees to pay. Because insurance companies often require a
certain percentage of employees to be covered, in order for the
employer to get that high minimum participation rate, they wind
up paying 100 percent of the premium.
If you look at employee data, if you look at employees and
ask them whether or not they pay anything, you find that more
employees in large firms pay something than employees in small
firms.
This does not mean that there are not employees in small
firms that do not pay anything. There is probably two pools
there depending upon whether or not they are subject to minimum
participation requirements. So I think certainly if the economy
slows down, we can see employers pulling back from this
benefit, like they did in the late 80's and early 90's when we
had rising health care costs.
Mr. McCrery. So two things could reduce the employer
coverage in the country: number one, economic downturn which
would reduce earnings for the businesses; number two, increases
in health care costs which would increase the premiums that
they would have to pay. Is that correct?
Dr. Fronstin. I think you would need both to happen at the
same time. I do not think that health benefit costs going up
without a recession is going to translate into more workers
leaving coverage because we have already seen--Jon Gabel's data
show this--between 1998 and 2000 more small employers started
offering coverage. The percentage offering coverage, he has in
Exhibit 1.
I hate to steal your thunder, Jon.
But it went up by 11 percentage points. I do not remember
the number for the increase in cost between '98 and '99, but
between '99 and 2000, it was over 10 percent for these
employers.
So I think if you have a strong economy, coupled with
rising health benefit costs, there is going to be some give-
and-take, and if you have a strong economy, I think employers
are in a better position to pay the higher health costs. So you
may not see employers cutting back so fast.
Mr. Gabel. I am pessimistic. I am pessimistic because I
believe we are in an economic downturn. We will have a
softening labor market.
I am pessimistic because we know beyond a doubt that health
inflation is back. What is most disturbing is that we have had
a surge in underlying health care expenses for health plans in
the last years. It has been particularly driven by higher
prescription drug expenses. We know from historical data that
when you put those two forces together, you have declining
coverage.
My third reason for being pessimistic has to do with long-
run earnings of low-income workers. Health benefits are a form
of income. When we examine the experience of low-skilled
workers, particularly those who are not high school graduates,
we see a real decline in wages of about 17 percent since 1973.
I believe that is why there has been a decline in coverage
among non-high school graduates.
Of course, when I was in school, you could get a very good
job if you graduated from high school. There were manufacturing
jobs with health coverage. Today, those graduates are in the
service industry and do not get coverage.
So, for those three reasons, I am pessimistic about the
future.
Mr. McCrery. How did we get started with this--oh, my time
is up. That was a quick 5 minutes.
Chairwoman Johnson. Mr. Stark.
Mr. Stark. Thank you, Madam Chairman, and I would like to
thank the witnesses.
Mr. Gabel, you show the average policy at about $2,400 and
a family policy at about $6,400, suggesting that employers pay
somewhere between 70 and 90 percent; 73 to 86 percent I think
is the exact figure.
Does it then follow that if we are going to subsidize
insurance and expect people to pick up insurance in the market,
then we have to talk about subsidizing the insurance at about
those rates for people to pick it up? Does that make sense?
Mr. Gabel. I think what the research would indicate is that
the subsidies have to be very substantial.
I just went to a conference, and if I can recall the
number--the subsidy must constitute more than 50 percent of the
costs.
The other point I want to make is these are employer-based
figures. Those figures will be about 8-to-10-percent higher in
2001. Second, if we are talking about buying insurance in the
individual insurance market, you are not going to get this kind
of a buy. It is just not an efficient market.
Mr. Stark. I will come back, if I can, to that in a minute.
I wanted to ask, Dr. Fronstin, if you have any information
for us. Somehow your testimony missed, I was going to say, what
is a fact, but I think it is correct, that the employers are
dropping coverage for retirees, and if these retirees are under
65, it seems to me there is a large chunk of the ``uninsured''
who are in that 50-to-65 range. Do you have any statistics on
what has happened to them, or can you comment?
Dr. Fronstin. Congressman Stark, our data would indicate
that there was a dropping of the retiree coverage during the
late 80's and early 90's, going up the FASB, Federal Accounting
Standards Board, and then after that, our numbers seem to go up
and down. That is for the early retirees.
Mr. Stark. Yes.
Mr. Gabel. For the Medicare-eligible retirees, there does
seem to be a decline.
Dr. Fronstin. I could submit this data when I return to the
office, but what we have found is that since 1994 through1999,
the percentage of early retirees with coverage from a former employer
have not changed at all. We hear the anecdotes about employers cutting
back on retiree health benefits. We are trying to find out whether
these cutbacks are for current retirees or future retirees. We need a
better interpretation of the types of questions that are being asked of
employers because, as of this point, it does not appear to have
affected where retirees get their coverage from or whether or not they
are uninsured.
Mr. Stark. Thank you. That would be useful information.
I want to come back to Mr. Gabel for a minute. You
mentioned the Illinois experience with the bare-bones policies.
Tell me, what is the difference between somebody, say, with an
income of $15-or $17,000 and a $5,000 deductible policy and
someone with no policy at all.
Mr. Gabel. Not much.
Mr. Stark. So that, I think that is key, and I do not know
whether Dr. Fronstin's figures can be extrapolated. At some
point, the coverage does not amount to much, and I wanted to
note that.
The only other question is whether or not these figures
include--and whether there is a difference--the folks off the
books, both illegal, recent immigrants who are non-citizens,
citizens who choose not to report or collect Social Security
and working, as I say, off the books. I would presume your
research does not cover them because they are sort of below the
radar scope. Any estimates of how many that would add to the
pot?
Dr. Fronstin. We are using data from the Census Bureau.
Mr. Stark. So you would include that?
Dr. Fronstin. If they included it, we would include it, but
I do not know that there is any way to distinguish between the
two in their data.
Mr. Stark. Thank you both very much. Thank you, Madam
Chair.
Chairwoman Johnson. Mr. Crane.
Mr. Crane. Dr. Fronstin, as you know, the current Tax Code
provides an open-ended subsidy through the employer exclusion;
that is, one receives a greater benefit for buying a more
generous benefit package, particularly if that individual is
wealthier and in a higher marginal tax bracket.
What has been the impact of this policy on health care, and
has this resulted in over-consumption?
Dr. Fronstin. I think the question is whether or not the
subsidy has resulted in over-consumption of insurance, more
people being insured than we would have had without the
subsidy. If we are talking about a higher level of income
receiving a greater subsidy, even without the subsidy, they may
have the means to buy insurance. So I am not sure. I think
there have been some studies on this that have tried to
quantify it. We could take a look through them, but I am not
really sure exactly which direction it goes in.
Mr. Crane. Do you think workers would be choosing different
types of health care packages if a dollar of wages equals a
dollar of benefits?
Dr. Fronstin. I'm sorry. Could you repeat that?
Mr. Crane. Do you think workers would be choosing different
types of health care packages if a dollar of wages equalled a
dollar of benefits?
Dr. Fronstin. Well, I guess the question really is will
employers offer a different type of benefit because employees
often do not have choice. So, if employees demand less
benefits, it is possible, but I think--you know, it is often
said that we are over-insured because of the tax treatment and
people are not sensitive to the cost of health care. I think it
is because people are sensitive to the cost of health care that
they have over-insured, and now that they have had experience
understanding what health care really costs, they would rather
stay with the insurance. I think even if we change the tax
treatment, given people are more risk-averse, they will
probably, to some degree, stay with the insurance they already
have.
Mr. Crane. In your testimony, you tell us that the delay in
collecting and reporting data often adds to the confusion on
health coverage and the uninsured. What can we do about this?
It is frustrating to those of us trying to understand the
current dynamics of an always changing market; that the best
data we have available is already 2 years old.
Dr. Fronstin. It will take more money, first of all, but if
you think about it, the way that the current population survey
is collected, it is in March of every year. The Census goes out
and interviews about 150,000 people and asks them about their
health insurance coverage for the entire prior year. So they
are not waiting that long between the end of calendar year 2000
and 2001 before they go out in the field to collect this data,
and then they do a very good job in turning this data around in
6 months.
I do not see much room for improvement there. There are
other studies that may be able to fill some gaps, but they face
the same issues of the cost of going into the field at a
certain time and speeding up the process of collecting the data
and cleaning the data. Certainly, they are not going to get as
large a sample size as the Census Bureau will.
Mr. Crane. Thank you. I yield back the balance of my time.
Chairwoman Johnson. Congresswoman Thurman.
Mrs. Thurman. Thank you, Madam Chairman. Thank you all for
being here today.
I think, Dr. Fronstin, you must have mentioned something
about the CHIP program. One of the things that I have followed
over the last couple of years and particularly some of the
issues in Florida that have come to bear on us is that when we
decoupled the welfare Medicaid program that we had an increase
of uninsured children, and I do not believe that CHIP has
picked that all up. That is actually being reflected more in
the cost of the hospitals of who they are seeing in emergency
rooms and bad debt and some of those things.
What kind of information do you have, and is there anything
in that area that we should be looking at?
Dr. Fronstin. Right now, there is very little information.
There is some information from Health Care Financing
Administration (HCFA) on the number of children enrolled in
CHIP. That data really is not reflected in the Current
Population Survey yet because it is only as of 1999 and you did
not have that many children. There were about 2 million
children enrolled in 1999, and there is no separate question
for CHIP. So it is hard to identify them, and it is hard to
track people in the CPS over time. You just cannot do that.
Concurrent with the decline in Medicaid coverage for
children and the increase in the uninsured, there was also an
increase in percentage of children covered by employment-based
plans between 1994 and 1997. So there is a lot going on there
that we do not quite understand yet, and I think as the data
becomes available, we will get a better sense of the dynamics
behind the program.
Mrs. Thurman. Do you want to comment on that as well, Mr.
Gabel?
Mr. Gabel. I will pass.
Mrs. Thurman. Let me ask another question. In the middle to
the late 80's, there was a concerted effort, I think, by a lot
of States to try to put some programs together called CHIP and
some of these organizations, and what we have found is that at
the beginning there seemed to be a lot of interest in those and
people actually signed up. Then what happened was their costs
began to rise, and, quite frankly, then the private market
started to come in and offer all of these new plans and
actually keeping costs down.
What has happened with those alliances to try for people to
buy into those markets? We kind of don't hear about that much
more when we kind of try to group folks together to keep the
costs down and some of those issues. What is going on in that
market today?
Dr. Fronstin. Well, in general, the alliances have not
taken off. As you indicated, in Florida, they have been closed
down.
Mrs. Thurman. Pretty much.
Dr. Fronstin. I think generally regarded as the most
successful one is the one in California, but even the one in
California--even that, as I recall, only enrolls a very small
percentage of the State's population. I think one problem is
many small employers do not even know that these purchasing
alliances exist.
A second problem has been that they have, in many cases,
met the resistance of the broker community which is so
important in the purchasing of health insurance for small
employers. The third problem is the HIPCS needed a big volume
in order to get big discounts to be effective. Since they have
never achieved that volume, they have never reached that
critical threshold point to really be successful.
Mrs. Thurman. So part of it was marketing, people knowing
about it, having the ability to fall into those alliances?
Mr. Gabel. That is very important.
Chairwoman Johnson. The other area that--and just, I guess,
probably because of the part of the area that I represent--and
I have to tell you, this issue is a growing issue and it is
probably going to grow even more over the next couple of years,
is this 55-to 64-year-old that is not on Medicare. Do tax
credits help them?
I mean, I do not know how that helps.
Mr. Gabel. Well, if coverage purchased in the individual
insurance market, the cost would be prohibitively high for a
55-64 year old. So it would require a very substantial tax
credit.
On the other hand, these people do want coverage--we are
not talking about the 21-year-old who thinks they are immortal.
These individuals are very serious and concerned about the cost
of health care.
Mrs. Thurman. What we are hearing from our constituents is
that they may not be sick right now, they do not know that they
will not be sick before they get on Medicare, and part of what
we are doing to them is because of the prohibitive costs that
they are not going in to see their doctors, they are not doing
their preventive care, and at some point, they end up very
sick. It has really created a problem in the district. I can
say that we hear about this every day. So I hope we can come up
with some solutions here for those folks, and all of them.
Chairwoman Johnson. Mr. English.
Mr. English. Madam Chair, insofar as I was profiting from
the line of question being advanced earlier by the gentleman
from Louisiana, I will yield my time to Mr. McCrery.
Chairwoman Johnson. Thank you, Mr. English.
Mr. McCrery. I thank the gentleman for yielding.
Dr. Fronstin, what is your Ph.D. in?
Dr. Fronstin. Economics.
Mr. McCrery. Good.
According to the Kaiser Family Foundation, workers paid
only 14 percent of the cost of self-only plans provided by
their employers, and those getting family coverage only pay 27
percent of the cost of that coverage.
As an economist, tell me, if my employer gave me 86 percent
of the cost of a new car, do you think the market for Cadillacs
might go up?
Dr. Fronstin. As an economist, I would say that the money
that the employer is providing them for coverage really comes
off their cash wages.
Mr. McCrery. Well, of course, it does. I did not ask that.
Dr. Fronstin. So are they really giving them the money for
benefits, or can they take it as cash wages? Plus, they are
actually not paying 14 percent because of the tax treatment.
Mr. McCrery. You have answered my question, even though it
did not sound like you wanted to.
Of course, Cadillacs, you would need more demand for
Cadillacs. If somebody is going to pay 86 percent of the cost
of my new car, I am not going to go get a Yugo. I am going to
go get a Cadillac because I can afford it, because you pay 86
percent of the tab. You do not have to be an economist to
figure that out.
Dr. Fronstin. But I am questioning whether or not the
employer is----
Mr. McCrery. But if you gave that employee wages, if you
gave that employee the equivalent in wages, instead of buying
his health insurance, and you were asked this question before--
I am going to ask it more directly. If you cashed out that
employee and, instead of spending $10,000 on health insurance,
you gave him $10,000 in wages and the employee then could go
out and buy health insurance, do you think he would buy exactly
the same coverage, first dollar of coverage that a single
employee might----
Dr. Fronstin. Some will and some won't. Some will and some
won't. It depends upon the person. It depends upon their income
level. It depends upon what they can get in the individual
market.
Mr. McCrery. Well, of course, individuals vary, but,
generally speaking, do you think that employee might go shop
around for a different product that would not cost him
$10,000----
Dr. Fronstin. I think generally----
Mr. McCrery. So he could use some of that money for----
Dr. Fronstin. They will go shopping around. Certainly, they
will go shopping around, but I think they will do their best to
try and find the same product before they settle for something
with less benefits.
Mr. McCrery. Mr. Gabel, can you give us some background on
how this employer coverage started and what was the rationale
for it?
Mr. Gabel. Our employer-based system is an accidental
system. Other countries will point to a legislative act such as
the National Health Care System in Britain. Ours grew out of
wartime shortages during World War II where wages were capped
due to wage and price controls. An executive decision was made
to allow health benefits not to be covered by this cap. Once
that occurred, a very strong growth in employer-based health
insurance followed.
Mr. McCrery. Exactly. There was no public policy thought
into this. It was just kind of an accident, and as a result
now, we have this system that leaves out a lot of people
because their employers do not provide coverage or they are in
a type of work where they are in and out of work and they do
not get coverage, whatever, and if you are a high-income
worker, you get a big subsidy from the government through the
tax system, but if you are a low-income worker, even if your
employer provides coverage, you get a little bitty subsidy from
the Government. That makes a lot of sense, doesn't it?
Mr. Gabel. No. What if we could start all over again? I
have met very few economists, liberal or conservative, who
would say an employer-based system like ours is the right
system. In fact, I do not know if I have ever met any economist
who believes our employer-based system is the right system.
Mr. McCrery. Well, as policy-makers, why do we continue to
fiddle with the current system around the edges instead of
offering comprehensive solutions to health care?
Getting back to the cost issue, I guarantee you if costs
continue to rise, employer-provided coverage is going to drop,
and the more uninsured we have in this country, the greater the
cry for us policy-makers to do something about it. The only
thing you will hear, I am afraid, is let the government do it.
We will just pay for it, and then you may as well just have the
Government pay for everybody. We already pay for Medicare,
Medicaid, CHIPs, and now we are going to do the uninsured, a
new tax credit. We may as well just make it easier and pay for
everybody's health care and then tax everybody.
If somebody, Dr. Fronstin, does not start worrying about
costs in the health care system and how to control those costs,
we are going to be in a world of hurt because we will be
controlling the costs through a universal budget, and a lot of
people will not like the result of that, mostly me.
Chairwoman Johnson. I am going to recognize Mr. Pomeroy,
who is a visiting guest from the larger Ways and Means
Committee, for his background in this, in insurance.
Mr. Pomeroy.
Mr. Pomeroy. Madam Chairperson, you are very kind to allow
me to ask questions.
I was a State insurance commissioner in a prior life and
sat where you are testifying to this Subcommittee. This is the
first time as a Member of the Ways and Means Committee I have
had a chance to participate even as a guest on this
Subcommittee, and I really appreciate it.
I very much enjoyed Mr. McCrery's questions and commend him
for his creative and very sincere thinking on how we can do
this better.
I have a different notion, and that is that the erosion of
employer-based health care insurance will rapidly fuel cause
for a full-blown public insurance system as opposed to private
coverage.
In 1993, as we debated the Clinton health reforms, through
'94, it appeared in looking at my own constituency that the
momentum shifted significantly when those with employer-based
coverage began to have questions as to whether the reforms
would change, and change in a negative way, the kind of
employer-based coverage that gave them security for their
health insurance needs.
Dr. Fronstin or Mr. Gabel, do you have any observations in
terms of whether or not employer-based coverage does achieve
for our population critical mass of quality health care
insurance, thereby being a mainstay for the ongoing support for
private insurance?
Dr. Fronstin. Well, certainly employment-based coverage
provides insurance for 90 percent of the population with
private insurance, and it covers 160 million people. We know
most of those people are satisfied with what they have, and are
probably afraid of what they may lose under a new system and
there is a lot of uncertainty about what that new system may
bring. It is a lot of people to put into a new system and
experience some type of potential disruption.
Mr. Pomeroy. They were very risk-averse when they began to
really perceive a threat, I believe, is what the Clinton, say,
health experiment would show us.
Mr. Gabel.
Mr. Gabel. I think public opinion polls would show that
most people who have employer-based insurance like their health
plan. They are satisfied with it, and, of course, in general,
their coverage, they generally want to keep.
Mr. Pomeroy. Mr. McCrery's point about an unacceptable
level of insured that will probably, inevitably, rise and that
is totally unacceptable is completely correct. I have come to
the conclusion that keeping that which works in our system and
building reforms for the rest of it is better than scrapping
everything and starting anew. It is just too much of an
undertaking.
That does get me to a second point, and that is a critical
feature within the employer-based coverage is the risk-pooling
that takes place. Some of the reforms would seem to pick away
at risk-pooling. I would cite specifically the effort by some
to have small employers self-insure or do it in an association
context. I think this raises questions that you will inevitably
return to, times in small group coverage where you have almost
a churning, people coming in and out of insurance pools for
very short durations of time. You also have questions in terms
of whether there is an adequate solvency oversight on self-
insurance associations of very small employer entities.
Dr. Fronstin and Mr. Gabel, do you have thoughts on that?
Mr. Gabel. Well, having studied the small employer market
and talking to employers for many years, my belief is we know
one thing for certain. The small employer market will never be
an efficient market until we make major changes in it.
Specifically, in a small employer market, so much of the
premium dollar to the sales force, to the brokers.
Small employers might be paying 30 to maybe even 40 percent
of their premium dollars for administrative expenses.
We do not have, as you noted, Congressman, the risk-
spreading in the small employer market that we do among large
employers.
Mr. Pomeroy. My time is about out. I want Dr. Fronstin to
also reply.
North Dakota, just for an example, is largely insured by
Blue Cross/Blue Shield and operates under an administrative
component under 15 percent, and by pooling all of the small
employers in this insured program they have, they do achieve a
significant spread of risk, although there is rating variables
based upon the unique circumstances to a degree.
Dr. Fronstin.
Dr. Fronstin. We already have two systems now. Even if all
the small employers were pooled into that, pooled together, we
have the large employers pooled together in the sense that they
are all self-insured and have pulled out of the fully insured
market. That has implications for premiums and the way we
spread risk as well, but I think the issues you raise are
important issues. They could be addressed in legislation.
Chairwoman Johnson. We will have good testimony to both of
those points in the next panel.
Before I move on to the next panel, however, I want to
pursue the questioning of my colleague from Louisiana in a
little different light.
First of all, I do absolutely agree with your fundamental
point, and that is that cost is important and that, if you
cannot pay for insurance, you do not get insurance. I think
that was clearly demonstrated by President Clinton's effort to
cover early retirees by opening up Medicare, and the result was
that only one in five would be able to take it because it was
too costly.
On the other end of the spectrum, your Exhibit 3 does not
show it. It says it is only looking at employer-covered
benefits. We do actually cover health insurance for 40 million
Americans. That is more than the entire current retired
population through Medicaid. We provide them with complete
health coverage, a very generous plan, and 2.5 million children
at this time. So, if you can afford it, you can have good
health coverage, and tax credits are about affordability. That
is, I think, important, as we move forward, to remember.
On this issue of who gets the subsidy, is it correct that
if I am an employer and I buy the same plan for everyone, low
income and high income, I get the same Government deduction for
the premiums of every one of those participants?
Mr. Gabel. You get the same deduction whether you paid for
insurance or gave it to them as cash wages----
Chairwoman Johnson. Right.
Mr. Gabel. With the exception of----
Chairwoman Johnson. Correct.
Mr. Gabel. How it is treated by Social Security.
Chairwoman Johnson. But you get the same deduction for the
premium for the high earner as the premium for the low earner,
assuming the plan is the same?
Mr. Gabel. Yes.
Chairwoman Johnson. Right. So, from the employer's point of
view, they get the same deduction.
Now, from the employee's point of view, they get the same
health care, assuming it is the same plan for everyone,
correct?
So, when your chart here shows on Exhibit 3 that low
earners receive this very low subsidy, all that is saying is
that because he is a low earner and he pays very low taxes that
his marginal tax benefit, were he to get that as income, would
not be great, but his health benefit is enormous. So this chart
is only looking at, in a sense, economic impact on him of the
Government-subsidized employer system. But it is not
reflecting--if it were reflecting the health impact, then all
the bars would be equal, recognizing that most plans are the
same for all employees, most company plans are the same for all
employees, would it not?
Mr. Gabel. What you are saying is correct. But I would add
that if you are a low-income worker, you are far less likely to
work in a firm that offers health insurance. If the firm has
many low-income workers, predominantly low-income workers, they
probably do not have health insurance or they probably have
very meager health insurance.
Chairwoman Johnson. I certainly appreciate that, that most
of the uninsured are working for small firms or self-employed
like cab drivers, but if you are in a firm and many, many firms
do provide the same plan for everyone, if that were translated
into income, you would have a very marginal tax benefit. But if
it is not translated into income, you get a very big benefit.
So, if we are talking about health benefits as opposed to
salary--and that is why this issue of translating this into
dollars is a problem because not only is the income impact
different, but the health quality access is different.
One of the reasons tax credits are so important is that it
gives the employee more buying power, and many of those small
firms could buy a better plan, but this bill cannot be
considered in isolation.
I think if you hear the next panel and some of the new work
that has been done in how we cut marketing costs, how we put
more affordable policies out there, which, of course, the
Commerce Committee will be responsible for discharging that
kind of information, but we also can have an opportunity here
to do it, then you can see that there is an opportunity to
really enhance health benefits through a combination of
policies. I just do not want this chart to hang out there with
its impression of variability when the impact on health benefit
availability is very great for low-income workers, especially
low-income workers who work for a company that has a good plan.
Chairwoman Johnson. Thank you so much for your testimony,
Dr. Fronstin and Mr. Gabel, and I look forward to hearing a
little bit more information back from you on these employers
that I understand to be a rather small number of plans in the
market, relatively speaking, where the employee takes a much
higher responsibility for the premium. Thank you.
The next panel will be Lynn Etheredge, who is with the
Health Insurance Reform Project at George Washington,
University; Mark Pauly, a professor of Health Care Systems,
Wharton School, University of Pennsylvania in Philadelphia;
Sara Singer, the Executive Director of the Center for Health
Policy, Stanford University; and Steven Larsen the Commissioner
of the Maryland Insurance Administration, Baltimore, Maryland.
Welcome to all of our panelists, and, Lynn, thank you for
your thoughtful conversations with me over many months now, and
look forward to your testimony.
STATEMENT OF LYNN ETHEREDGE, CONSULTANT, HEALTH INSURANCE
REFORM PROJECT, GEORGE WASHINGTON UNIVERSITY
Mr. Etheredge. Thank you, Mrs. Johnson. For the past
several years, there has been increasing discussion about how
to use tax policy to accomplish a number of important
objectives: reducing the number of Americans, now 42 million,
who are uninsured, for health insurance; expanding retirement
plans and savings to assist half the workers who lack employer-
provided pensions; raising the national savings rate, which is
now at a 40-year low; and expanding higher tax credits for
education, first-time home purchase and many other needs.
