Advisory Council Report of the Working Group on Challenges to the Employment-Based Healthcare System

November 14, 2001

Introduction

The U.S. medical delivery system, like the U.S. population, is quite diverse. Today, about two thirds of the U.S. population is covered by employment-based medical plans. These plans themselves span the gamut from rich, indemnity arrangements to heavily employee-paid plans with limited coverage.

On top of this diversity there are many working poor people who have access, but cannot afford to pay for employment-based coverage. Additionally, many uninsured individuals are not currently working or work for an employer that doesn't provide employment-based medical benefits.

Although the federal government provides a safety net for the indigent, there are millions of Americans who don't qualify for Medicaid and therefore fall through the cracks.  There are a significant and growing number of people who do not have or do not choose access to medical coverage from either public or employer sources.

In addition, the American workforce has become very fluid. Unemployment rates, serial layoffs, and job mobility are increasing. Individuals and their families who have coverage today may find themselves in a very different position tomorrow.

Furthermore, employment-based medical plans have experienced sharply rising costs over the past few years and have thereby stimulated intense debates over regulation, needed changes, and public outcry. The ERISA Advisory Council decided to study the challenges to the employment-based medical system to better understand the problems and issues involved in this complex subject. The findings of the Council are described in this paper.

One of the fundamental conclusions of the Council is that if we were starting with a blank slate, we would learn from the problems facing the current system and design a new paradigm that is very different from today's model. For example, in designing a system from scratch, the majority of the committee would probably favor basic medical care for all under a federal system, with additional or private care available on top of that from non-government funding.

However, from both a practical and political perspective, we are starting from an employment-based model that is augmented by state and federal programs, and therefore we need to consider how we improve and move forward from here. Change needs to happen in an orderly, thoughtful manner to mitigate the chance of creating more problems in the process.

Overview of the Employment-Based System

In order to visualize the opportunities for improvement, it is important to understand some basic underlying insurance concepts. Insurance, by definition, is a mechanism to aggregate risks and spread the cost of the "unknown expense" over a large population so that the cost per person is manageable and no one individual is faced with huge, unaffordable obligations. This risk can be spread over any group that is large enough to withstand the exposure to the group's expected costs. If the group is formed for the sole purpose of purchasing insurance, the risk will usually not be "manageable" by the group, since the cost per individual to purchase this insurance will be greater than the individual group members can afford.

The underlying insurance concept of "forming an appropriately balanced risk pool" is that the group will contain both individuals who will need the benefits and individuals who will not need the benefits. Since any one individual cannot predict his or her future needs, participation in an insurance program will be in the economic best interest of most group members.

Health insurance has some unique features that further complicate the analysis. Unlike life or fire insurance, health needs can be subjective. Medicine is as much an art as a science. No one knows all the answers to the myriad of medical problems we face today. With research and technology continually expanding the horizon of alternative procedures, processes and tools, the medical environment is in a constant state of flux. Additionally, certain benefits, like dental and vision, that are less prone to risk pooling and tend not to have catastrophic consequences have been added to medical insurance costs.

The U.S. has had a robust employment-sponsored medical care system since World War II. This contrasts with most nations today which generally have a national health care system. These national systems are financed by their respective governments through a tax on all citizens either directly or through some form of value added tax. Often, a second tier, private system of health care is also available. Today, however, some experts doubt the long-term viability of the US employment-based system. Testimony of Frank Cummings, a designer of early legislation leading to ERISA, stated that the employer-based system today,

"…may well be doomed to failure…the cost now seems out of control…employers are generally unwilling to set up new retirees' medical benefit plans, because the long term financial exposure is too great."

The ERISA Advisory Council studied the challenges to the U.S. employment-based health care system and received reports, testimony or written comments from over 40 witnesses or groups who presented their divergent views on this topic. The observations of the Council are described in the following .

Observations on the Employment-Based System

Employer plans are good for covered employees - The employer⁽¹⁾ plays a critical role in the delivery of health care from a number of perspectives. As an agent for its employees, the employer, especially the large employer, has the expertise and the resources to knowledgeably address the complicated nuances of health care delivery. The natural risk pooling of an employment-based group is an appropriately balanced risk group and therefore, well adapted for an insurance model. In addition, a large employer can wield clout in the market place by virtue of the sheer number of employees and hence the dollars it brings to the insurer. In her testimony, Christine Paige of Kaiser Permanente pointed out;

"Group purchasing provides economies of scale and a lower average premium. Since employees are enrolled through groups in a health plan, the per capita administrative costs are relatively low."

