Hearing of the House Small Business Committee - Health Care Reform in a Struggling Economy

Hearing of the House Small Business Committee - Health Care Reform in a Struggling Economy

HEARING OF THE HOUSE SMALL BUSINESS COMMITTEE
SUBJECT: HEALTH CARE REFORM IN A STRUGGLING ECONOMY: WHAT'S ON THE HORIZON FOR SMALL BUSINESS?
CHAIRED BY: REP. NYDIA M. VELAZQUEZ (D-NY)
WITNESSES: DAVE RATNER, OWNER, DAVE'S SODA AND PET CITY; JANETTE DAVIS, CPA, PRESIDENT AND CEO, SOUTHEAST AMERICAN FINANCIAL GROUP, INC.; THOMAS HAYNES, EXECUTIVE DIRECTOR, THE COACCOLA BOTTLERS' ASSOCIATION; ALISSA FOX, SR. VICE PRESIDENT, OFFICE OF POLICY AND REPRESENTATION, BLUECROSS BLUESHIELD ASSOCIATION; R. MICHAEL BEENE, SENIOR HEALTH ADVISOR, NATIONAL ASSOCIATION FOR THE SELF-EMPLOYED; DIRCK CLARK, CHIEF BUSINESS DEVELOPMENT OFFICER, HEARTLAND REGIONAL MEDICAL CENTER

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REP. VELÁZQUEZ: Good morning. I call this hearing of the House Small Business Committee to order.

(Gavel sounds)

My colleagues, The American Recovery and Reinvestment Act will go a long way in helping entrepreneurs weather the storm of recession. But, even after it is enacted, the new stimulus won't clear every cloud. The rising cost of healthcare continues to be a major stumbling block for small firms; an obstacle that threatens to restrict their ability to create new jobs for American workers. Until that roadblock is cleared, these businesses will be unable to grow and unable to help lead the path to economic recovery.

Most of the country's attention is now fixed on the faltering economy. But that does not make healthcare reform any less urgent. In fact, reigning in healthcare costs is as critical to financial recovery as restoring accountability on Wall Street. As soaring premiums cut deeper and deeper into profit margins many entrepreneurs are slashing coverage for employees and their families. Still others are dropping it altogether.

But perhaps worse yet, countless businesses have been forced to scale back their workforce. With unemployment at a 16 year high, we simply cannot afford to lose more small business jobs; especially considering that entrepreneurs are the country's greatest job creators. Clearly, healthcare reform for small firms is more than a moral obligation, it is an economic imperative.

In today's hearing, we will discuss the rising cost of small business healthcare, and the barriers it creates for financial recovery. We will also explore ways to break down those barriers, and to bring the economy back on track. In the last two years, healthcare costs have climbed at twice the rate of inflation. For small firms, premiums have jumped 80 percent since the year 2000.

As a result, coverage for small business workers has dropped off significantly. In less than a decade, it has declined by 16 percent for some of the smallest firms. Today, in the face of growing economic challenges, small businesses can no longer absorb these outlays. With lending down and credit tightening, few entrepreneurs have the resources to meet basic obligations like payroll, let alone provide health insurance. Clearly, the current health care system is unsustainable for employers as well as their employees.

As Congress discusses healthcare reform, one of the issues before us is that of employer mandates. I understand there is significant concern about whether health care reform will include mandates that small firms offer coverage. This issue must be addressed in a way that will not unduly burden small businesses.

The reality is that reform cannot work if it does not meet the needs of our nation's entrepreneurs. Beyond mandates, this Committee has been working to find consensus on the broader health care reform issues. Last Congress, working in a bipartisan manner, members of this Committee introduced the Choice Act, legislation that would have gone a long way in addressing small employers' health care needs. Today, along with Mr. Graves, I am reintroducing the bill. It is our hope that it will help make healthcare more accessible for small businesses.

As the country continues to consider recovery legislation, it is critical that healthcare reform play a role in the process. Yes, the American Recovery and Investment Act promises billions of dollars in tax relief to entrepreneurs, and yes, it will help unfreeze credit markets. But unless we can find a way to make small business coverage more affordable, the benefits of the stimulus may be blunted by healthcare costs.

How can we expect entrepreneurs to lead the way out of recession when they can't even afford to insure their employees? The more money that small firms are forced to pour into healthcare, the less capital they have for bringing on new workers. And at the end of the day, that is what a stimulus should be about; creating jobs. Small businesses can do it, but they're going to need all the means necessary, beginning with increased capital, through healthcare reform.

I am pleased that our witnesses could join us today and thank them in advance for their testimony. With that, I now yield to Ranking Member Graves for his opening statement.

REP. GRAVES: Thank you, Madame Chair and I too would like to echo the Chairwoman's thoughts on thanking you all for coming today. I appreciate it; I appreciate her having this hearing to gave us some more insight on healthcare and how it is affecting our businesses. Forty-seven million Americans are uninsured. By itself, that's a staggering number. Unfortunately, given the nation's economic crisis, we can expect that that number is going to rise; it's going to rise significantly unless we work together to find some reforms that are practical, efficient and realistic.

The United States has the best health care system around, but a wasteful and inefficient system for delivering that care. According to the Institute of Medicine, the United States spends nearly $100 billion per year to provide the uninsured with healthcare; often for preventable diseases that physicians could treat more efficiently with earlier diagnosis.

Clearly, our system of health insurance and healthcare is financially unstable and threatens the health and financial security of small business owners, their employees and their families. Several consecutive years of double digit premium increases have hit the business community pretty hard, especially small firms.

An employee in a firm with fewer than 10 employees pays 18 percent more for health insurance than a worker in a firm with 200 or more employees. Disturbingly, healthcare costs are continuing to rise for small businesses. As a result, a significant number of the uninsured, 60 percent of workers or dependants of workers in small companies.

Healthcare reform should make the market for health insurance more competitive resulting in greater access to affordable healthcare. For many years in Congress, including me, I have supported associated health plans, or AHP's, which would permit small business owners to pull together to purchase their health insurance at lower rates. These arrangements could increase negotiating leverage and administrative efficiencies and help to ensure more consistent benefits among states.

Another area to explore as we attempt to fix this problem is the way health benefits and spending are taxed. Federal tax treatment of health insurance is widely understood as a fundamental element at achieving affordable health care. It is arguably the most important factor shaping the health insurance markets and thus the key driver of the incentives to dominate health care financing and delivery.

Beneficial initiatives, like health savings accounts, need to be expanded and made more affordable through the tax code. Additionally, we must eliminate the inherent inequity within the tax code when it comes to the treatment of self-employed individuals by allowing them to deduct their health insurance expenses when calculating their payroll tax returns.

I also believe that changing the tax code to allow everyone to deduct non-compensated health expenses on their taxes would provide a significant benefit in making health care delivery more affordable. To this end, I have decided, and Chairwoman Velázquez pointed out, to be an original co-sponsor on the Small Business Choice Act, which she will be introducing shortly.

The bill tackles two of the most significant challenges facing small employers; the high cost of providing comprehensive health insurance and the volatility of insurance premiums. The bill would allow small businesses to form health insurance cooperatives, which would function similarly to risk pools and provide insurance against high cost or catastrophic claims.

Additionally, the bill offers a key incentive in the form of a refundable tax credit to small businesses in the form that choose to join a cooperative. This is a good start, Madame Chair, and I look forward to working with you on it.

There are many ways to tackle this problem and I firmly believe that mandating employers offer coverage to their employees is not a workable option. Just last week, the National Federation of Independent Businesses released a study measuring the economic impact of the National Employer Healthcare Mandate of what it would do to small businesses. This study conducted business simulations to measure the effects of a hypothetical national mandate requiring employers to offer private health insurance to all employees, starting at 2009, and to finance a minimum of 50 percent of the cost.

Among other findings, the research found that a mandate could lead to more than 1.6 million jobs lost between 2009 and 2013; and small businesses would account for more than one million, or 66 percent, of those lost jobs. Additionally, small businesses would loose roughly $113 billion in real output and account for 56 percent of all real output that is lost. Labor intensive industries with 20 to 99 employees would experience the most job loss.

There is no way to fix a problem as big as this. We must continue working towards a solution because America's small businesses can't wait any longer.

I look forward to working with you again, Madame Chair, and I appreciate again the witnesses for being here and for everybody that is working on this bill that you're getting ready to introduce.

REP. VELÁZQUEZ: Thank you, Mr. Graves.

It is my pleasure to welcome our first witness this morning, Mr. Dave Ratner. He is the owner of Dave's Soda and Pet City, a small chain of four pet stores in Springfield, Amherst and North Hampton, Massachusetts. He is here to testify on behalf of the National Retail Federation -- the retail industry and represents an industry that has more than 1.6 million U.S. retail companies and more than 25 million employees.

Welcome, Mr. Ratner. You have five minutes to make your presentation.

MR. RATNER: (Off mike)-- it's a great organization.