This morning I want to share with the Committee a new
approach that might be useful to accomplish all of these
objectives, a flexible benefits tax credit. Let me first
describe how it might work, and then some of its major
advantages.
For example, let's assume that the Congress were to provide
a $1,000 to $1,500 flexible benefits tax credit for workers as
part of this year's tax legislation. For workers without health
insurance, this tax credit would go to pay for health
insurance, usually a private plan chosen at the work place or
maybe through a State safety net program if the worker declined
the credit in writing. In this way, all workers would be
covered for health insurance, financed by the tax credit and
their own contributions. So for workers without health
insurance, the tax credit goes to health insurance. For workers
who have health insurance but don't have an employer retirement
plan, the $1,000 to $1,500 could be elected by them as a
payment to their retirement or savings plan, like an IRA. IRAs
can now be used for higher education, first-time home purchase
and catastrophic medical expenses. So these flexible benefits
credits could help to finance those purposes, as well as
retirement. And then, finally, the workers who have health
insurance and retirement plans already, could elect to take
their $1,000 to $1,500 flexible benefits credit as cash income.
This example makes clear, I think the most important point
about a flexible benefits approach. It adapts, or more
accurately, it allows the American worker to adapt the tax
credit assistance to the family's needs at one point in time.
When a worker is without health insurance--and that is usually
short term, 6 or 12 months--the credit pays a health insurance
premium. When the worker has health insurance, a flexible
credit helps with other needs like savings for a home, or
higher education, or retirement savings, or if working have
health insurance and a retirement plan already, they could take
the credit as cash income.
The second important point about flexible benefits is that
not only does it offer a menu for American families, it makes
very efficient use of taxpayer dollars compared to many stand-
alone health credit proposals. In a typical health insurance
tax credit, for example, the designers have to worry a lot
about unraveling employer group coverage, so we usually add
billions of dollars, sometimes tens of billions of dollars, for
people who already have health insurance, even for employers.
That just makes the current health insurance subsidies more
expensive. In some bills more than half the costs go to people
who already have health insurance.
Now, with a flexible benefit approach, the workers who
already have health insurance can elect new benefits in a form
of cash, either cash payment into their pension retirement
account, which they will be able to spend, or as cash income.
So the workers themselves get the cash income, not employers.
And, third, another important aspect of flexible benefits
is that adding this flexibility to new options doesn't really
increase government's costs. With a $1,000 to $1,500 credit per
worker, the government's cost is still $1,000 to $1,500 per
worker, even if the American family has more options for
spending it. For example, to put it into a tax favored pension
plan if they have that need.
Finally, one last point, and that is that this flexible
benefits approach, which I lay out more in the testimony and
the attached paper, is a concept that is compatible with a
large number of health insurance tax credit ideas. And I think
it broadens the potential support and the potential usefulness
of those ideas. It would fit with many of the ideas that other
people on the panel will be describing.
In summary, I would suggest that the Committee think about
a flexible benefits tax credit as a new approach for helping
people meet health insurance, and also retirement and other
needs. It has important advantages, as part of a legislative
strategy. And most importantly, I think the American families
and workers would welcome these types of benefits, as well as
the ability to make choices that meet their needs. Thank you.
[The prepared statement of Mr. Etheredge follows:]
Statement of Lynn Etheredge, Consultant, Health Insurance Reform
Project, George Washington University
Chairman Nancy Johnson and Members of the Committee, Good morning.
My name is Lynn Etheredge. For the last several years, I have been
working on issues of health insurance, retirement policy, and tax
credits at George Washington University. My background includes more
than thirty years of work, with the public and private sectors, on
health care and related issues. I am appearing today as an independent
witness.
Thank you for the invitation to participate in your discussions
this morning. The focus of my presentation will be on the idea of a
``flexible benefits'' tax credit. A flexible benefits tax credit offers
Congress a means to achieve health insurance coverage for most
uninsured workers and children, as well as to close large gaps in
retirement/savings plan coverage and offer a future with real economic
security for American families.
Separate tax credits for health insurance, retirement/savings
plans, higher education, first-home purchase and other purposes have
been discussed for a number of years. A ``flexible benefits'' tax
credit is a new approach. In this statement, I will outline major
features of this approach and its advantages. A recent paper (attached)
provides additional material.
To start with a basic example, let us assume that the government
makes available a $1,000-$1,500 per worker ``flexible benefits'' tax
credit for low to moderate income workers. Here's how the flexible
benefits provisions could work:
* A worker without employer provided health insurance would be
expected to use this credit to purchase health insurance, via automatic
enrollment and payroll withholding at his/her workplace. If a worker
did not elect to use a credit to purchase private health insurance, by
declining in writing, the tax credit would be assigned to state
government for safety net coverage (a ``default'' option). Thus all
eligible workers would have health insurance coverage, either through a
private health insurance plan of his/her selection or a public program.
A $1,500 premium (e.g. a $1,000 tax credit plus about a $10/week worker
contribution) would support a Medicare-level benefit for workers.
* A worker who has health insurance coverage, but does not have an
employer-provided retirement/savings plan, could elect to have his/her
$1,000- $1,500 flexible benefits tax credit paid into a retirement/
savings plan (such as an IRA). With a $1,500 tax credit (and $500
worker contribution) annually, a worker could anticipate savings of
$150,000 or more at retirement (in current dollars). A two-worker
family could invest twice the amount and have twice the total account
balance. IRA funds can now be withdrawn for higher education, first-
time home purchase, and catastrophic medical expenses. Early
distributions from retirement/savings plans that use flexible benefits
tax credits could similarly be made available for these purposes.
* A worker who already has employer-provided health insurance and a
retirement/savings plan could elect to receive his/her $1,000-$1,500
flexible benefits tax credit as cash income.
For American families, a flexible benefits tax credit would thus
offer a menu of assistance options from which they could choose
depending on their differing circumstances, as well as on how their
needs change over time. While 42 million Americans now lack health
insurance coverage, measured at a point in time, lack of health
insurance coverage is most often a short-term problem--for example, six
months to a year. At other times, a family's financial needs may
include higher education or first-time home purchase. For older
workers, such as baby-boomers, retirement savings becomes an important
issue. About one-half of the workforce now lacks employer-offered
retirement/savings plans.
A flexible benefits tax credit could also be used to provide
incentives for coverage of uninsured children, particularly the 94% of
uninsured children below 200% of poverty--6.7 million children--who are
already eligible for Medicaid or SCHIP but are not signed up. Workers
could be required to have health insurance for their children (signing
them up for SCHIP or Medicaid, or purchasing private coverage) as a
condition for receiving flexible benefits tax credits for their own
health insurance coverage. The flexible benefits tax credit would be an
incentive, e.g. $2,000/couple, for childrens' coverage.
As illustrated by the above example, a flexible benefits tax credit
design can broaden benefits (and potential political support) without
additional budget costs. If there were a $1,000-$1,500 per worker
single-purpose tax credit, for example, expanding it into a flexible
benefits tax credit (to include such benefits as retirement savings,
higher education, first-home ownership, etc.) would not increase
government's budget costs (which would still be $1,000-$1,500 per
worker). But it would offer workers more opportunities to use such
credits and would appeal to advocates for more causes.
A flexible benefits tax credit also maintains incentives for
employer group health insurance. Stand-alone health insurance tax
credits often include higher subsidies for employers' health insurance
to lessen the chances of unravelling employer group coverage. This just
makes current subsidies more expensive. A flexible benefits tax credit
handles these issues directly and with potential public appeal. It
provides the same tax credit for workers with and without employer
health benefits, and this maintains the existing tax advantages for
employer group insurance. Workers who now have employer group health
insurance could elect to receive their flexible benefits tax credit as
cash (a retirement/savings plan contribution or immediate income). This
gives these workers, rather than employers, the additional income.
A flexible benefits tax credit offers a means to close the major
gaps in health insurance coverage--which are mostly among workers and
their families--and in retirement/savings plans. The national savings
rate, for example, is now at its lowest rate in more than 40 years, and
many in the baby boom generation are not saving enough for retirement.
Increasing savings thus can be a prudent investment in the economy's
growth, as well as in the financial security of American families.
A flexible benefits tax credit would be compatible with a number of
different tax reform ideas. The attached paper provides a more detailed
discussion, including two examples, and estimates for increased
coverage and federal budget costs. A $1,000 per worker tax credit
targeted for about 2/3 of the workforce, for example, would cost about
$70 billion annually, or $785 billion (inflation adjusted) over 10
years, less than 30% of the available $2.7 trillion surplus. The paper
also considers topics such as Medicare benefits as a benchmark, the
role of employers, automatic enrollment, flat credits for lower-income
workers, direct payment of credits to health and retirement/savings
plans, and federal-state regulatory roles.
In closing, let me return to my opening observations. A flexible
benefits tax credit offers a new approach to accomplish many of the
goals that this Committee has been considering in separate legislative
proposals. A flexible benefits tax credit could achieve health
insurance coverage for most uninsured workers (with Medicare-level
benefits) and children, and offer a future with real economic security
for American families (several hundred thousand dollars of retirement
savings). These would be important benefits for many millions of
American families, and a flexible benefits tax credit would give them
new choices to elect such benefits. I believe they would welcome these
benefits and these choices.
Chairwoman Johnson. Thank you, Mr. Etheredge. Dr. Pauly.
STATEMENT OF MARK V. PAULY, PH.D., PROFESSOR, HEALTH CARE
SYSTEMS, WHARTON SCHOOL, UNIVERSITY OF PENNSYLVANIA,
PHILADELPHIA, PENNSYLVANIA
Dr. Pauly. Thank you, Madam Chairman and Members of the
Committee for inviting me today. I am Mark Pauly, Professor of
Health Care Systems and Economics in the Wharton School at the
University of Pennsylvania. I am happy to be here today to
discuss the results of my research and policy analysis with
Bradley Herring, now at Yale, that appeared in a recent issue
of Health Affairs.
We analyzed options for the design of refundable tax
credits intended to assist people in buying health insurance.
We focus on the most numerous population group among the
uninsured, those who are not poor, but have family incomes too
low to allow everyone to afford health insurance. If you define
this group as people with incomes between 125 and 300 percent
of the poverty line, 40 percent of the uninsured fall into this
category.
There are three important characteristics about this group
of uninsured people. First, there is general agreement that
they are uninsured primarily because the premiums for insurance
are high relative to their incomes. The problem is
affordability, and there is no better solution to this problem
than a subsidy that lowers the net premium for insurance.
Hence, critics of this approach who say it will be ineffective
cannot at the same time maintain that the problem is lack of
affordability.
Second, people in this group can nevertheless afford to pay
something for their insurance, just not the whole premium. In
fact, most people in this income bracket do obtain private
insurance, and even the uninsured on average pay substantial
amounts out of pocket for medical care. For them, even a
partial credit, what some critics of this approach call a ``10-
foot rope for someone in a 30-foot hole'' is of considerable
value because they do have some resources. They have some rope
down in the hole themselves, and the trick is to figure out how
to tie the pieces together.
Finally, as we emphasized at great length in the article,
all estimates of the impact of tax credits are fraught with
uncertainty, and therefore it is important to build in
flexibility in any policy design, rather, I think, than
regulating to prevent anything possible that could go wrong.
The most important design feature of any credit plan is how
generous it will be to the target population. There is more
here though than just the general observation, if you spend
more money, you are going to get more effect. Our research
suggests that there is a very pronounced notch or threshold
below which credits have small effects, and above which effects
become much larger.
For example, we estimate that a credit of half of the
premium for an average policy will reduce the number of
uninsured by about half, whereas a 25 percent credit will only
affect a few people, primarily those who are not wage workers.
Here is why. Take a worker who has not taken an insured job and
who is in the lowest marginal income tax bracket. The value of
the exclusion is about 30 percent, combining the payroll and
the income tax, and the loading for individual insurance is 15
to 20 percent higher than for group insurance. So someone in
this situation would need a credit of at least 45 to 50 percent
just to be as well off, tax wise and cost wise, as they would
have been had they taken a job that offered the insurance
options they rejected. The punch line here is: credits will
work.
Second, another design feature is the specification of the
policies that qualify for a partial credit. At one extreme the
required policy might be very comprehensive. At the other
extreme, there might be minimal restrictions in terms of
coverage and cost sharing, effectively requiring only that the
premium be at least as large as the credit. Then there should
be virtually universal take-up of a policy that many will
regard as parsimonious. The punch line here: some insurance,
even if incomplete, is better than none.
The third design feature is whether the credit is offered
to everyone who obtains a qualified insurance policy at a given
income level, or whether those who are currently insured or who
are offered insurance in an employment-based group plan should
be ineligible. If the credit is fairly generous, but is
restricted to those not in groups, there will be an incentive
to employers and employees to drop coverage in order to claim
the larger credit. There will be crowd-out. The economically
efficient policy here is somewhat counter-intuitive. The best
credit is a neutral one made available to all, regardless of
how they obtain coverage, and the higher budgetary cost for
such a plan, relative to a targeted one, is not a real cost to
the economy, but only a tax reduction, and one that to boot
improves both equity and efficiency. It is, after all,
manifestly unfair to offer a credit to someone who has
neglected thus far to obtain insurance, while denying it to
someone at the same income level who already made the
sacrifices needed to take the job that provided coverage. The
punch line: tax credits or tax cuts are for the lower-middle
class, and should be offered to all.
The final design feature is the form of administration. The
punch line here, I think, is: arm millions of people with
credits and private insurers will find them.
My own preferences in this matter are to suggest an
adequately funded minimally restrictive credit plan, and be
prepared to learn from the experience with such a program, and
especially the experience with a transformed individual
insurance market. In particular, I would suggest credits on the
order of $1,500 for self-only coverage, and $3,500 for family
coverage, and permit those credits to be used for health
insurance offered either by a private or a public insurer.
These credits could be made available in the form of a
redeemable coupon, $1,500 off your next insurance policy.
All people with incomes in the target range would be
eligible for credits even if they obtained employer-paid
coverage, but the value of the tax exclusion will be netted out
of the credit in the latter case. It would also be desirable
eventually to offer larger credits, equal approximately to the
premium for a comprehensive policy, for people with incomes
below 125 percent of poverty. They could use these credits for
CHIP, Medicaid, a government-contracted plan, or for a private
plan of equivalent coverage. The most fundamental point,
however, is that after years of talking about helping the
uninsured, tax credits provide us a way to do something, and we
ought not to make the unattainable perfect the enemy of the
feasible good. Thank you.
[The prepared statement of Dr. Pauly follows:]
Statement of Mark V. Pauly, Ph.D., Professor, Health Care Systems,
Wharton School, University of Pennsylvania, Philadelphia, Pennsylvania
Thank you, Madame Chairwoman, and members of the committee for
inviting me today. I am Mark Pauly, Professor of Health Care Systems
and Economics in the Wharton School of the University of Pennsylvania.
I am happy to be here today to discuss the results of my research and
policy analysis. Much of the background for my remarks was published in
a recent issue of Health Affairs and represents joint work with Bradley
Herring.
We analyzed options for the design of refundable tax credits
intended to assist people in buying health insurance. We focus on the
most numerous population group among the uninsured: those who are not
poor but have family incomes too low to allow everyone to afford health
insurance. In our analysis we defined this target group as families
with incomes between 125 percent and 300 percent of the poverty line;
more than 40 percent of the uninsured fall into this category. We also
offer some comments on the uninsured with lower family incomes.
There are three important characteristics of information about this
group of uninsured people. First, there is general agreement that they
are uninsured primarily because the premiums for insurance--either
explicit premiums they pay directly or implicit premiums they (like
most of us) pay by making a sacrifice in cash income to take a job that
carries health insurance--are high relative to their incomes. The
problem is ``affordability,'' and there is no better solution to this
problem than a subsidy that lowers the net premium for insurance. Hence
critics of this approach who say it will be ineffective cannot at the
same time maintain that the problem is lack of affordability. Second,
people in this group can nevertheless afford to pay something for their
insurance, just not the whole premium. Most people in this income
bracket do obtain private insurance, and even the uninsured on average
pay substantial amounts out of pocket for medical care, money they
could better use for health insurance premiums. For them, even a
partial credit--what some critics of the refundable credit approach
have called ``a ten foot rope for someone in a thirty foot hole''--is
of considerable value because they do have some resources; they have
some rope themselves, and the trick is to figure out how to tie the
pieces together. Finally, as we emphasize at great length in the
article, all estimates of the impact of various tax credit plans on
insurance purchasing behavior (including our own) are fraught with
uncertainty; there is a wide range of plausible values, and no valid
way to narrow it. To us, this means that any tax credit plan should be
designed to deal with uncertainty, not (as is sometimes the case) by
trying to regulate every possible thing that could go wrong, but rather
by designing policies that will work reasonably well (though not
perfectly) no matter what happens, and by planning to make adjustments
in the program as it is phased in and information begins to be
generated.
The most obvious and most important design feature of any credit
plan is how generous it will be to the target population. In this case,
however, there is more than just the general observation that offering
larger credits for a given insurance policy will get more people to
take it. Our research suggested that there is a very pronounced
``notch'' or ``threshold,'' below which credits have small effects and
above which effects become much larger. For example, we estimate that a
credit of half the premium for an average policy will reduce the number
of uninsured by half, whereas a 25 percent credit will only affect a
few people, primarily those who are not wageworkers. There are two
reasons why the credit has to be moderately large. First, all wage
workers would be eligible for a subsidy associated with exclusion of
employer provided premiums if they chose to take a job at a firm that
offered coverage. For people who choose a job that does not pay all or
most the premium, the value they attach to insurance must fall short of
the group premium by an amount greater than the exclusion subsidy.
Moreover, if they are to use the credit for a nongroup policy, the
insurance premium will be higher than that of the rejected group
option, because the administrative cost associated with that individual
insurance is higher. Take someone in the lowest marginal income tax
bracket. The value of the exclusion is about 30 percent (combining the
payroll tax and the income tax), and the loading for individual
insurance is 15 to 20 percent higher than for group insurance. So
someone in this situation would need a credit of at least 45 to 50
percent just to be as well off as they would have been after taking the
option they rejected. However, a credit of 50 percent for a policy with
a loading of 30 to 40 percent means in effect that one pays less for
the premium than the coverage of out of pocket payments the person
expected to get back: for the person of average risk, insurance is a
no-lose proposition. (The availability of charity care may temper this
motivation).
A second important design feature is whether the credit is a fixed
dollar amount (e.g., $1500 for self-only coverage) or pays a
proportional share of the premium. In the individual market, premiums
vary to some extent with risk--primarily with age and location, though
not with health levels if the person did not wait to become insured
before becoming sick. A fixed dollar credit will equal the premium for
lower risk young people, but become a smaller proportion of the premium
for higher risk middle-aged people. So the tradeoff, for a given
average per person subsidy, is between covering a large number of lower
risks or a smaller number of higher risks. Our estimates suggest that,
at credits at about the 50 percent level, the same amount will cover up
to 20 percent more of the uninsured if made available as a fixed dollar
credit, although this difference shrinks as the credit grows. A
possible design, present in the plan suggested by President Bush during
the campaign, is to define the credit as the lesser of a fixed dollar
amount or a proportional credit. At the modest $1000 level he proposed,
the program would effectively provide a fixed dollar credit to almost
everyone who bought a comprehensive plan.
Another design feature is the specification of the policies
qualified for the credit. At one extreme, the required policy might be
very comprehensive--assuring adequate (if not excessive) access to
care, but imposing on any buyer a substantial payment, large enough to
discourage many from purchasing. At the other extreme, there might be
minimal restrictions in terms of coverage and costs sharing,
effectively requiring only that the premium be at least has large as
the credit. Then there should be virtually universal take-up, but of a
policy that many will regard as parsimonious. We think it also
important that qualified policies could be purchased either from
private insurers or from a publicly contracted or operated plan.
A third design feature is eligibility for the credit by income
level. For both fiscal and administrative reasons, it seems sensible to
offer large credits to lower income families, and smaller or zero
credits to others (e.g., people with incomes above the median). The
latter group currently are rather generously subsidized by the
exclusion, so modest credits for them would rarely be taken up. But
reducing credits with income does offer some disincentive to earning
more income, and may be complex to administer. These observations
suggest that any credit should not phase down too rapidly, and that
perfect targeting by income might be compromised in favor of
administrative simplicity.
The fourth design feature is whether the credit is offered to
everyone who obtains a qualified insurance policy at a given income
level, or whether those currently insured in an employment-based group
plan should be ineligible. If the credit is fairly generous but is
restricted to those not in groups, there will be an incentive to
employers and employees to drop group coverage in order to claim a
larger credit (as long as the qualified insurance is reasonably priced
relative to group insurance); there will be ``crowd out.'' The
economically efficient policy here is somewhat counterintuitive: the
best credit is a neutral one made available to all regardless of how
they obtain coverage, and the higher budgetary cost for such a plan
(relative to one targeted only to those not offering or taking
employment-based coverage) is not a real cost to the economy, but only
a tax reduction, and one that improves both equity and efficiency. It
is, after all, manifestly unfair to offer a credit to someone who has
neglected to obtain insurance while denying it to someone else at the
same income level who already made the sacrifices needed to take the
job that provided coverage. The correct economic view of a credit as a
tax cut is to be distinguished from the erroneous ``target efficiency''
view that is often taken of this problem.
The final design feature is the form of administration,
encompassing mechanisms for identifying who is eligible for credits,
making them aware of the program, getting the credit to them in a way
that minimizes cash flow problems when they buy insurance, and assuring
that they do take advantage of the program for which they are eligible.
For people who pay federal taxes, both income taxes and payroll taxes,
a credit can be applied to those liabilities. Since such taxes are
withheld periodically from wages, the net effect of such credits would
be increase cash wages, thus furnishing the disposable income needed to
pay any remaining premiums. Since all workers are required to make an
estimate of their tax liability when they fill out a W-4 form for
employment, the Treasury Department does have this information. In the
interest of simplicity, it is probably better to offer credits of only
one or two different dollar amounts to people within a given income
range. Once the W-4 form is used to identify those eligible for
credits, they need to be informed of the program. It should be easy for
them to participate. Existing Medicaid and CHIP programs involve
complex processes of eligibility determination that cause more than a
third of eligibles to fail to apply. One simple device would be to
offer workers not already covered annual ``$1500 off'' coupons, which
could be redeemed by insurers or insureds for periodic credit payments.
Any deviations in end-of-year income from the original estimated income
could be adjusted as part of the income tax process. Private insurers
would be expected to seek out people who have a substantial subsidy for
the purchase of their product.
The most problematic feature of proposals to make credits available
for private insurance is the current rather unimpressive state of the
private individual insurance market in the United States. As already
noted, the main problem in this market is that administrative costs are
high. There is also some risk rating, though the presence of guaranteed
renewability features and other protections required by the HIPAA law
mean that few in this market pay higher premiums because of chronic
illness. One reason why the product is expensive is that it is bought
only by a small fraction of the overall insurance market, only by about
6 percent of all private insurance purchasers. The small scale which
makes the breakeven premium high and the need for substantial selling
efforts for a costly product would both be much changed if a large-
scale program of credits were available. If 18 million new buyers,
armed with substantial credits, entered this market, it is very likely
that product quality would improve, selling costs would fall, and such
riskscreening as there is would diminish greatly. Putting in place a
high-risk pool should allow the few high risks who fall through the
cracks to be supported.
What do these issues imply for policy design? The most obvious need
is to have some serious considerations of the tradeoffs just outlined--
between the size of the credit and the extent of effect, between
covering many low risks or fewer higher ones, between being fair in
treatment of employment based insurance and treating credits as
government expenditures rather than taxes, and between requiring
comprehensive but unaffordable coverage and incomplete but affordable
insurance. Our article provides some empirical estimates to help with
these tradeoffs, but the data do not uniquely anoint a single best
plan, so that some policy debate and decision making is needed.
My own preferences in this matter are to suggest an adequately
funded, minimally restrictive credit plan and to be prepared to learn
from experience with such a program. In particular, I would suggest
credits on the order of $1500 for self-only coverage and $3500 for
family coverage, and permit those credits to be used for health
insurance offered either by a public or a private insurer. These
credits could be made available in the form of redeemable coupons, with
reconciliation with total income at the end of the tax year. All people
with incomes in the target range would be eligible for credits, even if
they obtained employer-paid coverage, but the value of the tax
exclusion would be netted out of the credit in the latter case. It
would also be desirable to offer larger credits, equal to the premium
for a comprehensive policy, for people with incomes below 125 percent
of poverty; they also could use these credits either for a CHIP,
Medicaid, or government contracted plan, or for a private plan of
equivalent coverage.
Before fully opening the private market to the poor, it would
probably be best to wait to see if the improvements in functioning we
expect that follow from substantial credits to lower middle income
people do materialize. It would also be desirable to encourage (or at
least not obstruct) the emergence of alternative group purchasing
arrangements for individuals and small employers, such as ``Health
Marts'' and the like.
