EXPANDING AFFORDABLE HEALTH CARE COVERAGE: BENEFITS AND CONSEQUENCES OF ASSOCIATION HEALTH PLANS

HEARING

Serial No. 106-14

OPENING STATEMENT OF CHAIRMAN JOHN A. BOEHNER, SUBCOMMITTEE ON EMPLOYER-EMPLOYEE RELATIONS, COMMITTEE ON EDUCATION AND THE WORKFORCE *

OPENING STATEMENT OF RANKING MEMBER ROBERT E. ANDREWS, SUBCOMMITTEE ON EMPLOYER-EMPLOYEE RELATIONS, COMMITTEE ON EDUCATION AND THE WORKFORCE *

STATEMENT OF VICTORIA CALDEIRA, MANAGER LEGISLATIVE AFFAIRS, FEDERAL PUBLIC POLICY, NATIONAL FEDERATION OF INDEPENDENT BUSINESS, WASHINGTON, DC *

STATEMENT OF DONALD G. DRESSLER, CAE, PRESIDENT FOR INSURANCE SERVICES, WESTERN GROWERS ASSOCIATION, NEWPORT BEACH, CA AND ON BEHALF OF THE ASSOCIATION HEALTHCARE COALITION, WASHINGTON, DC *

STATEMENT OF MARY NELL LEHNHARD, SENIOR VICE PRESIDENT, POLICY AND REPRESENTATION, BLUE CROSS and BLUE SHIELD ASSOCIATION, WASHINGTON, DC *

STATEMENT OF STEVEN B. LARSEN, COMMISSIONER OF INSURANCE, STATE OF MARYLAND, BALTIMORE, MD, AND ON BEHALF OF THE NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS, SPECIAL COMMITTEE ON HEALTH INSURANCE *

APPENDIX A - WRITTEN OPENING STATEMENT, CHAIRMAN JOHN A. BOEHNER, SUBCOMMITTEE ON EMPLOYER-EMPLOYEE RELATIONS, COMMITTEE ON EDUCATION AND THE WORKFORCE *

APPENDIX B - WRITTEN STATEMENT OF VICTORIA CALDIERA, MANAGER OF LEGISLATIVE AFFAIRS, FEDERAL PUBLIC POLICY, NATIONAL FEDERATION OF INDEPENDENT BUSINESS, WASHINGTON, DC *

APPENDIX C - WRITTEN STATEMENT OF DONALD G. DRESSLER, CAE, PRESIDENT FOR INSURANCE SERVICES, WESTERN GROWERS ASSOCIATION, NEWPORT BEACH, CA AND ON BEHALF OF THE ASSOCIATION HEALTHCARE COALITION, WASHINGTON, DC *

APPENDIX D - WRITTEN STATEMENT OF MARY NELL LEHNHARD, SENIOR VICE PRESIDENT, POLICY AND REPRESENTATION, BLUECROSS AND BLUESHIELD ASSOCIATION, WASHINGTON, DC *

HEARING ON EXPANDING AFFORDABLE HEALTH

CARE COVERAGE: BENEFITS AND CONSEQUENCES

OF ASSOCIATION HEALTH PLANS

____________

Thursday, March 25, 1999

House of Representatives

Subcommittee on Employer-Employee Relations

Committee on Education and the Workforce

Washington, DC

The Subcommittee met, pursuant to notice, at 9:30 a.m., in Room 2175, Rayburn House Office Building, Hon. John A. Boehner, Chairman of the Subcommittee, presiding.

Present: Representatives Boehner, Roukema, Talent, DeMint, Fletcher, McKeon, Andrews, Holt, Wu, Romero-Barcelo, Kildee, and Payne.

Staff present: Robert Borden, Professional Staff Member; Christopher Bowlin, Professional Staff Member; David Connolly, Professional Staff Member; David Frank, Professional Staff Member; Michael Reynard, Media Assistant; Mark Rodgers, Workforce Policy Coordinator, and Deborah Samantar, Office Manager.

Chairman Boehner. Well, good morning everyone. I am glad that you are all here, and we certainly want to welcome you and want to give a special welcome to our witnesses.

I think all the Members know that, under the rules of the Committee, only the Chairman and the Ranking Member give opening statements, and, without objection, all Members' statements will be inserted into the record.

Today's hearing topic is extremely important as we look at options to increase the number of Americans who have access to affordable health insurance. Over the past few weeks, more and more surveys, both formal and informal, revealed that the issues surrounding health care in this country are clearly on the minds of the voting public. Unfortunately, the complex nature of the American health care delivery system and its associated problems does not lend itself to one sentence quotes in the media; rather, this Subcommittee, with its jurisdiction over ERISA, has the responsibility to carefully consider the implications for ERISA plans of the legislative and regulatory proposals that will arrive before this Congress.

Before I go on, let me say that we all know the broad subject of health reforms for both the insured and the uninsured are current, high profile issues. However, I want to emphasize to the witnesses and to the members of the Subcommittee that today's Hearing is only intended to review the pros and cons of one approach to addressing the problem of the uninsured.

Any health insurance proposal, I believe must adhere to responsible guiding principles. The subcommittee today examines the benefits and consequences of creating association health plans with an eye on the following guidelines: the number of uninsured Americans should not increase; the cost to provide coverage should not increase, and the number of uninsured citizens must be reduced in an affordable way.

And my predecessor, Harris Fawell, developed the association health plan concept and was its most vocal supporter. He and his staff did excellent work in this area, and AHPs have many positive aspects. Alternatively, many have argued that AHPs may have unintended consequences. Therefore, I want to take a close look at both sides of this issue.

As we know, approximately 80 percent of the uninsured either work for a small employer or have a family member who works for a small employer, and it can be argued that AHPs addressed the uninsured group by allowing small employers to join a health plan sponsored by a bona fide association. However, we don't want to make matters worse for those who remain in State regulated health insurance markets. Serious consideration should be given to what effect AHPs would have on the existing small group health insurance market.

AHPs allow employers and the self-employed to band together voluntarily in associations to form multiple employer groups. Under this concept, these large groups could self-insure or fully insure, gaining all of the advantages of pooling, including greater economies of scale and lower costs. The result could be a rising tide that lifts all boats. Small employers who now could not afford coverage could offer it to their uninsured workers. States may benefit by having fewer people on Medicaid or dependent on State high-risk pools.

On the other hand, opponents claim that AHPs, as designed, have inadequate solvency regulations. AHPs would harm the State regulated small group health insurance market; allow anti-selection, or cherry-picking, and erode State guaranteed funds. Further, some have raised the concern about whether creating AHPs would lead to abuses similar to those in the past with multiple employer welfare arrangements, or MEWAs as we know them. Many opponents of AHPs contend that they are MEWAs of a different name and could provide opportunities for fraud and abuse. These are serious concerns and deserve serious consideration. We must do no harm as we look at the options to increase access for affordable health insurance.

I look forward to the witnesses discussion of the impact of association health plans on providing health coverage to workers and their families. I hope that the witnesses will address the impact on the cost and availability of health insurance for all workers if these plans are implemented.

At the Subcommittee's first hearing, I stated that we must all understand that amendments to ERISA involve trade-offs between cost and access. The greater the regulation, the higher the cost of insurance and the greater risk employers will drop coverage for their workers. Thus, regulatory amendments in this area must be made with great care. Since I know Mr. Andrews shares my goal of expanding health care coverage for all Americans, I think both of us look forward to your testimony, and I now yield to my friend from New Jersey, Mr. Andrews.

WRITTEN OPENING STATEMENT, CHAIRMAN JOHN A. BOEHNER, SUBCOMMITTEE ON EMPLOYER-EMPLOYEE RELATIONS, COMMITTEE ON EDUCATION AND THE WORKFORCE – SEE APPENDIX A

Mr. Andrews. Thank you, Mr. Chairman. I thank you for calling this Hearing, and I commend you for its structure. One of the secrets of the legislative process in Washington, which I would reveal, is that very often hearings are really not hearings. If hearing means that you listen to people and learn from what they have to say, they are very often soapboxes for those of us who sit up here to espouse a particular point of view; both parties have been known to do this.

Today, I think is a refreshing departure from that policy. This is a very interesting question: The validity of association health plans, their value, their merits, and the demerits. It is not a partisan question. It is a question that I think members on both sides of the aisle are very interested in exploring.

It is looked at in its most favorable light, the association health plan concept, as a way to bring more competition to the health care marketplace; therefore, increasing quality, decreasing costs, and increasing the number of people who will be covered. Looked at in its least favorable light, due to the law of unintended consequences, as the chairman said, we could wind up with a situation where there is inferior coverage because of insufficient surety requirements, where there is a situation where fewer people wind up covered because plans that are not association health plans, or otherwise favored, would wind up unable to cover members or losing members.

This is an area that does not lend itself to easy, ideological categorization, which is why today's hearing should be very interesting. I am looking forward to hearing from each of the four witnesses. I have read much of what they have had to submit already, and I look forward to what they have to say this morning. Thank you.

Chairman Boehner. Thank you, Mr. Andrews, and I think we will begin. Our first witness this morning is Victoria Caldeira. Ms. Caldeira is Manager, Legislative Affairs, Federal Public Policy at the National Federation of Independent Business. Ms. Caldeira.

Ms. Caldeira. Thank you. Good morning, Chairman Boehner and Congressman Andrews, Congressman Talent, and Congresswoman Roukema; it is a pleasure to be here today. As you said, I am Victoria Caldeira from NFIB, and I want to begin by thanking you today for having this Hearing.

Nothing is more important to NFIB than solving the health care problems of small business. We firmly feel that national association health plans, or AHPs, if you will, are an ideal solution to our problems. They will increase access by lowering costs and providing more choices for small businesses.

We know that there are a growing number of uninsured in our country. At least 43 million people have no access to health care coverage today. What is truly alarming is that a large portion of these people are actually working Americans. In fact, 62 percent or 24 million of the uninsured have a family head who is self-employed or working in a firm with fewer than 100 employees.

Attempts to address the problem of access from the state level simply have not worked. Everyone from the conservative Galen Institute to the liberal Urban Institute recognizes that State reforms have increased costs and resulted in more uninsured people. As a result of these trends, the high cost of health care is the number one problem for small business owners today. In fact, 30 percent of our members with less than 6 employees provide a plan; the other 70 percent cannot afford to. We have been serving our members for over 10 years on this issue, and health insurance has been ranked their number one problem behind taxes and regulations which are two very important problems for small businesses. For those small businesses that do offer coverage, 35 percent pay over $5,000 per employee per year for a family plan.

In searching for a solution to the cost problem, our members looked around at what is working in our current system. When it comes to access, cost, and choice in the health care marketplace, Fortune 500 companies are doing better than anyone else. Size alone is not the only reason for their success. It is also that these companies are able to operate in a uniform manner, across state lines, under national rules to purchase health care for their employees. Unfortunately, under today's laws, it is impossible for small business to be able to purchase health care in the same manner, and it is for this reason that we support association health plans.