I'm the owner of Dave's Soda and Pet City - yes, I sell soda and I sell pet food - a four store business in the greater Springfield, MA. My business has been named the greater Springfield Chamber of Congress Small Business of the Year. We are the habitual winners of the People's Choice Award. We sponsor every little league team. We sponsor every church, every cheerleader, everything that has anything to do civically in western Massachusetts, we're involved with.

I'm sure that all of you in your communities have a business like Dave's and I am in the 20 to 99 employee group that is really nervous about what's going on. The retail industry, as you know, is one of the biggest supporters of the employer-based health insurance system. Despite not having an easy work force to cover, we are strong supporters of health coverage in spite of these challenges. It's not that we don't want health care for everybody; we just want to do it right and equitably.

As an industry that frequently endures wafer thin profit margins, we're also well acquainted with the need to manage the collective costs of labor in an effective manner as possible. Maintaining the balance between these two imperatives is not always easy; its borderline impossible, as you said, even in the best of times. Lord knows, these aren't the best of times.

We hope to work with you and other members of the U.S. House and Senate to bring about a meaningful relief in the rising healthcare costs and to be honest, I'm almost elated to hear you two talk about what you think. It's fabulous.

The key, in our view, is to reaching universal healthcare is maintaining or getting rid of the high cost. The NRF has proposed a comprehensive solution to increasing access to more affordable health coverage in our vision of health care reform and I ask that it be included at the end of my written testimony.

I'd like to touch on just a couple of points. Retailers who don't offer consistent value to there customers simply don't survive. Amazing, the same is not true in our healthcare system. We need to develop a consumer friendly comparative cost and quality information. My customers know more about the pet products on my shelves than they do about the doctors or the health plans that they use.

People should be able to select the best quality care just as they choose between me and my competitors on a daily basis; you do need competitors in order to have real competition. This was the first year in 20 years when my renewal came up that my health care costs didn't go up at least 15 percent. Why? Because there was a new legitimate player that came into western Mass and they came in with a better plan at the same rate. It's amazing.

Auto insurance in Massachusetts, when they finally let that get competitive, auto rates went way down. It's really about good competition. Reducing the health care costs should be an essential goal in all health care reform. Employer mandates, as you said, they add costs. The NRF particular looks forward to working with the committee on the Chairwoman's proposal to create a market for high risk claims; I think it's a fabulous idea.

When it comes to increasing access to coverage, we believe that we can reach universal coverage without mandating that employers provide coverage. The problem with employer mandates, either to provide coverage or to provide specific coverages, is they directly increase the coverage and hence, the cost of labor.

Here's the real world deal. It will kill jobs. Employers simply will not bring on new employees if they get mandated. It's just basic common sense.

Employer mandated health insurance will leave everybody unhappy and a ton of people unemployed and who's going to pay the doctor bills if these people don't have jobs? Yes, we urge policy makers to be wary about doing what Massachusetts did -- I will tell you, it did not work. Rates have sky rocketed and many people are still unemployed. It didn't work.

I understand one of the biggest challenges you will face will be building a consensus around the reform and I would venture to guess that there isn't an industry or any American who doesn't have an idea about how it should be done. We hope that the NRF vision will help add to the growing consensus around reform and it is time to get it done now and only the right reforms enacted into law.

I thank the committee, I look forward to your questions and I am so elated to hear what you guys are saying; it's great.

REP. VELÁZQUEZ: Thank you, Mr. Ratner.

Our next witness is Ms. Janet Davis. She's the president and CEO of Southeast American Financial Group, Inc. Her firm is a residential and commercial real estate lending firm based in Pembroke Pines, FL. Ms. Davis is testifying on behalf of the U.S. Women's Chamber of Commerce. The Women's Chamber of Commerce was founded in 2001 to increase economic growth opportunities for women.

Welcome.

MS. DAVIS: Chairwoman Velázquez, Ranking Member Graves, members of the committee, thank you for giving me the opportunity to share with you my challenges.

I am a small business owner who is the president and CEO of Southeast American Financial Group. My company is owned and operated by my husband and I. Through the years, I have employed as many as a dozen employees and sub-contractors. However, during this economic downturn, we had to reduce our staff to one and a half.

The explosive cost of health care makes it extremely difficult for us to continue to afford, especially during this current economic crisis. Currently I pay 50 percent of the monthly health insurance payment for my employee. To keep costs down, I chose an agency, but this becomes a challenge for the employee, who has a pre-existing health condition, early in the year before they able to see their deductable. For small businesses like mine, it is very important that our employees get the health care they need so that they can proactively manage their care and be available for our business needs.

Like many husbands and wives who work together, my husband and I have to purchase individual policies instead of a family policy. In 2007, the insurance increased for us to $1,400 per month. To continue to carry insurance, I switched my company to a high deductable agency policy. Now we pay $881 monthly for just both of us. However, we have to cover the first $3,000 for expenses and prescriptions. Our coverage, only after we have exceeded these deductibles. While our policies include preventative care, the insurance company almost always excludes something and sticks us with a co-pay.

My doctor recommended a preventative procedure. I verified with my insurance company that the procedure would be covered 100 percent. During the procedure, the doctor discovered a minute issue and recommended two additions to my diet. Consequently, my health insurance company changed the preventative classification and charged me $562.50.

The families of small business owners bare the brunt of the inequalities in our healthcare system that is heavily skewed in favor of big business. When I worked for a larger business, I had a more affordable family policy, which also covered my husband. Because I am younger and healthier, our coverage was cheaper because it was issued to me as the primary.

My husband had an eye emergency that resulted in a bill in excess of $80,000. The insurance company paid 25 percent of the street based on its discounted arrangements with the hospital. Why is it that the hospital services have to be priced at such exorbitant sums for the cash paying customer who, in most cases, cannot afford to pay these astronomical bills?

If we could reduce those costs to reasonable amounts, individuals could then afford to pay their bills. We need affordable solutions now. I ask that you put health care back in the hands of the doctors and prevent insurance companies from dictating the care that we receive. Remove the fine print and provide clarity so that we know what we're getting.

Health insurance companies should not be able to wiggle out of paying for health care services. The restrictions should be lifted as to what doctor or hospital that you may be able to use. Allow small business to pull together to purchase insurance under national group umbrella policies. Provide tax credits to small businesses that purchase coverage. Remove the 7.5 percent of AGI thresholds on income tax for medical expenses.

Do not mandate that small business provide coverage. Remove the 75 percent threshold for business to cover employees before they can get coverage. Divide insurance into medical and catastrophic care. Allow tax credits to individuals with direct pay to their doctor and they can purchase insurance coverage for surgery and other catastrophic illnesses.

In conclusion, it's time to end the stranglehold health insurance companies have on American citizens. Small business owners and their employees have been forced into paying exorbitantly high premiums, risking high deductibles and then nickel and dimed by insurance companies. We need to wrestle the control of our health out of their hands and put it back in the hands of individuals and doctors. Get rid of endless administrative overhead which is often aimed at finding ways to not pay for care. Help American small businesses to pool together to leverage our scale and bring the costs of care down.

Thank you. I'm open to any questions.

REP. VELÁZQUEZ: Thank you, Ms. Davis.

Out next witness is Mr. Thomas Haynes. He is the executive director to the Coca-Cola Bottlers Association. Mr. Haynes previously served as President of the Association Healthcare Coalition, which helped improve the healthcare options available to their small business members. Established in 1914, the Coca-Cola Bottlers Association assists its members in reducing costs and improving efficiency by meeting their needs in numerous areas.

Welcome back.

MR. HAYNES: Thank you, Chairwoman Velázquez, Ranking Member Graves, for the invitation to address this committee again. As Chairwoman Velázquez referred to, this is my third appearance before this committee.

I won't go into quite as much detail about what the Coca-Cola Bottlers Association does and some of our own history as a result. A lot of it is laid out in my statement. What I will say is that we are in the business of serving out members in every way we can and a particular focus of that service is on our smaller members.

Our members range in size from the largest, which has 50,000 employees, down to a number of bottlers that are much like Mr. Ratner's companies; they have 50 or fewer employees. So, approximately half of our remaining 73 members have less than 150 employees so they qualify as small businesses.

We serve them in every way that we can, we're successful in almost every arena in providing the same level of service to them, and getting their costs to the same level as the largest members; ranging from liability insurance to employee benefits to purchasing to any number of other areas. The one place where we cannot provide that service in the way we need to is in the healthcare area and I think that speaks volumes about the problems facing small business because it alone, among all of our challenges, is the one that we need help from Washington in solving.

Our small members were once part of a pool that the Bottlers Association managed, yet in 2000, shortly before I joined the Bottlers Association, we were forced to abandon that pool because of the administrative costs associated with compliance with state mandates, state regulations and a number of other administrative issues. As a result of that, our members' costs went up astronomically very quickly.

What happened to them is reflective, I think, of what's happening in the small business community in general and why we have such a challenge with the uninsured, is that a number of the members cut back on their policies, many of them discontinued family coverage and offer only individual coverage and, frankly, a lot of their employees have lost their health insurance; either because they can't afford the co- pays, they can't afford the share that our members have to charge in order to be economically viable or the benefits have been cut in a way that they choose not to participate because of the remaining costs.