The most fundamental point, however, is that, after years of
talking about helping the uninsured, tax credits provide a way to do
something. They furnish a vehicle that can be kept free of regulatory
restrictions, that does not require public decisions about exactly what
insurance people should have, and that gives people the wherewithal to
afford the health insurance that they feel is best. We ought not to
make the unattainable perfect the enemy of the feasible good.
Chairwoman Johnson. Thank you, Dr. Pauly. Ms. Singer, a
pleasure to welcome you to Washington.
STATEMENT OF SARA J. SINGER, EXECUTIVE DIRECTOR, CENTER FOR
HEALTH POLICY, SENIOR RESEARCH SCHOLAR, INSTITUTE FOR
INTERNATIONAL STUDIES, STANFORD UNIVERSITY, STANFORD,
CALIFORNIA
Ms. Singer. Thank you. Good morning. Chairwoman Johnson and
Members of the Committee, thank you for inviting me here this
morning to discuss potential solutions to the problem of the
uninsured. It is very nice to be back.
My name is Sara Singer. I am a senior research scholar at
Stanford University, and Executive Director of the Center for
Health Policy.
As I left home yesterday to come here, I explained to my
almost-2-year-old daughter, Audrey, that I was invited to
Washington by some very important people, to help them find a
way to make sure that when she grows up, she will always be
able to see a doctor when she needs to. In very simple terms,
this is my hope and my purpose here today.
To reduce the number of people who lack insurance requires
both subsidies to make coverage affordable, and cost
containment to keep it affordable. This cost containment could
be achieved by providing multiple choices, structured
competition, and incentives to select high-value plans.
Only a small minority of purchasers today have created
these conditions. They include the Federal Employees Health
Benefits Program, the California Public Employees Retirement
System and Stanford University. Though these are prominent
purchasers, alone they have not transformed the health care
delivery system. Transforming health care delivery will require
that providers actively seek ways to cut costs without harming
quality, and this in turn requires that a significant portion
of their patients demand value.
I would like to share with you some ideas for creating the
necessary conditions for effective health care reform. These
have been generated through discussions with colleagues, Alan
Garber and Alain Enthoven at Stanford, at the invitation of the
Economic and Social Research Institute, and with sponsorship of
the Robert Wood Johnson Foundation. Our plan has six key
elements.
First, insurance exchanges for individuals and groups, to
offer choice and promote competition among plans based on price
and plan quality.
Second, a United States Insurance Exchange, USIX, a Federal
insurance exchange program like the Federal Employees Health
Benefits Program, to serve as a backup for individuals and
firms with fewer than 50 employees.
Third, refundable tax credits for low to middle income
individuals to purchase insurance through an exchange.
Fourth, a default plan that would support safety net
providers. Those eligible for subsidies who do not choose a
plan would be automatically enrolled in the default plan.
Fifth, a phased-in cap on the exclusion of employer or
individually paid health benefits to encourage value-based
purchasing.
And, finally, sixth, a new Insurance Exchange Commission,
like the Securities and Exchange Commission, with narrow,
specific powers to oversee the exchange market and to
distribute the tax credits and the default plan payments.
The President's proposal, like ours, would use tax credits
to expand coverage, but his proposal offers considerably
smaller subsidies targeted to low-income individuals and
employment groups without coverage. These small tax credits are
unlikely to reduce substantially the number of uninsured due to
low take-up rates and crowding out of employer-provided
coverage. Even for those who receive tax subsidies, there may
not be a viable market to purchase coverage due to adverse
selection.
Insurance exchanges can create a structured and competitive
market, and facilitate expanded coverage at little cost. They
can increase insurance coverage whether subsidies are large or
small, and they would require little change if subsidies start
small and are expanded later.
The simplest approach to creating an insurance exchange at
the national level is to form a USIX, like the Federal
Employees Health Benefits Plan (FEHBP) available to Federal
employees. USIX could encourage development of high-quality
coverage, priced within reach of those eligible for subsidies,
and it could structure the market to create competition and
combat adverse selection.
I also suggest that you consider default plans, that is,
automatic enrollment in default plans for subsidy-eligible
individuals who do not enroll themselves, and default payments
tied to performance. This mechanism would subsidize safety net
providers and would create incentives for preventive care, that
should reduce hospital costs, and for expansion of coverage.
In conclusion, any serious proposal for reform of health
care financing should include elements of competition that
encourage consumers to seek value, and subsidies for lower
income individuals. I urge you to support a proposal that would
do both. Thank you very much.
[The prepared statement of Ms. Singer follows:]
Statement of Sara J. Singer, Executive Director, Center for Health
Policy, Senior Research Scholar, Institute for International Studies,
Stanford University, Stanford, California
Forty-three million Americans without health insurance is a serious
and complex problem. I would like to thank Chairwoman Johnson and the
other Members of the Subcommittee for this opportunity to discuss
potential solutions.
To reduce the number of people who lack insurance requires both a
health care system that delivers good value health insurance products
given the dollars available and makes them accessible to all, as well
as subsidies for individuals for whom the price of coverage is out of
reach. Competitive models like the Federal Employees Health Benefits
(FEHB) Program, the California Public Employees Retirement System
(CalPERS), or Stanford University contribute to the first of these
goals by offering multiple choices, structuring the competition among
them, and providing incentives for individuals to select high-value
plans (e.g., defined contributions). Though prominent and important
examples, these purchasers represent a small minority of the health
insurance market so by themselves they cannot be expected to transform
the delivery system. Most employers offer one or few choices and pay
more for more expensive health care plans thus weakening or eliminating
incentives to choose economical health plans. Transforming health care
delivery will require that providers actively seek ways to cut costs
without harming quality. This, in turn, requires that a significant
portion of their patients demand value.
My colleagues Alan Garber and Alain Enthoven and I, at Stanford
University's Center for Health Policy, recently formulated a proposal
to achieve near-universal health insurance by satisfying both
requirements. We carried out this work as part of a project organized
by the Economic and Social Research Institute and sponsored by the
Robert Wood Johnson Foundation. In doing so, we sought to make a wide
range of health insurance choices available to all Americans, to
encourage consumers to seek high value coverage through improved
competition and personal economic responsibility for choices, to
increase support for care to those who remain without insurance, and to
accomplish this without mandates on employers.
Our plan would provide near-universal coverage among the non-
Medicare population by making private plans more affordable. It would
do so by using insurance exchanges to promote competition among plans.
The exchanges would provide information about plan prices and plan
quality, enabling consumers to make informed choices and obtain good-
value health insurance. Our proposal includes the following key
features:
Insurance exchanges (public or private entities or
employers) would offer individuals a choice of at least two health
plans (one that provides some coverage for treatment by most providers,
and a low-priced alternative) in every geographic region. Considerably
more choices would be desirable, including point-of-service (POS) or
preferred provider organization (PPO) products as well as closed-panel
health maintenance organizations (HMOs) and newer alternatives such as
defined-contribution ``care groups.'' Non-employer exchanges would
accept all individuals not eligible for Medicare and groups in their
service area (guaranteed issue) at a flat premium rate (community
rating), with adjustments only for covering additional people, such as
a spouse or dependents. Exchanges would perform at least minimal risk
adjustment (initial risk adjustment would be based on age) and/or rely
on other mechanisms to limit the financial rewards to plans for
engaging in practices that encourage risk selection, to preserve choice
among plan types and create incentives for plans to enroll and care for
high-cost patients. Exchanges would also participate in risk adjustment
between insurance exchanges in a region or state. Exchanges would
require quality measurement and would make available comparative
information to help members make informed choices. Substantial
incentives would encourage development of private exchanges. These
include tying new subsidies to purchase of insurance coverage through
an exchange, preemption from state insurance mandates (i.e., ERISA
protection), and protection from adverse selection.
The U.S. Insurance Exchange (like the Federal Employees
Health Benefits Program) would serve individuals and firms with fewer
than 50 enrollees in areas in which private exchanges do not emerge.
Refundable tax credits for health insurance valued at 70%
of the median cost plan for lower- and middle-income Americans
(individuals with incomes up to $31,000/families up to $51,000, phased
out for individuals with incomes between $31,000 and $41,000/for
families with incomes between $51,000 and $61,000) who purchase
insurance through an exchange.1 In contrast to families in
higher tax brackets, today such households have limited financial
incentives for purchasing private health insurance plans.
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\1\ Any phase-out of subsidies will create high marginal tax rates
in the phase-out zone. This is a problem that must be addressed. We
recommend beginning the phase-out at income levels above the phase-out
of earned income tax credits and other means-tested benefits. Extending
the phase-out range would further alleviate the problem, but would also
be more costly.
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Individuals, eligible for tax credits, who do not enroll
in a health plan, will be automatically enrolled in a default plan
designated by the state to provide basic health care services. Default
plans will be federally funded through performance-based grants
initially equal to 50% of the tax credit. They will enable states to
provide new financing for public hospitals, clinics, and other
providers who meet standards of open access, as part of their default
plan. States will receive incentive bonuses or reductions based on the
extent to which they improve performance on a set of preventive care
measures (e.g., childhood vaccinations, first-trimester pregnancy
visits, hypertension control) and reduce the percentage of the
population that remains uninsured. The goal is to ensure that every
eligible individual is enrolled in a health plan.
Other individuals would continue to exclude from taxable
income their employer--or individually-paid health insurance, but a
phased-in cap would limit this exclusion from taxable income for
employer--or individually-paid health insurance benefits to encourage
value-based purchasing. Individuals eligible for both the exclusion and
the subsidy could choose which of the two tax benefits to use. The
dollar value of the cap would be set high enough to represent a
substantial subsidy, yet low enough to provide substantial new
financing for expanding health insurance coverage and other purposes.
A new, independent Insurance Exchange Commission (IEC)
with narrow, specific powers, similar in function and structure to the
Securities and Exchange Commission, would be created to distribute new
subsidies and default plan payments, accredit insurance exchanges,
conduct risk adjustment across insurance exchanges, and serve as a
clearinghouse for public information on the quality of health plans.
This agency would have an appointment procedure and organization
structure similar to that of the Securities and Exchange Commission,
and would have a similar function--to encourage smooth information flow
and functioning of insurance exchange markets.
This proposal contains many similarities with the proposal offered
by President Bush as a candidate. The President's proposal, like ours,
would use tax credits to expand coverage. The President's proposal
differs from ours in that it offers smaller subsidies, targeted to
lower-income individuals in employment groups without coverage. Unless
they are larger, tax credits are unlikely to reduce substantially the
number of uninsured due to low take-up rates and crowding out of
employer-provided coverage. Even for individuals who receive tax
subsidies, there may not be a viable market for these individuals to
purchase coverage.
Adverse selection has made it nearly impossible to guarantee access
to coverage and choice of plans to unaffiliated individuals in a system
of voluntary health insurance. This is true despite attempts by the
federal and state governments to ameliorate the problem through
legislation providing for continuity of coverage for those who leave or
change jobs and programs such as high-risk pools. The low level of
subsidy proposed by President Bush would likely do little to improve
the selection problem in an unstructured market.
The creation of a structured and competitive market through
insurance exchanges can facilitate expanded coverage at little cost.
Further, it can be an important part of any strategy to increase
insurance coverage, whether subsidies are large or small. In addition,
a system based on insurance exchanges would require little change if
subsidies were expanded in the future to include more people.
The simplest approach to creating the benefits of an insurance
exchange at the national level is the creation of one similar to the
one available to federal employees. In our proposal, USIX would be a
national exchange that would serve as an entry point for low-income,
uninsured individuals, who would become eligible for new subsidies to
purchase coverage. Like the FEHB Program, CalPERS, and Stanford
University, USIX would offer competitive insurance choices. USIX could
encourage development of high-quality coverage priced within reach of
those eligible for subsidies. USIX would mitigate many of the market
imperfections that plague the individual market (for example, through
risk pooling, community rating, guaranteed issue, and competition).
USIX could also determine limited benefit standards to provide
reasonable comparability among plans and to prevent risk selection and
segmentation. USIX would achieve economies of scale in brokering plans
and would be capable of providing information about plan quality to
individuals. Tax credits would promote higher-value health insurance
options offered through USIX by exposing consumers to price
differences.
A second feature of our original proposal worth consideration is
automatic enrollment in default plans for subsidy-eligible individuals
who do not enroll in a health plan. States would receive a payment
initially equal to 50% of the new tax credits for these individuals and
would apportion these funds to providers, such as public hospitals and
clinics that they designate as default providers. States will receive
bonuses or reductions based on performance. This mechanism would
provide needed financing for safety net providers to care for those
automatically enrolled in default plans as well as incentives for
preventive care that should reduce hospital costs and expansion of
coverage among subsidy-eligible individuals.
Any serious proposal for reform of health care financing should
include elements of competition that encourage consumers to seek good
value given the dollars available and subsidies for lower-income
individuals. Our plan, like several similar plans, offers both and
provides a path for further expansions in coverage in the future.
Chairwoman Johnson. Mr. Larsen.
Mr. Pomeroy. Madam Chairman, if I just might say a salutary
word about Mr. Larsen. He comes to the position of Insurance
Commissioner with extensive prior experience, both as
legislative aid to the Insurance Committee in Maryland, as well
as private practice work for USF&G. He has been--my brother was
formerly the Insurance Commissioner of North Dakota and a
colleague of Commissioner Larsen, so I know personally of his
good work and very high credibility with the Nation's insurance
regulators.
Chairwoman Johnson. Thank you, Mr. Pomeroy. Mr. Larsen.
STATEMENT OF STEVEN B. LARSEN, MARYLAND INSURANCE COMMISSIONER,
BALTIMORE, MARYLAND, AND CHAIR, HEALTH INSURANCE AND MANAGED
CARE (B) COMMITTEE, NATIONAL ASSOCIATION OF INSURANCE
COMMISSIONERS
Mr. Larsen. Thank you very much.
Chairwoman Johnson. Now, you see, you must be very good.
[Laughter.]
Mr. Larsen. Thank you for those comments from one
commissioner to another, and I am very glad to be here. Thank
you for the opportunity to testify.
As was mentioned, I am current Commissioner/Chair of the
Health Insurance Committee at the NAIC and also cochair of a
Maryland task force to study the individual market, and I would
like to just provide a few comments about the current
characteristics of the individual market, which I think will be
most important. That is the market into which recipients of a
tax credit would be going to purchase their coverage. And I
think many of us think about insurance companies and their job
being that of paying claims, but I think companies would view
their job as managing risk. And the way they do that is through
pricing policies and underwriting policies, high risks high
prices, bad risks frequently excluded from coverage.
And I think the most vivid example of those types of
practices was when the small group market became dysfunctional
in the late 1980s and early 1990s, in which pre-existing
condition exclusions, non-renewals, price spikes were
characteristic of the market at that time and that is what led
to the enactment of almost nationally across all the States,
small-group market reforms, which include guaranteed issue,
guaranteed renewability, and modified or full community rating.
Importantly, the individual market shares the same
characteristics that the small group market did back when these
reforms were initiated. Insurers today use the same types of
risk management techniques, pricing and aggressive
underwriting, in the individual market. But currently the
individual market is much less regulated and has much fewer
consumer protections than does, for example, the small group
market today. Only 19 States have any rating restrictions. That
means that insurers can determine rates based on health
conditions when they issue policies, with no upper limits on
the initial rate or rate increases upon renewal. Only 12 States
have some form of a guaranteed issue. I know that you all
passed Health Insurance Portability and Accountability Act of
1996 (HIPAA) a few years ago, but HIPAA provides limited
protection for those who are moving from group coverage into
individual coverage.
I would just like to share with you some statistics that I
think highlight some of the problems that you see today in the
individual market. As part of our task force review in 1999, we
did a survey, and we found, for the largest carrier in
Maryland, the Blue Cross plan, Care First, that 32 percent of
the individuals who applied for individual coverage were
rejected under their medical writing standards. Now, those
individuals had the option of going into an open enrollment
product that we have in Maryland, but that product was
substantially inferior with fewer benefits than the medically
underwritten product. Last year the legislature tried to remedy
that by making a richer benefit package for the open enrollment
products, and immediately Care First came in with a rate
increase of 100 percent for the product.
Recently, the Kansas Insurance Commissioner had the
opportunity to compare rates between the individual and small-
group market in her State. And just to give you an example, she
looked at a small group plan with $1,000 deductible, and for an
individual the rate ranged from $73 to $122 a month. She then
looked at a comparable individual market policy, and the rates
were almost double the rates that you got in the small group
market. And it was only by increasing the deductible five-fold
that you end up with comparable rates. So you would have ended
up with a policy, to get comparable rates in the group market,
the deductible would have gone up to $5,000.
And I think clearly, the higher deductible policy premiums
are lower. It is difficult to imagine with some of the target
population, the uninsured could afford such a high deductible
to get comparable rates.
It is also very difficult to shop currently in the
individual market because there is little standardization,
products vary by age, gender, health and many other factors.
And the individual market is very fragile. There have been a
number of States in which the individual market has collapsed
because of a number of different factors. Both in Kentucky and
Washington, I think, every carrier at one point had withdrawn
from the individual market. Many States do have high-risk
pools, but again, rates are frequently very high and the
coverage varies in those pools.
In conclusion, I would just like to say, of course it is
very important that we look at every option for expanding
access and coverage to individuals who do not have health
insurance, but I would just caution you that looking currently
to the individual market as a way to accomplishing that, I
think, at this point is a risky proposition. And with that, I
would be happy to take any questions.
[The prepared statement of Mr. Larsen follows:]
Statement of Steven B. Larsen, Maryland Insurance Commissioner,
Baltimore, Maryland, and Chair, Health Insurance and Managed Care (B)
Committee, National Association of Insurance Commissioners
I. Introduction
Good morning, Mr. Chairman and Members of the Subcommittee. My name
is Steve Larsen. I am the Insurance Commissioner for the state of
Maryland. I would like to thank you for providing me with the
opportunity to testify about the characteristics of group and nongroup
health insurance markets, and how any federal legislation might impact
those markets. Also, I am the chair of the National Association of
Insurance Commissioners' (NAIC) Health Insurance and Managed Care (B)
Committee. Although the NAIC 1 does not have an official
position on the variety of proposals being discussed to combat the
problem of the uninsured and I am not testifying on behalf of NAIC, as
chair of the NAIC's health committee I have been privy to numerous
discussions on health policy issues affecting the insurance markets
across the country. In 1999 I also served as Co-Chair of the Maryland
Task Force to study the Non-Group Health Insurance Market.
---------------------------------------------------------------------------
\\1\\ The NAIC, founded in 1871, is the organization of the chief
insurance regulators from the 50 states, the District of Columbia, and
four of the U.S. territories. The NAIC's objective is to serve the
public by assisting state insurance regulators in fulfilling their
regulatory responsibilities. Protection of consumers is the fundamental
purpose of insurance regulation.
---------------------------------------------------------------------------
One of the proposals Congress is considering is the use of tax
credits to encourage the purchase of insurance in the nongroup (or
individual) market. Without commenting on the adequacy of any
particular tax credit to buy such a product, I think it is important
that Congress understand the differences between and characteristics of
group and nongroup markets before deciding on whether tax policy will
be effective as a method of addressing our nation's uninsured problems.
II. Insurance Markets
The purpose of insurance is to spread risk among as large a group
of people as possible (``pooling''). By creating larger pools, insurers
reduce the uncertainty of the occurrence of insurable events and can
more accurately predict the losses the group will suffer. Groups are
better able to absorb increased claims costs of individuals within the
group among the group as a whole. As such, insurance is the ``law of
large numbers.''
Insurers manage risk through pricing policies and underwriting.
Higher risks are priced at higher levels, and particular risks,
individuals with particularly costly diseases, may be declined by
insurers seeking to manage their risk.
Large groups, because of the law of large numbers, have never been
a particular regulatory problem in group health insurance. However, in
the late 1980s and early 1990s, small group reform was initiated in the
states to combat the aggressive pricing and underwriting practices
insurers were using. These techniques included long pre-existing
condition limitations, large annual rate increases, and nonrenewal of
policies due to claims experience, also called claims underwriting.
State reforms included making small group policies guaranteed
renewable, requiring insurers to issue policies to all small groups,
limiting or doing away with any preexisting condition exclusion when a
job is changed but coverage is seamless, and limits on preexisting
condition exclusions, typically six or 12 months, or less. The Congress
later adopted many of these concepts in the Health Insurance
Portability and Accountability Act of 1996 (HIPAA).
One of the most important consumer protections the states have
adopted to protect small groups is to limit the rates an insurer can
charge to a small group. Today, 46 states have enacted some form of
rating restrictions for small group insurers. The most typical
arrangement is a limitation from the highest rate charged to the lowest
rate charged based on an index rate. These types of limitations can
still result in considerable variation from one small group to another,
even up to 100% variation from the lowest to the highest rate. But it
is a limit. A smaller number of states (approximately 17), Maryland
included, have taken stronger steps to restrict rates in this market by
enacting adjusted community rating provisions. These provisions
generally prohibit the use of health status and claims experience in
setting rates for particular small groups.
The individual market is subject to the same pressures as the small
group market. In fact, many believe that ``adverse selection'' is more
likely in the individual market because those who are willing to shop
for and purchase a policy on their own are the individuals most likely
to access benefits under the policy. Insurers use the same techniques
in the individual market as they did in the small group market to
manage risk.
The individual market, however, is far less subject to the types of
consumer protections that have been applied to the small group market.
Only 19 states have rating restrictions of any kind. That means
insurers can determine rates based on health conditions when they issue
the policies, with no upper limits on the initial rate or on rate
increases upon renewal. Only 31 states have limitations on the use of
preexisting condition exclusions. That means insurers can permanently
exclude named conditions--the insured will never have coverage for
those conditions. Only 12 states have some form of guaranteed issue.
That means insurers can reject coverage entirely based on health
status. And it is important to remember that HIPAA provides none of
these protections. The only protection HIPAA provides for the
individual market across the board is guaranteed renewability of
policies. (HIPAA also provides guaranteed issue for persons coming off
group health coverage of at least 18 months, but it provides no
protection regarding how much individuals can be charged for the
coverage).
Some statistics are enlightening. A survey done by the Maryland
Insurance Administration showed that the Maryland BlueCross/Blueshield
plan, CareFirst of Maryland, rejected 32% of the 18,000 people who
applied for individual coverage in 1998. Those who were rejected, up
until this year, had as an option to buy an open enrollment product,
without medical underwriting, that had substantially fewer benefits
than the underwritten product, even though the open enrollment product
is subsidized by the state. This year, when benefits of the open
enrollment product were increased, Carefirst sought an increase in some
age bands of over 100%.
The Kansas Insurance Commissioner recently had occasion to compare
premium rates in the small group and individual markets. The monthly
premium rate for a small group plan ($1,000/$2,000 deductible; $1,000/
$2,000 80%/20% coinsurance maximum) from one insurer was:
Insured: $73-$122
Insured/Dependent(s): $196-$326
A comparable individual plan offered by the same carrier had the
following rates:
Insured: $58-$215
Insured/Dependent(s): $176-$652
Only by increasing the deductible five-fold do the rates become
comparable. An individual plan with a $5,000/$10,000 deductible lowers
the premium range to:
Insured: $34-$120
Insured/Dependent(s): $90-$322
While the small group market does contain rate fluctuations, there
is an upper limit because of rating restrictions, and the fluctuation
is not nearly as dramatic as that in the individual market.
Importantly, generally people in small groups cannot be refused
entrance into the market for medical reasons. Although the higher
deductible policy premiums are much lower, it is difficult to imagine
that the targeted market, the uninsured, could afford such a deductible
or would find what is essentially catastrophic coverage, rather than
comprehensive coverage, attractive.
Also, ``shopping'' for individual health coverage is quite
complicated for consumers. While most insurance departments have
consumer representatives, web sites and printed materials, the
individual market varies so dramatically with a consumer's age, gender,
health, and other factors that many people are very confused about what
to buy and how to find the best buy.
These facts suggest that efforts to direct individuals to the
individual market as a way to address all uninsured problems should be
undertaken with caution. In addition, the individual market is a
fragile one. One need only remember the crisis that befell Kentucky and
Washington State when they attempted reforms of the individual market:
they were left with virtually no companies as insurers left the market
in droves. States have been understandably cautious ever since.
Larger groups provide buying clout in the market, spread the risk,
and protect individuals against fluctuations of smaller pools. It is
for this reason that many states have looked to strategies to pool
groups together, using high-risk pools for adverse risks, expanding
public programs such as SCHIP and Medicaid, and even opening public
employee groups. By the same token I am not aware of any state that has
looked to the individual market as the solution for uninsured citizens.
III. Beware of Association Health Plans
While Congress is considering how to reduce the number of uninsured
persons, I want to strongly caution you against looking to Association
Health Plans (AHPs) as a ``magic bullet.'' As consistently expressed in
the past by the National Governors' Association, the National
Conference of State Legislatures and the NAIC, the creation of AHPs
outside the state regulatory structure may very well result in hurting
the very small business employees that you are trying to help. If
exempted from state regulation, AHPs would ``cherry pick'' the
healthiest people from state risk pools. Premiums for those remaining
in the state-regulated market would rise as the coverage base declined.