The AHP concept is a private market solution to the small business problem of the uninsured. It gives small business the same access, cost control, and choices in the health care marketplace that big business now enjoys, and there are five reasons why this is the case. First, nationally uniform AHPs will result in lower administrative costs per person for small business. Right now, administrative costs are 30 percent higher for small businesses than for large business. Secondly, nationally uniform AHPs will have the greatest bargaining power. Purchasing health care for tens of thousands of people would enable association health plans to negotiate lower rates with providers in exchange for a large volume of business. Third, nationally uniform AHPs will improve small businesses' ability to absorb risk and provide stability. Similar to large employers and union plans, AHPs would have enough members to spread the risk so that if a member gets sick, the costs can be absorbed in the pool without a substantial increase in premiums. Fourthly, nationally uniform AHPs will give small business the ability to self-insure which has the power to be a huge cost controller. And, fifth, nationally uniform AHPs will give small businesses more choices in designing products that small businesses need and want.

In closing, I would like to respond to some of the unwarranted criticisms that have been leveled against association health plans. The first is that association health plans are like multiple employer welfare arrangements, or MEWAs. MEWAs were irresponsible, fly-by-night organizations that had no rules or standards to prevent fraud and abuse. Given this fact, stories of MEWAs disasters are really not that surprising. However, association health plans are simply not MEWAs. AHPs will have strict eligibility rules, strict solvency standards, and strict certification requirements to protect plan participants.

The second unwarranted criticism is that association health plans would cherry-pick the healthy; this is absurd. AHPs must take every comer into the plan, sick or healthy. That is right, a whole section of the bill is devoted to this, and I have it here, and I am happy to make it available to the members. In addition, an AHP cannot charge a sick member more money, and it cannot charge the small business that the small business employee is a part of more money. So, there are plenty of non-discrimination rules in this bill.

The final unwarranted criticism is that association health plans will not reduce costs. NFIB and the other members of the Association Health Plan Coalition contracted with CONSAD Research Corporation to determine a reasonable estimate of the number of uninsured that could obtain coverage due to the increases in choices and declining premium prices that would result if AHPs become law. CONSAD conservatively estimates that premiums for small businesses would be reduced by 5 to 15 percent and that this would result in association health plans being able to provide coverage for 2 million to 8.5 million more people who were previously uninsured.

NFIB strongly believes that if the AHP provisions become law, our health care system will be fairer; there will be more choices available to small business owners at lower costs, and the result will be more insured people. We are confident the marketplace can work to provide better options for small business. We hope that you will step out in faith and work to provide us with this opportunity, and we look forward to working with you in this regard.

I would just like to close, also, by letting you know that everyday we hear from our small business members on health insurance and their problems. I have a few stories here, and I have a lot more stories back at the office, and I would just share one with you. Joe Alivo from Perfect Printing in Cherry Hill, New Jersey has 18 employees, and this year, he experienced a 17 percent rate increase. He responded to this by raising the deductible to such a point and dropping prescription drug coverage that his employees rightly feel that they have no health insurance. But, that was the only option that they could really make work for them without dropping the plan entirely. I have a fistful of stories here, and I just really don't know what to tell these people, Congressman Boehner, and our job is to represent them. So, if this isn't the solution, we really don't know what is.

WRITTEN STATEMENT OF VICTORIA CALDIERA, MANAGER OF LEGISLATIVE AFFAIRS, FEDERAL PUBLIC POLICY, NATIONAL FEDERATION OF INDEPENDENT BUSINESS, WASHINGTON, DC – SEE APPENDIX B

Chairman Boehner. Ms. Caldeira, thank you very much for your testimony.

Our next witness will be Donald Dressler. Mr. Dressler is the President, Insurance Services for the Western Growers Association, Newport Beach, California and is testifying on behalf of the Association Health Care Coalition. Mr. Dressler.

Mr. Dressler. Thank you, Mr. Chairman, and thank you, Ranking Member Andrews, and Members of the Committee. This is an important issue for us, and what I would like to do is submit my written testimony and tell you three stories about association plan experiences that I think illustrate the need for this legislation and what we are trying to do.

The first is the Ohio Lumbermen's Association. The Ohio Lumbermen's is a plan that has about 5,500 lumbermen, forestry, and nursery employers in that State. It is an insured plan. It has been in existence for a number of years. It has a number of wonderful examples of its service. It has designed individual plans to meet its members needs and takes into account seasonal layoffs of up to six months depending on construction cycles and so on. It adds coverage for people after they are working through retirement, and has guaranteed issue and guaranteed renewal and same pricing for all participants. It is financially very successful; operates about 10 percent less cost than the conventional insurance market. It runs its program on an operating cost, including insurance company retention of 9.5 percent, meaning, almost all of their money is available for benefits for participants, and it is interesting that it is competing in a State that have a very aggressive and lively insurance market, as I am sure you know.

Ohio was recently analyzed by a study by Wake Forest University School of Medicine and found to have a highly competitive market in Ohio. There are a number of successful purchasing cooperatives, for example, Cleveland, as well as association plans that are popular, and self-sustaining. It does go on to note, however, that small group underwriting reforms in Ohio still allow significant adverse selection by insurance carriers. The rating bands of plus or minus 30 percent of rates allow disparate pricing based on health experience of small employers; allow insurers to use agents to field underwrite, and allow employers to list bill and exclude sick employees. The association plan doesn't do that, and it is successful even in competing with a market where, for ironies sake, it is the insurers that are cherry-picking and the association plan is operating under the same rules we are proposing in the bill that Congressman Talent and Congressman Dooley are considering introducing; no adverse selection, guaranteed issue, guaranteed renewal.

We want to run our plan the way the Ohio Lumbermen plan operates, and they are so successful that this March they are having a 78 percent premium holiday for their premium participants; meaning, they are giving back or saving money for their participants because of their financial success.

A little more difficulty was faced by the Eastern Building Material Dealer's Association, which operates in New Jersey, Pennsylvania, Delaware, and Maryland. That program has had severe problems, because small group underwriting in those states has impacted the ability to provide benefits. In fact, their insurance carriers have canceled the program in Maryland altogether. In New Jersey, they are restricted to underwriting employers who have more than 50 lives. In Delaware, they can only underwrite employers with more than 25 lives, and I happen to know the execs who run this program personally. They are very skilled, knowledgeable professionals, responsive to their members, and they are frustrated, because they have had the tools to service their members taken away from them by the disparate small group underwriting reform.

In the western part of the United States, the Western Growers Association has operated for over 40 years, and we really do represent cherry pickers, Mr. Chairman. I mean, our members grow cherries, fresh sweet Bing cherries. We hope to bring them to your market in May and early June; hope you look forward to that time of year. They are as sweet as the cherries from Washington and Oregon. In fact, the cherry season is three weeks long, and people who handle and process cherries may work a few more months afterwards, but it is a seasonal industry, and we have built our program covering seasonal, agricultural workers, people who are often Hispanic by origin and language, who may be itinerant, who the commercial insurance markets don't want, and yet we have been serving them for 40 years and successfully. We represent about 3,000 employers. The Ohio Lumbermen's group average size is 10. It is interesting, our members' average size is 10 as well.

What we have in California is a state certification law that we operate under. The problem is it expires in the year 2000, because, when it was passed, our Legislature felt that Congress would have solved the problems of health care by the year 2000; would have laid a track which we could operate on. Unfortunately, well, in 1994, that might have been optimistic, but, today, I think we recognize its limitations. Plus, you don't grow crops in just one state; you have to grow with the sun and where the seasons go.

Just to conclude, I think that we have proven that we can run successful programs. There are a lot of criticisms that are going to be mentioned to this program, and we would love to deal with them, and we would love to meet and resolve them. Unfortunately, in the last few years, all we have had are criticisms. As we have tried to address solvency issues or adverse selection or other things to make it a good, successful program, we continue to just get resisting criticisms.

The time has come when large employers are still offering health care. You are not seeing an erosion of uninsureds in the large market, because they have ERISA and the tools there to work with. It is only in the small employer market where we are seeing rising uninsureds. In California, 50,000 more people are uninsured every month, and it is resembling that nationwide.

We need to have access to the tools. Some of us have proven with our track records that we can run successful, financially solvent, responsive programs, and when a member has a problem with a prescription in our case, they have my number, and they call me personally. Try and call the president of BlueCross of any state and get them on the phone and ask for help with a problem.

WRITTEN STATEMENT OF DONALD G. DRESSLER, CAE, PRESIDENT FOR INSURANCE SERVICES, WESTERN GROWERS ASSOCIATION, NEWPORT BEACH, CA AND ON BEHALF OF THE ASSOCIATION HEALTHCARE COALITION, WASHINGTON, DC – SEE APPENDIX C

Chairman Boehner. Well, Mr. Dressler, thank you for your testimony.

Our next witness is Mary Nell Lehnhard, the Senior Vice President of the Office of Policy and Representation, BlueCross and BlueShield Association.

Ms. Lehnhard. Mr. Chairman, Mr. Andrews, Members of the Committee, I am here representing all of the BlueCross and BlueShield plans, and these plans are very deeply committed to finding ways to increase the number of small employers that can provide health benefits. We just recently released a multi-faceted proposal to increase the number of insured, and the centerpiece of this proposal is focused on what we see as the most serious problem. The very high rate of uninsured in what we call the baby groups, the very small groups, particularly groups of under 10.

My message today, though, is that expanding ERISA preemption to small groups will only make the problem worse. Proponents of AHPs and MEWAs have stated two objectives: first, to create large pools, like large employers, and, secondly, to offer reduced costs by eliminating the costs of state-mandated benefits and lowering administrative costs.

Let me first comment on the objective of large pools. The states understand very well that maximum pooling is critical in a small group market. It is the only way to assure that the sick groups are cross-subsidized by the healthy groups, and this is what makes large group coverage affordable, that cross-subsidy.

By the 1980's, competition in the small group market, though, had become almost entirely focused on insurers, targeting and enrolling the healthiest groups; minimal pooling and cross-subsidies. If you get a healthy group, you give them a low price, because they don't use services. Premiums for healthy groups were 10 to 12 times more than premiums for sicker groups.

The states, though, led by the NAIC said to the insurers, ``No more of this. We want all insurers to pool their small group business. All products, all enrollment goes into one pool.'' They allowed insurers to vary the premiums by certain factors, such as age, health, and status, but each state put a limit on how much we could vary those premiums from the sickest to the healthiest group. The state regulators in effect said, ``We want the insurance principle of maximum pooling of risk to work for small groups like it works for large groups.'' And the chart over here at the top, above the dark line, illustrates what the states required us to do as health plans. Essentially, put all of your small group business in one pool and when we negotiate with providers, we negotiate with tens of thousands of small groups.

The AHP, MEWA legislation would reinvent the devastating problems that the states have addressed. The legislation would enable AHPs and MEWAs to target the healthiest groups, pulling them out of large state-regulated, insured markets by four ways: number one, they could avoid attracting the less healthy groups by not covering the state-mandated benefits that less healthy people need. This is particularly true in the case of women's benefits. A small group with women trying to get pregnant would stay in the state pool where the in-vitro fertilization is covered. Employers with problems of mental health, substance abuse, would not go onto a MEWA or an AHP where these benefits are not covered.