Now, why is that? Well, as I said, part of the issue is state regulation, but it is not the entire issue. I have attached to my testimony a study that Mercer did for us that looks at the sources of the 18 percent disparity that Congressman Graves referred to. What it shows is there are three primary drivers of that; one is higher administrative costs, the second is the significant difference in the premiums paid for shifting the risk and the third is what I believe is some differences in terms of the effectiveness of chronic disease management by the employer.

The issue is, quite simply, that large employers are operating a self-insured environment, have efficient plans with scale in their administration and don't pay a profit driving premium to carriers to take on risk because they are largely self-insured. If we are in a position to create the same kind of pooling, the same kind of scale for our smaller members, we could achieve the same savings and reduce that disparity to a significant degree, even leaving state regulation in place.

So, where does that leave us? Well, what that leaves us, in my view, is three basic needs that small business has in order to solve the challenge they are facing relative to providing healthcare.

One, is an uneven playing field. We need Congress' help in making the playing field even. Second, is an opportunity to do risk pooling and, in the process of doing risk pooling, doing risk retention. The third, is to create a system where incentives between the employer, the employee, the people who are likely to be driving decisions as to healthcare utilization are aligned in terms of the economic interest.

I believe that the bill that Congresswoman Velázquez and Congressman Graves are introducing today, the Choice Act, will achieve all of those objectives from our perspective. By creating a tax credit to facilitate the formation of the cooperative pools and by providing sufficient tax credit to make the playing field more even, in our case, our members will be able to offer affordable healthcare once again.

It is the only solution, frankly, that our members need. If it were enacted by Congress, we would have no reason to oppose mandates because our members would be able to provide coverage. I'm not about to speak for every other small business and say that this is all they need, but in our situation, based upon the way we do business, it is all we need to restore coverage and restore affordable healthcare for our smaller members.

REP. VELÁZQUEZ: Thank you, Mr. Haynes.

Our next witness is Ms. Alissa Fox. She is the Senior Vice President of the Office of Policy and Representation for the Blue Cross/Blue Shield Association. BCBSA is a National Federation of 39 independent and locally operated Blue Cross/Blue Shield companies that provide health care coverage for more than 102 million Americans.

Welcome.

MS. FOX: Thank you very much, Madame Chairwoman, Ranking Member Graves and other distinguished members of the committee. Thank you for being here.

I am Alissa Fox, Senior Vice President of Blue Cross/Blue Shield Association. As you mentioned, Blue Cross/Blue Shield Association represents 39 Blue Cross/Blue Shield plans across the country and collectively, we provide coverage to 102 million people. We're unique in that we provide coverage in every zip code in every part of the country and all those plans offer coverage to small employers; a sign of our strong commitment to the small employer market.

We believe that expanding coverage and improving affordability for small employers must be a centerpiece of healthcare reform. Today, I'd like to focus on three areas.

First, I'd like to talk a little bit about how states regulate heath insurance sold to small employers today. Second, I'll highlight what Blue plans are doing to increase coverage for small employers. And third, outline our recommendations for federal legislation.

Today, state and federal law require insurers to offer coverage to every small business, regardless of their employees health. (It's a ?) guarantee issue, every insurer has to offer coverage to small employers and the small businesses can't have their coverage turned down or cancelled if one of their employees becomes sick; that's both federal and state law.

In addition, state law requires health plans today to pool all their small employers together when establishing premiums and they limit the extent to which insurers can vary the premiums today based upon the health status of individual employees. These reforms spread the medical costs of small employers more evenly to generate more affordable premiums for employers with less healthy members.

However, this does result in higher premiums for the healthiest employers. As we've heard this morning, affordability is a central challenge facing small employers. To help address these challenges, our plans across the country have been pursuing two strategies.

First, we're working on a variety of initiatives to reign in costs for everyone that's facing healthcare costs that are growing at much too high a rate. The initiatives we're pursuing range from changing the way we pay providers to promote better care, not just more services, and to focusing on prevention, wellness, and managing chronic illnesses. We have a website we just put online that highlights many of the BlueCross BlueShield initiatives underway in each of these areas. Second, our plans are developing special programs designed to make coverage more affordable for small employers.

My formal statement includes several examples. I'd just like to highlight one. BlueCross BlueShield of Oklahoma worked closely with their state legislature to develop Insure Oklahoma, a program that provides subsidies to low-income workers in small businesses to help cover the cost of health insurance. This program has been very successful. To date, nearly 4,000 small employers are participating in the program and more than 11,000 employees and their families receive subsidized coverage from the program.

According to a recent survey, 56 percent of enrollees were previously uninsured and 37 percent of employers offered coverage for the first time. While these types of programs are making a difference, federal action is needed to address the problems facing the small employer health insurance market as part of comprehensive health reform. We have three recommendations for your consideration.

First, we're recommending legislation to encourage states to establish what we're calling state insurance marts. They simplify shopping for small employers, increase competition among insurers, and help educate small employers on potential subsidy options. These marts would make it easier to shop for coverage advise, for the first time creating a central point in every state where a small employer knows they could go to identify what insurance options are in their marketplace and apply for coverage and for subsidies.

Our vision is that you go to the one -- one site. If you want to get -- you fill out an application, one application, regardless if you're applying for Aetna or BlueCross. It checks off if you want Aetna, BlueCross, et cetera, price quote, push a button, and get quotes pretty instantaneously, and then you can actually find out what subsidies you might be available and also enroll online.

Second, we're recommending four types of targeted subsidies on improving ones patterned after the Oklahoma plan that I mentioned earlier that would provide tax credits to small employers for their low-wage workers. And third, we believe the underlying cost drivers in our current healthcare delivery must be addressed and we have very specific recommendations in our Pathway to Covering America.

I would like to close by saying reforming how we pay for and deliver care it won't be easy, but it's the only way that affordability challenges facing small employers can be solved over the long term. We look forward to working with you, this committee, other members of Congress, the new administration, and other stakeholders to enact healthcare reform that works for everyone. Thank you.

REP. VELAZQUEZ: Thank you, Ms. Fox, and now I yield to the ranking member, recognize him for the purpose of introducing our next witness.

REP. GRAVES: Thank you, Madame Chair. Madame Chair, our next witness is Michael Beene. He serves as the senior health advisor and general counsel for the National Association for the Self-Employed. The National Association for the Self-Employed is a national -- national membership association and they represent 250,000 micro businesses. Those are businesses with 10 or less employees.

As the senior health advisor, Mr. Beene works with the NASE's legislative staff. They educate policy makers on the health coverage issues faced by the self-employed and health policy options that would assist the micro business community and gain access to affordable healthcare coverage. Thank you, Mr. Beene, for being here and for testifying.

MR. BEENE: Well, thank you. Thank -- thank you to the committee for visiting this important issue early in the session and we do support the choice bill and pleased to hear that it is going to be introduced again. The plight of micro business owners -- those with 10 or less employees -- is becoming more challenging as our economy continues to decline. The pool of money these entrepreneurs have to draw upon for both business and family expenses has been dwindling, forcing many self-employed to make tough choices.

Most distressing, many of the self-employed are scaling back their health coverage and some are dropping coverage completely in order to keep the doors of their business open. As discussions on health reform progress, the National Association for the Self-Employed would like to emphasize that proposals must address two key issues, affordability and choice -- those two issues being key in order to improve the ability of micro business owners to obtain quality health coverage.

The common denominator for all small businesses is they must pay taxes, thus the tax code is an excellent vehicle to provide financial relief to micro business. A key step forward in addressing the affordability issue faced by the 21 million self-employed would be to tackle the current inequalities in the tax code that this segment of the business population faces as they purchase health coverage, and those -- several of those things were -- have been mentioned. I believe Mr. Graves mentioned in his remarks.

All business entities except sole proprietors receive a business deduction for health insurance premiums. Employees and owners pay for their health insurance premiums pre-tax, and therefore they are not subject to FICA taxes. However, a sole proprietor's premiums are not paid with pre-tax dollars and they're exposed to 15.3 percent self- employment tax. The most recent Kaiser Family Foundation study indicated that the self-employed pay on the average $12,000 a year annually for family health coverage.

Because they cannot deduct these premiums as an ordinary business expense, that would require them to pay an additional $1,800 in taxes that no other business pays. Removing this inequity would be a significant economic stimulus for the self-employed and just a fair leveling of the playing field. Discrimination against the self- employed also persists in Health Reimbursement Arrangements -- HRAs. HRAs -- distinguishing from HSAs, HRAs are a flexible benefit option that allows small business owners to reimburse employees for out-of- pocket medical expenses including health insurance premiums.

An HRA gives an owner of a business predictability when it comes to benefit costs since the owner determines the maximum amount of annual reimbursement each employee will receive. It has to be the same across the board for the owners' employees. The reimbursements are tax deductible for the business and tax free for the employees. An important component of HRAs is the non-discriminatory rules that apply to them.