Employers can demand things from the insurer that individual buyers could not. Again, Ms. Paige,

"…employers have more leverage in negotiating discounts on the premiums than individuals on their own. An employer can also serve as an effective advocate for the individual if there is a dispute between the health plan and the enrollee."

However, many of these advantages are not available to the small employer.

Employees in these plans are generally satisfied. Medical insurance is usually cited by employees as the most important employee benefit.

Employment-based systems do not maximize inclusively - Although an employer provided health care system makes sense for certain employers and employee groups, this system, by its very nature, results in certain segments of the population not having adequate coverage. Examples of coverage gaps include:

• Retirees under age 65,
• Prescription drug coverage for retirees of any age,
• Individuals not currently employed,
• Individuals employed by businesses that do not provide employment-based medical coverage or are not eligible for their employer's plan (part-timers, new hires, etc.),
• Employees who opt out of employer provided coverage because they cannot or chose not to pay their portion of the cost, and
• Free agents, independent contractors or other types of mobile employees who move from employer to employer.

The employment-based system even if mandated will never eliminate the problem of uninsured people.

Rapidly rising medical costs stress the employment-based medical system.

Many employers either cannot or do not choose to absorb higher medical costs.⁽²⁾  In an environment of downsizing and excess labor capacity, some employers feel less competitive pressure to continue to absorb these cost increases. A significant number of small businesses already do not offer health insurance. In his March 30, 2001 letter to the Working Group, Thomas Wildsmith of the Health Insurance Association of America notes,

"…among smaller firms (firms with fewer than 50 employees) one out of two offer health care coverage as an employee benefit."

Taking into account the heavy weighting of total employment by small firms provides a somewhat more dramatic picture. In his June 12, 2001 presentation, Rick Curtis of the Institute for Health Policy Solutions points out that

"…87% of workers whose employer does not offer coverage to any workers are in small (under 50 employees) firms."

The issue then becomes - who will pay for these additional costs (the employer and/or the employee)? It also creates instability for employees who don't know from year to year what their employers are going to do with their employer provided medical plans.

Observations on Alternatives to the Present Employment-Based System

Testimony of E. Neil Trautwein, of the National Association of Manufacturers pointed out,

"Higher costs, potential liability, the increased complexity of administering benefits, and the employee complaint factor have all encouraged some employers to ask whether there may be some alternatives to employer-sponsored coverage."

Following is a summary of alternatives reviewed by the Working Group:

Defined Contribution Plans - The term defined contribution (DC) health plan, in general, denotes a health plan in which the employer provides a fixed dollar amount, as opposed to a fixed benefit. Therefore, DC plans can take many forms from a "plan" in which the employer provides more dollars in the employee's paycheck that the employee can use to purchase health coverage on the open market to a plan in which the employer provides a fixed dollar amount that can be spent by the employee on one of a variety of health plans selected and maintained by the employer. The role of the employer varies considerably in each of these designs, ranging from merely a variant of current employment-based plans to approaches in a completely different conceptual territory.

Pay or Play - A universal "pay or play" system in which employers have the choice to either provide an employment-based medical plan that meets certain criteria or participate in a federally/nationally run medical program is another alternative to consider. Testimony suggested that such a system could be designed so that equity is preserved for those employers who currently provide medical coverage for their employees. For example, the pay or play system might be designed so that employers who currently provide medical coverage for their employees would not be better off abandoning that coverage in favor of the federally run program. In addition, the design of a pay or play system needs to consider the financial implications for employers struggling to stay in business. For instance, if the national alternative were financed through a general tax that equally impacted employers who have an employment-based medical plan and those that do not, there would be little incentive for employers to maintain their current plans.

Individual Market - There are many problems with the individual health insurance market, such as the lack of affordable coverage for the elderly and those individuals in poor health. Since health providers can pick and choose which individuals to cover and what to charge, there will be a segment of the population that either cannot afford individual coverage or cannot find coverage in the individual health insurance market place. Testimony from Janet Stokes Trautwein of the National Association of Health Underwriters pointed out,

"…the realities of the individual market as well as the basic concept of evaluation and pricing of insurance risk make more aggressive models less likely to be successful…Because health care costs in general have gone up so much, low-income individuals are increasingly being priced out of health insurance coverage. Many of these individuals can't pay their share of employer sponsored health insurance premiums, much less afford the cost of an individual policy on their own."

Even where it is available, dealing with the individual market involves significant extra administrative costs. Testimony of Louis Saccoccio, of the American Association of Health Plans stated,

"Typically, administrative expenses account for 5% or less of the health insurance premium costs for large employers. While such costs are higher for small employers, they are still well below those in the individual market."