Second, it is using membership criteria that essentially limits enrolling groups to healthier groups. The Congress just passed HIPAA legislation that said, ``We will have no more turning down anybody who covers small groups; turning down any kind of groups.'' This would go back to limited eligibility, small groups being able to say no to certain types of higher risk.

Third, by marketing association membership only in areas with lower costs. Take a state like Illinois, teaching hospitals in part of the state, very high costs; you are going to target your MEWAs or AHP marketing. You target it in a lower part of Illinois where your health care costs are lower.

And, fourth, setting rates based only on the claims experience of their own group, they could avoid that cross-subsidy in that large pool that the States have created.

Insurers might still have a large insured product open to everyone, but the premiums would quickly escalate. The healthier, small employers would find a way to join the lower cost, better risk AHPs and MEWAs. The bottom line is we would go back to lots and lots of small pools, small employers, competing on risk selection, and this is illustrated underneath the line. For example, BlueCross and BlueShield plans would form MEWAs, would service AHPs, and they would keep their larger risk of people who weren't eligible to get into AHPs, but those premiums would quickly escalate.

The worst part is that many of these new pools would no longer be regulated by the State Insurance Commission. They would be regulated by the Department of Labor. This is a prescription for no regulation at all. The Department of Labor has said they can expect to get around to each large ERISA plan once every 300 years, forget protecting small employers. The most egregious practices in the small group market would return. AHPs and MEWAs would offer very limited benefits; annual caps of $10,000 to $20,000 would be allowed, and these limited benefits could be hidden in the marketing materials, whereas the State regulator would make sure there was full disclosure of these limited benefits. The plentiful examples of MEWAs that close up after three years when the benefits of risk selection wear off and leave enrollees with unpaid bills and no coverage, and the representative from NAIC will say more about that.

Finally, I would say that contrary to reducing costs, we believe administrative costs would increase, because AHPs have the same cost insurers plus membership fees dues and probably royalties and licensing fees of insurers they contract with. A MEWA study by William & Mercer attached to your testimony underscores this point. And, most critically, the leftovers in this state-insured group will see their premiums increase dramatically. It is a double-whammy to them; they are getting worse and worse risk selection, and they are carrying the costs of mandated benefits on top of that risk selection.

We urge the Congress to work with the States, not against them. The objective of maximum pooling of small groups has been achieved. The next step to helping small employers should be financial incentives, particularly for those small employers who have low-wage workers. Thank you.

WRITTEN STATEMENT OF MARY NELL LEHNHARD, SENIOR VICE PRESIDENT, POLICY AND REPRESENTATION, BLUECROSS AND BLUESHIELD ASSOCIATION, WASHINGTON, DC – SEE APPENDIX D

Chairman Boehner. Thank you very much for your testimony.

Our final witness is Steven Larsen, the Insurance Commissioner for the State of Maryland, testifying on behalf of the National Association of Insurance Commissioners. Mr. Larsen.

Mr. Larsen. Thank you, Mr. Chairman and Members of the Committee. It is a pleasure to be here on behalf of the NAIC, and I would like to present to the Committee, it was just handed to me, a letter from the NSCL, the National Conference of State Legislatures, which is providing a letter in support of our testimony.

Mr. Chairman and Members of the Committee, the NAIC does have a number of serious concerns about AHPs, including those that were just referenced in terms of the impact that it would have on the small group market reforms that the vast majority of states have enacted. In the interest of time, I would like to focus on two of the most significant areas of concern that we as state regulators have and that is with respect to the solvency oversight and the preemption of state consumer protection laws. And, as has been mentioned, I would just like to remind, again, the Committee that in 1983, Congress did amend ERISA to place the regulation of MEWAs and employer trusts under State regulation because of the many abuses that occurred, and we do see many similarities between the AHPs and the problems that were sought to be remedied by Congress in 1983.

One of the key aspects of the state regulation of insurance is the financial oversight and regulation of risk-bearing entities. This includes very strict reporting requirements, financial examination requirements, and ongoing proactive solvency review of the AHP provisions that we have reviewed. It appears that the solvency requirements applicable to AHPs rely primarily on self-reporting by the AHPs, and any review of the solvency is done solely by the accountants or actuaries that are retained by the AHP.

In contrast to the current and, I believe, very successful system of solvency oversight by the state, state solvency review relies on the state financial reviewers to examine the books and records and ledgers of the companies, their assets, and their reporting and reserving techniques. This ensures an objective review of the financial condition of the insurers that we regulate. And my experience has been, almost universally, that insurers that are experiencing financial difficulty do not come forward to the regulator to indicate the problems they are having. The insolvency that we have had in Maryland and in other states are almost exclusively identified because of the financial examinations that the state insurance commissioners conduct and the review of the data that is submitted to us by the carriers. And we frequently look at and revise the information that is provided to us even from the company's own actuaries and their own CPAs and accounting firms.

Although there is some regulatory authority vested in the Department of Labor relating to solvency, it is essentially an after-the-fact regulatory authority. The authority of DOL to intervene is limited to where the insolvency has already occurred, and at that point, and again I can speak from experience, there is a period of substantial chaos for the members of any company that becomes insolvent. We believe that the solvency provisions in the AHP proposals are inadequate. There is no ongoing oversight, no financial exams, and the substantive standards, themselves, we believe are also inadequate to protect the consumers who will wind up having policies under these AHP plans.

Our second area of concern is the AHP provisions that would preempt state consumer protection laws. Some examples of the key state law protections that would not be available to protect the purchasers of AHP plans because of the state preemption in this bill would be laws relating to the unfair claims settlements practices of insurers. State regulators can currently handle complaints from members relating to unfair claims settlement practices. All the laws ensuring that advertising and sales practices are fair and not misleading, we believe would not be applicable to the marketing and sales practices of AHPs. Part of our financial review is conducting background checks on the officers of insurance companies to make sure that they are trustworthy; that would not occur. Currently, almost all States have rules ensuring that the provider networks of the health insurers are adequate to serve the members. Those laws would not be applicable to the plans offered by AHPs, and we currently conduct extensive rate and form policy review to ensure that the consumer protections are in place.

We all agree and all recognize that there is a need to increase access and deal with the affordability issues relating to health insurance. We think the states have done that. In Maryland, the number of lives that are insured under the small group market have gone up since we enacted our small group market reforms, not down.

We would urge you not to adopt the AHP approach, although we do want to work with the Committee to find mutually agreeable ways to address the issues of access and affordability. I would be happy to answer any questions. Thank you.

WRITTEN STATEMENT OF STEVEN B. LARSEN, COMMISSIONER OF INSURANCE, STATE OF MARYLAND, BALTIMORE, MD AND ON BEHALF OF THE NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS, SPECIAL COMMITTEE ON HEALTH INSURANCE – SEE APPENDIX E

Chairman Boehner. We thank all the witnesses for taking their time today and helping the Committee understand this issue more clearly by trying to delve into all these different positions I hear from the four witnesses.

Mr. Larsen, many have argued that state mandates on health insurance have forced up the costs to small employers, and, as a result, many small employers have decided just not to offer health insurance to their employees. Do you share this view that state mandates do in fact raise the costs of health insurance?

Mr. Larsen. Well, yes and no, if I can answer like a typical lawyer. I think that there is some data out there to suggest that the costs may increase. We recently did a study in Maryland. Our Health Care Access and Cost Commission looked at that specific issue: Do the costs of mandates increase? And the increases are marginal, in the single-digit percentage range, and I guess it is our position, or my position at least, as the State of Maryland Insurance Commissioner that that is an extraordinarily marginal increase that is part of the trade-off to ensure that people insured under these plans have a minimum level of protection and that the State can protect them from marketing practices and underwriting practices of the plans. I think there is a small and marginal increase, but it is not anywhere near the magnitude that I think some of the proponents of AHPs have argued.

Chairman Boehner. Well, I am sure some of those state mandates and certainly the consumer protections are well-intentioned, well-meaning, but, as you have indicated, there is some increase in costs, and I think most of us up here believe that every dollar that is added to the cost of health insurance pushes more people out of the insured market.

What I am trying to get my arms around is this relationship between cost and access. I was a state legislator; fought state mandates just for that particular reason; raising the prices. When you raise the price, you are going to push more people out of the system. We now have over 40 million uninsured. In your opinion, where is this increase in the uninsured coming from?

Mr. Larsen. Well, as I would imagine, Mr. Chairman and the Committee knows, there are a number of factors that are increasing the cost of health care. Health care costs are rising across the board for all employers, not just in the small group market. So to look at the root causes of the increase in the uninsured is a broad problem relating to increased health care costs generally and not with respect to, in my opinion, the imposition of mandates at the state level.

I won't, I think, argue that as costs increase, there are points at which certain insurers, I mean employers, elect not to purchase the coverage. I would certainly acknowledge that. The question is, what is causing the cost increases, and I would argue that it is not the existence of the mandated benefits, because our experience is that those add marginally to the cost. It is the generic across-the-board factors that are affecting the level of uninsureds.

Chairman Boehner. Mr. Dressler, you have an association plan operating under state regulations. You are here today arguing that the association health plan proposal from the last session would be of great help today. What I want to do is narrow down why you think there are significant benefits in this proposal that has been under consideration in Congress?

Mr. Dressler. Well, first of all, what has happened in our society is that as health care organizations emerged and grew, they offered less and less choices to the employer, and no incentives. In fact, what we have is a group of folks nobody is competing for; nobody is going after and trying to design. For example, the Building Dealers that are covered by BlueCross BlueShield have just received a 20 percent rate increase. In my membership, if I had a 20 percent rate increase, I would go sit down with the members and I would talk about how we solve this problem, because I am not responsible to shareholders; I am responsible for trying to keep business people in business. So, what I am after in this legislation are the tools that would assure the chance to compete, and particularly the tools we need are flexibility of benefit design because that drives costs.

The other concerns that have been mentioned, such as fair claims practices, we would love to work those out. We don't want to have unfair claims practices for our members; we don't want to mislead them in a promotion. We want to resolve those problems, but the benefit design and the ability to group together are critical.

There is a group in California called Pacific Employers Group that have 35 companies with 3 million employees. They have grouped together for an average employer size of 8,500 and found it to be an advantage. Think what we can do by grouping together small employers.

Chairman Boehner. I understand the advantages of larger purchasing power, but let me ask you this then: when it comes to state mandates on the plan that you offer today, as compared with what you believe you could offer if this AHP, as being proposed, were given to you, what effect do you think it will have on the costs of your employers and employees if you weren't subject to those state-mandated benefits?

Mr. Dressler. Depending on the state, we are looking at anywhere from five ----.

Chairman Boehner. Well, how about the western growers?

Mr. Dressler. In California, about 15 percent of our costs are driven by state benefit mandates.

Chairman Boehner. Do you believe that your members and their employees could have insurance premiums 15 percent lower than where they are today?