If an HRA is set up the benefits must apply equally to all employees. At present, self-employed persons are not eligible to participate in an HRA. Expansion of HRAs to allow the self-employed business owner to participate in the plan would likely significantly increase the number of businesses that use HRAs, and HRA reimbursements would likely be more generous if the owner also got to put his health -- his or her health coverage in that. So we would like to see that inequity removed.

As we look at our health insurance markets, it is important to consider the potential impacts of market reform on micro business. The self-employed or micro business can purchase health insurance in two markets -- the small group market, which was referenced, and the individual market. We have seen a definitive shift of micro businesses from the small group market to the individual market in the past three years. Thus for health reform to be beneficial to the micro business sector proposals must tackle cost issues in the individual market.

The creation of pooling mechanisms can be utilized to begin addressing the high costs and lack of negotiating power faced by the self-employed. In current reform proposals, discussion has centered on creating a national pool managed by the federal government to allow small business and individuals to purchase coverage. Micro business owners are evenly split in their opinion on whether a government-run health option is the right approach.

Chief concerns expressed are the quality of their healthcare, would it be as good or not, would they have as many choices, and there also is a worry among micro businesses that taxes would significantly increase. The establishment of mandates either for individuals or employers has been a hot topic. The NASE does not support the mandating of health coverage at this time. In particular, an employer mandate to purchase and provide health coverage that does not exempt micro business, 10 employees or less, would put millions of owners out of business and would leave millions of workers unemployed.

The NASE believes that an individual mandate would be harmful in this current climate. This is not the time to do more harm to business. As you look to reform the system, don't forget that the needs of the 10 or less micro business may be very different than the 200-employee small business. Thank you.

REP. VELAZQUEZ: Thank you, Mr. Beene. And now again I recognize the ranking member for the purpose of introducing our next witness.

REP. GRAVES: Thank you, Madame Chair. Our next witness is Dirck Clark. Dirck serves as the chief business development officer for Heartland Health Systems in St. Jo (sic), Missouri. His responsibilities include strategic planning, advocacy, regional development, and medical student education. Prior to coming to Heartland, Mr. Clark spent seven years working in the United States Senate with Senator Kit Bond. Most of his tenure with Senator Bond was spent working on healthcare and rural development issues.

Originally from Savannah, Missouri, he received his Bachelor's degree in business administration and Master's degree in healthcare administration from the University of Missouri. In addition, Mr. Clark serves on the Board of Governors in Missouri Western State University, the board for the Missouri Chamber of Commerce, the Executive Council to the Boy Scouts of America there in St. Jo. So thanks for being here, Dirck.

MR. CLARK: Thank you. Thank you, Madame Chair, members of the committee. I appreciate the committee's interest in the effect of health insurance on small business and this opportunity to testify. As background, St. Joseph -- St. Joseph is a town of about 75,000 people located an hour north of Kansas City. Heartland is comprised of the only hospital in St. Joseph. We also have a small rural insurance company and a physician group practice of about 110 physicians.

Heartland is the only tertiary hospital between Kansas City, Omaha, and Des Moines. Like many hospitals in rural areas, we are the largest employer in town. It is in that role, as an employer, that I am here today. Fifty-one percent of our costs -- of our expenses -- are related to labor and 10 percent of that goes to healthcare costs. As a healthcare provider, we have an understanding of the effect of health status on healthcare cost and insurance rates.

We have a team that works with local employers to help them keep their healthcare costs down. My main focus today is on the subject of individual responsibility and the role an employer can have in improving employee health, ultimately impacting healthcare expenses. With our employees at Heartland, we have implemented some ambitious programs to help employees with their health status, at the same time giving them an incentive as a reward for helping keep their healthcare costs down.

Some examples would be the following. If you're an employee of Heartland and on our insurance program and are injured in an automobile accident, we will only pay 60 percent of the healthcare costs associated with that accident, and would note that Missouri is a mandatory seat belt state and so all employees would have to do is comply with the law. Like many other businesses, we offer a 10 percent health insurance differential incentive for employees that choose not to use tobacco products along with reimbursement for smoking cessation programs and free smoking classes -- non-smoking classes.

This year, based on research showing increased medical costs for those whose body mass index, or BMI, is above certain benchmarks, we started a program to offer a premium discount for lower BMIs. If you are a Heartland employee and on our insurance plan and have a BMI below 35, you receive a premium discount of 10 percent. In this first year, if an employee has a BMI above 35 and wants to improve, we will offer the incentive to the employee if they agree to participate in wellness programs.

In order to help the employees earn this benefit, we have built an on-site fitness center that is free to employees and spouses. Along with the fitness center we offer free weight -- free classes in weight loss, nutrition, and exercise, to name a few. Our hope is to break ground this spring on a day care that will allow employees to exercise before work and after work and have their children nearby.

This first year the BMI threshold is 35. However, each year the BMI threshold will be decreased until it reaches 29. Our goal is to work with employees to help them stay below the threshold as it decreases. The result has been that 92 percent of eligible employees have signed up for the benefit. Eighty-four percent of those who signed up have earned the discount outright, and an additional 12 percent are earning the discount through participation in wellness programs.

As this is the first year of the BMI incentive we don't yet have trend data showing its impact. However, the effect of these programs has been dramatic -- a dramatic increase on participation in the self- help programs and a fitness center that is nearing capacity four months after it opened. This is the second fitness center. We had to expand the first one.

When the fitness center initially opened, as you would guess, it was populated primarily with employees who were already in good physical condition and enjoyed exercise. What we're finding now is that more employees are showing up to exercise and participate who have higher BMIs. Our hope is that we can continue to work together with the employees to improve their overall health risks and keep their BMI under the insurance threshold as it decreases.

My hope that as you look at health insurance challenges for small business that you also look at programs that provide workers incentives to improve their health and help keep healthcare costs down. I thank you for the opportunity to testify and look forward to your questions.

REP. VELAZQUEZ: Thank you. I would like to address my first question, if I may, to Ms. Davis. You mentioned that you offer high- deductible coverage for your employees. For many here in Congress, these plans were supposed to be the answer to all the problems in the small group market. While these plans may be lower priced, can you talk to us about some of the shortcomings of this plan in controlling healthcare costs?

MS. DAVIS: The major shortcomings of the high deductible -- (off mike) -- Congressman Velazquez, the major shortcoming with the high- deductible policy is that for the employee who let's say, for example, has a pre-existing condition and they have not yet saved that deductible, that becomes an issue for them in terms of they may have to scale back on their care because they cannot afford to pay all up front to pay for themselves. That's a major issue that employees face because -- face it, not everyone can find $3,000 up front, you know, right away if they become sick early in the year. Maybe after 10 or 12 months of saving that money is there, but that's a major issue that they have.

REP. VELAZQUEZ: Ms. Fox, this committee held a series of hearings last Congress focusing on consolidation of the healthcare industry. What we have learned is consolidation has left small businesses with fewer insurance carriers to choose from and higher prices. According to your testimony, state-based connectors or exchanges are better for small businesses than national ones. Given that consolidation threatened to eliminate competition in the state insurance market, why would the state-based connector be better?

MS. FOX: Thank you. Well, first of all, we don't think that consolidation has really reduced the number of insurers in the marketplace in a significant way. GAO looked at this back in 2005 and what they estimated was that on average there are 28 insurers in a state -- in those states, which is a lot of competition. I think when we --

REP. VELAZQUEZ: (Cross talk) -- how many?

MS. FOX: I'm not sure but I think --

REP. VELAZQUEZ: Well, that's the question.

MS. FOX: I think -- I don't know that. I'd be happy to look for that but I think 28 insurers in a state is a significant number of competitors. I'd say that when you look at the states where there have been a lot of competitors leaving the market the reason has not been consolidation. It's been the regulation has been very, very tight. You look at places like Maine, Massachusetts, New Jersey. That's where you've seen a lot of insurers leave the marketplace and our perception, I think it's best to ask them, is that they've left because the rules have been very tight.

REP. VELAZQUEZ: Well, perception is not fact.

MS. FOX: No, not --

REP. VELAZQUEZ: Yeah.

MS. FOX: (Cross talk) -- perception.

MR. HAYNES: I just -- if I could interject. In another life I was an antitrust lawyer and the one thing I would say is you never measure competition by counting competitors. You have to measure it by share, and I think, you know, you've looked at that issue and there are definitely some issues in terms of shares that would suggest from an antitrust perspective that there might be market power in at least some markets.

MS. FOX: Well, I would add on to that that, you know, the federal government has looked at where there has been consolidation and there -- when insurers get to a certain size they use it to get leverage with hospitals and doctors and it directly benefits the consumer. So this is something that has been examined very closely and, you know, just on -- just to be candid, on our market share we have about a third across the country in market share.

And state connectors -- we think state connectors would be better because it would be piggybacked on the existing state infrastructure. There are state regulators who have excellent long-term expertise in protecting consumers and we don't think that it makes sense to reinvent that at the federal level when we have state experts there. So what we designed was a program to get the benefits of what we've heard of from a national exchange with simplified shopping for small employers.