Those groups unable to join an AHP will be priced out of insurance. In
addition insurers, who are under an obligation to ``guarantee issue''
all products to any small group, will be forced to cover groups that
leave the AHP for more comprehensive coverage when a group member
becomes ill. Insurers will then abandon the small group market as it
loses its necessary proportion of healthy workers. Thus, AHPs will lead
to the ultimate outcome of deregulation or collapse of the small group
market. Such a result does not serve consumers very well. As the
numbers show, there is no real evidence that an unregulated market
(individual) is more cost-effective than a regulated market (small
group), except for the healthiest risks.
States have enacted substantial reforms to the small group market
in order to make insurance more accessible and affordable. In a report
last year, the Congressional Budget Office (CBO) confirmed this
analysis. CBO found that 80 percent of workers in small employers would
see their health insurance premiums rise if AHPs were exempted from
state regulation.
In addition, let us not forget the past and be destined to repeat
it. In the 1980s, inadequate oversight of multiple employer welfare
arrangements (MEWAs) resulted in rampant fraud and abuse, leaving
consumers in nearly every state responsible for millions of dollars in
unpaid medical bills. Congress and the Department of Labor subsequently
addressed this issue by clarifying that MEWAs fall under state
regulatory authority. Current AHP proposals would again grant
regulatory authority to federal regulators who lack the necessary
experience and resources to oversee these plans, thus recreating the
same circumstances that caused the 1980s MEWA nightmare.
It is important to remember that the states, not the federal
government, have pioneered improvements in the health insurance market.
Long before debate about a national Patients' Bill of Rights or access
reforms began, states were developing innovative insurance market
reforms to address consumer needs. Exempting AHPs from state regulation
will deny states the opportunity to maintain the important consumer
protections they created.
IV. Conclusion
While it is vitally important that we continue our efforts to
increase access for those millions of American consumers who do not
have health insurance, care should be taken to ensure that any
solutions provide meaningful options to those we are trying to assist.
Currently the individual market is characterized in many states by
higher prices, more limited access and stricter underwriting than group
markets. Thank you for the opportunity to testify.
Chairwoman Johnson. Thank you very much. Thank you very
much. Ms. Singer, do your health exchanges--your insurance
exchanges, would they overcome the kind of problem that Mr.
Larsen is describing? Would they serve individual buyers,
enable them to get group rates, and for society to manage the
risk issues involved that have already increased cost in the
individual market?
Ms. Singer. That is the idea, and I think that would be the
result. They would act like large employers do, and so the
individuals who have subsidies, purchasing through the
exchange, would have all the benefits of large employment
groups: guaranteed issue and renewability, community-rated
premiums, multiple choices, information about those choices,
and et cetera.
Chairwoman Johnson. And in California is there experience
with this kind of mechanism that also involves risk--management
of risk across plans?
Ms. Singer. Yes, in the small group market, the Pacific
Business Group on Health manages Pac Advantage, which used to
be called the Health Insurance Plan of California (HIPC), which
was previously managed by the State. PBGH risk adjusts premiums
across plans within that marketplace to accommodate for plans
that get different risk mixes.
Chairwoman Johnson. And that is the largest HIPC in the
country, is it not?
Ms. Singer. Yes, it is.
Chairwoman Johnson. Mr. Etheredge, why do you think $1,000
is going to make a difference, when the average cost of family
coverage is over 3,000?
Mr. Etheredge. Well, I think $1,000 is probably the lowest
number you ought to consider. I get to $1,000 by starting with
the Medicare benefit package. These are estimates done by
Gordon Trapnell, of the Actuarial Research Corporation. A
Medicare benefit package for the working population will now
average about $1,500 per worker. That is much less than the
typical policy that is sold, but we all know Medicare has a lot
of things it doesn't cover, like prescription drugs, and has
very high deductibles--I guess we are getting close to $1,000
now in Part A and Part B. And then I look at the fact that we
ask Medicare enrollees to pay over $600 a year, and they are on
an average Social Security benefit of $10,000. So, at a bare-
bones level, I am thinking we should try to assure at least the
Medicare benefit. That is what we have had as a national
standard, and ask workers to pay something, maybe comparable to
what we ask elderly people to pay. And that logic leads me from
a $1,500 premium, and I subtract out about $10 a week, $500, as
a reasonable contribution from the worker. So, a $1,000 tax
credit per worker, as a national average, could support a
Medicare-level benefit.
That isn't the national average health plan, but I think if
you told uninsured people that they could get a Medicare
benefit, and the government will be paying two-thirds of the
cost, that is probably a viable proposal. So that is how I got
to $1,000. I would be happier personally with a more generous
policy, but I think it is an interesting exercise to reason
that through.
Chairwoman Johnson. Thank you. I am going to limit my
questions. You are just an excellent panel, very good, and I
appreciate it.
And if each Member takes about 3 minutes, and then if we
have time, we will come back for a second round, but you all
get to question before we vote. Mr. Stark.
Mr. Stark. Thank you, Madam Chair. I would like to thank
the panel. In the brief time we have, I guess I would like to
ask Mr. Larsen two questions. One, what is the experience in
the States in general, regarding the sale of very high-
deductible policies? Are they popular? In your opinion, do they
provide a meaningful assistance?
And before you answer that, I am going to recall the
experience we had back in the nineties with kid's health
insurance. The companies came forth with a lot of policies that
offered $50 a day if they were hospitalized, and almost what I
would classify as meaningless insurance. So, what does an
insurance commissioner do in terms of protecting the consumers
from paying for a policy where the benefits won't really
provide health care? I mean, they will provide little pieces of
it, but not a broad coverage?
Mr. Larsen. Well, ultimately the consumers have the choice.
I think as a practical matter, high-deductible policies are not
the preferences of many consumers, and in fact, consumers often
aren't able to have the foresight to understand that they are
paying a low premium now, but actually when it comes time to
need the coverage, they are sometimes surprised to learn that
the coverage is low or they don't have the coverage until they
have spent 5,000 or 10,000 out of their own pocket. So I think
conceptually there may be appeal for that. I think as a
practical matter, I don't think those are attractive to many
consumers.
Mr. Stark. Ms. Singer, welcome back. It appears that Mr.
Enthoven has had an epiphany judging by the HIPCs that are
missing from your testimony, which I can only suggest is the
best thing I can say. You do suggest that unless there are
larger tax credits, it is unlikely to reduce the number of
uninsured, and you also suggested there may not be a viable
market for individuals to purchase coverage. Do you have a
figure in mind as a ballpark figure of where these credits
would have to go, or the subsidy would have to go in terms of
dollars, to provide an adequate coverage for individual or
family today?
Ms. Singer. Well, I haven't done the type of research that
Professor Pauly has done, but I am working with a nonprofit
organization in California, to look at what they could provide
at a much-reduced price to serve those receiving a low level of
subsidy. The issue we are struggling with is that this managed
care organization is used to providing first-dollar coverage.
They are considering increasing levels of cost sharing, as
opposed to implementing high deductible.
From the perspective of a consumer, who would be a subsidy
recipient, the notion that they would be covered for
catastrophic care, but not for first-dollar coverage, is
probably not terribly attractive.
Mr. Stark. But how do you get that dollar figure? You don't
have it?
Ms. Singer. My point is that plans could offer a lower-
priced product to accommodate a low level of subsidy. I don't
have a dollar figure. I am sorry.
Mr. Stark. And the last thing--because my time is up--is,
Mr. Larsen, would you expound a little bit, in layman's
language, on the real dangers to the new rise in the
association health plans, and how they can really harm small
businesses rather than help them?
Mr. Larsen. Well, I think whenever you set up a system of
insurance that is outside State regulation, you do a couple
things. One, you get rid of all the consumer protections that
are in place for the small businesses, guaranteed issue,
guaranteed renewability. You essentially, I think, end up
destroying, as we saw previously under the Multiple Employer
Welfare Arrangement (MEWA) example, the existing insurance
market, all the, quote, good risks end up going to the
unregulated market. It leads to so-called bad risk, people with
sicker employees in the insured market, and then you get into
what even laymen call an actuarial death spiral, where rates go
up and up and up, and you drive people out. At least laymen
that I hang around with use that term.
So, you know, we had that model many years ago, and I think
from a regulatory and consumer perspective, it was a failure.
Mr. Stark. Thank you. Thank you, Madam Chair.
Chairwoman Johnson. Mrs. Thurman. And you have as much time
as you--we have 5 minutes to vote, and they hold it open 2
minutes, so 6 minutes left? 6 minutes left. Mr. McCrery is
coming back.
Mrs. Thurman. OK. I won't take that long. Mr. Larsen, you
had said in your opening things that there were consumer issues
that needed to be addressed, and if you could get those to me,
I would really appreciate that. That is the only question,
because I think this is a very important issue if we are
looking at any kind of--I don't want to spend $1,500 on a tax
credit and find out that it has all been spent on
administrative costs, quite frankly. I want something that is
actually going to do what it was intended to do, and that is to
take care of the uninsured in this country, and I think we need
to really look at some of those issues out there. So if you
could get some of that to us, I would appreciate it. Thank you,
Madam Chairman.
Chairwoman Johnson. Thank you. Now, Mr. McCrery is going to
come back, if you could hang around and--actually, I have a
minute, so I am going to ask Ms. Singer if you could respond to
Mr. Larsen's comments? In other words, are there and maybe
Mr.-- either one of you might have some comment on this,
because the problems he points to are the current problems with
the individual market, and what we have to look at is if we
provide a tax credit to individuals to increase their buying
power, can we also provide them with a way of buying? Now, you
can through some of the new proposals, reduce the cost of
marketing very clearly, and certainly both of your proposals do
that, so that reduces cost considerably. And we had earlier
testimony that 30 or 40 percent of the premium is marketing. So
that is really a big bust. And then ERISA has demonstrated that
ERISA protection can provide lower cost plans in the market, so
you can drive cost down that way. And can you then also deal
with this issue of risk in such a way that the individual
market doesn't look at medically underwriting every individual?
Ms. Singer, and then Mr. Etheredge and Dr. Pauly?
Ms. Singer. Yes. I think that you can address the issues
that the individual market is experiencing through pooling
those individuals into groups. I think it helps a lot that they
are subsidized individuals and would lose those subsidies if
they don't purchase something in the market so they have a
strong incentive to purchase something. But I think that giving
them the opportunity to purchase through a group is a key
element, and I don't think that it has to be necessarily an
employment group, but some other mechanism and that is why we
have proposed---
Chairwoman Johnson. Dr. Pauly.
Dr. Pauly. I think it is wrong to look at today's
individual insurance market and imagine that is what it would
look like, even without additional regulation, if you offered
substantial subsidies. The reason why administrative costs are
so expensive in the individual insurance market, paradoxically,
is because individual insurance is so expensive. So the
companies have to offer substantial commissions to persuade
people to take this over-priced insurance.
If, on the other hand, you offer a tax credit of 50 or 60
percent of the premium, the stuff will sell itself. And there
has actually been experience in States that have cross-
subsidized individual coverage. When the cross-subsidy is
generous, the administrative cost for the individual coverage
falls down to the 15 percent level, so that is sort of the
first point. I think it is a mistake to look at today's
individual insurance market and imagine that is what it would
be like if you transformed the financing.
The second point I want to make is I think it is a mistake
to obsess about risk segmentation in that market. What we know
is, if we community rate, maybe that is more just, but it
doesn't get more people insured. It leaves the number of
uninsured the same. The real problem with the individual
insurance market, as I have written, is not that it is
expensive for high risks, it is that it is expensive for
everybody. And one way to get that down is to offer the subsidy
itself, and the other is to offer the opportunity of group
insurance purchasing, although I am somewhat skeptical about
how much you can lower costs there. A custom suit is a lot more
expensive than an off-the-rack suit, and even if I buy my
custom suit from Sears, it is still going to cost a lot of
money. If you sell things on a one-on-one basis, it does cost
more. But I think there is some real opportunity to get those
costs down, many of which--many of the opportunities which
would be caused by the availability of subsidies.
Chairwoman Johnson. Mr. Etheredge, 1 minute.
Mr. Etheredge. Sure. I think there are two sets of
regulations that would be useful, assuming we want a Federal/
State framework where most regulation still rests with the
State government. The first is HIPAA type regulation of no
preexisting condition or medical underwriting, and that could
be applied to the group of people eligible for the tax credit.
So simply extending HIPAA to people eligible for tax credit
will solve that medical underwritingproblem.
The second set of rules you need after availability is
rating rules. There I would say you could have a fairly
straightforward Federal rule which says if the State uses
something other than community rating, it has to adjust the
credits to match the factors that are used by the insurance
plans. So you want to make sure the credit matches what the
premium variations will be.
Chairwoman Johnson. In other words, there are
possibilities. I do think it is significant that Maryland is
one of the highest--the States with the highest number of State
mandates, and of course, the individual market is controlled by
State mandates, and part of the goal would be to provide a
buying option that would allow people to get out from under
State mandates like most employer plans are under State
mandates.
Unfortunately, my time is expired, so that I really do have
to go, but Mr. McCrery is returning within minutes. So I will
recess the hearing, but as soon as he gets back, he will begin
his questioning. Thank you very much for your testimony, and we
will be back in touch with you, and if you care to add comment
from hearing the comments of your co-panelists or those that
preceded you, we would be happy to receive those. Thank you.
[Recess.]
Mr. McCrery. [Presiding.] The hearing will come back to
order. Thank you all, members of the panel, for waiting for us
to get back from the vote. I am sorry I missed the questions
from the other Members of the Subcommittee, and forgive me if I
cover some of the areas that they have already covered.
First of all, let me say I am very appreciative of the time
that all of you have given us. I know that you all are very
well-respected experts in the field of health care and
insurance, and so it is very nice of you to come all the way
from California or Penn or Maryland to be here with us today.
I have a lot of questions, and some comments. I guess I
will start with Dr. Pauly. You said that the perfect shouldn't
be the enemy of the good, and we will do what we can, and you
proposed a tax credit scheme. What good will your plan do? What
is the good that your plan does?
Dr. Pauly. I think there is a number of things. The most
obvious one, at least according to our estimates, is it would
cause a substantial number of the currently uninsured to
purchase or obtain insurance because it would make it
affordable for them. Second, it would put in place--at least
the version we have that would offer this credit to people who
got insurance, no matter how they got it--it would put in place
the appropriate neutral incentives for people to decide how to
get their insurance. If their employer can arrange insurance in
an attractive way, then that is an appropriate way for people
to obtain their insurance in a group, and group insurance is
actually one of the greatest inventions known to mankind.
On the other hand, particularly small groups and distracted
small employers don't do a very good job of arranging
insurance, and when they do buy the insurance, their employees
hate it. And I guess our thought here is that by giving those--
instead of under the current situation, offering a tax-related
bribe to let your boss arrange your insurance, if you could get
the same tax credit either way, then the harried small employer
and the irritated workers might be better off going to a non-
group, at least a non-employment-base group setting or maybe an
individual setting. So I think those are probably the two main
advantages, that it would help everybody who needs serious help
to get insurance, and it would set in place incentives for them
to make the right choices about where to get that insurance.
Mr. McCrery. About what percentage of the uninsured do you
estimate would get insurance under this plan?
Dr. Pauly. Well, our ballpark estimates would be for the
kinds of credits we propose, it would be more than half of the
uninsured, probably on the order of 60 percent or so because
the credits are on the order of 55 to 60 percent of the
premium.
The other point though that I think is important to make,
although I wish I could tell you more about it, we are
convinced that above and beyond the design of the credit, the
other absolutely most important thing is kind of the marketing
of the insurance. If you follow the Medicaid and make the
subsidy hard to get, if people have to have a face-to-face
interview, as they do in New York, in order to establish
eligibility, you will have the same experiences with Medicaid.
And the simple thought, and my modest proposal, is if you mail
people these coupons, you can use the power of private
enterprise to market its product. After all, those coupons
don't turn into money until an insurer sells a product. And I
have hope--or maybe it is faith--that that would
substantially--that would be a better way--a good way of
getting to the uninsured and reminding them of the value of
insurance as opposed to the sort of public service announcement
approach, which we tend to do for Medicaid.
Mr. McCrery. Have you estimated the cost of your proposal?
Dr. Pauly. No, I have not. It will be high though if you
offer credits of that order of magnitude to everyone, although,
as I said in my remarks, I think the right way to look at that
is as a tax cut, and it potentially could substitute for the
less-directed tax cuts that are currently being contemplated,
could be included in that.
Mr. McCrery. Fine. Does your proposal do anything about
cost and the health care system?
Dr. Pauly. It would help to lower the administrative costs.
If you subsidize insurance, then insurers have to put much less
resources into persuading people to buy it. It will sell
itself, and if it sells itself, you don't have to pay
commission to an insurance agent.
As to overall health care costs, there is, of course, the
general belief that if you offer people neutral incentives,
they may choose policies that are more cost containing, because
there is no longer a subsidy at the margin, and so high-
deductible policies, medical savings accounts, or even fairly
strict managed care plans, where you are being rewarded for the
bother by having a lower premium. So I think that would be the
main impact.
My view of what is currently happening is that the rises in
health insurance premiums are largely driven by the increased
spending on new drugs, which I think the market has already
told us--since most employers are not cutting back--workers
really value that coverage. And so I think it is not important
not to focus too much on cost, or spending growth, as if it
were necessarily evil. What you want to do is get the right
rate of spending growth--and here again, it is kind of the
economists' perspective--if you get the incentives right, which
what I am talking about would do, neutral tax credit proposals,
then whatever rate of spending growth comes out of that you can
feel reasonably confident is the right rate.
Mr. McCrery. Well, let me just interject. I don't think
costs are evil. I just think we need to do a better job of
containing costs. Otherwise, we are going to find ourselves
with public policy makers containing cost for the system, and
that----
Dr. Pauly. Well, I think we need to do a better job of
convincing ourselves, if we can, that the costs we are
incurring are worth the--the benefit is worth the cost.
Mr. McCrery. Exactly. But that should be up to the
marketplace and not up to government to decide how much we
should spend on health care.
Dr. Pauly. That is right.
Mr. McCrery. If hundreds of thousands of individuals every
day in the marketplace decide they want that drug, then they
can pay for it. But for us to create a global budget and say
everything has got to fit within this global budget, it is a
recipe for dumbing down the health care system, in my opinion.
Dr. Pauly. Yeah. I have been trying to get investors for my
new HMO, whose slogan is going to be, ``Last year's technology
at last year's premiums.''
[Laughter.]
And I haven't gotten very far, so I think there are worst
things than growing premiums. It depends on what the money goes
for.
Mr. McCrery. Right. But again, if you allow those premiums
to be generated by private decision-making, you are probably
going to have more money spent on health care than if we create
a budget for it, and the quality of health care is likely to be
better as a result. Do you have a problem with that?
Dr. Pauly. No, I don't.
Mr. McCrery. Ms. Singer, welcome back. It is nice to see
you again, both you and Dr. Pauly, who have been kind enough in
the past to suffer through my questions and educate me a little
bit about health care and health insurance.
You propose a cap on the tax exclusion. Do you know where
you would put the cap? Would it be $5,000 or the average cost
of a policy, or where would you put the cap?
Ms. Singer. What we propose more specifically in our plan
is to phase down the current tax exclusion. We would start at
double the price of the median plan, and we would reduce that
over a 10-year period to the price of--essentially the price of
a median plan, that is actually the price of last year's median
plan plus 5 percent, which we assume will account for
increasing premiums.
Mr. McCrery. OK. So eventually you would get to allowing
the tax exclusion for up to the cost of an average plan
basically. And you would do that to foster the consumer seeking
value?
Ms. Singer. Well, actually, to encourage employers to offer
employer contribution policies that would encourage consumers
to seek value, yes.
Mr. McCrery. Wouldn't it be more effective if consumers
themselves were shopping for their own value? In other words,
rather than having the employer do all the work in coming up
and saying, ``Here is your product'', wouldn't it be more
effective from a seeking value standpoint, if each consumer
were out in the marketplace shopping for that product?
Ms. Singer. Do you mean paying for 100 percent of the
premium?
Mr. McCrery. Sure.
Ms. Singer. Actually, the important point is that the
consumers pay the marginal cost--the difference between the
prices of different plans. So it is important that consumers
have choices, but absolutely every choice may be more
detrimental if this creates a bewildering array of choices.
Mr. McCrery. I understand that. But assuming that we could
put in place a structure somewhat like you suggested so that
consumers would have a marketplace kind of a store to go to to
shop and choose from among a variety of plans,wouldn't it be
more effective from a value standpoint and getting value in the
marketplace, to have each of those consumers going and making those
decisions themselves, rather than the employer doing it?
Ms. Singer. Absolutely. Individual choice is very
important.
Mr. McCrery. Yes, I agree, individual choice is important,
but isn't it also important in terms of cost in the system,
making the consumer aware of the true cost of purchasing that
health care?
Ms. Singer. Yes, absolutely. If consumers are aware of the
differences in the prices of plans, they are more likely to
seek value when they choose their plans, and we hope that this
will encourage consumers to begin to demand value. When the
consumers demand value, then the providers who are providing
services to those consumers see it in their interest to begin
to try to provide value, and that is a big part of what is
missing now. Both the consumers and the providers don't see it
in their interest to seek value, and so the health care
delivery system isn't cutting costs where it is possible to cut
costs and still either improve quality, or at least not harm
quality.
Mr. McCrery. I couldn't have said it better myself.
Ms. Singer. Thank you.
Mr. McCrery. Very well stated. Mr. Larsen, you talked about
some other--I don't know what State it was; maybe it was
Maryland, maybe another State, and somebody went out in the
market and bought a product in the small group market and it
cost X, and then somebody went out in the individual market and
bought essentially the same product, and it cost 2X. Is that--
--
Mr. Larsen. Yes. That was a comparison done by one of the
States for roughly a comparable policy between small group,
individual market.
Mr. McCrery. In that small group market, was that composed
of employer groups?
Mr. Larsen. Yeah. The small group markets generally is
groups up to either 25 or 50, generally 50, with a number of
reforms wrapped around that market to make sure that there is
access, renewability.
Mr. McCrery. Are the employers in that group under ERISA?
Mr. Larsen. The small group is generally a regulated
market, so that is the insured market that States can regulate,
yes.
Mr. McCrery. So they are subject to the same mandates that
the individual market would be?
Mr. Larsen. Yes.
Mr. McCrery. Have you--do you have any studies that tell us
the increase in cost due to State mandates?
Mr. Larsen. I can get that to you. The Maryland Health Care
Commission actually has done a study on the marginal cost of
mandates, Maryland being, I guess, some would say for better,
some would say for worse, the king of the mandates. That study
demonstrated that it was actually a relatively small, meaning
less than 5 percent marginal cost due to the mandates. I know
there is a lot of generalized discussion that mandates add a
lot of cost, but in fact, at least in Maryland we have found
that that was not the case. And I would be happy to get that
study to you.
Mr. McCrery. Yes, I would like to see that. Did any of the
other panelists say anything on the increased cost due to State
mandates?
[No response.]
Mr. McCrery. No. And you mentioned some reforms in the
small group market, and I believe one of the reforms was
community rating within that market.
Mr. Larsen. Yes. Some States have pure community rating,
and some have modified community rating, right.
Mr. McCrery. And I know some States, New York I guess being
the best example, mandated community rating in their insurance
industry, and you saw insurance companies leaving the State,
and some say because of the community rating mandate. And while
that is true, part of that, I suppose, was because they could
go elsewhere, they could go to other States that didn't have
community rating and sell their products and make more money.
And so they left. What if we had community rating on a
nationwide basis, wouldn't that solve a lot of the problems
that we have in the insurance marketplace today?
Mr. Larsen. Well, I think it might solve the particular
problem that you are referring to, in that it then doesn't make
sense to move to a neighboring State because the rules are the
same. There are a lot of issues surrounding community rating,
how to do it, what the particular characteristics of the
marketplace are. I think that is why some States have pure
community rating and some States have modified community
rating. And I think it is why States regulate insurance, why we
have a State system of regulation, is that marketplace do vary
from State to State. But in answer to your question, if the
particular problem you are trying to solve is leaving one State
because I can get a better deal in the next State, I think that
would address it, but it might raise a number of other issues.
Mr. McCrery. Well, it would negate the need for assigned
risk pools and all that that we do to try to cover people that
can't get insurance in the regular market, wouldn't it?
Mr. Larsen. I am sorry?
Mr. McCrery. If you do nationwide community rating, it
would solve the problem of assigned risk pools, trying to come
up with some device to get products to people that can't get
them in the marketplace today, they are too expensive?
Mr. Larsen. Again, I think community rating has benefits
and disadvantages, and there are some--there are definitely
some advantages to it and some disadvantages to pure community
rating. I guess it is hard for me to speculate what the effect
of a national community rated system will be.
Mr. McCrery. Anybody else on the panel have any thoughts
before I give it to Mr. Pomeroy?
Mr. Etheredge. I think where you are going is asking the
question:--if government comes up with a tax credit, how much
regulation do we need from the Federal level of this market? If
you start with the assumption that you want as much regulation
as possible left at the State and local level, rather than have
the Federal government getting into that, there are two basic
sets of rules I think are needed to make a tax credit work. One
is availability of the product, and there I think you can
extend the HIPAA rules and say no preexisting condition
exclusion. So the tax credit eligible groups get the HIPAA
protection. That makes the insurance available.