Mr. Dressler. Absolutely.

Chairman Boehner. My time has expired. The Chair will recognize the gentleman from New Jersey, Mr. Holt.

Mr. Holt. Thank you, Mr. Chair. I would like to ask Ms. Caldeira and Mr. Dressler a question. The proposal before us seems to have nothing to address the health insurance access problems of small businesses that are not part of an association. What should be done to assist them?

Ms. Caldeira. Well, I think, first, we would want to pass this legislation, because it represents a private market, no government funding solution to the problems, and we would have to assess where we are from here, because we are probably going to pick up, as we said, from 10 million to 8 million; there are 43 million uninsureds. We are currently trying to struggle with that question. We certainly don't think subsidies to small business are the way to do it. Maybe subsidies to low-income individuals would be a better approach, but we have not polled our members on that yet.

Mr. Dressler. And, if I could just add, I have been in association management for 30 years. I really went to work for the farm organization when I completed my college education. I laid out a career to be a non-profit association exec. There was a time 15 years ago when almost 70 percent of all trade associations and local and regional associations sponsored health care plans. That has eroded dramatically with the advent of the legislation that amended ERISA in the 1980's and with small group underwriting reforms. What we are trying to do is create the balance back. There are 20,000 trade associations in the United States; we have an association for everybody, and you should belong to at least several of them.

[Laughter.]

But we think we could access anybody in the small employer market to one program or another. Now, this is not a plan designed for the folks that are out of that particular economy; we acknowledge that, but this is a whole lot of folks. As the chairman indicated, about 80-some percent of the uninsured are in families that are in small employer groups, and all of them should belong to an association somewhere.

Mr. Holt. Thank you. The state laws mandating coverage from certain benefits that you would like to be exempt from, in some cases, relate to women's health services, preventive services for children, and mental health care. Exactly, which of these types of benefits would you like to see excluded? I would like to ask both of you to respond again, please.

Ms. Caldeira. I think they are all great benefits, and the one thing that we are doing now at NFIB is we poll our members in terms of plan design. We can't do much about the benefits package at this point, but if we could, we would poll them too. Just like large employers poll their members and find out the benefits that are the most important to the most people in the plan. That is the way you would target your benefit package.

For example, Xerox Corporation does cover in-vitro fertilization, because they have a high percentage of women in their forties that are having a hard time getting pregnant, and it was a demanded benefit, but that might not be something, if you have a lot of older employees, that you want in your benefit package. A lot of self-insured employers do this, and they are very effective in really targeting the package to just what the needs are on their employers fees.

Ms. Lehnhard. Mr. Holt, could I comment on that?

Mr. Holt. Mr. Dressler, first, and then Ms Lehnhard.

Mr. Dressler. Our approach to that, I actually sit down with the employees and foremen and personnel managers of our companies and say ``What is important to you?'' For example, I sat down with a group of folks and they said, and this may not be politically correct, but they didn't want to carry substance abuse and alcohol abuse in their plan for the cost, because they felt those folks weren't people they were worried about. They were more worried about children getting access to immunizations and mothers being able to take their sick children in. We are interested in things like care for women for breast cancer, but we are not as concerned about in vitro-fertilization which is an elective procedure some people may choose to engage in.

But that is interesting about the association community. We can sit down and talk with folks and design plans that are meaningful to them; something that, frankly, the BlueCross programs won't do. There is a pool program in Texas, and I talked with them about it. Texas endorsed our legislation last year. They were saying, ``Why have you had a successful program in California with 100,000 participants in the small sector of the economy, and we can't have a successful program in Texas?'' I said, ``Well, who designed the plan?'' A couple of folks sitting in Austin, Texas in a board room, not folks out talking across the desk to a small businessman saying, ``What is important to you?'' And, so I don't think there is a universal answer for everybody about what to include.

Mr. Holt. When you sit down with them, I presume that you are sitting down with the growers, not with the itinerant workers.

Mr. Dressler. We are sitting down with the foremen who are with them, because you need to know what folks want. We are having trouble attracting labor force, as you probably know, in the West. We need good benefits. Health benefits are important to our workers, so it does us no good to have benefits that they don't appreciate and want to use.

Mr. Holt. Ms. Lehnhard?

Ms. Lehnhard. I think when you look at addressing the problem, that he is describing, a tailored benefit package; that they don't want the in-vitro, they don't want the mental health substance abuse, you have to look at the consequences of waiving mandates for some in the market and not others. And if you sort of look at this chart over here for this large group of people who are left in the state insured markets that don't want to go into an AHP because they need in-vitro fertilization or they need mental health substance abuse, their premiums are going to go up. Because the people who didn't need those expensive services have moved in an AHP, and the people who need the services have stayed in that large insured pool, I an guarantee you when that small AHP or the AHP needs in-vitro fertilization, they will jump back in the state insured group and use the services and then jump back out when they no longer need them. That is a huge unintended consequence of providing relief for part of the market and not the rest of the market. The people who need the services are going to end up paying very close to the cost of their care with no cost subsidy from the healthier people.

Chairman Boehner. Ms Caldeira, if you would like?

Ms. Caldeira. Thank you very much. I’d just like to respond to Mary Nell's comment. Our problem is that our small businesses, the majority of them, are not in the pool at all. They are just not there; they are not purchasing health care coverage. So, we want to get them in the pool, and that is why we really want this legislation.

Mr. Holt. Thank you. I see my time is expired. I will reserve my further questions. Thank you. Thank you, Mr. Chairman.

Chairman Boehner. Thank you, Mr. Holt. The gentleman from South Carolina has another commitment here briefly, and the gentle lady from New Jersey was kind enough to allow Mr. DeMint to go ahead. Mr DeMint.

Mr. DeMint. Thank you, Mr. Chairman. I have been a small businessman for 15 years, and I have experienced first-hand the problem of buying health insurance. A number of my clients have also been physicians in hospitals, and I have seen the difficulty that they have dealing with them in a market where there are two or three major insurance companies that are pretty much running their business. So, I tend to like the idea of more competition. I believe that the national marketing of insurance products would enlarge the risk pool and create a wider variety of products for individuals and businesses to buy. I think we demonstrated by oversight of the investment industry, including life insurance, that we can ensure issues of solvency although I realize that has been a problem before.

But I am interested in the association health plans as well as the national marketing of BlueCross and other insurance products, because I see it as an opportunity to solve what I find to be one the biggest problems in health care, and that is that individuals cannot buy permanent whole life health insurance. The only thing available to us is temporary or term health insurance that either belongs to our employer or it belongs to the Government when we retire.

My question to the witnesses here today, and I would like a comment from any of you that would like to comment, is could AHPs serve as a retailer of health insurance products that are paid for and owned by individuals and could, within this context of a larger risk pool and a variety of products, could we create permanent health insurance products that these individuals own? I realize this is a different paradigm than you are thinking about, but as long as all employees can only buy temporary health insurance, we are stuck with the same problem of an employer-based system. If any of you would care to comment; Mr. Dressler, we will start with you.

Mr. Dressler. I think that we have an example of that, if you would combine the concept of medical savings accounts with the current section 125 of cafeteria flexible benefits. We offer flexible benefits, the cafeteria benefit plans, to seasonal agricultural workers, and they like it, and they like the choice involved. The problem now with section 125 is the so-called use it or lose it feature of flex spending accounts. If you don't happen to spend the money in one year, it is gone forever. This is ridiculous, because the ability to save up is gone, but within those frameworks, I think associations could very easily design these permanent products. We already essentially offer guaranteed renewal. We are not going to let you go away, but we need the ability to have employees develop some net worth, if you will, for their health care costs in this combination of flex spending account or medical savings account concept. The seeds are there, and I think you could build upon them very effectively.

Mr. DeMint. Just a follow-up question: the reinsurance component of that medical savings account right now is term insurance. Do you see a way that we could create permanent insurance products that people buy? In other words, I may have equity in my MSA, but I may have $10,000 or $15,000. Can I buy a permanent health insurance product, and do you think AHPs just by their size could facilitate the development of those products?

Mr. Dressler. Absolutely. In fact, effectively, the Ohio Lumbermen do that now by guaranteeing retirees continued access; retirees of employers as well as retired lumbermen, themselves. They have chosen that approach, and this is a beautiful time in the reinsurance market for these products to be created, because there is excess capacity right now, and you can have so-called evergreen or guaranteed renewable products. I think it can be done.

Ms. Caldeira. We think that there should be more choices, as you do, Congressman, in the marketplace, and that is why there would be as many choices as association plans that are offered. We would be very open to that approach, an MSA approach, but I would say that at this point we are looking more at a PPO approach, because that is just what our members tell us they want, and the idea here is that there be more choices of all kinds for small businesses.

Mr. DeMint. Just a quick comment from the payer side here.

Ms. Lehnhard. I couldn't give a better example than Mr. Dressler gave about the Ohio Lumbermen Association. This is an association health plan; the employees when they change jobs, they end that coverage; they have it when they retire, but it is an insured, state-regulated product that he is raving about. Why put DOL in charge of it with a vacuum of regulations?

And the other issue would be is your insurance going to be there. Your insurance will only be there if you insurer is stable, has adequate reserves every year, and can cover unanticipated claims. And I can tell you from experience that when we get into trouble or an insurer gets into trouble, if you are regulated by the state, you have a 30-day recovery program; the insurance commissioner sends someone to sit in your facility; co-signs the checks with you over $1,000, and you don't make a move without the insurance company. I can't imagine DOL with three people providing that kind of consumer protection.

Mr. DeMint. Thank you. Thank you, Mr. Chairman.

Chairman Boehner. The Chair recognizes the gentleman from New Jersey, Mr. Andrews.

Mr. Andrews. Thank you very much. Commissioner Larsen, I read your testimony, and I want to apologize for being absent from the room; I had to attend a meeting for a few minutes.

I wanted to come back to a point we were just pursuing with Mr. Dressler about the Ohio Lumbermen's plan which really does sound like a very fine plan. Would you characterize the State insurance regulations of Ohio to be about the same as the other States in the country; less restrictive, more restrictive? How would Ohio stack up?

Mr. Dressler. I haven't had a chance to go through all of the details of Ohio. I do know that their rating bands of plus or minus 30 percent is quite liberal, and so they do give a lot more flexibility for rating. What we have proposed in association health care plans is really non-discriminatory in our operation.

Mr. Andrews. Yes, and I wouldn't expect you to. But my sort of superficial understanding, and I am sure the Chairman would know a lot more about this, is that Ohio is certainly representative of State insurance regulations around the country. It may be less restrictive in some ways; more restrictive in others, but it is in no way abhorrent or unusual.

If that is the case, let me ask Ms. Caldeira a question and by the way, I have to commend you on your outstanding educational background coming from Cornell, as a graduate of a law school there.

Ms. Caldeira. I am sensing maybe a fellow graduate.

Mr. Andrews. And I understand that Mr. Larsen is a Rutgers-Camden graduate, so I don't want the other two panelists to feel in any way put out by that fact, but it is nice to have two friends with similar backgrounds.