I think when you go and you try to shop as a small employer -- I used to be a small employer and it's very difficult to shop for insurance. So we designed this to really simplify the process, make it easier, and I think it would also reduce the administrative costs for small employers or administrative costs for us as well as small employers.

REP. VELAZQUEZ: But don't you agree that a national exchange would give -- provide more transparency and that consumers care more about what is out there for them to see and to choose from?

MS. FOX: We agree 100 percent that we need transparency but we think you can get all that transparency at the state level and having state connectors and require every insurer to be listed on that site. So it's not just (them ?) but everybody so you know everybody in the market. I think it will really increase competition.

REP. VELAZQUEZ: So why do you think that, you know, the real issue here in terms of cost -- bringing down costs -- that the rising healthcare cost is the -- is a systemic one so how could you explain that the premium cost has not come down, even after you talk about putting together a strategy that will have the effect or the goal of bringing costs down?

MS. FOX: I agree. You know, bringing costs under control, you know, is a huge problem facing this country and we all need to work together. We have strategies in place but we can't do it alone. We need to partner with the federal government and we have very specific recommendations on how working with the federal government that we need to be looking at changing the incentives.

For example, for providers right now the way we and the government pay is that the more you do the more money you make. We need to change those incentives. And I'll give you just one example of a program that we have underway where we think it's really making a difference. Our plan in Pennsylvania is now paying hospitals to reduce their infection rates, and what they've shown is that through giving them coaches to help them in the hospital and giving financial incentives they were able to bring the infection rates where people were getting sick unnecessarily way down. We think these are the kinds of initiatives that need to -- need to be pursued.

REP. VELAZQUEZ: Anybody else would like to comment? Let me ask you, Ms. Fox, why do you think that the Massachusetts experience has not been able to bring cost down?

MS. FOX: Well, I forgot to mention, I think it was Mr. Ratner was talking about that. I think that they've -- that they focused on extending access first and controlling costs is something that they're now working on, and we think you need to do both together. We -- we think everybody needs to be covered but you need to attack the rising costs at the same time, and I think they did the expansion first. I think that's -- you know, we would do them together.

REP. VELAZQUEZ: Mr. Haynes -- thank you. One of the reasons small businesses find it hard to maintain coverage is affordability. If pooling risk is part of the solution, what other kinds of reforms should we be discussing that will help move us in that direction?

MR. HAYNES: Well, going back to sort of the core issue and what caused the abandonment of our small-group program, it was variability in state regulation, particularly mandates created so much complexity. We have -- that group had probably about 2,500 employees in 40 some- odd different states. So we had a lot of states where we might have 15, 20, 25 employees and having to write unique coverages with unique rules in that kind of a program just drove the administrative costs up.

So if we could figure out a way to make state regulation more consistent -- I mean, one example that I think probably added no value was at one point we had eight different rules to administer as to the age at which and the circumstance at which dependents had to come off the coverage because there are eight, nine, 10 different state rules on something as simple as that -- 18 19, 20, full time student, part time student -- and just the complexity of managing that with a relatively small group across multiple states is a real problem.

REP. VELAZQUEZ: Thank you. Mr. Ratner, we are working here both in the House and in the Senate on a stimulus package that will have the goal of getting the economy back on track, and to get this economy growing again we need to create jobs and, of course, we all know that the backbone of our economy are small businesses that creates all the new jobs, between 70 to 80 percent.

In yesterday's New York Times, there was a story about how small firms were choosing between laying off workers and providing health insurance. So with the current economy, how have the additional costs of health coverage affected your ability to hire or provide additional wages to your workers?

MR. RATNER: I think I'm probably the luckiest guy in the business world right now that I'm in a business that -- a business that has not gotten whacked with the recession so I have -- I have not had to lay off people or to deal with that. What I will tell you is that every person that we look to hire we're now at the point where we want to hire a part time person so that we don't have to pay the benefits, especially in light with what our state wants to add on on top of what they already added on.

So I'll -- I'll speak for a few friends of mine who have small business. They literally have laid off people solely for the reason of the health insurance and they've laid of some people my age so the rates are even higher, and they just -- they just couldn't do it or they cut their hours to -- to part time, and it's happening.

REP. VELAZQUEZ: Mr. Clark, to a lot of people in this country, you know, when presidential candidates were running they were discussing healthcare reform as an important issue especially for small businesses. But now we're dealing with the economic crisis that we are facing in this country. Your firm not only provides medical services but you also provide insurance to many small firms. Can you talk to us about how health insurance coverage can be critical to the economic well being of this country?

MR. CLARK: I think the answer we just heard a minute ago is the most important one because of layoffs. We're seeing that in our community -- layoffs with small business. One of the things that we do is we sit down with the small employers and look at their healthcare costs. We do health risk assessment on their employees to help them determine what their issues are and then we try to provide programs for them to help their -- help them keep their employees healthier and then help them keep their costs down.

REP. VELAZQUEZ: Thank you. Now I recognize Mr. Graves.

REP. GRAVES: My question is to Mr. Clark and I might open it up to some of you who represent associations or your own business. But out of curiosity, healthcare savings accounts, which we created what was it, five years ago or something like that -- six years ago -- I'm hearing mixed feelings. You know, they were created as a possible alternative for small businesses to be able to create a healthcare savings account for their employees rather than the expense of full- blown health insurance. But I'd heard some small business saying it's too expensive or it's too tough to get them going. Are you seeing any of that as a provider for healthcare savings accounts? Are you seeing any at all?

MR. CLARK: Virtually none in our little area at all right now.

REP. GRAVES: How about anybody that -- yes?

MR. : We -- we had -- we've had some firsthand experience with that. We -- we have encouraged some of our members who are already on our healthcare plan to look at healthcare savings accounts and the (take ?) rate is tiny.

REP. GRAVES: Really?

MR. : Virtually zero.

MR. HAYNES: And I think -- I think the reason is, frankly, how making decisions about -- financial decisions about healthcare without knowing what's going to happen is very difficult for people. I think folks are simply reluctant to set aside money or to completely understand the tradeoffs between coverage and a healthcare savings account because of the uncertainty aspect of it, and I just think as it's been discussed with both our bottlers and their employees I think there's a -- there is an uncertainty and fear factor that's a significant impediment, particularly for folks who may not be highly educated.

REP. GRAVES: Ms. Fox?

MS. FOX: I'd just add that according to Kaiser Family Foundation, 13 percent of workers in small firms are now in high- deductible health plans and we do -- many of our plans do sell HSAs with high-deductible health plans and they've found -- one plan has reported that 20 percent of its enrolment in that product are from people that were previously uninsured. So -- and what our plans do is we give our customers a range of products and so that they could pick what best meets their needs. So it's not we're favoring one versus another but we do find that some previously uninsured workers (try it ?). Small employers have found that very attractive.

MS. DAVIS: I would like to add that --

REP. GRAVES: Yes, absolutely.

MS. DAVIS: -- for the HSAs -- I have an HSA with my company but as the economic times get tougher and tougher the employee tends to pull back the coverage, the money that they would be contributing, to use for something else.

REP. GRAVES: Kind of a --

MS. DAVIS: It's a catch 22 situation.

REP. GRAVES: -- (don't think it would make it ?) healthy forever --

MS. FOX: Right.

MR. RATNER (?): And with my company, we have a lot of young employees. You couldn't get them to sign up for that. They need every nickel. They want it to come home. You know, they're young. Nothing's going to happen to me. I don't need to contribute to it.

MR. : You know, the encouraging -- the good side of the HSAs is that they do allow more comprehensive coverage for catastrophic events for less money. And so all of this is such a tradeoff between what does it cost to get coverage -- and, you know, we want to avoid this under insured situation as well, and I understand the people that say, well, the HSA may keep you from going to the doctor when they need to, but there are ways with a PPO that I think it can be structured well. But obviously, it needs more education and more examination.

REP. VELAZQUEZ: Mr. Schrader? (Is he here ?) Mr. Moore.

REP. DENNIS MOORE (D-KS): Thank you, madame chair. I'd like to direct my first question to Ms. Fox and Mr. Beene. Last summer, President Obama proposed a new tax credit for small businesses that offer quality healthcare to their employees, specifically under his proposal. Small businesses would be offered a refundable credit of up to 50 percent on premiums paid on behalf of their employees. Some have recently expressed questions about whether or not such tax credit would be sufficient given the dire circumstances that most small businesses currently find themselves in, and the difficulties associated with restraining costs and maintaining cash flow.

Given your policy expertise in this area and your understanding of the circumstances that many small businesses currently find themselves in, do you think that a tax credit would do enough to encourage small businesses to provide healthcare coverage for their employees, or would additional incentives need to be offered?