The other set of rules is rating rules. There could be a
community rating standard, since we have a level tax credit.
You can add one more rule, and that is that, if a State is
going to allow insurance companies to depart from community
rating, it would need to provide subsidies that match those
rating rules. So if a State allows age and sex variations, it
has to come up with the money, maybe with a Federal matching
equalization fund that adjusts the credits for those factors.
If insurers have a geographic difference in premiums, a State
has to provide for this difference in adjusting the credit.
So HIPAA has to make available the policies, and basic
rating rules so that the tax credit matches the premium. I
think those are at least the two logical essentials.
Mr. McCrery. OK.
Dr. Pauly. I presume you would have to allow for some
geographic variation in the premium. If you had a national
uniform standard, you would reduce the number of insured in New
York, but raise them in Louisiana. So some kind of modified
community rating would probably not do a great deal of harm,
although I personally think it wouldn't do a great deal of good
for the number of uninsured. It would change the composition of
the uninsured population to be more higher risks and fewer
lower risks, and maybe some people would think that is an
improvement, but I doubt it would affect the head count very
much.
My own belief is that an awful lot can be done to solve the
problem of what happens to high risks by putting more emphasis
on guaranteed renewability and on the idea that people should
be subsidized to buy insurance while they are still low risk,
and have that insurance contain the provision, as it required
by HIPAA now, even for individual insurance, that if you remain
insured, your premium cannot be increased by more than the
average for your group, and that effectively protects you
against the disaster of being a high-risk person and not being
able to obtain insurance at reasonable premiums.
So the problem with community rating, of course, in the
extreme version, is people only buy insurance when they think
they are going to be sick, which of course, then makes it very
expensive for everyone. So, personally, I would rather see much
more emphasis on guaranteed renewability and that type of
device before we go to community rating, and then if it turns
out--as I said in my remarks, you need to be flexible--if it
turns out that there is still a substantial number of high-risk
people without coverage, then we might think of what best to do
for them. But in some sense, by definition, the number of
people who are unusually high risk is bound to be a small
fraction of the total population, and it does seem a bit
disproportionate to me to want to restructure the whole
insurance market just to deal with that small fraction. Perhaps
they can be handled reasonably well with a properly run high-
risk pool, coupled with guaranteed renewability to make sure
that most people don't get in that pool.
Mr. McCrery. Well, thank you very much. I certainly
wouldn't go to a community rating standard absent significant
other reforms, such as an individual mandate to purchase and
other things that would solve our problem. So I didn't mean to
imply that we should just change that element of the market.
Well, thank you all very much for your testimony and for
responding to our questions, and we look forward to working
with you as we try to solve the problem of the uninsured, and
other problems in our health care system.
Thanks.
[Whereupon, at 12:36 p.m., the hearing was adjourned.]
[Questions submitted by Mr. Crane, and Dr. Pauly's response
follow:]
Wharton School, University of Pennsylvania
Philadelphia, Pennsylvania 19104-6218
April 12, 2001
1. It is my understanding that a non-refundable tax credit can
achieve the same tax result produced by an appropriately tailored tax
deduction. Would you elaborate more on this similarity?
Both a tax credit and a tax deduction can reduce taxes by the same
amount for a given individual, so in that sense both can produce the
same result. For example, if I am in the 28% marginal income tax
bracket, my taxes would be equally affected by a $1000 credit or
permission for me to take a $3571 deduction. However, the difference is
that a given dollar tax credit produces a uniform tax reduction to all
who are eligible, whereas a given dollar deduction produces different
amounts of tax reduction depending on the person's marginal tax rate.
If one wanted to reproduce the credit's effect with a deduction, one
would have to have limits on the deduction that varied inversely with
the marginal tax rate, which would be complicated. More generally,
deductions tend to offer lower tax reductions to lower income tax
payers who pay lower marginal rates, while credits can be made uniform
or made to increase as income falls. Deductions also are often limited
to those who itemize on the individual income tax return, while credits
need not depend on how a person calculates their income taxes.
2. Are there differences in the cost associated with providing a
tax credit vs. a tax deduction?
If a tax deduction and a tax credit both provided the same tax
reduction to a given individual for the same activity (e.g., obtaining
a specific health insurance policy), both devices would have the same
budgetary cost and the same real resource cost.
3. Can you discuss more the differences between refundable and non-
refundable tax credits?
Refundable tax credits provide a money refund to individuals whose
credit exceeds the value of their tax obligations. Compared to a non-
refundable credit, refundable credits permit larger subsides to be
directed to people with low tax liabilities.
4. Isn't it true that a refundable tax credit could yield a
negative income tax, which would be the equivalent of an appropriation?
A refundable credit could produce a negative tax balance to an
individual whose credit exceeded that person's income and payroll tax
liabilities. The Treasury treats this as an appropriation. There is,
however, an economic difference between ``appropriations'' which simply
transfer income to individuals and appropriations which go to pay for
public expenditures that draw real resources out of the private sector
for public purposes.
5. In your opinion, are there instances where refundable tax
credits could become a mandatory entitlement program?
Since any tax credits I have considered have been defined in dollar
terms and are under the control of the legislature, I find it hard to
see how they could become entitlement programs--unless the Congress
wanted to set up an entitlement program.
Sincerely Yours,
Mark V. Pauly
Chair
[Submissions for the record follow:]
Statement of Advanced Medical Technology Association
AdvaMed is pleased to present this testimony on behalf of the
world's leading medical technology innovators and the patients we
serve. AdvaMed represents over 800 of the world's leading medical
technology innovators and manufacturers of medical devices, diagnostic
products and medical information systems. Our members are devoted to
helping patients lead longer, healthier and more productive lives
through the development of new lifesaving and life-enhancing
technologies.
AdvaMed shares the concerns of the Members of Congress, the
Administration and millions of working Americans about the number of
people in our country lacking access to affordable health insurance
today. Our nation enjoys the best health care system in the world, and
everyone should have full access to it. While today's market-based
system provides insurance coverage to the majority of Americans, and
along with it access to most of the latest, breakthrough technologies,
some 43 million Americans are currently uninsured.
To bridge the current gaps in insurance coverage, AdvaMed has
consistently supported maintaining tax incentives to encourage
companies to offer health benefits to their employees, as well as
expanding tax incentives to allow individuals to more affordably
purchase coverage. As supporters of market-based health care and
competition, AdvaMed also believes consumers should have a wide choice
of health plans and coverage options that allow them to select those
that best fit their needs.
To expand the number of choices available, AdvaMed supports the
creation of Individual Membership Associations or Association Health
Plans to allow groups to leverage size for more affordable health
options, as well as the expansion of Medical Savings Accounts, which
have already helped address the insurance needs of a select group of
previously uninsured Americans. To address the many problems facing
individuals with uninsurable medical conditions, AdvaMed also supports
efforts to encourage states to offer ``risk pools'' that help them
access insurance that will meet their complex and costly health care
needs.
America is on the cusp of a revolution in medical technology.
Through advances in technology we can detect diseases earlier when they
are easier and less costly to treat, provide more effective and less
invasive treatment options, reduce recovery times and enable people to
return to work much more quickly. Insurance coverage and adoption of
medical advances is crucial not only for the health of America's
insured workers, but also helps lower overall health care costs.
Medical technology has advanced to the point where it is
fundamentally transforming our health care system in ways that improve
quality and reduce costs. For example:
Three types of laparoscopic surgery have generated
approximately $1.9 billion annually in increased productivity by
enabling people to return to work more quickly, according to a study by
DRI-McGraw Hill.
Angioplasty and other minimally invasive heart procedures,
for example, have greatly reduced the need for riskier, more expensive
heart bypass procedures. An angioplasty procedure costs $20,960 on
average, compared to $49,160 for open-heart surgery. Surgeons can
complete an angioplasty procedure in 90 minutes compared to 2-4 hours
for open bypass surgery. Patients can leave the hospital in one day
instead of 5-6 days, and recovery only takes one week rather than 4-6
weeks for bypass.
Total knee replacement produces an average one-time health
care cost savings of $50,000 per patient; a savings of $11.5 billion in
1994 alone, according to the American Academy of Orthopedic Surgeon
(AAOS).
A recent article in the Washington Post highlights another of the
many advances transforming health care delivery: a health care
information system that alerts doctors at Brigham and Women's hospital
to potentially dangerous medical decisions. The system has cut the
medication error rate at Brigham by 86% compared to 10 years ago.
Information systems like these can dramatically improve the safety
and efficiency of health care delivery and help reduce health care
costs. Automation in the insurance industry alone could save an
estimated $20 billion. That is why both the President's Information
Technology Advisory Committee and the Institute of Medicine in its
recent report on health care quality have stressed the need for a new
health information infrastructure.
Steady declines in mortality rates, medical procedure times,
hospital stays and patient recovery times all illustrate the emergence
of the New Health Economy. Gains in workforce productivity and
accelerating declines in disability rates point to this shift as well.
In order to reap these benefits, advanced medical technologies must
be rapidly assimilated into the health care system. The Institute of
Medicine's recent report, ``Crossing the Quality Chasm,'' underscored
this point, stating: ``Narrowing the quality chasm will make it
possible to bring the benefits of medical science and technology to all
Americans in every community and this in turn will mean less pain and
suffering, less disability, greater longevity, and a more productive
workforce.''
In a recent statement on the Medicare Trustees' Report, Treasury
Secretary and Medicare Trustee Paul O'Neill cited this IOM report in
highlighting ``tremendous potential for improvements in the health care
sector.'' AdvaMed shares this concern, as well as Secretary O'Neill's
understanding of the importance of adopting new technologies and
medical practices that can transform the health care sector by
improving quality and reducing costs. As Chairman of Alcoa, O'Neill
championed the adoption of so-called ``disruptive'' technologies as the
solution to rising health care costs. In a recent Forbes article,
O'Neill stated: ``It is possible to improve the health and medical care
value equation by as much as 50%.''
Again, AdvaMed applauds Congress for addressing the many needs of
the uninsured in America. We look forward to working with the Congress
and the Administration on efforts to help increase access to affordable
coverage, as well as improve the quality, efficiency and cost
effectiveness of the health care system through innovative medical
technology.
Statement of American College of Physicians--American Society of
Internal Medicine
The American College of Physicians--American Society of Internal
Medicine (ACP-ASIM or ``the College'') represents over 115,000
physicians who specialize in internal medicine and medical students
with an interest in internal medicine. ACP-ASIM's membership includes
practicing physicians, teaching physicians, residents, students,
researchers, and administrators who are dedicated to assuring access to
high quality medical care for all Americans.
We appreciate this opportunity to present our comments on the needs
of uninsured Americans and we are pleased that the Subcommittee on
Health is addressing specific steps to facilitate access to health
insurance coverage for the nation's uninsured population.
As physicians, the primary mission of our members is to care, to
heal, to advocate for the sick, and to promote the good health of the
individual and the nation. On a daily basis, internists see the delayed
treatment and poorer health that results from a lack of insurance. The
College believes that it is unconscionable for the United States to
allow tens of millions of its citizens to go without health insurance
simply because they cannot afford it.
In 1999, ACP-ASIM launched a major campaign to address the problem
of the uninsured. Our campaign has included athree-pronged effort of
research, public education and advocacy: research on the health
consequences of a lack of insurance; a public education campaign to
inform policymakers, candidates, and the public about the adverse
health consequences of being uninsured; and advocacy of core principles
and a sequential plan on how the health care system should be reformed
to achieve affordable access to care for all Americans.
The College's plan to expand health insurance coverage includes the
expansion of public programs, the implementation of a refundable tax
credit, and other measures. ACP-ASIM will continue to press for
solutions until we have achieved affordable, accessible health
insurance for all Americans.
America's Uninsured Population
The latest statistics from the Census Bureau indicate that roughly
one out of every six non-elderly Americans or nearly 43 million people
in the United States--have no health insurance. Millions more have some
health insurance, but lack adequate coverage to provide financial
access to needed health care or sufficient protection from catastrophic
medical expenses.
Nearly two-thirds of the nation's uninsured persons
live in a family with an income less than 200% of the federal
poverty level (FPL). Thirty percent live in a family with an
income between 100 and 199% FPL and another 35% live in a
family with an income less than 100% FPL. In 2000, FPL for a
single person was $8,959 and $17,761 for a four-person family.
More than 80 percent of the uninsured are in working
families, but 60% are not offered employer-based health
insurance coverage. These families must choose between a
doctor's appointment and feeding their families, buying
medicine or paying the rent.
Not all low-income persons are eligible for public
coverage. Even with an income as low as $4,000 per year, adults
with no children do not qualify for Medicaid coverage. In 11
states, no non-disabled adult without a child can qualify for
Medicaid.
Hispanic Americans comprise more than one-quarter of
the total uninsured population, though they account for only
12% of the total population. Hispanics have been consistently
over-represented in the uninsured population. Given the current
projected growth in the Hispanic population, the number of
uninsured and the proportion of the U.S. population that is
uninsured are also expected to increase through 2050.
Ten million children under age 18 are uninsured,
including 2.8 million poor children living in families with an
income below 100% FPL. Over seven million children under age
19, living in families with an income at or below 200% FPL, are
uninsured.
A combination of strategies is required in order to adequately
provide insurance coverage to America's uninsured population. Poor
children may benefit from expanded outreach efforts for Medicaid
enrollment. Poor adults (with or without children) may benefit from an
expanded Medicaid program, including a broader definition of
eligibility. Working near-poor persons may benefit from a properly
designed health tax credit. It is unlikely that any one specific
proposal will work best for each person included in the diverse
population of uninsured Americans.
Health Consequences of a Lack of Insurance
The lack of health insurance has important health and financial
consequences for both the individual and the nation. Millions of
Americans are unable to receive the care they need, which endangers the
health and lives of all patients, adds cost to the health care system,
and reduces productivity. Missed or delayed care may result in
unnecessary morbidity or mortality and greater severity of illness.
Delays in seeking care are particularly damaging in diseases such as
cancer and diabetes for which diagnosis and treatment during early
stages may prevent further complications and prolong survival.
Medical treatment for the uninsured is often more expensive than
preventive, acute, and chronic care of the insured because the
uninsured are more likely to receive medical care in the emergency
department than in a physician's office. According to the National
Center for Health Statistics, non-urgent cases accounted for more than
50% of the 90 million visits to U.S. hospital emergency departments in
1992. These increased costs are absorbed by providers as free care,
passed on to the insured via cost shifting and higher health insurance
premiums, or paid by taxpayers through higher taxes to finance public
hospitals and public insurance programs.
The inability of the uninsured to access preventive care also
increases the nation's health care costs. For example, uninsured
pregnant women typically seek prenatal care late in the pregnancy, if
at all, and this increases the probability that newborn care will occur
in a neonatal intensive care unit. Another example is the failure to
detect and treat hypertension in its early states, which increases the
likelihood of hospitalization and care in the intensive care unit for
stroke, myocardial infarction, or congestive heart failure. The failure
to prevent these complications results in loss of productivity and
increased costs of medical care. In consideration of these facts alone,
it is clear that insuring the uninsured is in everyone's best interest.
Making preventive medicine and existing treatment therapies
accessible to uninsured people will not only increase overall access to
health care but may also substantially contribute to a reduction in the
total burden of illness facing the United States.
Evidence of Health Consequences
ACP-ASIM conducted an extensive literature search to document the
evidence of a relationship between a lack of health insurance and a
reduced access to care and poorer medical outcomes. We identified more
than 100 scientific studies that adjusted for factors other than
insurance in order to focus on the link between the lack of health
insurance and access to care and medical outcomes.
The results of these studies confirmed what doctors know from their
own practice experiences: people without health insurance tend to live
sicker and die younger than people with health insurance. Our results
were published in our first report called, ``No Health Insurance: It's
Enough to Make You Sick.'' (All College reports mentioned in this
statement are available at www.acponline.org/uninsured.)
Evidence from the available medical and scientific literature
suggests that:
Uninsured Americans are three times more likely than
the insured to experience an avoidable hospitalization for
diabetes and two times more likely for hypertension.
Uninsured people are more than three times more
likely to die in the hospital than the insured.
Uninsured men are one and one-half times more likely
than the insured to be diagnosed with prostate cancer at a late
stage.
Uninsured adolescents between the ages of 10 and 18
are four times more likely to have unmet health needs, four
times less likely to get dental care, four times less likely to
get needed prescriptions, and four times less likely to get
needed eyeglasses.
Uninsured children under 17 are nearly two times
less likely to receive medical treatment for common childhood
illnesses, such as sore throat or tonsillitis, acute or
recurrent earache, or asthma.
Uninsured children are up to 40% less likely to
receive medical attention for a serious injury.
Our second report, ``No Health Insurance? It's Enough to Make You
Sick: Latino Community at Great Risk'' focused on the evidence of the
unmet health needs of America's Latino population, the nation's fastest
growing minority group and the largest uninsured population:
Uninsured Latino women with breast cancer are more
than twice as likely to be diagnosed at a later stage compared
to uninsured non-Latino women.
Uninsured Latino men with prostate cancer are almost
four times more likely to be diagnosed at a later stage than
uninsured non-Latino men.
Uninsured Latino children with asthma are six times
more likely not to receive standard medical treatment than
uninsured non-Latino children.
Our third and most recent report, ``No Health Insurance? It's
Enough to Make You Sick: Uninsured Women at Risk'' highlighted evidence
of consequences experienced by uninsured women:
Uninsured women are up to five times more likely
than the insured to report unmet health needs.
Uninsured women aged 50-64 are two times less likely
to have had a recent mammogram, two times less likely to have
had a recent Pap test, and two times less likely to have had a
recent clinical breast examination.
Uninsured women with breast cancer, compared with
the insured, have a 49% higher adjusted risk of death.
Uninsured women, ages 18 to 64, experience nearly
twice the risk of in-hospital death than all insured patients.
Uninsured pregnant women are three times more likely
than insured women to report not receiving the recommended
number of prenatal visits and have a 31% higher likelihood of
an adverse hospital outcome at childbirth.
Arguments that uninsured Americans receive the same levels of
medical care as insured Americans, despite their lack of coverage, are
contradicted by these studies. Research has clearly demonstrated that
having health insurance makes a difference in health care for
Americans. The uninsured--even those who are sick, chronically ill, or
who have special health care needs--get less health care than those who
have insurance. Many studies have shown that increasing coverage
improves access to care.
Evidence from the available medical and scientific literature also
clearly demonstrates that uninsured Americans experience poorer medical
outcomes. A lack of insurance is associated with a delay in seeking
care, disease progression, and reduction of the likelihood of a
favorable outcome or survival. It is also associated with the increased
probability of avoidable hospitalizations for manageable illnesses
(some of which are risk factors for the leading causes of death), a
generally higher mortality level, and specifically higher in-hospital
mortality.
Uninsured children are particularly vulnerable to reduced levels of
medical care for normal childhood illnesses such as a sore throat,
earache (which, left untreated, can lead to hearing loss and speech and
language deficits), and asthma, in addition to reduced levels of
medical care for serious injuries or acute illnesses such as
appendicitis.
Lack of insurance contributes to the endangerment of the health of
each uninsured American as well as the collective health of the nation.
Because lack of insurance is as much a risk to the public health as
smoking, alcoholism, and obesity, this national crisis merits the
nation's immediate attention.
Strategies for Reducing the Number of Uninsured
The College understands that it is not enough just to educate
voters and policymakers on why it is important that everyone have
access to affordable healthcare, we must also suggest how to improve
access to care for all uninsured Americans.
Early in 1999, the College released a package of proposed reforms
that sought to use the federal tax code, existing government programs,
and some new subsidies to help reduce the number of uninsured. During
the past decade we have identified a number of steps that could be
taken to improve access to health insurance. ACP-ASIM urges the
Subcommitee on Health to consider ways to achieve the long-term goal of
assuring that all Americans can obtain affordable, accessible health
insurance coverage.
The following proposals should be considered as part of a
comprehensive, sequential plan of action that will lead to coverage for
all Americans:
Enact refundable tax credits to expand coverage for
lower-income Americans;
Expand Medicaid to cover all individuals at or below
100% of the poverty level;
Increase funding for outreach to encourage eligible
children and families to enroll in Medicaid and the S-CHIP
(Child Health Insurance Program);
Provide subsidies for those individuals who are
eligible for COBRA coverage but cannot afford it;
Establish a defined timeframe for achieving
affordable coverage for all Americans; and
Include an ongoing plan of evaluation to assure
progress.
This multi-faceted approach recognizes that there is not just one
way to expand health insurance coverage for all Americans. Expansion of
Medicaid and the S-CHIP program will work well for certain segments of
the population. Refundable tax credits will work well for individuals
whose income is above poverty but not sufficient to purchase insurance
in the marketplace.
Tax Credit Legislation to Purchase Health Insurance
There are several important considerations on how a tax credit
should be designed to assure that it is effective in reaching the
targeted population of low-to-moderate income Americans.
The tax credit should include an advance payment
option, which would enable taxpayers to receive monthly
payments to offset premium costs, rather than having to wait
until their taxes are filed to obtain credits.
The credit should be refundable, meaning that
individuals who have no federal income tax liability would
still be able to qualify for the credit.
The credit needs to be high enough to subsidize 90%
or more of the costs of purchasing health insurance coverage,
since a smaller credit will not be enough to make coverage
affordable for many lower-income individuals.
The College is pleased that President Bush has proposed an income
tax credit for the purchase of health insurance for individuals under
age 65 that is refundable. The College also supports the advance
payment option, which would make the tax credit available at the time
the individual purchases health insurance. In addition, ACP-ASIM
supports the proposal that the tax credit equal 90% of the health
insurance premium. We hope, however, that the maximum credit will be
raised above the current proposal of $1,000 per individual covered by a
policy and $2,000 per family.
The Commonwealth Fund reports that the median family income of
those with an income less than 100% FPL is $5,636 and those with an
income 100-199% FPL is $18,324. If an average insurance policy covering
a single employee under 65 cost $2,424 and a family policy cost $6,348
in 2000 (as reported by Gabel et al, ``Job-Based Health Insurance in
2000: Premiums Rise Sharply While Coverage Grows,'' Health Affairs 19,
Sept./Oct. 2000: 144-151), it would be nearly impossible for these
individuals and families to purchase health insurance coverage on their
own with the President's proposed maximum credit. On average, health
insurance premiums would consume 25% of the family income for poor and
near-poor families; however, the premiums may take even 40% or more of
the family's income.
ACP-ASIM recommends that the Subcommittee consider reporting a tax
credit bill that is modeled after the provisions in the Relief, Equity,
Access, and Coverage for Health (REACH) Act (S. 590), introduced by
Senator James Jeffords (R-VT), Chair of the Health, Education, Labor
and Pensions (HELP) Committee. The REACH bill includes refundable and
targeted tax credits with an advance payment option. The College
suggests, however, that a higher premium subsidy than is currently
proposed be recommended by this Subcommittee.
Making the credit refundable means that even those individuals with
no federal income tax liability would still qualify for the full tax
credit. REACH targets those who face the greatest financial barriers to
purchasing insurance, thereby using federal funds judiciously and
avoiding ``crowding out'' or substitution of employer-provided
insurance for insurance purchased by individuals using the tax credit.
``Crowding out'' becomes a danger when individuals make more than 200%
of poverty and are more likely to have employer-provided insurance.
Implementing an advance payment option that means the value of the
credit would be available at the time the premium is paid by the
employee, e.g., when payments are due, not at the end of the year. ACP-
ASIM believes that a tax credit bill modeled after the REACH proposal
will minimize disruption in both public--and employer-provided coverage
by building on, rather than replacing, the current system.
The REACH Act provides a $2,500 tax credit for couples that make up
to $55,000 a year and have no access to employer-provided insurance.
Individuals who earn up to $35,000 would receive a $1,000 credit.
Smaller credits are available to individuals and families whose
employers provide health insurance. ACP-ASIM is concerned, however,
that the amount of the tax credit provided by the REACH bill may still
be too low to make coverage affordable to many low-income families.
Therefore, ACP-ASIM strongly encourages this Subcommittee to report a
bill, modeled after the REACH proposal, that would include a higher
premium subsidy to assure that the tax credit is sufficient to make
insurance affordable for those most in need.
Expansion of Access through Medicaid and S-CHIP
Tax credits will be more effective if combined with expansion of
Medicaid and the S-CHIP program. Congress should recognize that a tax
credit, by itself, would still leave millions of Americans without
access to affordable health insurance coverage. Tax credits may be
useful to many Americans whose incomes are between 100 and 200% of the
federal poverty level, but other strategies to increase access to care
work better for the population below poverty.
The College therefore recommends a combined approach of tax
credits, public program expansions, and increased funding for outreach
to make coverage available to all Americans with incomes up to 150% of
the federal poverty level.
ACP-ASIM believes that Medicaid and S-CHIP programs
should be expanded to include all adults with incomes below the
federal poverty level.