Ms. Caldeira, your argument is that some combination of increased competitive choices and fewer mandates leads to lower premiums which leads to more coverage for people in these plans. The question I am asking is what is the mix between the percentage of the cost reduction that has accrued because of lower mandates versus more competition? The example that Mr. Dressler gives would seem to indicate that the principal force driving lower premiums is more competition not lower mandates. Do you agree with that?

Ms. Caldeira. Yes, I do. Well, this is what I would say: you are going to get a percentage decrease in cost for many but like a few percent from a lot of different factors, as I mention in my testimony. The administrative costs insurers charge to market to small businesses now and the claims processing costs on an appropriations basis are going to be much lower when you can purchase in a large age group, and the larger the group, the lower the administrative costs. I have some data here that was provided to the Ways & Means Committee when they were first considering this in the context of health reform a couple of years ago.

The second thing I would say is that the shear volume of negotiating with providers when you have tens of thousands of people you are negotiating for is definitely going to result in a discount. I couldn't tell you how much; I would say a few percent. You get a few percent from administrative savings, a few percent from the volume discount, and then you get a few percent more from targeting your benefits, and so I think it would be a variety of factors. If you chose to offer both a fully-insured and a self-insured product, you would probably get that much more savings.

Mr. Andrews. Let me ask you this question then: Given the success of this Ohio association, given my assumption that it is subject to many State mandates under Ohio law, and given the fact that it is relatively small, I assume it is not that large of a plan. Do you know Dr. Dressler?

Mr. Dressler. Five thousand lives.

Mr. Andrews. Five thousand lives; that is a rather small plan. Why is it necessary for the association health plans to work? Well, let me ask it a different way. Why couldn't we take all of the most stringent regulatory requirements that Commissioner Larsen talks about and write them into one uniform Federal standard and then let association health plans proceed under that standard?

Ms. Caldeira. Well, I think that is what we did in the solvency area under the bill which was the most important standard.

Mr. Andrews. Why can't we do it in all areas?

Ms. Caldeira. Because in the benefits package area, I think you don't want to bind yourself down to one cookie-cutter kind of benefit package; you do want to provide choices in the marketplace.

Mr. Andrews. But there is a difference between cookie cutters and minimums. I mean, couldn't we agree that there is a minimum that women who had a c-section birth are entitled to a certain minimum stay in a hospital or that there is a minimum number of pap smears or breast exams that people are entitled to? Why couldn't we have a minimum like that?

Ms. Caldeira. Well, we are so minimized from the small business perspective that we only take positions from our membership, so we poll them basically. I could ask them about the minimums, but I think that when it comes to the mandate word, they get very upset just because they feel that they have been mandated to death.

Mr. Andrews. If I could ask our representative from BlueCross essentially the same question. Why couldn't we have a strong, protective set of consumer protections at the Federal level, and let people have the association health plan?

Ms. Lehnhard. I think the problem is who is going to regulate them? As I mentioned, DOL could get around to large ERISA plans once every 300 years; this is their own estimate. Who is going to be there looking at their books; co-actively regulating them?

I just have to say one thing: the issue about lower administrative costs, lower marketing costs, lower per person costs. We have right now huge pools, tens of thousands of small employers that we negotiate with providers on, and there is tremendous competition in the small group market; lots of carriers in the small group market. It is not like there are little pools of small employers out there now. The states said no to that; they said you put them all on one pool.

Mr. Andrews. I understand that. Let me ask you this question, and I wonder if you could supplement the record in writing on this; that if you could tell us for each State that comprises your association membership, the market share of covered lives that those associations have?

Ms. Lehnhard. We insure about one out of four small employers in the country. I can give it to you state by state.

SUBMITTED FOR THE RECORD, MAY 20, 1999 LETTER TO CHAIRMAN BOEHNER AND "NUMBER OF INSURERS AND AVERAGE MARKET SHARE WITHIN MAJOR PLAN TYPES: THE INDIVIDUAL HEALTH INSURANCE MARKET IN SELECTED STATES, 1995" - SEE APPENDIX F

Mr. Andrews. It would be very interesting. If I could just quickly wrap this up. One of the concerns a lot of us have is the concentration of market power that some of the members of your associations have in given metropolitan areas, and we have to then wonder if your opposition to this is more based upon the desire not to have the competition than it is these consumer protections?

Ms. Lehnhard. I think that our opposition, our concern, is based on the fact of what we have been through. We used to community rate all of our business, guarantee issue, and we have been through the aggressive risk selection, and we know it tears apart the market. It leaves the sickest with the highest premiums; we have been through that. The states cleaned up the market, and I think our plan of looking at the prospect of going through that again with tremendous disruption. We are probably the only carrier in the country that is in the small group market and never gotten out of the small group market. So, we have a tremendous interest in it being stable over time. We are not in it to make a profit and get out.

Mr. Andrews. I think my time is up, yes. If you would like to respond.

Ms. Caldeira. I would just like to say that I would just like to submit for the record the associations that either have some form of association health plan or would like to start one. I think if you look historically at the record, the associations that have gotten involved in this, like the Independent Grocers Association and the Builders and Contractors, the reason they started their plans was because their members couldn't get affordable insurance in the marketplace, and they wanted to provide them an option to begin with.

SUBMITTED FOR THE RECORD, "ORGANIZATIONS SUPPORTING ASSOCIATION HEALTH PLANS" – SEE APPENDIX G

Mr. Andrews. Thank you very much.

Chairman Boehner. The Chair recognizes the gentle lady from New Jersey, Ms. Roukema.

Mrs. Roukema. I thank the Chairman. I don't think it will come as a surprise to any members of the panel and certainly not to my colleagues what my feelings are in this matter since I have been a rather outspoken member of our side along with Congressman Ganske and Congressman Norwood and others for overhaul reform, not only at the Federal level but with respect to how ERISA and the ERISA preemption issue applies.

I do appreciate what Ms. Lehnhard said, and what I believe Insurance Commissioner Larsen agrees with, and that is expanding ERISA preemption will only make things worse. I don't know that those were your exact words, but that was the primary reason I voted against Mr. Fawell and the Republican inclusion of MEWAs in the bill last year, because I do believe it will make things worse. It was creating a loophole that would override state mandates that I thought were very useful state mandates.

Let me say to the panel what I say frequently to my business groups when I speak to them, and as a Republican, I speak to a lot of business groups, not that Democrats don't speak to business groups. But I am particularly close to the business community in New Jersey, and New Jersey, in case you don't know it and I think Mr. Andrews will endorse this, is one of the states that has more far reaching standards for coverage than a lot of other states. They have more protection for medical coverage, for insurance coverage in New Jersey, and, therefore, when you talk about your proposal and you are increasing the exemptions, because that is literally what you are doing, you are telling people in the State of New Jersey, that maybe 60 percent of the people who are currently covered with minimum standards would lose their coverage. Here is where I want to make a statement that we are not talking about costs, we are talking about rationing of care; rationing of care put in the hands of insurance people rather than the medical personnel to make the decision on whether or not a procedure should be, not necessarily covered, but done. Whether or not the procedure should be done, because that is what it comes back to, the insurance company making that decision overriding the professional decision.

But getting back to what I always say to business groups is that if we don't deal with this problem in a cooperative way, there is going to be a backlash in this country that is going to make the insurance companies and the business groups look back on these proposals in a longing way. There is a backlash out there, because there are too many people that have been denied legitimate care because of narrow interpretations of the law; narrow application of the insurance program.

Now, there are two points I want to make, and maybe you have covered this, but I didn't hear it, and I am going to give you the opportunity for more specificity, particularly Ms. Lehnhard and Mr. Larsen and anyone else who wants to address themselves. What about the small business pooling both within the states? That is a growing phenomenon, is it not? I didn't hear any reference that you made to that, particularly the Insurance Commissioner. Is this not one of the avenues that has to be explored and expanded nationwide for small business pooling within the states and interstate as well, but not interstate using the ERISA preemption as a loophole to avoid that application nationwide? Yes, Mr. Larsen, Ms. Lehnhard.

Mr. Larsen. Just briefly, there are pooling arrangements in Ohio, and other states have alliances that have been effective in terms of bringing ----.

Mrs. Roukema. New Jersey has one too, yes.

Mr. Larsen. New Jersey, of course. And, so it is not as if there are not opportunities, and, indeed, many of the examples that have been cited exist under the current system. We were saying, well, if those are working so well, what changes to the current structure given the downside, extreme downside, of what I think is blowing a hole in what states have done to this proposal. So there is experience out there with that.

Mrs. Roukema. All positive experience. What can we be doing to encourage that and expand it? Yes, Ms. Lehnhard?

Ms. Lehnhard. Can I comment on national pooling? There is a fundamental issue here. When you create a pool nationally and you ask people to buy in Arkansas and New York and New Jersey, they are going to look at that national pool rate and say, ``Can I do better in Arkansas?'' And, for example, we looked at what it would be for all the New England States to pool each other, and all the New England States would subsidize Massachusetts 17 percent. So, everybody in Massachusetts would buy, but nobody else would buy; they would buy at home. So, I think you have to be careful when you think about advantages of big national pooling organizations.

Mrs. Roukema. Well, that is a good point, but then wouldn't you recommend to the groups like the NFIB and the others represented here that they should be doing everything they can within the individual States to promote that pooling? That has been sadly lacking as far as I can tell nationwide.

Ms. Lehnhard. I would say that there are pooling arrangements, but, again, states have passed laws that say every insurance company has to pool all their small group business which has the same benefit as a separate pooling arrangement. For example, all of our competitors have to put all of their small group business in a pool and negotiate. Everybody gets the same discount from providers; everybody gets the same cross-subsidy, so the states have forced the pooling already in every state.

Mrs. Roukema. And you think that is positive?

Ms. Lehnhard. Very. Tremendous cost subsidies.

Mrs. Roukema. Okay. Yes, Ms. Caldeira?

Ms. Caldeira. We were initially very excited about state pools in Florida, in California, in Colorado, and our enthusiasm has diminished considerably, because the prices have not gotten lower, and, as a result, the product is not any more affordable to our members. The other problem with the pools is that they only offer or tend to offer HMO products which our members don't tend to like to begin with. So, those are the two major problems we see with the pools.

I would like to submit this for the record. We have talked a lot about different things that the pools really hadn't come up. In Florida, the pools are called Chipas, and there is a December, 1998 article that says how the prices really haven't sufficiently resulted in people using the pools, and so the uninsured rates have really not been affected.

SUBMITTED FOR THE RECORD, "REPORT SLAMS FLA. PURCHASING ALLIANCES," BY MICHAEL H. ADAMS, FLORIDA CORRESPONDENT, COPYRIGHT 1998 THE NATIONAL UNDERWRITER COMPANY, LIFE & HEALTH/FINANCIAL SERVICES EDITION, DECEMBER 7, 1998 – SEE APPENDIX H

Ms. Caldeira. And the other point I would just like to make is that New Jersey is one area where we actually are offering a plan now because our members are so concerned, basically, about what is happening there. Prices are still very high in that state, and the regulation is such that in the state, actually, the uninsured rates have increased considerably, and I am sure that that is a concern to you as a Congresswoman. They have gone up from 9 percent in 1987 to 20 percent.