MS. FOX: We're very supportive of the tax credit proposal that's in President Obama's plan. We think that it would go a long way. (We ?) did a survey on that and surveyed small employers that didn't offer coverage. Seventy-one percent said they would be interested in offering benefits, though that was a little while ago before the economic downturn, and 71 percent said it would make a big difference. We're finding in (Chura ?), Oklahoma that that really is being very successful, having some assistance to provide benefits. So we do think it would be helpful, but we think it needs to be more. We need to reign in costs across the board, so it needs to be a multiplicity of approaches.

REP. MOORE: Good. Mr. Beene?

MR. BEENE: Yes, well, we believe tax credits are really -- probably the key help that we can give small business, and we'd like the tax credits to be refundable, and I think that they need to come monthly. They need to come at a time that a business can use them, be refundable. I support -- and we agree with the concept. And specifically, I think we -- most small businesses in our surveys want to provide health coverage for their employees, and they think they need to from a competitive standpoint because often they're competing with a big company.

You put these things together -- if you can just give some financial help so that it's not a question of paying the mortgage at home or getting some health coverage for the employee -- and I think the one way you can really get an effect and help small businesses with the refundable tax credit issue.

REP. MOORE: Anybody else care to comment?

MR. : Yeah, if I could comment briefly, I think tax credit's a good idea. I think it's necessary with -- but they only achieve one of the objectives that I think ought to be the focus, and that is to get more people covered.

REP. MOORE: Sure.

MR. : I think a targeted tax credit -- and I think it needs to be larger than 50 percent, because after all, that's not a whole lot more than simply making it deductible. I think a targeted tax credit that works against market forces is very important. I think we need a tax credit that has enough effect on the market to reduce overall cost. And that's one of the reasons I would, frankly, prefer the Choice Act solution over a simple 50 percent tax credit.

REP. MOORE: Anybody else? Okay. (Now, broadly ?), do each of you have thoughts, or do any of you have thoughts on various options that are out there that are designed to ensure that a higher percentage of small businesses are able to provide their employees with health insurance? Should the federal government be encouraging the development of purchasing groups, which would've increased plan choice and no administrative costs, subsidize insurance coverage for high-cost individuals, subsidize insurance coverage for low-income individuals? Any thoughts about any of those proposals?

MR. : I'd say yes to all three of those. (laughs)

REP. MOORE: So a consensus, huh?

MR. : Yeah. (laughter) We think that, you know, supported groups for certain individuals is one way to deal with -- you know, with the small business problem of the unhealthy individual we don't want to see. I know the law is everybody, you know, hires equitably and doesn't base things on health, but you wonder out there -- we've got to give options to businesses because we can't bankrupt businesses, especially now when things are tight. And I think all of those proposals have appeal to the small business community.

REP. MOORE: Any other comments? Mr. Ratner.

MR. RATNER: I think that's a huge deal. I think it would help immensely between the tax credits and the pooling. You know, no one here has had the problem of if you have four or five employees in their '30s and you have one who's in his '50s -- your -- the rate just goes right through the roof, or you have someone who has a preexisting condition. Forget it. They won't write the policy. So I think that would be a huge deal to get more people signed up. And again, you know, we still have to address the cost issue, control and cost. That has to go along with it.

Mr. Clark?

MR. CLARK: I would just say from the provider standpoint, anything we can do to see more coverage -- we've seeing a dramatic increase in our bad debt, as you would imagine. We're to the point now where 50 percent of the babies born in our OB unit are born into the Medicaid program. And so anything we can do would be helpful.

REP. MOORE: Thank you all. Thank you, madam chair.

REP. VELAZQUEZ: Mr. Thompson?

REP. GLENN THOMPSON (R-PA): Well, thank you, madam chairwoman and ranking member very much. Appreciate your leadership in this. I'm new here by about five weeks. I come from a hospital floor to the House floor where for 26 years these have been very important issues and represent one of the more rural -- most rural districts in the country. So small businesses are our backbone, and having employers growing those jobs and health concerns are obviously very important for our economy, and to me, my former profession.

Just a question for Mr. Clark -- in terms of rural America, you know, our rural residents rely more heavily on individual small group market. And because these economies are dominated by small business and the self-employed, they're less likely to be offered health insurance through an employer. Could you explain how much more difficult this makes things for people from rural areas, rural America?

MR. CLARK: Yeah. I mean, we're seeing two things. We're seeing, one, fewer people insured, obviously, but number two, more and more people that are under insured. So they show up in the emergency room with a card that says they've got insurance only to find out it doesn't cover much, and so it's causing a -- just -- as I mentioned earlier, a tremendous increase in our bad debt, and we're seeing it more and more every month.

REP. THOMPSON: Sorry. Mr. Haynes, you stated that some form of financial support for small business communities needed to create a fundamental fairness -- now, how would the federal government fairly distribute financial assistance to small businesses when -- given the situation with state-by-state, the small business community faces significantly difference mandates and regulations?

MR. HAYNES: Well, the issue with mandates is not simply the cost of the individual mandates. It's the collective cost of the difference between the mandates. So it's simply a part of our federal system when you've got a bunch of different regulations. It becomes much more expensive to comply with all of them. I was a supporter of the AHP legislation, but understand that, you know, there was concern about the federalism principles of it, and I respect and support that.

A tax credit that recognizes the uneven playing field is really what I'm talking about, and the uneven playing field is basically because big businesses don't have to comply with those mandates. They simply create a self-funded program that is not treated as insurance for purposes of those state rules, and they don't comply with them.

So all small businesses face pretty much the same issue. There may be differences in magnitude, but because they're not large enough to have an individually self-funded plan, they can't, therefore, take advantage of the ERISA preemption. They're in a position where economically the only way they can put together a viable plan is by pooling themselves with other businesses. I think the reality of a tax credit targeted at small businesses is that it simply compensates for the extra cost that they pay because of an uneven regulatory system.

REP. THOMPSON: Okay, thank you. And any other -- would like to comment on that?

MR. : Just briefly that the mandates in certain states often -- I mean, there's a lot of good that comes from them. Often it's political, obviously. People -- you know, different interest groups want to have -- you know, it's easy to -- let's put it in. It's paid for. But then you look up and in a small business situation, you're competing against someone who's got ERISA plans. And now you're faced with just that situation where on one hand the regulation makes it impossible. On the other hand, some of it's just too expensive. There's things you don't need where you're having to pay for.

REP. THOMPSON: Okay. Thank you, madame chairman.

REP. VELAZQUEZ: Sure.

REP. THOMPSON: I yield back the rest of my time.

REP. VELAZQUEZ: Mr. Griffith.

REP. PARKER GRIFFITH (D-AL): Is it on now? Thank you, madam chair. I appreciate so much being here and hearing the comments. I do believe that we are trying to figure this out from within the box, and I appreciate all the calisthenics that we're going through to exist within a structure that over the last four or five decades has proven intractable to lowering cost. And although we're figuring out various ways to increase the deductible or a tax credit, it has nothing to do with lowering the cost of healthcare.

I think we're not addressing the problem. I think maybe some stakeholders that need to be at the table are not at the table. Less than two percent of all of our medical school classes are going into primary care. A third of all of our primary care physicians are 55 years of age and older. We have a huge, huge deficit of primary care providers, and that is what we need for preventive care. A child born today in America that does not smoke and is reasonably well-informed about nutrition is going to live to be 100 years old. Okay.

We now have the ability to cure many, many major diseases that are -- at least allow the patient to live with them. My concern from business -- and I'm hearing the insurance industry, the small business hospital industry, et cetera. We are all advocates for our industry, but there are no patient advocates here. And I think that America's faced with a huge crisis that unless we come to grips with the fact that there are no primary care providers -- and they are distributed when we do have them so unevenly that we're going to have to look for other solutions.

And one of those solutions is that we need traditional medicine -- the American Medical Association and state medical associations -- to allow our nurse practitioners who are certified in multiple specialties to be in touch and help with us -- help us care for America. It's an artificial restraint. And I think that would go a long way to preventive care when we realize that half of all lives lost in the next century will be lifestyle related disease, whether it be obesity, hypertension and what have you. We have the solutions to affordable healthcare, but they're not going to be within the traditional boxes that we're looking in right now.

Thank you, madam chair, for allowing me to make that comment.

REP. VELAZQUEZ: Sure. Thank you. Mr. Gohmert.

REP. LOUIE GOHMERT (R-TX): Thank you, madam chair. And I appreciate having the hearing. I appreciate the work in this area, because this is something that affects everybody. And during the time I left the bench to run for Congress and the time I got elected I learned some valuable lessons about healthcare. I also had learned them as -- when I was in a small business myself as an attorney, but they became more pronounced.

For one thing, I had a relative who was in a car accident, fault of another driver, so I agreed to help this person with their two days of medical expense, make a claim for the other guy's insurance company. And we did so, and the way the practice goes you gather all available medical receipts. We did that, supplied those to the car insurance company. And we had a settlement, and then under Texas law, once that's done, you can't distribute any proceeds until you pay back all of the medical, which -- I contacted the hospital, ambulance, doctors, MRI, all that, procedures, and we had had about $10,000 in medical bills.