The College will soon be publishing a policy monograph that
proposes a strategy for expansion of Medicaid and S-CHIP programs. The
recommendations include: establish a uniform income-based eligibility
limit for enrollment in Medicaid (equal to 100% of the federal poverty
level); increase in the federal contribution level to make it possible
for states to enroll all low income persons; initiate a process to
establish a uniform nationwide floor on benefits covered under Medicaid
and S-CHIP; eliminate administrative barriers that inhibit enrollment
and participation; and increase Medicaid reimbursement to physicians to
assure adequate access to physician services. A copy of the monograph
will be provided to this Subcommittee.
ACP-ASIM also recommends increased funding for
outreach since the numbers enrolled in both Medicaid and S-CHIP
fall short of those eligible.
Outreach programs are designed to make already-eligible individuals
aware of their eligibility for coverage under either the Medicaid or S-
CHIP program. Lack of knowledge concerning coverage options is one of
the principal reasons that millions of Americans who are eligible for
Medicaid or S-CHIP coverage remain uninsured. The ability of states to
educate potential enrollees about their options has been hampered by
inadequate funding for outreach programs.
ACP-ASIM also advocates that states and the federal
government institute administrative changes to make enrollment
in Medicaid and S-CHIP a simpler option for potential
enrollees.
Complex and lengthy enrollment procedures and forms serve as a
significant barrier to enrollment in the Medicaid and S-CHIP programs.
Congress could increase enrollment by providing states with funding and
direction to develop ways to simplify the process of enrolling
individuals in both the Medicaid and S-CHIP programs.
Conclusion
The 107th Congress will have a unique opportunity to finally tackle
the issue of lack of health insurance. This Subcommittee on Health is
to be praised for taking the initiative now to pave the way for
constructive action next year.
ACP-ASIM believes that a combination of approaches, including
refundable tax credits for low-wage workers, expansion of Medicaid and
S-CHIP programs to all individuals below the federal poverty level,
increased funding for outreach, and simplified enrollment procedures,
would represent a major step forward in making affordable health
insurance coverage available to those most at risk of being uninsured.
However, ACP-ASIM believes that such reforms be included as part of
an overall sequential package that will lead to coverage for all
Americans by a defined date, rather than being treated as stand-alone
incremental measures. Later this year, ACP-ASIM will be providing the
Subcommittee with further ideas on making coverage available to all
Americans, in a series of steps, starting with low-wage workers and the
poor.
As a nation we are capable of great things. When we muster our
collective will, no enemy or obstacle can withstand our collective
might. If we all recognize the health risks associated with the lack of
health insurance and if we can all agree that it is a problem that must
be solved, we believe that we can achieve health coverage for all in
the near future. Concern for the health risks of the uninsured is not
an issue for one party or another. The health risks of the uninsured
can and must be addressed by all.
Statement of the American Hospital Association
The American Hospital Association, on behalf of its nearly 5,000
hospital, health system, network and other health care provider
members, submits this statement for the record regarding the hearing on
the uninsured. We applaud the committee's efforts to search for a
solution to the plight of 43 million people living in the United States
without health care coverage. Every day in America's hospitals,
caregivers experience firsthand how the absence of health care coverage
acts as a significant barrier to care, reducing the likelihood that
these patients will receive appropriate and timely preventive,
diagnostic and chronic care services.
As a nation we continue to enjoy a robust economy, despite recent
stock market fluctuations. The Congressional Budget Office is
forecasting a bright outlook for the economy, with federal budget
surpluses projected for the next 10 years. However, a robust economy
and historic lows in the number of unemployed Americans contributed to
only a slight reduction in the numbers of uninsured between 1998 and
1999.
Expanding health insurance coverage and sustaining access to
essential health care services for the uninsured as well as those with
coverage must be at the top of the national public policy agenda. The
American Hospital Association believes that every American deserves
access to basic health care services, services that provide the right
care, at the right time, in the right setting.
To generate greater public attention to the plight of the
uninsured, the AHA has partnered with the Robert Wood Johnson
Foundation and other national associations with diverse interests but a
similar goal: getting health care coverage to the uninsured. Among the
many activities we have participated in are an advertising campaign,
and ``Expanding Health Coverage: Make it America's Priority,'' a
national town meeting broadcast by satellite to more than 200 hospital
sites across the country. This subcommittee's chairman, Rep. Nancy
Johnson, participated in the broadcast, effectively setting the stage
for the congressional debate on the uninsured.
One of the first steps that should be taken to reduce the number of
uninsured is to improve access to coverage for low-income workers and
their families. Eighty-four percent of the uninsured live in families
headed by workers.
Refundable tax credits would give individuals and families the
means and the flexibility to purchase the type of coverage that meets
their needs. Tax credits targeted to low-income families and
individuals will ensure that federal subsidies will benefit those most
in need. The AHA supports legislation such as the Fair Care for the
Uninsured Act of 2001 and the Relief, Equity, Access, and Coverage for
Health (REACH) Act of 2001--both approaches that use refundable tax
credits to make insurance more accessible.
Because the high cost of health premiums is the number one reason
workers decline coverage that is made available by their employer, the
AHA supports tax code changes that would provide employers with a tax
credit to help subsidize the purchase of health care coverage for their
low-wage workers. In addition, the AHA supports allowing the self-
employed to deduct the full amount of their health insurance premiums,
and providing tax credits so small employers can afford to provide
insurance.
While these tax code changes are important steps, more needs to be
done. Coverage expansions should also build on the current successes of
public programs such as Medicaid and the State Children's Health
Insurance Program (S-CHIP). The AHA supports expanding Medicaid and S-
CHIP to single adults and families, including legal immigrant children
and pregnant women.
Still, placing an insurance card in the hands of every American
does not guarantee access to services. The AHA urges that, as attempts
are made to tackle the problem of the uninsured, the committee also
recognize the critical importance of making sure key health care
services remain available. This requires investment in America's health
care facilities, technology and workforce.
The AHA looks forward to working with the committee to expand
health care coverage to the uninsured, and to ensure that high-quality
health care services are accessible to all Americans.
Statement of Blue Cross and Blue Shield Association, Employee Benefit
Research Institute, and Consumer Health Education Council
2000 Small Employer Health Benefits Survey Summary of Findings
This summary presents findings from the 2000 Small Employer Health
Benefits Survey (SEHBS). The survey examines a number of issues related
to small employers (between two and 50 workers) and their decision to
offer--or not offer--health benefits to workers. The goal of the survey
was to gather information to better understand what would make more
small employers offer health benefits. It is a well-known fact that
small employers are less likely than large employers to offer health
benefits. In 1999, 40 percent of employers with between three and 49
workers did not offer health benefits to their employees. In contrast,
nearly all employers with 200 or more employees offered coverage.
Since the vast majority of large employers offer health benefits,
but many small employers do not, small businesses are seen as perhaps
the most crucial factor in efforts to reduce the growing number of
uninsured Americans. There are many reasons why small employers do not
offer health benefits. While small employers report that cost is the
primary reason they do not offer health benefits, many other factors
may also contribute to their lower coverage rates (table 1). For
example, small employers that do not offer health benefits often are
not aware of the value of offering benefits, do not understand how the
tax code provides incentives to offer benefits, and do not understand
how insurance laws have addressed the accessibility and affordability
of health benefits.
The survey was conducted within the United States between May 16
and June 30, 2000, through 20-minute telephone interviews with 506
companies with health benefits and 449 companies without health
benefits. The SEHBS was co-sponsored by the Blue Cross and Blue Shield
Association (BCBSA), a federation of independent, locally operated Blue
Cross and Blue Shield Plans that collectively provide health care
coverage to 75 million Americans; the Employee Benefit Research
Institute (EBRI), a private, nonprofit, nonpartisan public policy
research organization; and the Consumer Health Education Council
(CHEC), a health education organization formed to help the American
public better understand, acquire, and utilize health insurance. Mathew
Greenwald & Associates, Inc., conducted the survey.
The following sections present the survey's findings on various
topics concerning health benefits and small employers. These topics
include the tax treatment of health benefits, knowledge of insurance
regulations, the impact that offering health benefits has on employers,
the difference between employers that do and do not offer health
benefits, worker and family participation in health benefits, the
likelihood that employers will offer health benefits in the future, and
the impact of future costs and tax incentives on employer behavior.
Table 1.--Small Employers Cite Affordability as the Primary Reason for
Not Offering Health Benefits
------------------------------------------------------------------------
Major Minor Not a
Reason Reason Reason
------------------------------------------------------------------------
The business cannot afford it.... 53% 16% 30%
Employees have coverage elsewhere 43 18 35
Revenue is too uncertain to 40 16 43
commit to a plan................
Owner has coverage elsewhere..... 40 13 45
Employees cannot afford it....... 37 17 43
Large portion of workers are 34 15 49
seasonal, part time, or high
turnover........................
Employees prefer wages and/or 30 20 47
other benefits..................
Company does not need to offer a 18 17 63
plan to recruit and retain good
workers.........................
Setting up a plan is too 11 20 68
complicated and time consuming..
Employees are healthy and do not 10 17 71
need it.........................
Do not know where to go for 8 21 71
information on starting a plan..
------------------------------------------------------------------------
Source: EBRI/CHEC/BCBSA 2000 Small Employer Health Benefits Survey.
Tax Treatment
Many small employers make decisions about whether to offer health
benefits to their workers without being fully aware of the tax
advantages that can make this benefit more affordable (chart 1)
57 percent of small employers do not know that health
insurance premiums are 100 percent tax deductible.
65 percent of small employers do not realize that health
insurance premiums are treated like general business expenses with
regard to taxes.
[GRAPHIC] [TIFF OMITTED] T4217A.020
Small employers not offering health benefits are less aware of the
tax treatment than those that do offer health benefits.
59 percent of small employers offering health benefits do
not know that health insurance premiums are treated like general
business expenses, compared with 73 percent of employers that do not
offer health benefits.
Many small employers are not knowledgeable about the tax treatment
of health benefits as it affects their workers (chart 1).
48 percent are not aware that employees who purchase
health insurance on their own generally cannot deduct 100
percent of their health insurance premiums.
37 percent do not know that employees do not pay tax
on the share of their premiums that are paid by their employer.
Small employers offering health benefits are much more likely to be
aware of the tax treatment of employee contributions to health
benefits.
69 percent of small employers offering health
benefits understand that the employer share of the premium is
not included in an employee's taxable income, compared with 53
percent of employers not offering health benefits.
Insurance Regulation
Small employers are largely unaware of the laws that nearly all
states and the federal government have enacted to make health insurance
more accessible and more affordable for many small employers (chart 2).
61 percent do not know that insurers may not deny
health insurance coverage to small employers even when the
health status of their workers is poor.
80 percent do not realize that states have, in
effect, required insurers to spread the cost of insuring small
employers with sick employees across a large pool of workers
through the use of rating restrictions.
65 percent are not aware that there are limits on
what insurers can charge employers with sick workers compared
with employers that have healthier workers.
[GRAPHIC] [TIFF OMITTED] T4217A.021
Impact of Benefits
Most small employers offer sound business reasons for offering
health benefits to workers.
80 percent report that it helps with recruitment and
retention.
70 percent report that it increases productivity by
keeping employees healthy.
69 percent report that employees demand it.
68 percent report that it reduces absenteeism by
keeping workers healthy.
88 percent report that they offer health benefits
because it is the right thing to do.
When specifically asked whether offering health benefits has an
impact on their business, most small employers with benefits agree that
it does (chart 3).
78 percent report that offering this benefit has had
an impact on employee recruitment.
75 percent indicate it has had an impact on employee
retention, attitude, and performance.
67 percent report an impact on the health status of
their employees.
58 percent state that offering health benefits has
had an impact on absenteeism.
[GRAPHIC] [TIFF OMITTED] T4217A.022
In contrast to the value perceived by respondents from small firms
with health benefits, most of those from companies that do not offer
benefits tend to think that not offering them has had no impact on
their business.
72 percent report that not offering coverage has had
no impact on employee recruitment.
78 percent report that not offering coverage has had
no impact on retention, attitude or performance, or the health
status of their employees.
85 percent report that not offering health benefits
has had no impact on absenteeism.
Employer Profiles
Small employers that offer health benefits tend to be distinctly
different from those not offering health benefits.
48 percent of employers not offering health benefits
pay annual wages of less than $15,000 per year to 50 percent or
more of their employees, compared with 12 percent of companies
that do offer health benefits.
43 percent of small employers not offering health
benefits report that 100 percent of their workers are employed
full time. In contrast, 56 percent of small employers offering
health benefits report that 100 percent of their workers are
employed full time.
Of the employers that do not offer health benefits,
83 percent employ fewer than 10 workers. In contrast, of the
employers that do offer health benefits, 66 percent employ
fewer than 10 workers.
Small employers not offering health benefits are more than twice as
likely to have annual gross revenues of less than $500,000.
60 percent of employers that do not offer health
benefits have annual gross revenue of less than $500,000,
compared with 27 percent of employers that do offer health
benefits.
29 percent of companies offering health benefits
report gross revenues of $1,000,000 or more, while only 8
percent of employers not offering health benefits report this
level of revenue.
Small employers not offering health benefits are more likely than
those offering them to have a larger proportion of females, workers
under age 30, or minority workers.
6 percent of employers offering health benefits
report that 100 percent of their employees are female, compared
with 16 percent of employers not offering health benefits.
17 percent of employers offering health benefits
report that at least 50 percent of their employees are under
age 30, compared with 30 percent of employers not offering
health benefits.
11 percent of employers offering health benefits
report that at least 50 percent of their employees are
minority, compared with 21 percent of employers not offering
health benefits.
Employee Participation
Not all workers are eligible to take advantage of the health
benefits offered by their employers.
61 percent of small employers offering health
benefits report that all workers are eligible for health
benefits.
7 percent report that less than one-half of their
workers are eligible to participate.
19 percent report that between 50 percent and 79
percent of their workers are eligible to participate.
11 percent report that between 80 percent and 99
percent are eligible.
Not all small employers that offer health benefits get full
participation among those workers who are eligible (chart 4).
Just over 60 percent of employers offering health
benefits had 100 percent participation among employees.
[GRAPHIC] [TIFF OMITTED] T4217A.023
Not all small employers offer health benefits to dependents.
13 percent do not offer health benefits to
dependents.
Among small employers that offer health benefits to dependents,
take-up rates are much lower for dependents (chart 4).
Only 16 percent report that all employees eligible
for dependent coverage actually include dependents in their
health benefits coverage.
Small employers report a number of reasons why workers do not
accept health benefits for dependents when this type of coverage is
available (chart 5).
48 percent of the employers offering dependent
coverage report that the workers do not take coverage for their
dependents because the dependents have coverage from somewhere
else.
27 percent report their employees decline coverage
because they cannot afford the premiums.
[GRAPHIC] [TIFF OMITTED] T4217A.024
Small employers are more likely to make contributions toward the
cost of employee-only coverage than they are to contribute to dependent
coverage (chart 6).
58 percent of employers pay the full premium for
employee-only coverage.
30 percent pay the full amount of family coverage.
3 percent require the worker to pay the full amount
of employee-only coverage
40 percent require them to pay the full amount for
dependents.
[GRAPHIC] [TIFF OMITTED] T4217A.025
Dependent take-up is considerably higher in small firms that
contribute at least some percentage toward the cost of the coverage
than it is in firms where the employee is required to pay the full
amount.
The average take-up rate for dependents among
employers that contribute toward the cost of dependent coverage
is 56 percent, compared with an average take-up rate of 23
percent among employers that do not contribute toward the cost
of dependent coverage.
Likelihood of Offering Benefits
Some small employers not currently offering health benefits have
offered them in the past.
12 percent of companies that do not currently offer
health benefits report their business has offered some type of
health benefits plan in the past five years.
Nearly one-third of small employers that do not currently offer
health benefits are potential purchasers.
12 percent of employers not currently offering
health benefits say they are either extremely or very likely to
start offering a health benefits plan for employees in the next
two years.
17 percent are somewhat likely to start a health
benefits plan.
Small employers that are likely to start a health benefits plan
differ from others not currently offering a plan in a number of ways.
Nearly 70 percent of employers not offering a health
benefits plan, but who are extremely or very likely to offer
one in the next two years, report that they have been in
business for less than 10 years.
35 percent of those not likely to offer health
benefits have been in business less than 10 years.
A number of factors would increase the likelihood that a small
business would seriously consider offering a health benefits plan.
Affordability of health benefits is the dominant factor (chart 7).
64 percent would seriously consider offering health
benefits if the government provided assistance with premiums.
57 percent would consider offering health benefits
if there were an increase in profits.
43 percent report that they would consider doing so
if insurance costs fell 10 percent.
50 percent would be more likely to seriously
consider offering a health benefits plan as a result of
employee demand.
36 percent would consider offering a health benefits
plan if it improved recruitment and retention.
A large number of small companies not offering health benefits
state they would need major government subsidies for them to provide
health insurance coverage.
20 percent would need to receive a subsidy of
between 25 percent and 49 percent of the premium.
42 percent would need to receive a subsidy of at
least 50 percent of the premium.
7 percent state they would not provide coverage even
if the government paid 100 percent of the cost.
Among those that indicate they would require
subsidies of at least 50 percent to offer coverage, 76 percent
say they would be more likely to consider offering a health
benefits plan if they were able to receive cash from the
government for 50 percent of the premium costs on a quarterly
basis and would not have to repay this money.
[GRAPHIC] [TIFF OMITTED] T4217A.026
Future Costs and Tax Incentives
Many small employers with health benefits have recently switched
health plans.
34 percent report that they switched health plans
within the past year.
63 percent report that they have switched plans
within the past five years.
21 percent indicate that their business has always
had the same plan.
Affordability for the small employer and the worker is clearly a
critical factor affecting the likelihood of switching health plans.
Nearly all employers who have switched health plans
within the past five years cite price or cost as a reason for
the change.
33 percent of respondents from companies offering
health benefits think their firm would change coverage, and 5
percent think it would drop coverage, if the cost of health
insurance in general were to increase by 5 percent.
If costs increased only 1 percent, 10 percent would
change coverage and 3 percent would drop coverage.
If costs increased 10 percent, 46 percent would
change coverage, while 14 percent would drop coverage.
Most small employers support tax breaks to reduce the health
insurance costs of low-wage workers (chart 8).
86 percent of all small employers favor tax breaks
that they could use to reduce health insurance costs for their
low-wage workers (56 percent strongly favor and 30 percent
somewhat favor).
7 percent would somewhat or strongly oppose tax
breaks for health insurance.
Companies that currently offer health benefits are slightly more
likely than those that do not to strongly or somewhat favor tax
credits.
Nearly 90 percent of small employer offering health
benefits favor credits, compared with 82 percent of those not
offering health benefits.
[GRAPHIC] [TIFF OMITTED] T4217A.027
Statement of Gail Shearer, Director, Health Policy Analysis, Consumers
Union
Summary
At a time of unprecedented budget surpluses and an uncertain
economic outlook that could result in growing numbers of uninsured and
underinsured Americans, it is critical that Congress move forcefully
and expeditiously to make health insurance more affordable. Tax credits
for health care coverage are increasingly discussed as a policy option
for reducing the ranks of the uninsured. We are concerned that,
unfortunately, most tax credit proposals are misguided: some are too
small to make coverage affordable; some undermine employer coverage;
some have inadequate protections for sick people who are shifted into
the individual market. Because of the variation in proposals, they have
dramatically different implications for the health care system. The
following ten questions provide a framework for evaluating various
health care tax credit proposals.
1. What will be the impact on the number of uninsured?
2. Will the credit cause employers to drop coverage?
3. What will be the impact on the number of underinsured (i.e.,
those with coverage that is not comprehensive)?
4. What will be the impact on the health insurance marketplace:
will there be a shift from employer-based coverage to individual
coverage?
5. Will those people with higher health risks (e.g., chronic or
pre-existing conditions) face higher premiums, exclusions in coverage,
and/or denial of coverage?
6. How cost-effective is the proposal?
7. What is the total cost to the federal government (e.g.,
taxpayers)?
8. Does the proposed tax credit make health insurance subsidies
more equitable?
9. Does the proposal target relief to those most in need, in
particular those with low and moderate income?
10. What marketplace reforms are included in the tax credit
proposal?
Below is an explanation of each question regarding tax credits for
health care.
Tax Credits for Health Insurance: Will They Be a Cost-Effective Tool
for Expanding Comprehensive Health Insurance?
1. What will be the impact on the number of uninsured?
Most tax credit proposals are at subsidy levels that represent one
third or less of the cost of buying a health insurance policy. This
means that for most of the uninsured, they will still face sizable out-
of-pocket payments for premiums. For many, health insurance will remain
unaffordable.1 Researchers have developed models to estimate
the impact of various tax credits on the uninsured. Most health
insurance tax credits are estimated to reduce the uninsured by 1.5 to
12.4 million people.2 The design details of the tax credit
(e.g., does it apply only to those without employer-sponsored coverage?
what is the size? is it refundable?) all affect the impact on the
number of uninsured.
---------------------------------------------------------------------------
\1\ See also Iris J. Lav and Joel Friedman, Center on Budget and
Policy Priorities, ``Tax Credits for Individuals to Buy Health
Insurance Won't Help Many Uninsured Families,'' February 15, 2001.
\2\ See, for example, Jonathan Gruber and Larry Levitt, ``Tax
Subsidies for Health Insurance: Costs and Benefits,'' Health Affairs,
vol. 19, January/February 2000, p. 79. Some tax credits, such as that
of the Heritage Foundation, would replace the existing tax deduction
system and impose an individual mandate, which by definition would
eliminate the uninsured. See also John Sheils, Paul Hogan, and Randall
Haught, The Lewin Group, Prepared for The National Coalition on Health
Care, ``Health Insurance and Taxes: The Impact of Proposed Changes in
Current Federal Policy,'' October 1999, which estimates that tax
credits without mandates will reduce the uninsured by 1.5 to 9.8
million.
---------------------------------------------------------------------------
2. Will the credit cause employers to drop coverage?
Most tax credit proposals result in a modest net increase in the
number of insured, but this results from a combination of an increase
in the number of people with nongroup insurance, and a decrease in the
number of people with employer based insurance.3 One tax
credit proposal ($2,000 for individuals and $4,000 for families) for
those not covered otherwise is estimated to result in a 10 percent
reduction in employer based coverage.4
---------------------------------------------------------------------------
\3\ See Gruber and Levitt, p. 79.
\4\ See Gruber and Levitt, p. 79 and Guenther, p. CRS-21.
---------------------------------------------------------------------------
3. What will be the impact on the number of underinsured (i.e.,
those with coverage that is not comprehensive)?
The question of adequacy of health insurance coverage is rarely
addressed in studies of tax credits. The issue of comprehensiveness of
coverage is critical in light of the large and growing number of
Americans whose health insurance does not adequately protect them
against financial devastation caused by out-of-pocket health care
costs. An estimated 31 million adults (in 1998) were underinsured,
risking incurring out-of-pocket expenses (not including premiums) in
excess of 10 percent of their income in the event that they faced
catastrophic illness.5 Based on government surveys of actual
health expenditures, about 16 million households (under 65) and an
additional 12 million households over 65 actually spend more than 10
percent of their income out-of-pocket on health care costs and
premiums.6
---------------------------------------------------------------------------
\5\ Consumers Union, The Health Care Divide, August 2000, p. 13.
See also Pamela Farley Short and Jessica S. Banthin, New Estimates of
the Underinsured Younger than 65, JAMA, 274: 1302-1306.
\6\ Ibid., p. 14, 16.
---------------------------------------------------------------------------
If tax credits are skimpy (e.g., $500 per individual) at a level
less than half of the average cost of coverage, the marketplace may
respond by designing skimpy benefit packages. If policies were designed
with very high deductibles, high copayments, low stop-loss levels, and
skimpy benefits (e.g., a cap on doctor visits, hospital days, a lack of
prescription drug coverage), then it is possible that more people would
be ``insured'' but at the same time more people would be
``underinsured.'' It is important, therefore, that policymakers
carefully consider not only the number of people with insurance
coverage, but that they also measure the quality of the coverage that
people have and the total financial burden of paying for health care.
4. What will be the impact on the health insurance marketplace:
will there be a shift from employer-based coverage to individual
coverage?
Some tax credit proposals (e.g., all but one studied by Gruber and
Levitt) are expected to lead to an increase in the non-employer market
at the same time that they lead to a decrease in employer-based
coverage. This shift from the employer to individual market is
troubling in light of the fact that state regulation varies
considerably, and usually leaves high risk individuals and families
vulnerable to facing barriers to access to affordable coverage in the
individual market. Congress should not undermine the employer-based
market which does a good job of pooling the healthy and the sick
together, keeping premiums relatively low, unless there is in place a
robust and stable individual health insurance market that protects the
interests of those with pre-existing conditions.
5. Will people with higher health risks (e.g., chronic or pre-
existing conditions) face higher premiums, exclusions in coverage, and/
or denial of coverage?