Mrs. Roukema. Well, again, this is not solely about costs; it is about rationing of care, and I see the consequence of rationing of care where people are denied very basic and fundamental elementary care, and then the cost factors at a later time when things become acute are even higher. So we have to weigh those balances. But I do appreciate that.

Chairman Boehner. The time of the gentle lady has expired.

Mrs. Roukema. Yes, my time is up. I appreciate that. I would simply say for another time and for your own reference, if you will look into the improvements in Mr. Ganske's legislation that will direct itself to the appeals process and reduce litigation costs, and I think that is a positive contribution to our whole discussion. Thank you very much, Mr. Chairman.

Chairman Boehner. The Chair recognizes the gentleman from the State of Michigan, Mr. Kildee.

Mr. Kildee. Thank you, Mr. Chairman. Mr. Dressler, how does the Talent-Dooley proposal compare to the proposal of Mr. Bilirakis? You mentioned Talent-Dooley in your testimony.

Mr. Dressler. I am not sufficiently apprised of the Bilirakis proposal

Mr. Kildee. Would anyone else care to comment on it?

Ms. Caldeira. I believe it is essentially the same in most respects. It is a work in progress at this time. It hasn't been introduced yet. Congressman Talent's bill is essentially the same.

Mr. Kildee. Essentially the same.

Ms. Caldeira. As the Bilirakis proposal; the association health plan provision.

Mr. Kildee. So, one is not less attractive or more attractive than the other to you?

Ms. Caldeira. Well, we are delighted Congressman Talent is going to focus on the issue, whereas the Bilirakis bill has many other issues contained in it also.

Mr. Kildee. The Talent-Dooley proposal is more narrowly construed or constructed to address….

Ms. Caldeira. Right, it just addresses the association health plan issue. It doesn't address any of the other issues like medical savings accounts or any of the other access proposals that the major Hastert Task Force had worked on.

Mr. Kildee. And that narrow area, then, would you find that more attractive than what Mr. Bilirakis has proposed within his broader proposal, or you don't know yet?

Ms. Caldeira. We don't know yet. We love them all.

Mr. Kildee. Okay, I will let you go.

Ms. Caldeira. Thank you.

Chairman Boehner. The gentleman from Kentucky, Mr. Fletcher.

Mr. Fletcher. Thank you, Mr. Chairman. I regret that I didn't get to hear each of your testimony, but I am trying to review that, and certainly this is an area that I take a great deal of interest in. We have seen a lot of states pass a lot of different regulations, and we have seen even small companies operate over multi-state regions, and it has always been my philosophy that we give to the states and let them do what they can and need to do, and don't do anything from the federal level unless it is necessary and it truly has a constitutional inter-state issue. And I have come to the conclusion with my experience in working in Kentucky and looking at the other states, that we could name several of them that have had some very good health care reform. The fact is that it truly is a national issue now, and it is very difficult to regulate state to state and allow folks to operate over multi-state levels having to deal with the administrative costs of meeting the demands from different states that they operate in or have facilities or insure from.

So, I think it is important to look at, and I am concerned about quality. I think if we can increase 8 million to 10 million insureds which is an estimate; I don't know how accurate that is or how it is derived. But if we can increase the insurance for folks now, and don’t get tied up in talking about specific things that folks don't get, and don’t forget the excellent quality we do have.

There are some very major concerns, and I am obviously concerned about provider-patient relationships and making sure that that is maintained. I think it is appropriate to look positively at this, and I just wonder what concerns, especially Ms. Lehnhard, that you would see that we would need to address, say if this did take effect, to address some of the concerns that you have outlined regarding the states that have issued guaranteed issue. And we have portability now on a national level. We have already made some strides, and, as has been mentioned, there are other bills regarding patient bill of rights or patient protection that we are looking at. I just wondered, specifically, what would make you comfortable with allowing small employers to collectively bargain for health insurance, so that they could cover more folks? What would make you comfortable?

Ms. Lehnhard. What would make me comfortable is letting the state reforms prevail, and I think your state is a very good example; a microcosm of what would happen if this law passed. Kentucky passed small group reforms that said every carrier has to pool their business, and cross-subsidize, the same reforms that all the states passed, except they said we are going to let MEWAs and association health plans out of those rules. Sixty percent of the small group business in Kentucky is now operating with none of those regulations, and the pool that is left that is regulated is so bad that BlueCross and BlueShield is the only private carrier willing to cover those. All the other carriers have left the state because of the adverse selection in that insured pool, and that is precisely the point we are making. If you have different rules, it is like telling people they are going to sell cars.

Mr. Fletcher. Let me interrupt you. That is the reason I asked that, because I was against it. It was S343. It was a lousy bill, because it did deal with some things in a very poor way, exempting folks that it shouldn't have exempted and other folks it didn't, and Minnesota had done a very similar thing, and they repealed it the same year that we were enacting ours.

But what can be done on the federal level to prevent that sort of thing? Because the problem we had was that 45 insurance companies left, so I think now with state reforms we can have folks running from state to state, and I think we need some national reform to allow people to collectively purchase but prevent some of the things you are talking about. So, I would like some specifics of what you think could be done on a national level to avoid the things you have witnessed.

Ms. Lehnhard. I think the national solution is that the States have created the right architecture that said to people who want to compete ``You can't compete by offering low prices to healthy people; you have got to have cross-subsidies, and you can't just market to very healthy people.'' You have guaranteed issue under HIPAA nationally which helped the States. You didn't get into rating which helped the States; I think States are still experimenting on how much rating flexibility you need. And we feel the next step is you have got to look at financial incentives.

The cost problems that have been cited today aren't unique small group cost problems. They are large group cost problems, and they are not going to be addressed by creating new pools. The negotiation that is going on is very powerful, and we probably negotiate about as much as we can.

Mr. Fletcher. Our time is drawing near. Let me bring you back, because I am not hearing some specific things.

Ms. Lehnhard. We suggested, for example, tax credits for low wage workers of very small employers. The uninsured rate is 30 percent for groups under 9, and we have said get that on the table while you are debating what to do with the subsidy; give it to small employers in a way that uses no paperwork; just uses their wages; don't test family income, and subsidize those low wage workers whether they have coverage or not.

Mr. Fletcher. Okay. Mr. Dressler.

Mr. Dressler. If I could just respond? Actually, I think there are some answers to your question, but you have to sit down, and you have to look at the details item by item. We would welcome the chance to do that. What we have faced in the past has been just blanket opposition to the concept, and what has happened is 43 million people have left the system while we are dithering, and the small group underwriting reforms have reached their maximum impact, and now we are seeing the rise in an uninsured population of people who decide that they just can't afford to play. We need to have the creative options that the association community can bring. We need the protections and securities as well; we would love to work on those item by item and get them resolved.

Mr. Fletcher. If the Chairman would indulge Ms. Caldeira just to make a comment.

Ms. Caldeira. I will be very quick, Mr. Chairman.

Chairman Boehner. Go right ahead.

Ms. Caldeira. I would just like to point out that the cost increases for small business are really much higher than they are for big business, although they are a big problem for big businesses. They are about 7 or 8 percent for big businesses, and they are 15 to 20 percent for small businesses.

And I would also like to point out that we agree that Kentucky is a disaster and submit for the record, though, that the association health plans in Kentucky were only 3 percent of the market, 3 percent.

Ms. Lehnhard. They were 60 percent.

Ms. Caldeira. Actually, I am happy to submit this which is the backup documentation to support my point of view, and I would also refer you to the Galen Institute study on the State experiences.

SUBMITTED FOR THE RECORD, "TOTAL KENTUCKY MARKET ANALYSIS," MARKET REPORT ON HEALTH INSURANCE AND COUNTY BUSINESS PATTERNS – SEE APPENDIX I

Mr. Fletcher. Yes, we have reviewed that, thank you.

Chairman Boehner. Thank you. The gentleman will recognize the gentleman from New Jersey, Mr. Payne.

Mr. Payne. Thank you very much. As you know, there was a tremendous amount of discussion regarding this. We call this the Fawell MEWA plan, but now that he is gone, though, it remains with us. I wonder, perhaps, maybe from BlueCross BlueShield, because I missed your testimony, and your name fell under all these papers.

Ms. Lehnhard. Lehnhard; it is not easy even if you have it in front of you.

Mr. Payne. Lehnhard, okay. You see that was it, I couldn't pronounce it, and I wanted you to say it. The question about exempting MEWAs from State health insurance, could you kind of elaborate on that a little bit? I see that on page 14, I am browsing through your testimony, you raise that in your testimony. Could you give us a little more elaboration or just speak on that for a couple of minutes?

Ms. Lehnhard. Yes, what we essentially have said is that states have done a very good job of reforming the small group market and telling us, the insurance carriers, ``You have got to pool all your small groups; we want your sickest groups in with your healthiest groups, and we want you to cross-subsidize and make the coverage for your sick groups more affordable.'' What we are concerned about is if you say to groups, ``Okay, now you can get out of those state laws,'' the healthy groups will start to jump out, and the rates for our sickest groups will go up, and not only will they have higher rates, because healthier people have left, but they will have the cost of mandated benefits, and every time a group that has left needs in vitro-fertilization or mental health substance abuse, they get back in this pool, and it will just get worse and worse until we can't manage it or sustain it anymore.

Mr. Payne. Yes?

Ms. Caldeira. Mr. Payne, I would just point out that our members are not in the pool; 56 percent of our members don't have insurance, so they are not in the pool.

Mr. Payne. Yes, I know that when HMOs started out 20 years ago, they were very successful early on, because basically they dealt with really healthy people. The pool wasn't as broad as today. Once you have to bring in all people, then you find the experiences are different, and an HMO with all healthy people is great, because it is going to have very low premiums. But if you bring in the general public, then you are going to have the same experiences as anyone else.

I just wonder if you could comment about the Department of Labor. They say that the Department of Labor should monitor this, should regulate. What do you think about the Department of Labor's ability to monitor if all these MEWAs were all over the country.

Ms. Lehnhard. Right now, there are three people on the Department of Labor who monitor ERISA plans, and you missed the testimony of Mr. Larsen. When an insurance company gets in trouble, whether it is a small company or a large company, you do a 30-day plan of recovery; you are checked every 30 days and if you are not recovering, they physically put somebody in an office. In our instances, unfortunately, where we have had problems, we couldn't sign a check. The check had to be co-signed by the insurance department; any check over $1,000 had to be co-signed by the insurance department. You will not get that kind of oversight, early identification and recovery, and then if, unfortunately, you go out of business, the commissioner makes sure your enrollees go to other health plans. DOL could not possibly provide that kind of consumer protection.