They all said we've been taken care of pursuant to our contract with the health insurance company. So once I had all those agreements in, that they'd all been taken care of pursuant to their agreement with the health insurance company, all I had to do was pay the health insurance company. And for the $10,000 in bills, their total out-of- pocket was about $800.00.

So it brings me to wondering -- you know, if there wasn't some way to get total truth about what procedures cost in cash -- I'm told -- I've not been allowed to see actual contracts, but I've been told that in some -- perhaps Blue Cross contracts -- there are provisions that do not allow hospitals or healthcare providers to charge a cash price that's as low as what the insurance company could get. I had a daughter that needed a procedure. We got a $200 discount for a $2,300 or $2,400 procedure, but I'm told that the health insurance companies pay a fraction of that, but they couldn't charge us that little because of their agreement.

So it just seems that what we have in this country -- everybody talks about health insurance, but we -- most of what we have other than the catastrophic care is not health insurance. We have the insurance companies and we have the government running healthcare. And I also think for those who want to be entrepreneurs, since healthcare insurance has taken off so well, you could do the same thing with gasoline. The price is up. It's down. Tell America you pay us, you know, a big wad of money every month, and we'll give you a co-pay and a deductible and we'll pay your gasoline bill every month. It's the same type thing. It's not insurance as much as it is management.

And so I would love to see us get back to the place -- what we were when I was younger when you could have catastrophic care. Insurance did a phenomenal job of taking their monthly payments, depositing them, making them grow, and then covering catastrophic events instead of managing healthcare. I'd love to see us get back to a doctor-patient relationship that we don't have anymore. It's either patient, government, doctor, or patient, insurance company, doctor. I want to see the health insurance companies do well and take care of us in catastrophes.

The HSAs seem like an avenue to address that, especially if it's pre-tax money, goes into account, can't be spent on anything else, can be rolled over and not one of these if you don't use it, you lose it, could even be inherited. You know, we could provide for future generations.

Now, I have seniors say I'm too old and I'm too sick to ever have an HSA. So we looked at numbers. We got 2006, and we're told that the federal government spent an average for households in America -- around $6,100 plus dollars per household in America of tax dollars, that state governments spent around $2,200 or $2,300, about $8,400 per household. Heck, for that much money we could tell everybody here's your HSA. If you're too sick and too old or out of work, here's your HSA. Here's your catastrophic care. You're covered. And we'd save $3,000 or $4,000 of tax dollars if we did it for everybody in the country. And it would be back to a doctor-patient relationship.

So I'm open to any proposals, but I'm not sure that we are back to where we should be where we can have a doctor-patient relationship. I saw socialized medicine in the Soviet Union when I was an exchange student there. I don't want to go there. Socialized medicine needs people to die before they get their care so it doesn't cost too much. I don't want to go there.

So thank you, madam chair.

REP. VELAZQUEZ: Thank you. I don't know who's proposing that because even if the President is talking about tax credits for small businesses, that is not Socialism.

But Mr. Ratner, I would like to -- are we finished with -- oh, Mr. Nye. I'm sorry.

REP. GLENN NYE (D-VA): Thank you. Just a quick question. Mr. Ratner, I'm interested to hear from -- if you wouldn't mind commenting from a small business owner -- clearly, right now we're very focused on trying to create jobs. Small businesses we're counting on to create most of those jobs. And I just wanted to hear your input on how our treatment of health benefits from a tax perspective impacts your ability to hire people and to grow your business.

MR. RATNER: It's part of the package. Every time -- if there is a mandate, if there -- every time there's an added cost to bringing on a new employer, it's one more thing in the liability column when you look at should I hire someone or should I not? So it's not 100 percent that I'm not going to hire some, but you really have to have a real strong desire and need to hire that person. If (there's not ?) you're just not going to hire them. There's no need to. There's too many costs.

You know, frankly, what we're going through -- I should've said this before -- is now instead of hiring new people, we'll just give our regular crew more hours and give them overtime. It's cheaper to pay them overtime than it is to hire new people. So it kills job creation.

REP. NYE: I want to allow anybody else that had another comment -- if they (want to jump in ?) --

MR.: If I can just add a little bit of that too, because I hear a lot of this from my members, the smaller guys. Most of my smaller members compete with big public companies. It's just the way the system is configured. There are large bottlers and small bottlers throughout the country. They often compete with each other.

What they tell me basically -- the smaller members -- because they can't offer the same level of insurance, is they keep losing people to big business. They keep losing people who are good employees, and having to go through this cycle with hiring new employees and training them. So it drives up their costs from multiple perspectives.

Now, I don't think it should be lost on this committee that, you know, the Fortune 500 is -- companies are engaged in a fairly large- scale job reduction. I mean, it's going to happen when a big public company misses an earnings report. They both have reduced needs for people, but they also have unfortunate incentives to take one-time write-offs and have -- you have large-scale job reductions. And last week I think the number between eight companies was over 100,000 job cuts, eight, nine public companies.

And small business does have to scale down its employees when the needs change, but I don't think they have quite the same pattern of behavior in terms of eliminating people because there's an expectation they do so. And that's something that concerns me, I think would concern the members of this committee and Congress.

REP. VELAZQUEZ: Got another question?

REP. NYE: I yield back the remainder.

REP. VELAZQUEZ: Thank you. Mr. Ratner -- oh, I will recognize Mr. Sestak, and then I will come back to you.

REP. NYE: (All right ?)

REP. JOE SESTAK (D-PA): Madam chair, could I maybe note most of these questions have been asked, but Mr. Ratner, if I could follow up with a mandate question -- in -- I think it was your testimony, sir. It might've been yours -- Coca-Cola -- talking about the direct cost of a mandate. I understand the direct cost of a mandate, but the indirect cost of a mandate going through many vettings, a real benefit to -- not directly to your cost, but to the nation's cost of healthcare.

So how do we take that on board when one fifth of our uninsured in America who earn more than $50,000 or above -- generally the youth of America that have a great job, don't bother to spend a couple thousand bucks out there for health insurance. They're in a car accident -- and now we have to take care of the TBI with the nation's money, which basically taxes you anyway. How do you measure the days off of your sick persons who are down there, that yeah, you've got ten employees, you don't want to lose another one, but you've got to give them some sick leave, you know? But generally, you know -- but you lose that.

And there's a lot of studies that show that mandating -- and I'm not -- let's just say it's the Massachusetts healthcare plan way. I think that you talked about -- you're from Massachusetts, correct? That in the social cost -- and I don't mean goodness. I just mean as a business that mandating that everyone is involved drives the risk down for those pools when they're healthy and as well as unhealthy. And by mandating that everybody's in it, people actually go in for your preventive care.

For example, the unemployed -- the woman who testified today in the unemployed, self-employed -- I read her testimony. Is she here? Is that you?

I mean, you didn't go in for some preventive care or -- I guess you went in and they switched it on you and --

MS. : I had to have insurance.

REP. SESTAK: No, there was one woman here -- I can't remember who it was -- that had testimony --

MS. : But I had preventative care that I went in for, and I got a bill after the fact.

REP. SESTAK: But let me then get back -- I probably misread -- my question, I guess, is why not, then, mandate if we all benefit from it?

MR. : Well, that's the problem. We don't all benefit from it. If I was sitting here -- and I'm from Massachusetts -- and it's mandated and I said to you, you know what, guys, my premiums dropped 20 percent -- everyone's got coverage. Everyone's healthy. Let's go for it. But that didn't happen.

REP. SESTAK: But the Urban Institute Study last June said that the Massachusetts healthcare plan seems to me working. Yes, it's costing a bit more, but so is doing nothing. Probably the premiums would've gone even more than what Massachusetts tried to do. And so my question is overall when you take direct and indirect costs, mandates -- those who look at mandating it -- and I'm not saying single payer at all -- I'm not a single payer type -- appear to say that we all benefit as a nation with greater savings than if we don't mandate.

MR.: You know, I guess the devil's in the details, which is what everyone is struggling here with. If it came out -- and, you know, again, if the rates had dropped and if her small -- her business with two employees was paying -- the playing field was leveled and she was paying the same as the guy with 200 people, and everything was level and all premiums were level, I don't know how much of an argument you would get from me. But the problem is getting all that stuff to work with it.

And here's the other problem. We keep hearing that the small business, the entrepreneurs, the backbone of the country -- it's so out of whack that every time you add one of these costs to these micro-businesses, you just literally cripple them. So if you came to me and said listen, we're going to have this mandate, but there's going to be a tax credit for the micro-businesses --

REP. SESTAK: Yeah.

MR.: -- and we're going to level that out so the cost doesn't cripple them. That's what I'm afraid of.

REP. SESTAK: Yeah, I have to agree with you. I think that how we do this -- I mean, it would just seem that so many people's testimony -- sorry, had another hearing on Pakistan -- but it just seemed to me, as you said, with how the mandate is done -- because there seems such good in getting, you know, those people who are healthy and uninsured into the risk premium pools.