Because of the varied and limited state regulation of individual
health insurance markets, health care tax credits are likely to
adversely affect the health insurance options that millions of high
risk individuals and families face. The likely effects will include:
denial of coverage, exclusions of coverage for pre-existing conditions,
and high premiums (to reflect high risks). The issue of individual
health insurance markets is very complicated, in part because state
regulation varies substantially, and in part because these small
(residual) markets--and their regulations--have not been examined as
carefully as employer-based markets. Some studies assume that the
individual marketplace will be regulated much more aggressively than is
actually likely. For example, Gruber and Levitt analysis ``assumes that
policies in the individual market are universally available (at health
risk-adjusted prices).'' 7
---------------------------------------------------------------------------
\7\ Gruber and Levitt, p. 84.
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6. How cost-effective is the proposal?
What is the federal cost per newly insured person, and how does
this compare with expanding public programs such as SCHIP and Medicaid?
The measure of ``cost per newly insured person'' is used to rate the
tax credit proposals for cost-effectiveness. Cost per newly insured of
tax credit proposals ranges from about $2,200 (for a small tax credit
targeted to those without health insurance currently) to $5,000 (for
larger credits available regardless of prior coverage), in the Gruber
and Levitt study.8 Sheils (et. al.) estimates of cost per
newly insured range from about $1,250 to about $10,500.9 If
expanding coverage of the uninsured is the primary objective, then
alternatives such as Medicaid/SCHIP expansion are likely to be far more
cost-effective. To extend Medicaid coverage (in 1998) to an additional
child cost on average $1,225 and to an additional adult cost on average
$1,312.10
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\8\ Gruber and Levitt p. 79.
\9\ Sheils, Hogan, and Haught, p. iii.
\10\ ``Medicaid Enrollment and Spending Trends, Kaiser Commission
on Medicaid and the Uninsured,'' February 2001, www.kff.org.
---------------------------------------------------------------------------
7. What is the total cost to the federal government (e.g.,
taxpayers)?
The total annual cost (in 1999 dollars) to the federal government
of proposals recently under consideration ranges from just under $1
billion (for an above-the line tax deduction) to $62 billion (for a
large credit available regardless of prior coverage), according to
Gruber and Levitt.11 Sheils estimates range from annual
costs of $3.3 billion to $55 billion.12
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\11\ Gruber and Levitt, p. 79.
\12\ Sheils, Hogan, and Haught, p. iii.
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8. Does the proposed tax credit make health insurance subsidies
more equitable?
Current tax policy with regard to health insurance can hardly be
described as equitable. Individuals without employer based coverage
(other than the self-employed) do not get any federal income tax
subsidy (and don't have access to lower cost group plans). Moderate
income families in the 15% federal tax bracket get a $150 tax subsidy
per $1,000 of premium paid by their employer, while those at the 39.6
percent bracket get $396 of tax benefit per $1,000 of premium. Some tax
credit proposals are designed to make the tax subsidy more equitable by
including individuals who do not have employer based coverage.
9. Does the proposal target relief to those most in need, in
particular those with low and moderate income?
Low--and moderate-income families have the most difficult time
affording health insurance. They are much more likely to lack health
insurance than higher income families. An estimated 85 percent of
uninsured households have incomes that are below median household
income for their family structure.13 Some proposals target
the tax credits to people with low--and moderate--income. Tax credits
are preferable to tax deductions (which give larger benefits to higher
income tax payers).
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\13\ Gary Guenther, Congressional Research Service, ``Tax Subsidies
for Health Insurance for the Uninsured: An Economic Analysis of
Selected Policy Issues for Congress,'' December 12, 2000, citing
Jonathan Gruber.
---------------------------------------------------------------------------
10. What marketplace reforms are included in the tax credit
proposal?
Since tax credits are likely to shift coverage (to some degree)
from the employer based market to the individual market, it is
important that regulations be in place to protect the interests of high
risk individuals and families so that coverage will be both
comprehensive and affordable. The types of marketplace reforms that
will be essential include: standard benefit packages, community rating,
and guaranteed issue. In addition, to protect against adverse
selection, some sort of individual mandate would be needed to assuring
that the healthy and the sick remain in the same risk pool. These
regulations are necessary to prevent marketplace incentives from
separating individuals by their risk level, which drives premiums up
for those considered to be high-risk.
* Consumers Union is a nonprofit membership organization chartered
in 1936 under the laws of the State of New York to provide consumers
with information, education and counsel about goods, services, health,
and personal finance; and to initiate and cooperate with individual and
group efforts to maintain and enhance the quality of life for
consumers. Consumers Union's income is solely derived from the sale of
Consumer Reports, its other publications and from noncommercial
contributions, grants and fees. In addition to reports on Consumers
Union's own product testing, Consumer Reports, with approximately 4.5
million paid subscribers, regularly carries articles on health, product
safety, marketplace economics and legislative, judicial and regulatory
actions which affect consumer welfare. Consumers Union's publications
carry no advertising and receive no commercial support.
Statement of Healthcare Leadership Council
The Uninsured: Background
Estimates on the number of those lacking health insurance in the
U.S. ranged from 42 million to 47 million in 2000. This number has
increased over the past decade, from 34.3 million in 1989.
As the number of uninsured increases, so too does the number of
failed attempts to address this problem. From market-based efforts that
would provide incentives to purchase insurance, to government-based
efforts that would create a single health coverage system for all--
abruptly or gradually--solutions for reducing the rolls of the
uninsured have not been realized.
Major Efforts. The most notable efforts in the past decade to
increase coverage for the uninsured include President Clinton's Health
Security Act of 1994, the Health Insurance Portability and
Accountability Act signed into law in 1996, the State Children's Health
Insurance Program signed into law in 1997, and the access provisions of
the Patients' Bill of Rights passed in the House of Representatives in
1999. Most of these proposals were rejected, and the ones that have
passed have not resulted in significant reductions in the uninsured.
The Health Security Act of 1994, which would have created regional
health alliances and required employers to purchase health insurance
for their employees through these alliances, was roundly rejected by
the public and Congress as being too far-reaching and overly invasive
by the government. Since this comprehensive reform effort collapsed,
most lawmakers and policy experts have agreed that future efforts to
solve the problem of the uninsured must proceed in an incremental,
voluntary fashion.
In 1996, Congress passed and the President signed the Health
Insurance Portability and Accountability Act (HIPAA), which attempted
to solve the problem of uninsurance known as ``job lock'' for people
with pre-existing conditions. While HIPAA has helped some individuals
with pre-existing conditions who change employment and move from one
insurance group to another group, it has not helped to make insurance
attainable for those with pre-existing conditions who must move from
group coverage to individual coverage--as the law had originally
intended. HIPAA also included two other provisions to try to increase
health coverage: medical savings accounts and increased deductibility
for the self-employed. Enrollment in medical savings accounts has been
limited, mostly attributed to design problems resulting from political
controversy as MSAs were developed. Deductibility for health insurance
purchased by the self-employed would have increased to 80 percent by
2006 and that has since been increased to 100 percent deductibility by
2003 in subsequent legislation.
The State Children's Health Insurance Program (S-CHIP), signed into
law in 1997, was a revolutionary new public program that was
anticipated to cover 10 million uninsured children. Unfortunately,
though, the program has enrolled less than one third that many.
Overall, the number of uninsured children has increased in a booming
economy. The S-CHIP's failure has been largely attributed to the
difficulty in educating and physically signing up the targeted
population for this program.
Access to health insurance provisions in the patients' rights
legislation passed in the House of Representatives in 1999 included
several provisions believed to make insurance more accessible. However,
this bill failed in conference with its companion Senate bill late in
2000, mainly because of the controversial liability and regulatory
provisions also contained in that bill.
Barriers to Legislative Solutions. The main barriers to a
legislative solution for the uninsured continue to be financing,
disparate political ideology, and superceding health care priorities
such as preserving Medicare and regulating managed care. Financing
coverage for the nation's uninsured has been considered prohibitive
until the emergence of recent federal surpluses. Proposals range
anywhere from $5 billion to $80 billion a year. Even President
Clinton's Health Security Act, which would have cost $400 billion over
five years, included a plan to fund this proposal through Medicare,
Medicaid, and other federal program reductions, a tobacco tax, a
corporate assessment, and other taxes. But recently, with an
anticipated non-Social Security surplus of almost $850 billion through
2005, greater willingness has been demonstrated by the Congress and
President Bush to spend some of the nation's prosperity on solving the
problem of the uninsured.
Traditionally, finding solutions to the uninsured has been
politically divisive because Republicans have preferred methods
centering around tax credits and deductions and Democrats have
advocated expanding existing public programs including Medicare,
Medicaid and S-CHIP. More recently, however, there have been
encouraging signs of more common ground. Over the past year tax credit
proposals have been sponsored by members of Congress on both sides of
the aisle.
But increasing access to health coverage will require a strong
commitment by lawmakers to make this issue a priority on the
legislative calendar. Over the past several years, Congress and the
former President dedicated a great deal of time and debate to improving
insurance for those who already have it. Managed care regulation has
received an inordinate amount of attention over the last three years
without any resolution. And Medicare reform, including prescription
drugs for Medicare, has and will continue to require thoughtful
deliberation to ensure this program is preserved and improved for the
future. But the uninsured is an equally important population that needs
and deserves to be a top priority item on the 2001 agenda.
The Uninsured: The Future Envisioned by HLC
The members of the Healthcare Leadership Council (HLC) have made
accessible health care coverage for uninsured Americans its highest
priority. We have commissioned in-depth studies to understand the
makeup of the uninsured population, so as to better understand how to
target effective policy solutions. We have surveyed the nation's small
business owners--particularly those who do not currently offer health
insurance coverage to their employees--to understand the reforms they
need in order to make health insurance a viable option. And we have
examined dozens of programs across the country, innovative initiatives
striving to make coverage accessible.
These examinations have led us to fundamental conclusions about
this issue and how it should be addressed:
Reducing America's uninsured rolls is not an
unresolvable problem. Our studies have shown that 16.7 million
(40 percent) of the uninsured are in families with an employer
offer of insurance that is declined. And an additional 17.3
million (41.2 percent) of the uninsured are in families with at
least one worker but no offer of insurance. In other words, a
total of 81 percent of the uninsured are in families connected
with the workforce. This data strongly indicates that the most
feasible solutions for the uninsured are to be found by working
within the existing employer coverage framework. In fact, the
most recent Census Bureau data released last October confirmed
that employer-provided health insurance was the driving factor
that caused uninsured rates to drop in the past
We have the resources to get the job done. There is
an ongoing debate in this country about how the growing budget
surplus can best be utilized. We believe the nation has no
greater priority than the nearly 43 million Americans who are
without health insurance. This is a critical priority because
these individuals and families do not have access to the most
innovative care and preventive medicine that greatly enhances
and even saves the lives of those who do have coverage. And it
is a critical priority because of the severe toll uncompensated
care is taking on our nation's health care system. In every
state in this country, there are dozens of hospitals that are
in serious jeopardy because of health care provided--usually
expensive acute or emergency room care--for which there will be
no direct payment. For example, in 1998 alone, the nation's
hospitals provided over $18 billion in uncompensated care. If
we do not make progress in reducing the uninsured population,
the ramifications will be severe for all patients and health
care consumers.
Employers want health insurance for their employees.
We know that the owners of America's small businesses--the
people who face the greatest challenge in providing health
coverage to their employees--want to offer insurance to their
employees, have a strong desire to provide that coverage, and
believe that solutions are within reach. Our survey of small
employers told us this, and it also revealed that if we don't
move toward solutions in the near future, a significant number
of small businesses who currently offer health insurance will
succumb to economic pressures and will cease to do so.
HLC believes the following ten principles provide the framework
necessary to develop a sound set of policies to increase access to
health coverage for the uninsured:
1. Emphasize Flexible, Targeted, Pluralistic Solutions.
The nearly 43 million uninsured are not a monolithic population and
there is no one-size-fits-all solution for the uninsured. Such a
solution would be both too costly and ineffective given the varied
nature of the uninsured. Obstacles to coverage vary among disparate
populations of the uninsured, and solutions must be tailored
accordingly. For example, an individual who is offered employer
coverage but declines because he finds the premiums unaffordable merits
a separate solution from one who is chronically unemployed with no hope
of an employer subsidized insurance offer. HLC believes in an eclectic
mix of market-based approaches to address effectively the problem of
the uninsured including tax credits, insurance market reforms, more
effective use of existing public program resources, and educational
efforts about the value and importance of health insurance.
2. Promote Competition, Innovation, and Research.
Some public policies to cover the uninsured such as a single payer
health system and government price controls would severely limit the
incentives for research and development inherent in our current health
care system. There is a noticeable deficiency in the development of
cutting edge health care technology in countries with health systems
not based on free market principles. HLC advocates a health care system
that supports competition, innovation, and research in the financing
and delivery of health care services so Americans can continue to have
access to the best and latest technologies, health care services, and
products.
3. Respect Consumer Preferences for Employment-Based Coverage Where and
When Possible and Help Increase Access to This Preferred
Coverage.
Two recently published surveys strongly indicated that the public
prefers its health care coverage to be provided through an employer,
even if those individuals received equal tax treatment. The
Commonwealth Foundation commissioned a survey of 5,000 people, 49
percent of whom chose employers as their preferred source of coverage,
while 23 percent preferred to purchase individually, and only 18
percent chose the government as their preferred source. Another recent
survey, commissioned by Harvard University, found similar results:
three out of four people would rather have their insurance provided
through their employer over receiving an equivalent amount in wages so
they could buy it for themselves.
This consumer preference is not surprising. The employer-based
coverage system in the U.S. is serving the nation well. Not only are
employers uniquely effective in pooling varied risks, but they also are
a driving force in negotiating fair prices and quality improvement
measures. Individuals negotiating on their own behalf would have far
less influence in driving these variables.
Currently, 54 percent of Americans receive health coverage through
their private employers. We believe this number could be greatly
increased with the help of targeted tax incentives to small employers
or to employees who cannot afford to purchase their employer's
coverage. Our research shows that seven of ten of the uninsured are in
families with at least one person connected to the workforce, mostly
through small employers. By leveraging the employer and employee
contributions with tax credits, small employers can become more
formidable players in the insurance market, and insurers will begin
competing for them on the basis of cost, quality, and ease of
administration.
The employer-based insurance system is already in place. HLC
strongly believes that the urgent nature of the growing uninsured
population precludes the option to build a substantially new and
different insurance system based on a different purchasing structure,
as some are suggesting. Political and financial obstacles associated
with such massive reform would severely delay the resolution of the
problem of the uninsured.
4. Take Advantage of Experience by Building Upon Successful State and
Local Private-Public Partnerships.
A number of regionally based public-private partnerships have
succeeded in finding ways to make health coverage more affordable and
accessible for employers and individuals. Not only are these programs
filling coverage gaps in small areas around the country, they can also
serve as excellent laboratories of experimentation that provide crucial
information on what is necessary to encourage small employers and
individuals to participate in coverage programs.
For example, an insurance program developed in Wayne County,
Michigan, for small businesses found that it was difficult to entice
these businesses to participate by subsidizing less than one-third of
the premium. The premium formula that eventually got this program off
the ground was one-third paid by the employer, one-third paid by the
employee, and one-third subsidized by the county. HLC believes these
local successes should be pinpointed and examined for their potential
application to other areas and populations.
5. Limit the Government's Role to the FINANCING of Insurance Coverage.
Governments (federal, state, and local) can play a constructive
role in assisting poor families in gaining access to health care
services and coverage, but should do so in fiscally responsible ways
that do not impair, but instead encourage and build upon the effective
functioning of the private market. State grants for low-income people,
as well as targeted tax credits, block grants, Medicaid and S-CHIP
funds, and other public health service programs should be free of
mandates, regulations, administrative and other requirements that
impede the provision of high-quality, affordable insurance and
effective functioning of the private market.
For example, while Congress and the Clinton Administration allowed
states more flexibility in designing their S-CHIP programs than their
Medicaid programs, they nonetheless have made it difficult for States
to use S-CHIP funds to allow parents of eligible children to purchase
employer-offered health insurance. Research supported by HLC
demonstrates that 16 million people are in families where an employer
insurance product is offered but declined, often for reasons of
affordability. Allowing more flexibility to use S-CHIP funds to help
pay employee health insurance premiums could help provide an
additional, more cost-effective option to those who would otherwise
remain uninsured.
6. Encourage, Don't Discourage the Maintenance of Private Insurance
Programs.
Occasionally, subsidized health care or health care insurance
results in employers or other sponsors of health care coverage
believing they have been ``let off the hook'' for providing what they
traditionally have. Public health care subsidies and other programs for
expanding coverage or care should be implemented in such a way that
current efforts are maintained to the greatest extent possible. Any tax
or other subsidy for the uninsured must be carefully targeted to ensure
that it be utilized only by the segment currently declining coverage,
and not be misdirected toward (or ``crowd out'') those who are already
insured.
Some community programs HLC has studied that have tried to
facilitate employer-based coverage in their local areas limit subsidies
to employers who have not offered coverage within the past year. Still
other models have prevented crowd-out by targeting subsidies to only
limited benefit packages that would not be otherwise attractive to the
employees of employers already offering a standard employer benefit
package. We believe that funds should be targeted toward lower income
workers or small businesses with primarily low-income workers.
7. Refrain From Passing Legislation or Implementing Public Policies
That Increase the Cost of Health Care.
Government micro management in the provision of health care, such
as benefit mandates and liability expansions, increase the cost of
health care, making it difficult for small employers to afford
providing insurance for their employees. Federal, state, and local
governments should resist the passage of laws that will ultimately
result in more uninsured. It will be counterproductive for Congress to
use a portion of our nation's budget surplus to make health insurance
more affordable, yet at the same time pass legislation that makes
health coverage more expensive. Imposing new mandates on insurers and
employers, or making employers liable for coverage decisions will
create additional barriers and decrease the number of people that can
be covered by new solutions for the uninsured.
8. Include Education to Facilitate Awareness.
An important part of the solution to health insurance coverage--
often overlooked--is information and education, for both employees and
employers. It is not uncommon for small employers to be unaware of the
various options they may have for offering affordable coverage. In
fact, a recent small business survey by the Employee Benefit Research
Institute has shown that many small employers are not even aware that
employee insurance is deductible.
There is also some misconception regarding the affordability of
health coverage. In a survey by the California Health Institute, many
individuals who cited expense as the reason for not purchasing
insurance actually agreed that it was affordable once they were
informed of the true cost of various policies. More than likely, there
are similar misconceptions among individuals and small business owners.
This may indicate that some amount of uninsurance could be reduced
through broad efforts to increase awareness of options. Clearly,
education initiatives could help employees and employers understand the
critical value of health insurance, as well as ways to keep their
health insurance premiums down once they do have coverage.
Educational efforts should be multifaceted--directed toward small
businesses, employees, and individuals not linked to the workforce.
Educational efforts must also include efforts to inform those already
eligible for public insurance programs of how to access those programs.
The State Children's Health Insurance Program (S-CHIP) is just the most
recent example of a program in which too few members of the eligible
population are enrolling for program benefits.
9. Include Solutions for Those Who Are Still Uninsurable.
While lawmakers focus on access to insurance coverage for the
majority of the uninsured population, it is also necessary to ensure a
safety net of non-emergency health care services for those who are, for
one reason or another, still uninsurable at any given time.
While reducing the number of uninsured will also reduce the amount
of uncompensated care, there will still be a need to maintain federal
and state funding for safety net programs including community health
centers, rural health clinics, migrant health centers, and health
services for the homeless. Additionally, it is very important to ensure
that the nation's hospital system and other providers of charity care
retain enough strength to be able to offer care to the uninsured. In
1998, the nation's hospitals alone provided over $18 billion in
uncompensated care. Continued erosion of Medicare and Medicaid
disproportionate share payments and other federal payments that have
helped them to keep their doors open to the uninsured could seriously
jeopardize safety net services in the near future.
10. Encourage Individual Responsibility.
Any plan to increase access to health care coverage should
encourage an appropriate level of personal responsibility in gaining
access to coverage on the part of individuals, and where children are
concerned, on the part of parents or guardians. Government approaches
that discourage self-sufficiency and create incentives for long-term
dependency on public resources should be avoided.
Conclusion
The Healthcare Leadership Council (HLC) believes that the benefits
of the health care system should be available to all Americans by
promoting bipartisan solutions to close gaps in access to health care
coverage. We believe that these solutions can and should be consistent
with HLC's mission: To advance the market-based health care system,
building on the quality and innovation inherent in the private
employment-based system, in order to provide all Americans with access
to affordable coverage and high-quality health care services.
Statement of Janet Stokes Trautwein National Association of Health
Underwriters, Arlington, Virginia
The National Association of Health Underwriters is an association
of insurance professionals involved in the sale and service of health
insurance, long-term care insurance, and related products, serving the
insurance needs of over 100 million Americans. We have almost 17,000
members around the country. We appreciate this opportunity to present
our comments regarding the rising number of uninsured Americans. NAHU
has been a proponent of refundable health insurance tax credits to
address the problem of the uninsured for more than a decade, and is
pleased to have this opportunity to discuss the practical application
of a tax credit with the members of this committee. We believe a
refundable health insurance tax credit will provide a real solution to
the problem of the uninsured in America by addressing affordability--
the most basic component of access to health care.
The current estimate on the number of uninsured in this country is
approximately 43 million people. That number represents an increase
from a few years ago, despite numerous state and federal efforts to
improve access. Over half of the 43 million uninsured Americans are the
working poor or near poor, many of whom already have access to health
insurance through an employer-sponsored plan.1 Since
employers already provide access to health plans and pay a significant
portion of the premiums for many Americans, why do we have so many
uninsured? The problem isn't access--it's affordability. They just
can't pay for it.
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\1\ U.S. Census Bureau, 2000.
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This inability to pay has many causes. As we know, the United
States government gives a tax break to people covered under their
employer's health insurance plan. Health insurance premiums paid by an
employer are not taxable as income to employees, even though many
people consider employer-paid health insurance to be a part of
compensation. Although this tax break has provided an excellent
incentive for many people to become insured, it has also inadvertently
created another problem--lack of tax equity. When an employer pays $100
in tax-free health insurance premiums for an employee in a 30% tax
bracket, it's worth $30 to that employee. To another employee in a 15%
tax bracket, it would be worth $15, and for the low-income employee
with no tax liability or the person who is self-employed or otherwise
has no employer-sponsored plan available, the tax break is worth
nothing. That's why many low-income employees who must pay part of the
cost of employer-sponsored health insurance coverage for themselves or
their family have declined coverage. Most people in employer plans
benefit from both the dollar amount of the employer contribution and
the tax exemption on employer-sponsored health insurance premiums. Low-
income individuals only benefit from the employer's contribution if
they are able to pay their share of the remaining premium, and they
don't benefit at all from the tax exemption. Increased deductibility of
health plan premiums for the self-employed has helped and will help
more as greater deductibility is phased in. Unfortunately, however,
deductibility does nothing for the bulk of the uninsured--the working
poor with no or very low tax liability.
People with no tax liability don't benefit from a deduction for two
reasons. First, if they owe no taxes, there is nothing from which to
deduct their premiums, even if the deduction was available without the
requirement that a person itemize. Second, and probably more important
for the working poor, a deduction or even a credit that is only
available at the end of the year is of no value to them because they
need the funds at the time their health insurance premium is due. They
can't wait a year to be reimbursed, so they forego insurance entirely.
That's why they are uninsured now.
Fortunately, there is a solution for this problem. A refundable,
advanceable tax credit would allow individuals to receive their tax
credit dollars monthly, when their premiums are due. This type of
credit, advanced monthly and administered through the insurance company
or the employer, provides the following benefits:
It is simple to understand.
It is almost impossible to abuse, since the
insurance company or employer would certify that coverage was
purchased.
It enhances the effectiveness of COBRA's access
mechanism by providing a means to pay COBRA or other health
insurance premiums when people change jobs.
It provides early retirees with needed dollars to
help them purchase a health insurance policy.
Small employers who currently can't afford to
provide a health insurance plan would, with the combination of
the contribution they could provide and dollars provided to
eligible employees through a health insurance tax credit, be
more likely to offer a group health plan to
workers.2
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\2\ See NAHU survey of small employers, March 2001--http://
www.nahu.org.
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Tax Credits in Employer-Sponsored Plans
Some health insurance tax credit proposals do not allow a credit to
be used in an employer-sponsored plan. A better solution is a health
insurance tax credit designed to be used either to buy coverage in the
individual health insurance market or to help an employee pay his or
her share of premiums in an employer-sponsored plan. Most people are
happy with the employer-based system, according to a 1999 survey by the
Employee Benefits Research Institute, and many uninsured individuals
already have high-quality employer-based coverage available to them. A
recent NAHU survey of small employers shows that many small employers
pay most or all of an employee's health insurance premium, but little
or none of the cost of coverage for dependents. Allowing low-income
employees to supplement their employer's contributions with a
refundable tax credit would allow families to be insured together,
which many employees prefer, and would provide the funds necessary to
allow them to come up with ``their share'' of health insurance
premiums. It would also address concerns from the business community,
such as declining take up and shrinking pools, and would empower
individuals to select their own place of purchase, rather than having
it imposed on them by the government.