Mr. Dressler. I just wanted to add to that, though. Number one, 80 percent of the members of our coalition are insured and offer insured plans, and under the proposed Talent-Dooley bill, associations will be required to offer insured plans, and most will offer insured plans. So, most of the criticism that is being leveled is totally irrelevant, because these are going to be insured plans. What we are giving is new tools to insurers to enter the market and to be competitive in the market.

There are a handful of self-funded plans, and you need self-funding because of the options. If you can't negotiate with the insurers, then you could call their bluff, so to speak, and take the risk and enter the market, but you have very severe restrictions.

The reality is this plan helps the Department of Labor. We met with the Department of Labor three weeks ago when I was in town last. They are handicapped. There was a big article on business insurance about a month ago where they claim they don't have cease and desist order authority which the insurance commissioners have; that is why it is in the Dooley-Talent bill. We know that we need to give some more tools to the Department of Labor, but they are not going to be representing thousands of plans; they are going to be dealing only in this area with the small number that are self-insured.

Mr. Payne. Yes?

Ms. Caldeira. Mr. Payne, I would also like to point out that there were several changes made to the bill, and we are open to more changes that you would like to make too that would give the states the ability not only to certify the plans but to enforce the federal law.

Mr. Larsen. The issue of solvency cannot be overstated. This bill does not parallel the state system. The Department of Labor can go in only after the fact, and the key to effective solvency regulation is the examination process. We have an HMO in receivership now. It was operating for nine months, and we were getting certified opinions from their actuaries saying everything was great, and had we not gone in there, that plan would have been insolvent, and their members and providers would not have gotten service. It was only through the examination process that we were able to protect the providers and the consumers in the state. So, not only does the Department of Labor not have the resources to do it, the language of the bill doesn't even provide them the authority to do what should be done.

Mr. Payne. Thank you very much. I see my time has expired. It is a reverse from my colleagues on the other side. The move has been to say that States know how to do it better, even with our Title I money and all the rest; just give it to the States, and lock it in, and they can regulate; they can do it and all. This is kind of reverse now, saying no, no to the States; let us do it on a national level. So, I will have to talk with the other side. I ought to see if it is Tuesday, it is the States; Thursday, it is Federal, but, anyway, I yield back the balance of my time.

[Laughter.]

Chairman Boehner. The Chair recognizes the gentleman from California.

Mr. McKeon. No, if it is 1992, it is the states, and if it is 1999, anyway, I come from a business background. Thank you, Mr. Chairman, for yielding. I started in a business with two people and saw it grow. I served on the Chamber of Commerce board in the local community, and we had a lot of businesses that were comprised of one, two, three, four, five. You know, small businesses, and, as Ms. Caldeira has mentioned, one of the problems is just being able to get insurance period. We have spent a lot of time talking about in-vitro fertilization or different kinds of coverage, but I think if a lot of these people could just get basic coverage, that is pretty important.

I think Ms. Lehnhard, you said in your testimony and I apologize, I got here late and I didn't hear the presentations, but I have been able to look through some of your written comments, that you said that the state enacted legislation that guarantees access and affordability for these small firms. If that is the case, then why would it be that we still have 43 million uninsured Americans, and 70 percent of them are comprised of small business?

Ms. Lehnhard. The insurance coverage for employer-based coverage has actually gone up in the last four years. Most of the increase in the uninsured is Medicaid and other factors. However, there is still a problem with the uninsured rates for very small groups of workers, and when we analyze it, there is a very clear picture. It is low wage workers across the board; small groups, large groups, and it happens that small employers hire low wage workers. This is not a reorganization issue. It is a they need help financially issue. Even having to pay 30 percent of a premium, a state employer pays 70 percent, it is too much for somebody at 150 percent of poverty and three children.

Ms. Caldeira. Can I please respond to that? We have some data. We just recently polled our members, and there is a substantial and growing number of uninsured small businesspeople that are not low income, but are middle income people. I have the income levels here, and I am happy to provide that to the Committee.

SUBMITTED FOR THE RECORD, "PROVISION OF EMPLOYEE HEALTH INSURANCE BY INCOME FROM THE BUSINESS (FOR AT LEAST A MAJORITY OF FULL-TIME EMPLOYEES), SOCIAL SECURITY SURVEY – SEE APPENDIX J

Mr. McKeon. That, I was going to comment, is my experience also. As I go back and visit businesses in the community, there are some that are small that do hire low wage workers. We have landscape companies or gardening companies that hire a couple of people, but there are some high-tech companies with very small numbers of employees that pay substantial salaries but are not able to get the large groups. I also sold insurance, and I know things have changed a lot since the days that I sold health insurance, but still, it was a real problem trying to find any kind of coverage for small groups. And I remember at the Chamber of Commerce, we would have people come in, and we would ask why couldn't we form associations? What do you as the benefits that AHPs could bring that we could take care of with this legislation?

Mr. Dressler. If I could just respond? I think that what they can do is they can meet with a constituency, whether it is a local community Chamber or an NFIB organization or in our case, we represent landscape nursery growers and so on, and you can design plans that provide care that meet their needs. It is different for different folks.

But what is lacking right now is that competitive alternative. There are, for example, in the California health insurance purchasing pool only HMOs. If you want an HMO and you want to have your doctor controlled and so on, that is available. Unfortunately, in agriculture, we tend to be more independent and like freedom of choice in selecting our own doctor and staying with a physician. So, we really have been focused on plans that give people more choice. To do that, then, you have meet other needs. But we can go, for example, to a local clinic and talk about access to our employees and their families to that care and end up with a little exclusive benefit plan; a so-called EPO, where we use a clinic in a community and use their doctors. Some of them have dentists and other care services and a pharmacy, and the prices can be start at $80 a month for family care. Now, that is not everything for everybody, but it is at least an option. All we are after, because we absolutely believe and we think we have proven if you let the association community group our industries together and let chambers organize, we will show you that we can give you creative alternatives.

Ms. Lehnhard. I would just say that these are the good guys at the table. I think the experience that the regulators have had is there are lots of opportunities for the not good guys to play in this, and it is very easy to sell a product that you have marketed in a part of the state with low cost people. Give them a huge price break, because you are enrolling very healthy people that aren't going to use services. Put a nice profit on top of it, and it is never noticed because you have lowered prices, and then you are out of there in three years. That is what we had with MEWAs. That is what you could have with association health plans, and they are giving you some very good examples of what you can do very constructively, but it is opening the door to everyone.

Mr. Dressler. With just all do respect, it was insurance agents and insurers that set up those other programs. It wasn't legitimate trade associations with members and ties to the community. Because my job is to keep my guys growing vegetables and fruits in California, producing nursery products, I don't have that luxury of going away in three years and neither do the other associations involved.

Mr. McKeon. Ms. Caldeira?

Ms. Caldeira. I would just like to say that we are willing to work with the Blues on certification requirements to make sure that that doesn't happen. In the bill, right now, you have to be a legitimate, bona fide association, and you have to be in existence for three years. You have to be in business for other than health care purposes, and the state or the Department of Labor must certify you.

Mr. McKeon. Thank you very much.

Chairman Boehner. The gentleman from Missouri, Mr.Talent.

Mr. Talent. Well, I thank you, Mr. Chairman, and I am sorry I had another Hearing going on at the same time, interviews and all the rest of it. I appreciate your indulgence and thank the witnesses for being here.

Let me just say that the reason I am so attracted to this and why I want to file this bill is the potential it offers to open up options to good health insurance for a lot of people who don't have it. I mean, that is such a terrible problem today that it seems to me we ought to be looking for ways to do that rather than finding reasons why not to do that.

Let me go into a couple of areas that people have raised in the past. I know there has been a lot of discussion on mandates. Tell me why the reasoning here is wrong, if you would, if you think that it is wrong. It is true that if you self-fund as an AHP, that you would be exempt under ERISA from the state mandates. Isn't that substantially mitigated by the fact that many big, national self-funded plans already contain the coverage that is in many of the state mandates, number one. Number two, it would mean that health care is available to many people who right now don't have it, and, therefore, don't have the benefits of the state benefits. And, number three, if there are mandates that we really believe are necessary and are important, why don't we put them in the federal law. We

are moving to do that this year. We are going to pass patient protections, which is really nothing but mandates, and then we will have a national, uniform standard and protections for everybody. Isn't that the answer? I mean, if we really are concerned about this, isn't the answer to pick those that we really think do a lot of good relative to their costs and put them in the federal law; not to say, ``Well, because of this concern, we are not going to open up health insurance to millions of people who don't have it.''

Ms. Lehnhard. The point that I made by saying to some groups, ``You don't have to have state-mandated benefits,'' is the groups that are going to take advantage of that through their association health plan are the groups that don't need the in-vitro fertilization, the mental health substance abuse, the benefits that the states have covered, and the AHPs will offer. I mean, we are hearing today that is what they want to offer. They want to offer the benefits without that, which I can understand, but the problem is as the people who get into the AHP and don't need the benefit, the state-insured pool will have the people who do need the benefit, and the premiums will go up very quickly. It will be an accelerating, downward risk pool with higher premiums, and you have the costs not only of your higher risk people but your State-mandated benefits on top of that. What you will essentially end up with is a small employer, high risk pool that the state has to begin looking at subsidizing.

Mr. Talent. Well, I am going to digress a minute. That is what we have got. I mean, the idea that small employers with sick people are going to stay out of this, AHPs, it seems to me the contrary of reality. Right now, it is those small employers with the sick people who can't get insurance, and they are stuck in a private market that is charging them an exorbitant regular insurance market rate. The way this bill is set up, there has to be a bona fide association to take all comers, so it seems to me that it is precisely the employers who have the higher risk employees who are going to gravitate towards this area, because outside of this area it is so much more expensive. So, they will come into the AHPs, and I think that is the answer, isn't it, on the broad adverse selection?

Then let me address the mandates, and I will give you plenty of time, believe me. On the mandate issue, then why aren't you saying to us, ``Look, these state mandates are very, very important,'' whether it is in-vitro or mammogram coverage or whatever it is, and some of them are, I believe, excessive relative to the costs. So, why aren't you saying to pass AHPs and then put the state mandates in the laws that are important? Isn't that the answer?

Mr. Larsen. If I could briefly respond to a couple of the points? I think there is disagreement over the cost of the mandates. In Maryland, we have a very successful small group market reform. Where the number of insured lives has increased through community rating, we have done studies that show that the incremental cost of the mandates is very small, particularly if you agree that there ought to be a basic level of protection. The incremental costs of the so-called additional expensive mandates, in fact, is a very small percentage, and does not impact the cost to the extent that others have argued that it does.

The second point that I would make is that when you referenced the ERISA exemption from mandated benefits, that also applies to a number of critical areas, such as solvency review and the consumer protections that are out there for insured plans.

Mr. Talent. Well, wait a minute. On the solvency issue, Mr. Larsen, isn't it fair to say that this bill substantially increases all those regulatory requirements for solvency. You are an insurance person, and I am not, so you understand it better than I do. But the capital requirements are up to $2 million, stop loss requirements, both in the plan broadly and as regards individuals, reinsurance requirements, and then all backed up by Department of Labor regulation or state regulation, if you want to do it. I mean, we have had insurance failures on the state level too, you know.