My second question, though, if I could ask, was how do you -- I'm very attracted to the idea of pooling, (as in ?) Massachusetts. The chairwoman has the Choice Act, but that's kind of more risk retention, as I believe her act does. So -- and one of you testified on that, or has in the written testimony. How do you compare risk retention through an (associate ?) cooperative (version ?). What I found also attractive, which -- at least as a -- was supposed to have been done -- this quasi-government connector that actually with a mandate then puts it in the same 20 insurance plans theoretically that Congress members have access to in the federal government. Is one better than the other of that pooling?

MR. : I can speak -- I'm not sure I can speak to superiority. I have an opinion on superiority. I can speak to what you can do with pooling, because as I indicate in my testimony -- that may be my testimony you were referring to -- we have a pooled, captive-based program with our liability insurance. It works beautifully. We've got large members. We got small members. And we put -- we take 100 percent of the risk, or nearly 100 percent of the risk, even though there's an embedded insurer that writes the papers, but we do the re- insurance.

We take the money from the -- with -- that goes into the loss fund and invest it. We have active claims management people. We have active loss control programs to reduce the cost. We're totally motivated to reduce the total cost. And we work very hard on that, sharing best practices. And that program delivers -- we've been at it for five years. We deliver about a 25 percent reduction to our members that participate in that.

So it works beautifully in the liability area, and I don't know why it wouldn't work just as well --

REP. SESTAK: All right.

MR. : -- in the health insurance --

REP. SESTAK: Can I (interject ?) madame chairman? My prejudice, so you know, is -- you know, I was in the military up to about three years ago, and only about 23 percent of high school graduates every year can qualify to go to the U.S. military because physically and health wise they don't qualify. So to some degree, (we can ?) get healthy kids, but once you're in it, there is this mandate that everybody and their families are covered. Now, it's a different healthcare plan. All that said, I mean, we don't deploy overseas until everybody has 99 percent dental readiness. Sounds funny, but in a sense, we are really a healthy force out there with this.

And then I was quite struck when my daughter had a brain tumor and I needed to get out, take care of that, by the failure to have transparency, first off. And who is the right doctor to go to -- which is why fee for service has to change, you know, in Medicare and all. Number two, that I could go to an 11-month war -- and my mind was strictly on the mission, because I knew my family was there and I wasn't away from the work, this nation's work at the time.

And so to my mind, that model -- I understand TRICARE's different and all -- bodes to me that if cost for economy overall is to be something, having healthy, preventive care with everybody involved, the healthy as well as the unhealthy -- and how you do that, seems to me, is one of the most critical pieces that we can have to have the most proficient economy we have, because you do have people who wouldn't get sick if they had the preventive care and items like (dental ?).

I'm sorry to go on, but I think this is one of the most important hearings that we could have. Thank you, and I'm sorry I was late.

REP. VELAZQUEZ: Thank you, Mr. Sestak. Mr. Graves, do have any other questions? On this side? Yes, Mr. Moore? No? Okay, so let me thank all of you for your insight on this issue.

REP. : We have one.

REP. VELAZQUEZ: Yes.

REP. : Mr. Ratner --

MR. RATNER: Yeah.

REP. : -- what came first, the soda pop or the Pepsi? (Laughter)

REP. : I'd ask the same thing. (Laughter)

MR. RATNER: No, I was wondering if I should put that in the testimony. I said nah.

REP. : (laughs)

MR. RATNER: I started out selling all different brands of soda at an empty gas station in 1975, and about a year later I bought a dog. And I walked into a grocery store to buy dog food for Bentley, and I looked down the aisle and I said holy smokes, there's more pet food in here than there is soda. So I bought dog food for Bentley and went back to my store, called Nine Lives and Purina and went into the pet food business.

(Laughter)

REP. (?): If I could just comment as the owner of Seven Dogs and a representative of the soft drink industry, I think it's a marriage made in heaven. (Laughter)

MR. : Except soda is now two percent of my business. We can't compete with Costco and Wal-Mart (laughter) these days.

REP. VELAZQUEZ: I just have one -- Mr. Beene, you know, the issue of national mandates requiring employers to offer private health insurance -- everybody has an opinion about that, but let me ask you -- to what extent do you think that the small employer would support such mandates?

MR. BEENE: I think at this point there is a lot of hesitancy from the small employer because of the fear of the unknown, especially in this economic time. We're talking at a time that people are -- I mean, I think generally across the board things are pretty tight, and while -- you know, I think as time goes, people will -- you know, perhaps the ideas will come around, because I do think there are some benefits to it. It's certainly one way to look at things, but I think that right now the reaction is from a -- from what will this do to me? How much is this going to cost? Will it ruin my business? So I think right now we've got issues with support of that from small business.

REP. VELAZQUEZ: Do any of you have an opinion as to -- being able to structure a mandate that could address concerns over cost?

MR. BEENE: I think bringing the tax credit into it at the same time would be probably the place to start.

REP. VELAZQUEZ: Okay. Yes, Mr. Ratner.

MR. RATNER: I think the mandate, unless there's good tax credits in it, would cripple the micro business, the guys with two and three -- folks like her. It would be a disaster.

REP. VELAZQUEZ: Ms. Fox?

MS. FOX: I would just add that we're supportive, and I think there is -- becoming more broad support for an individual mandate. I know there's a lot of concern in the business community about, you know -- especially small employers and large employers have lots of concerns about the mandate. But I'm hearing a growing consensus that an individual mandate might make sense, especially if we can address the affordability and provide -- reign in costs and provide appropriate subsidies, because I think the issue that we heard about young people not purchasing coverage is a real serious issue.

I know I have a 23-year-old son, and, you know, he'd rather buy fancy phones than his insurance. So I think it is -- there is -- they tend to feel invincible. We need to get them in the system to make sure everything works best for everyone.

REP. VELAZQUEZ: Ms. --

MS.: I think the mandate has to be on the individual, as opposed to the small business owners, because putting the burden just on the small business owners and not on individuals to take care of themselves is not going to work.

REP. VELAZQUEZ: Mr. Haynes.

MR. HAYNES: I've got a concern about individuals mandates, and the question is how do you price it? The reality is that young person -- the pricing on that insurance, to be fair to that person, is going to have to be very, very small. And so you can't have any kind of a -- you know, what typically happens in insurance markets, which is ratings and community ratings and all that kind of stuff. Otherwise, we're going to impose costs on our young people, who are already paying a lot -- you know, a lot of costs associated with the aging of the population. It just isn't there.

So if there was a pricing mechanism that was fair and made that cost containable, you know, I could see it, but I think a lot of young people are making individually rational decisions not to be insured.

REP. VELAZQUEZ: Thank you. Well, --

REP.: Madam chairman --

REP. VELAZQUEZ: Yes?

REP.: Would you yield? Could I ask a question? If I could, though -- don't we end up paying anyway, you businesses, for that youth who decides not to be insured? And even on the tax credits, don't you pay anyway, because you're going to pay it your income tax, the federal government to give it. So shouldn't there be a shared -- (and anything ?) great that is done is hopefully done in a bipartisan shared responsibility between individual business and society? Can we really in something like this that is so dramatic to our future exclude one of those three?

MR.: Well, the way I would put it is it should be an objective to have as many people insured as possible, because it is correct that we all pay the cost of the uninsured. It's the reason why there's such a difference between, you know, the quoted price and what might be negotiated as part of a network. On the other hand, what I see as what should be your objective is to find a way to adopt the policies that both provide coverage and affect the marketplace. And if you've got -- if your focus is entirely on getting coverage, you're not going to decrease the total cost that our society pays for healthcare. And that has to be at least as important an objective as obtaining universal coverage. Focus on things that will change the marketplace.

REP. VELAZQUEZ: Mr. Ratner, in terms of the Massachusetts experience, how much of an economic burden is imposing upon the state government?

MR. RATNER: At this level, you know -- imposing on the government?

REP. VELAZQUEZ: Uh-huh.

MR. RATNER: Oh, that I don't know. I could tell you that at this level it's tolerable by the employers, but there's a new wrinkle that they're trying to put in, which is insane. Now they want to take all your part-time employers and use them as full-time equivalents. So if you're not paying, you know, 33 percent of your full-time equivalents, they're going to whack you another mandate, another fine for $275 -- this is the nuts part -- even if that employee is covered somewhere else.

And these are the costs that you don't think about. It's the other costs to the businesses. And they want you to pay it four times a year. So now we have to hire -- because we can't figure it out. Now we have to hire someone else to figure that out. So the cost goes up, and that'll have a real detrimental effect to everyone who has a seasonal business, because this is not just for guys like me, who have year-round -- now you're talking seasonal businesses who just hire kids who may have coverage. So I don't know what it's doing from the government's point.

REP. VELAZQUEZ: Well, we will continue to have a discussion on this issue. It's a very important issue that has such a direct impact on our economy and particularly small businesses. So I want to thank all of you for coming here this morning, and I ask unanimous consent, and members will have five days to submit a statement and supporting materials for the record. Without objection, so ordered. This hearing is now adjourned.

END.

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