Another way to help employees pay their share of premiums would be
to allow (but not require) advanceable Earned Income Tax Credit (EITC)
dollars to be combined with health insurance tax credit dollars for
eligible employees. Past concerns about whether or not adequate
coverage would be purchased with EITC dollars would be addressed
through the administration mechanisms of the health insurance tax
credit, which require the purchase of HIPAA-creditable coverage,
certified by either the employer or the insurance company.
Should a Tax Credit be Flat or a Percentage of Premiums?
Some people claim that because the cost of individual health
insurance is different for individuals of different ages and in
different states, a flat credit is unfair and inflexible. It is true
that health insurance costs are different for different populations.
But a credit based on a percentage of premiums is difficult to
administer because of these very differences. It is very important that
a health insurance tax credit be advanced monthly, when premiums are
due. This can be done through insurance carriers for those who purchase
individual health insurance coverage as well as through the employer
payroll process for those who purchase coverage in an employer-
sponsored plan. If administration becomes too difficult, it won't be
cost-effective for employers and insurers to handle this
administration, and they will elect not to advance tax credits to
individuals. This will result in the tax credit not being available to
individuals and families until they file their tax return.
How Much Should the Tax Credit Be?
Over the years, NAHU has spent a considerable amount of time
looking at the dollar amount of a health insurance tax credit. In doing
so, we looked carefully at the amount of coverage that is currently
financed by employers. Employers pay for much of the coverage that
insures most people today. It is very important that in our zeal to do
something about those without health insurance that we don't
inadvertently discourage employer funding of coverage for those who are
already insured today. For that reason, it is important that a health
insurance tax credit be low enough so that it will not provide an
incentive for employers to discontinue their financial contributions
towards plans. At the same time, it is important that the credit be
large enough to provide a meaningful incentive for people without
access to an employer-sponsored plan to obtain coverage.
A credit in the range of $1,000 for individuals and $2,000-$2,500
for families is not large enough to cause an employer to stop providing
coverage for employees, yet still provides a good base to finance
coverage, even for employees purchasing coverage in the individual
health insurance market.3 We've attached as exhibits several
comparisons of the cost of health insurance across the country. The
first exhibit gives some examples of the types of health insurance
coverage that are available to a single mother with two children for a
contribution of about $2,600 per year. This assumes she does not have
an employer plan available and has a $2,000 tax credit plus $50 per
month of her own money. We've also illustrated the costs of coverage in
a second exhibit for a higher level of benefits. A third exhibit gives
a sampling of group insurance costs for the same person. Keep in mind
that coverage offered in employer-sponsored plans provides a
significantly higher level of benefits in many cases that what is
available in the individual market, in addition to being less
expensive. The controlled access in employer plans is much more
effective at keeping a balanced risk pool than the individual health
insurance market. But a tax credit would bring new people into the
individual health insurance pool and would over time encourage
insurance companies to write individual health insurance policies
geared to the size of the credit, offering more options and making it
possible for low-income families to obtain coverage without paying much
more than the credits available.
---------------------------------------------------------------------------
\3\ The amount of the tax credit would periodically change to
reflect increases or decreases in the cost of living, as reflected by
the medical Consumer Price Index (CPI).
---------------------------------------------------------------------------
Is a $1,000 Tax Credit ($2,000 for a Family) Large Enough to Buy
Reasonable Coverage?
Individuals without employer-sponsored health insurance currently
must purchase coverage in the individual health insurance market
entirely on their own. This is particularly hard for low--income
employees who may have to choose between health insurance and
groceries, and even employees who do have employer-sponsored coverage
available may not be able to participate because they can't afford
their share of the premiums. A health tax credit should be considered a
base from which to build on the financing of health insurance coverage.
It is not designed to take away the role of the employer in the
financing of health insurance coverage, or to replace personal
responsibility.4
---------------------------------------------------------------------------
\4\ To get an idea what is available in the individual health
insurance market, see ``Individual Health Insurance Coverage options
across the United States,'' March 2001, National Association of Health
Underwriters.
---------------------------------------------------------------------------
What if Someone Doesn't Qualify for Coverage in the Individual Health
Insurance Market due to a Health Condition?
In most states individual health insurance requires that a person
be in relatively good health. If a person does not qualify for coverage
based on their medical history, many states have a high-risk pool or
some other mechanism to ensure that coverage is available. High-risk
pools provide an affordable alternative for high-risk individuals who
don't have access to employer--sponsored coverage and must purchase
individual health insurance coverage. An exhibit illustrating the cost
of coverage in a sampling of states with high-risk pools is attached. A
refundable health insurance tax credit could help eligible high-risk
individuals afford the cost of health insurance coverage in high-risk
pools in the same way it would be used for others who purchase coverage
through their employer's plan or through the regular individual health
insurance market. In addition, states without any safety net for the
medically uninsurable should be encouraged and provided with incentives
to develop programs to ensure that coverage is available for these
individuals.
Administering a Refundable Health Insurance Tax Credit
The Treasury Department would have primary responsibility for
administering tax credit payments. The credit, while owned by the
individual, would not be paid directly to the individual, but would be
transmitted to an insurance company, employer, high-risk pool, or other
organization maintaining the individual's insurance account. The credit
could be used only for the payment of private insurance premiums, and
could not exceed the total cost of the premiums. Only health plans
eligible as creditable coverage under the Health Insurance Portability
and Accountability Act of 1996 (HIPAA) would be eligible for credit
payment. The credit would be available on a monthly prorated basis, in
order to ensure the continuing availability of credit funds throughout
the year, particularly in cases of job change, and to help protect
against fraud.
In cases of employer-provided insurance, the monthly tax credit
allocation can be handled as part of the regular withholding process.
The credit would be shown as a specific line item on the pay stub.
Federal income taxes withheld by the employer on behalf of employees
would be reduced by the amount of the credit before being sent to the
government.
For those individuals purchasing coverage in the individual health
insurance market, the monthly tax credit allocation could be subtracted
from the regular monthly health insurance premium due, with the
insurance company using normal billing mechanisms for the balance, if
any, of the premium. As with employer plans, insurance companies could
reduce federal taxes owed by the amount of credits they had advanced to
eligible individuals.
Economic Impact of a Health Insurance Tax Credit
A refundable health insurance tax credit for low-income individuals
is an innovative way to achieve affordable health insurance coverage
through the competitive private sector. A health insurance tax credit
will help ensure that low-income Americans who have the greatest
difficulty affording coverage will have a basic level of resources to
purchase health insurance. The tax credit, by being available only for
the purchase of private sector insurance, will allow a shift of low-
income individuals from the very costly Medicaid program into private
insurance plans. A health insurance tax credit would also help to lower
the per capita cost of insurance, by reducing the amount of
uncompensated care that is currently offset through cost shifting by
health care providers to private sector insurance plans, and by
substantially increasing the insurance base, spreading the cost over a
wider number of people.
The Children's Health Insurance Program
A discussion of the uninsured would be incomplete without mention
of the Children's Health Insurance Program. Many of NAHU's members have
been invited to serve on state task forces and committees to assist in
implementation and outreach for CHIP. They have consistently reported
several shortcomings of the federal CHIP legislation, which they feel
have impeded their states' ability to reach the largest number of
uninsured children.
Under the Balanced Budget Act, states have a number of options for
implementing plans most appropriate to the needs of their uninsured
children. One of those options is to expand Medicaid. The other
available options are centered in the private sector. One reason many
of the people who are already eligible for Medicaid today do not enroll
is that they do not want the negative stigma associated with public
assistance. Private sector programs can represent a transition from
this stigma by allowing and encouraging people to embrace the concept
of ``self-help'' as opposed to the expectation of government
entitlement. As you know, this is a concept that has ramifications that
extend far beyond the health insurance benefits provided by the plan.
Congress wisely considered these private sector advantages and not only
authorized states to develop private sector CHIP programs, but also
allowed for children to be enrolled in the employer-based plans of
their parents.
Unfortunately, due to some of the inflexible provisions that were
also contained in the CHIP provisions of BBA, many states have been
unable to adequately implement the full range of options allowed by the
legislation. Even though it appears that states have a range of plan
benefit options, that reality is virtually eliminated by the cost-
sharing limitations contained in the legislation. Cost sharing is
prohibited for children in families under 150% of the poverty level,
and is limited to 5% of family income above that level. Unfortunately,
cost sharing is defined to extend beyond premium to include co-payments
and co-insurance.
A quick calculation of the maximum potential co-insurance liability
of an ``average'' plan, such as might be offered to state employees,
one of the plan prototypes allowed under the legislation, for example,
would make that plan unacceptable. Under CHIP guidelines, the co-
insurance responsibility alone would exceed the 5% maximum for many
eligible participants. This requirement, along with certain mandated
benefit requirements that were also included in the legislation,
virtually forces states to use a benchmark plan based on Medicaid level
benefits, which, we would point out, are far in excess of what the
average child who is already insured enjoys today. Those parents who
have already made the sacrifices necessary to see that their children
are insured, many of whom are at an income level that would allow CHIP
participation, are not eligible for CHIP funding because they are
``already insured.'' In addition, the message they are receiving as a
result of exercising responsible behavior is that the plans under which
their children are now insured aren't good enough, because they may not
meet the standards established under CHIP for uninsured children.
The other problem associated with the cost-sharing requirements is
that because each employer plan is different, and the family income of
each eligible child is different, a separate mathematical calculation
is required for EACH participant, to be sure the 5% cost-sharing
limitation is met for that particular plan and participant. Employer-
sponsored coverage is often the easiest and most cost-effective option
available for children and their families, and will allow families the
opportunity to be enrolled together on the same employer-sponsored
plan, but the separate calculation requirement makes plan
administration unwieldy and expensive. For this reason it is unlikely
that opportunities for participation in employer-sponsored plans will
be aggressively pursued. This frustrating provision of the legislation
is only worsened by a ruling by HCFA that employer plans where
employers are paying less than 60% of the family premium are not
eligible for participation in the CHIP program.5 Not only
does this ruling by HCFA have no legislative basis, but surveys show
that very few employers pay a significant part of the dependent
premium, much less 60%.
---------------------------------------------------------------------------
\5\ Pending HHS Children's Health Insurance Program regulations may
lessen this requirement slightly. HCFA's 60% employer contribution
requirement was designed to avoid ``crowd-out'' which theoretically can
occur when employers or employees drop the coverage they currently pay
for in order to take advantage of government funding.
---------------------------------------------------------------------------
Summary
A refundable health insurance tax credit represents a simple and
realistic way to extend private health insurance coverage to those
uninsured individuals and families who are most in need of assistance.
It is fair and is easy to administer. It is a private sector solution
to a difficult public problem. It gives people the tools to make their
own decisions.
In addition to a tax credit, the Children's Health Insurance
Program could be greatly improved and made available to many more
eligible uninsured children if changes were made to the cost-sharing
requirements of the CHIP program to define cost-sharing as premium
cost-sharing only. It would also appear that HCFA's concerns about
crowd-out are unwarranted at this time since many states have not been
able to use their current allotment of CHIP dollars. The best safeguard
against crowd-out would be to facilitate the use of employer-sponsored
plans in the CHIP program.
The most important patient protection is the ability to afford
health insurance coverage. Real access to health care and choice can't
exist without the dollars required to buy a health plan.
Should you have any questions or if we might be of any additional
assistance, please contact Janet Stokes Trautwein, Director of Federal
Policy Analysis for NAHU, at (703) 276-3806, or [email protected].
______
In this study, the National Association of Health Underwriters
(NAHU) compared how much a health insurance policy purchased by a low-
income American family through the individual health insurance market
in each state would cost, as well as what type of plan benefits would
be available to the family. The family used in this analysis includes a
single mother, age 35, who is a non-smoker and is in relatively good
health, as well as her healthy daughters, ages seven and nine. For each
state, NAHU sought price and benefit information for a health insurance
policy with an average annual price of $2600. In some states, coverage
cannot be obtained for the average price, so information for the least
expensive available policy is listed. In addition, this analysis lists
the maximum income level for Medicaid participation by state, as well
as the maximum family income level for participation in each state's
Childrens' Health Insurance Program. Both maximum family income levels
are listed as a percentage of the federal poverty level. Finally, this
table lists the current state mechanism for providing individual-market
insurance coverage to medically uninsurable and HIPAA-eligible
individuals.
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Individual Market Health Insurance Options for Subject Family Maximum Income Level for Medicaid Benefits, 1998 Maximum
-------------------------------------------------------------------------------- (Percentage of the FPL) Income for
----------------------------------------------------- State
Children's
Health Medically
State Insurance Uninsurable/
Plan Type Annual Annual Coinsurance Additional Pregnant Kids Kids Kids Medically SSI Program HIPAA Eligibles
Premium Deductible Rate Policy Benefits Women/ Under 6-14 14-19 Needy Recipients Benefits,
Infants 6 1999
(Percentage
of the FPL)
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Alabama...................... PPO............. $2316 $1000........... 100% after All benefits 133 133 100 100 N/A 72.8 200 Risk Pool
deductible. subject to
deductible.
Alaska....................... Indemnity....... $2502 $1500........... 80%............ All benefits 133 133 100 90 N/A 100.2 200 Risk Pool
subject to
deductible.
Arizona...................... Indemnity....... $2647 $750............ 90% (60% out of RX $15 generic/ 133/200 133 100 30 N/A 72.8 200 None
network). $35 namebrand
copay.
Arkansas..................... Non PPO......... $2541 $500............ 80%............ 80% preventive 200 200 200 200 16 72.8 200 Risk Pool
care after
deductible.
California................... PPO............. $2256 $2000........... 75% after Maximum out of 133 133 100 100 87 98.4 250 Risk Pool/Open
deductible. pocket is Enrollment
$8500.
$2748 $1000........... ............... HealthyCheck
Centers $25 or
$75 copay for
basic
screenings. RX
$10 generic/
$25 namebrand.
Colorado..................... PPO............. $2533 $1000........... 80% (60% out of $25 office 185 133 100 37 N/A 78.1 185 Risk Pool
network). visit copay.
RX $20 maximum
copay.
Connecticut.................. PPO............. $2536 $750............ 70%............ $15 office 185 185 185 185 69 209(b) 300 Risk Pool
visit copay.
Routine care
ltd. to $150
per year. RX
$15 generic/
$25 namebrand
copay.
Delaware..................... PPO............. $2618 $1000........... 80%............ RX $15 generic/ 185 133 100 100 N/A 72.8 200 Risk Pool
$25 namebrand
copay.
District of Columbia......... PPO............. $4488 $750............ 80% (60% out of RX $100 185 133 100 37 55 72.8 200 Open Enrollment
network). deductible
then $10
generic/$20
namebrand
copay to
$1,500 annual
maximum. Other
benefits
subject to
deductible and
coinsurance.
Florida...................... PPO............. $2395 $750............ 50%............ RX $15 generic/ 185 133 100 100 26 72.8 200 Risk Pool
$25 namebrand
copay.
Preventive
care ltd. to
$150 per year.
Georgia...................... PPO............. $2531 $1000........... 80%............ RX $15 generic/ 185 133 100 100 30 72.8 235 None
$35 namebrand.
Office visit
$30 copay.
Hawaii....................... Not available. State-wide employer coverage mandate 185 133 100 100 53 209(b) 200 Employer
Mandate
Idaho........................ PPO............. $2484 $2000........... 80%............ $30 copay 160 160 160 160 N/A 79.8 150 Risk Pool
includes
routine not
subject to
deductible, RX
$10 generic/
$25 namebrand
copay.
Illinois..................... PPO............. $2628 None............ 80%............ $30 copay for 200 133 130 133 41 209(b) 185 Risk Pool
office visits.
RX $10 generic/
$25 namebrand
copay.
Indiana...................... PPO............. $2532 $750............ 50%............ RX $15 generic/ 150 133 100 100 N/A 209(b) 200 Risk Pool
$25 namebrand
copay. $15
copay for
office visits
including
preventive
care.
Iowa......................... PPO............. $2442 $500............ 80%............ $25 office 185 133 100 37 70 72.8 185 Risk Pool/
visit copay. Guaranteed
RX $25 generic/ Issue
$35 namebrand
copay.
Kansas....................... PPO............. $2508 $750............ 100%........... $10 office 150 133 100 100 69 72.8 200 Risk Pool
visit copay.
Rx discount
card.
Kentucky..................... PPO............. $2865 $2500........... 80%............ Includes RX 185 133 100 46 32 72.8 150 Risk Pool
coverage with
a separate
$100
deductible.
Louisiana.................... PPO............. $2526 $1000........... 80%............ 80% office 133 133 100 17 15 72.8 200 Risk Pool
visit copay
and RX
coverage.
Maine........................ PPO............. $1880 $5000........... 80%............ Includes rider 185 133 125 125 46 74.3 150 Guaranteed
for preventive Issue
care and
supplemental
accident
insurance.
Maryland..................... No PPO.......... $2400 $1000........... 100%........... RX 100% copay 185 185 185 33 51 72.8 200 Open Enrollment
after
deductible.
Massachusetts................ HMO............. $4206 none............ 100%........... $15 copay, $25 185 133 133 133 76 91.6 200 Guaranteed
RX copay. Only Issue
plan available
in state.
Michigan..................... No PPO.......... $2594 $1000........... 100%........... RX 100% copay 185 150 150 150 50 74.9 200 Open Enrollment
after
deductible.
Minnesota.................... HMO............. $2470 $2000........... 80%............ Preventive care 275 275 275 275 68 209(b) 275-280 Risk Pool
100% coverage.
RX $12 copay.
Mississippi.................. No PPO.......... $2412 $1000........... 100%........... Office visit 185 133 100 32 N/A 72.8 200 Risk Pool
and RX subject
to deductible.
Missouri..................... PPO............. $2706 $500............ 80%............ RX $25 generic/ 185 133 100 100 N/A 209(b) 300 Risk Pool
$35 namebrand
copay.
Montana...................... Indemnity....... $3180 $3000........... 50%............ RX discount 133 133 100 48 71 72.8 150 Risk Pool
card and 100%
coverage after
deductible.
Well baby
coverage.
Optional
preventive
care coverage.
Mental health
coverage.
Nebraska..................... PPO............. $2406 $500............ 90% (60% out of RX $15 generic/ 150 133 100 100 57 72.8 185 Risk Pool
network). $35 namebrand
copay. $20
office visit
copay.
Nevada....................... Indemnity....... $3069 $1000........... 80%............ $20 office 133 133 100 31 N/A 78.1 200 None
visit copay.
RX $20 copay
when filled in-
network.
New Hampshire................ Indemnity....... $3579 $1750........... 80%............ $30 copays. RX 300 185 185 185 74 209(b) 300 Guaranteed
subject to Issue
deductible.
New Jersey................... HMO............. $5200 None............ 100%........... $30 copays. RX 185 185 133 133 53 77.4 201-350 Guaranteed
50% copay. Issue
New Mexico................... PPO............. $2580 $750............ 100%........... $10 office 185 185 185 185 N/A 72.8 235 Risk Pool
visit. RX
discount card.
New York..................... PPO............. $3820 $250............ 100%........... $20 copay. RX 185 133 100 51 85 85.5 250 Guaranteed
is $50 Issue
deductible
then $10 copay
for generics.
North Carolina............... PPO............. $2652 $2000........... 80%............ $30 office 185 133 100 100 35 72.8 200 Open Enrollment
visit copay.
Preventive
care with $30
copay. Well
baby and child
care with $20
copay. Rx
coverage with
sliding copay.
North Dakota................. PPO............. $2051 $1000........... 90% (70% out of $20 office 133 133 100 100 59 209(b) 140 Risk Pool
network). visit copay.
Rx subject to
deductible.
Ohio......................... PPO............. $2254 $500............ 80%............ $15 office 150 150 150 30 N/A 209(b) 200 Open Enrollment
visit copay.
RX $15 generic/
$25 namebrand
copay.
Oklahoma..................... PPO............. $2617 $1000........... 80% (50% out of Office visit 185 185 185 185 38 209(b) 185 Risk Pool
network). including
routine care
deducible and
copay
applicable. RX
$15 generic/
$35 namebrand.
Oregon....................... PPO............. $2850 $1500........... 20%............ 20% copay. RX 133 133 100 100 96 73.1 170 Risk Pool
greater of $20
or 50% copay.
Pennsylvania................. PPO............. $2660 $500............ 50%............ $15 copay. 185 133 100 37 62 76.8 235 Open Enrollment
Mental health
covered up to
$3000. RX $15
generic/$25
namebrand
copay.
Rhode Island................. PPO............. $3888 $5,000.......... 100%........... $10 office 250 250 250 250 81 82.2 250 Open Enrollment
visit copay.
RX discount
card and 100%
coverage after
deductible.
Well baby
coverage.
Mental health
coverage.
Optional
preventive
care coverage.
South Carolina............... PPO............. $2487 $2000........... 80%............ RX deductible 185 150 150 150 N/A 72.8 150 Risk Pool
and copay
applicable.
South Dakota................. PPO............. $2676 $3000........... 100%........... RX discount 133 133 100 100 N/A 75.0 140 None
card and 100%
coverage after
deductible
Optional well
baby coverage.
Optional
preventive
care coverage.
Mental health
coverage.
Tennessee.................... PPO............. $2573 $1000 ($2000 out 80% (50% out of $30 office 400 400 400 400 25 72.8 100 TENNCare
of network). network). visit copay.
RX coverage
with sliding
copay.
Preventive
coverage.
Texas........................ PPO............. $2343 $750............ 50%............ $15 office 185 133 100 17 15 72.8 200 Risk Pool
visit copay
without
meeting
deductible
including
routine exams
and
immunizations.
Rx $15 generic/
$25 namebrand.
Utah......................... Indemnity....... $2340 $1000........... 80%............ All benefits 133 133 100 100 54 72.8 200 Guaranteed
subject to Issue
deductible.
Vermont...................... HMO............. $6191 none............ 100%........... Office visits 200/225 225 225 225 99 80.8 200 Guaranteed
$20 copay. RX Issue
not covered
but available
for an
additional
$44.05 per
month.
Virginia..................... PPO............. $2592 $1000........... 80%............ $25 office 133 133 100 100 32 209(b) 225 Open Enrollment
visit copay/RX
$25 generic/
$35 namebrand
copay.
Washington................... Indemnity....... $2712 $1000........... 20%............ RX subject to 185 200 200 200 77 76.7 300 Risk Pool/
deductible. Guaranteed
Issue
West Virginia................ Indemnity....... $2525 $1000........... 80%............ All benefits 150 133 100 100 29 72.8 185 None
subject to
deductible.
Wisconsin.................... PPO............. $2567 $500............ 80%............ $15 office 185 185 100 45 84 85.0 185 Risk Pool
visit copay.
RX $15 generic/
$25 namebrand
copay.
Wyoming...................... Indemnity....... $2760 $2500........... 100%........... RX discount 133 133 100 52 N/A 74.2 133 Risk Pool
card and 100%
coverage after
deductible.
Optional well
baby coverage.
Optional
preventive
care coverage.
Mental health
coverage.
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
PLEASE NOTE: The information presented in this analysis is the exclusive property of the National Association of Health Underwriters (NAHU). It was prepared as an informational resource for
NAHU members, state and federal policymakers and other interested parties. It is not to be duplicated, copied, or taken out of context. Any omission or the inclusion of incorrect data is
unintentional. If you have any questions about the information presented in this document, please contact Jessica Fulginiti Waltman, NAHU's Manager of Health Policy, at (703) 276-3817 or
[email protected]
Washington MSA Project
Issaquah, Washington 98027-8616
April 15, 2001
Allison Giles
Chief of Staff
Committee on Ways and Means
U.S. House of Representatives
1102 Longworth House Office Building
Washington, DC 20515
Dear Ms. Giles:
Please accept this letter as testimony in response to your
Committee solicitation for written statements bearing upon recent
hearings on making health care affordable. This statement relates
directly to Representative Nancy Johnson's Health Subcommittee Hearing
dated 4 April, 2001.
The Washington Medical Savings Account Project is a nonprofit
educational and research organization based in the Seattle area. We
continue to research the roles and effectiveness of ``Archer MSAs''
nationally and in Washington state. We have concluded that federal tax
favored MSA programs given appropriate latitude, expansion, and scope
under new legislation will bear constructively upon increasing
measurably the availability of affordable health insurance.
Addressing the proposed MSA expansion legislation Representatives
Thomas and Lipinski introduced this month and which we support, we
recommend two further vital improvements:
Eliminate the ceiling for the Archer MSA high deductible
health insurance but set the upper limit on the allowed total tax
favored annual contribution to the MSA.
Allow flexible MSAs linked to either front end deductibles
or to deductibles for health care services other than routine primary
and preventive care.
Both of these modest additions to the Thomas/Lipinski ``Medical
Savings Account Availability Act'' fit well the intention of
Congressional action to enhance and improve the affordability of
healthcare.
Thank you for an opportunity to provide this testimony;
Stephen Barchet, MD, FACOG, CPE, FACPE
Chair/CEO
Cc: The Honorable Jennifer Dunn