Mr. Larsen. There certainly have and there are thousands of companies that operate. The record of the State has I think, in the last 10 years, been exemplary. To answer your point, there are standards in the bill, but the question is are they enforceable or how can they be enforced? The state system is premised on ongoing review by financial examiners and reporting. This is a system that is premised on a plan of reporting to the Department of Labor that it looks like we are insolvent, and our experience has been that never happens. The critical function of insolvency regulation is that you are out there reviewing the books, and the Department of Labor has neither the resources nor, in our opinion, the statutory authority to really do much until the company, the plan, the AHP has already declared itself insolvent.

Mr. Talent. Mr. Chairman, I don't know how strict you have been about the five minute limit. Could I ask a couple more or no? I am in your hands.

[Laughter.]

Chairman Boehner. Briefly.

Mr. Talent. Well, on that issue, how many self-funded, roughly speaking if anybody knows, ERISA plans are run by major companies? They have got to be in the hundreds and hundreds and hundreds and hundreds, right? Now, this plan, this bill here, allows bona fide associations who put up an awful lot of capital and go through an awful lot of trouble to offer association health plans. There is something like 100 groups that are supporting it, and I bet the number of associations that are going to want to do this is not going to be much greater than the number of associations supporting this bill. So, you are talking about another 100, another 150, when the Department of Labor is already supposed to be regulating these hundreds and hundreds that exist now with the big companies. And the bill also permits the states to regulate.

Let me just say this, because this is important. Mr. Andrews said at the beginning, we ought to get our beliefs on the table. All of this is beginning to sound less and less to me like real concern and more and more like a battle over turf. We have an opportunity to open up health insurance to millions of people who currently don't have it at a very low cost, and if there are concerns about regulations, let us fix them, but let us not let this idea stay in limbo year after year after year with the same kinds of objections. When we answer them and then come back, and there is more, and then you do more, and then there are more objections. I would like to get this done so we can help these people. And I will let you have the last word, and, then, thank you, Mr. Chairman.

Mr. Larsen. On the turf protection, I have heard those points raised before just say this. I think every Commissioner views their job as trying to protect the consumers in their state that are covered by health plans, and our view is that this bill does not provide those protections whether it is through the states or the federal government. They are simply, in our view, not there. So, although we understand the goal of affordability, the way to affordability is not to strip away what we think are well established and enforceable consumer protections that are at the state level.

Ms. Lehnhard. I would just say that these organizations that you are looking at are not individual companies. They are collections of small employers, and it is an insurance function. The same type of insurance function that the states regulate. It is not like a single employer self-funding their own employees benefits.

Mr. Talent. Would either of the witnesses like to comment?

Ms. Caldeira. We just like state regulation, but it is just not working in his area, and there is a lot of evidence to support that from the Galen Institute and Urban Institute and other places, and so we would say this is akin more to transportation and other areas of commerce where we need some federal involvement. We would love the states to be more involved with the federal legislation enforcing the roles and would like to work with them. And I would just say, for my own interests, I would like to ask the Commissioner what his viewpoint is towards Fortune 500 companies and whether he thinks that they should be allowed to continue their plans?

Mr. Larsen. Well, I think, again, the issues, even with the large self-insured plans is the level of protections that are provided to those consumers, and I think everyone is debating that now at both the state and federal level.

Ms. Caldeira. Thank you.

Chairman Boehner. The Chair recognizes the gentleman from New Jersey, Mr. Andrews, and he will be able to ask some questions, and I will be able to ask a few questions, and then we are going to go vote.

Mr. Andrews. As I had hoped, the panel has been very enlightening, and I appreciate the effort everyone has put into this. In listening to this, it appears to me that there are four options in front of us: we can maintain the status quo, which functionally limits AHPs to intra-State, because of the difficulty in complying with many, many States' laws; we could write a law that gives AHPs the ability to be inter-State and not preempt State laws, and I assume the argument against that is that much of the benefit would be cancelled out and would create too much confusion to comply with too many States' laws.

The third option is to have AHPs operate inter-State and have the protections that are in the Talent-Dooley bill that is before us. And there is a fourth option which would be to have AHPs inter-State but have a combination or a more limited preemption.

Let me ask you this question: what is the reaction of the panelists to the following conceptual proposal: we permit AHPs to be set up on an inter-State basis. There are two kinds of regulations. There are fiduciary and organizational regulations that say what kind of reserves the fund must have; whether it must have reinsurance or be self-funded, and other questions of that nature, and then there are regulatory questions about what kind of benefits you much include in a package that you offer.

What if we had a proposal that said we have inter-State AHPs; there would be Federal standards for fiduciary organization, reinsurance requirements, and other such organizational issues, but then that the consumer protection type regulations would not be preempted, and each State would be permitted to require whatever it chose to require.

Now, I understand that the initial reaction is, ``Well, that is no good, because it is going to wipe out the benefits of this.'' I would just ask you to think about all of the other businesses in this country that operate on an inter-State basis effectively under the regime that I just described. Let me offer as an example the mortgage business. Mortgage companies are organized under State law, but, in effect, they are answerable to one authority, whatever State it is they are organized under for their fiduciary and financial requirements, but then they are subject to the State laws of each State in which they do business as well as Federal laws like regulation Z.

So, if I am Sendant Mortgage Company, which is in my district, they are doing business in each of the 50 States. I am not sure where they are organized corporate-wide, but I am sure that if California has certain requirements when you do a residential closing, they comply with them, and if those requirements are different than Kentucky or Connecticut or Ohio, they comply with them all. You can make a compelling argument that the choices and the access to capital and the quality of this industry has improved measurably in recent years, and consumers are doing very, very well under those circumstances.

How would people on the panel react to that conceptual proposal? Mr. Dressler, do you want to start?

Mr. Dressler. That is precisely what we have in California today. With our state MEWA certification we have adopted all the fair claims practices, benefit mandates, and so on. Most important for the association community is the ability to exist. The problem we have in some states where they say you just can't exist at all, what you proposed would work for us, because we know we need to address the financial solvency issues. We want to have legitimate organizations, but we also want to be able to play in the marketplace. Giving us a chance to compete in that marketplace, I think we can show you what we can do.

Mr. Andrews. What do the other panelists think?

Ms. Caldeira. We are certainly willing to work with you. I think that Congressman Talent's bill, technically, the consumer protection of the states should still be in the law, not the benefit mandates. I think that that is true. It would all depend on what you pass.

Mr. Andrews. I would consider the benefit mandates to be consumer protection.

Ms. Caldeira. Okay, well, then, we will need to chat a little bit longer.

[Laughter.]

Mr. Andrews. I will bet we will.

Ms. Lehnhard. I don't know what, under current law, precludes you from having a national organization of small employers. We have national accounts that set the federal standards at times when we have computers that you flip a switch, and automatically take care of the local regulation.

Mr. Andrews. Yes, but it is very simple what precludes you. To hold yourself out as a health insurer in New Jersey, you have to comply with the New Jersey insurance laws which are different than the insurance laws of Ohio or Connecticut or California, so you would have to basically invent yourself 50 times as a corporate entity to do that. That is what precludes you from doing it.

Mr. Larsen. Just a quick comment. We would be happy to look at that and work with you on it. The critical point would be what are those federal, as you refer to them, fiduciary standards? Are there resources needed to enforce those? How would they match up against the state? Are we going to be setting up a three-tier system? We have self-insured, then we have the state companies, and then you have those subject to the federal standards.

Mr. Andrews. As a final comment, it is an imperfect model, but certainly a model exists for this under the PBGC. Now, you can argue the PBGC has not done a perfect job, but I think on balance, it has created some good, clear Federal standards for pensions that have been administered on national level and work. Thank you, Mr. Chairman.

Chairman Boehner. If I could, we are running out of time. If you look at the number of ERISA insureds in America, you see about 160 million people insured under ERISA by employers. If you look at the percentage of those who are insured under the self-funded plans, it is about one out of four, or 25 percent. And my guess is that if this proposal were to move ahead, very few of the associations would have self-funded plans. So, what about another option that we will add on to Mr. Andrews' series of options?

Currently, the State Insurance Commissioners and Insurance Departments have regulatory authority over MEWAs to guarantee solvency and to solve some of the problems we were referring to earlier, and one that we have in the association health plan. But the only option would be through an insurer, no self-funded plans. What are the benefits and drawbacks we will be seeing? We will begin with Mr. Dressler.

Mr. Dressler. That would tie the hands of the employer behind their back. The Texas insurance pool, right now, is facing that. This happens to be a state pool created by the Texas legislature in 1993. It is used skeptically by the insurance market and it doesn't have a self-insured option; there is nowhere for them to go. The Western Growers Association was insured for 35 years, but we were able to do a better job and save our members money when we replaced Connecticut General, in those days, now CIGNA, with programs. We are reinsured by Anthem, which is an Indiana BlueCross, and our life insurance is provided by Pacific Life, which is a licensed carrier. In other words, please give us at least the tools, don’t constrain us with financial solvency; put the restrictions or investigations or audits or whatever you want on us, but at least don't tie both hands behind the small employers' back. Give us the choice of self-funding, because we need that as an option. It will keep BlueCross much more honest.

Chairman Boehner. Ms. Caldeira?

Ms. Caldeira. I would just say that self-funded plans are really driving the marketplace in terms of innovations like outcomes research and direct contacting. We would hate to preclude ourselves from investing in those possibilities at this point in time.

Chairman Boehner. Let me ask Mr. Larsen. Under AHPs as have been proposed, and given the regulatory authority that you already have under MEWAs, are you suggesting that you don't have enough regulatory authority to guarantee solvency and don’t have the kind of powers that you need given the proposal we have?

Mr. Larsen. Well, the current regulation of MEWAs, I believe, is adequate because of what Congress did in 1983 which was to kind of kick back to the states the ability to regulate MEWAs in the same respects almost that they regulate insured plans.

Chairman Boehner. But they are not subject to state mandates, are they?

Mr. Larsen. MEWAs are regulated as insurers. That was what the changes were enacted for in light of the kinds of the fraud and abuse that occurred. Essentially, we have the same authority to the extent that it is not inconsistent with ERISA, and ERISA doesn't have any substantive mandate benefits or provisions, so that we regulate them essentially as insurers.

Chairman Boehner. Quickly, Mary Nell.

Ms. Lehnhard. One comment. I think you will see self-funding, and I think you can almost set aside the cost of mandated benefits. The big costs small groups can get out of if they self-fund. It is having to cross-subsidize thicker groups, and the groups that jump out will jump out because they know they can get a better price. The groups that stay in will stay in because they know they can't go out and get a better price. The self-funding is what is going to tear apart these large pools that the states have created.

Chairman Boehner. Okay, we have got to go vote. Let me thank the witnesses very much for their excellent testimony and their willingness to endure all the questions of the Mmbers. Thank you.

Ms. Lehnhard. Thank you.

[Whereupon, at 11:30 a.m., the Subcommittee was adjourned.]

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