Also, individual market insurance could be especially difficult for less-sophisticated or non-English speaking families to navigate.

National Healthcare - Although conceptually a national health care system has a great appeal to some, there is inconsistent testimony to the contrary on the overall efficiency of federal systems such as Medicare and Medicaid. Marcia Angell, of the Harvard Medical School told the Working Group,

"Medicare is the most efficient part of our health care system, with overhead costs of less than 3 percent. It covers virtually everyone over the age of 65, not just some of them. Medicare is not perfect, but it is by far the most popular part of the U.S. healthcare system, as evidenced by the resistance of Medicare beneficiaries to any changes."

A somewhat different overall perspective was provided by Frank Cummings in his comments,

"…I can tell you unhesitatingly that Medicare as I have experienced it is just wonderful. I go to a doctor, or a hospital; I show my Medicare card; I receive treatment, and I never pay a bill. Indeed, I never see a bill. Under my former PPO plan, it seemed as if I never stopped seeing bills. From the doctor's point of view, however, even this system may not really be acceptable in the long run. My own doctor, for example, does not take new Medicare patients because, he tells me, he loses money on them!"

Observations on Structural Problems of the Current System

There are a number of structural problems within the current employer provided health care system that need to be addressed if the employment- based system is to survive.

Conflicts Between State and Federal Mandates must be Resolved - State and federal governments both "mandate" that companies include specified medical services, administrative processes and procedures, etc. in the plans they offer. Mandates in general are costly, and when contradictory, extremely so. Louis Saccoccio noted,

"The interaction of state and federal insurance laws and ERISA can result in a confusing and sometimes contradictory regulatory environment…employers, unions and health insurers should have a uniform, clear set of guidelines to follow in administering and providing insurance coverage. This can be done by strengthening the current state law preemption in ERISA."

At a minimum, new mandates should be carefully evaluated and existing conflicts rationalized.

Inefficiency and Waste - The current system does not rationalize cost or access to care. Marcia Angell stated,

"We should remember that we now pay for health care in multiple ways - through our paychecks, the prices of goods and services, taxes at all levels of government, and out-of-pocket."

Entitlement Mentality - The American public must alter its current perspective on medical care so that cost of treatment is balanced with the desire to have access to every available procedure. Cost-effectiveness evaluations will be necessary to enable us to provide essential care to all without excessive medical cost.

The Patients' Bill of Rights - The ultimate legislation must be tempered so that the protection provided to patients does not result in some employers abandoning their medical plans or result in substantially increased costs for employers and employees. If employers feel threatened by the potential liability stemming from their medical plans, some might choose to terminate such plans. Although it does address the critical issue of quality of care, the Patients' Bill of Rights does not go to the heart of the problem with today's medical system, which is cost and access.

Consumer Access to Information - Due to technological advances, access to more information about health care issues and providers is inevitable. However, access to higher quality information and the ability to discern its value is both essential and positive, since informed consumers will better understand the cost implications of providing medical coverage, make better decisions about their own health care, and have a vested interest in the medical system.

Product and Service Competition - Current competitive trends among providers such as hospitals and medical groups needs to be tempered so that the medical slice of the GNP is spent effectively and does not produce an oversupply of certain equipment or technology to the detriment of needed investments in other areas. This inefficiency is enabled by the current financing system. A prime example of this is multiple competing hospitals that each purchase the latest and greatest equipment when one such investment in that geography would be more than enough to meet the medical needs of the local population. Some system, perhaps similar to the Michigan "Certificate of Need" program to mitigate wasteful expenditures, needs to be devised and implemented.

Policy Perspectives

Policy Changes Should Be Designed to Avoid a Flight from Providing Health Coverage by Companies - Because employer plans are voluntary, proposed policies must be evaluated for their potential to cause a significant number of companies to choose not to offer health insurance plans as a benefit.

Defined Contribution Plans that Eliminate the Employer as Intermediary Will Probably Not Be as Effective - Defined contribution plans are plans in which the employer sets a contribution level as opposed to providing a specific benefit. They cannot provide the same advantages of defined benefit employment-based plans (pooling, corporate purchasing power, etc.)

Transitional Change Required - It is time to begin making transitional changes that would both encourage and make feasible, an evolution from the employment-based systems. Examples of transitional changes include:

• Federal catastrophic health insurance
• Increase the viability of public-private partnership to cover the working uninsured.

Federally Provided Catastrophic Insurance - Some form of federal catastrophic insurance that provides a safety net for major medical needs should be considered. Such a program would insure that a minimum level of coverage to meet severe healthcare needs is available to every citizen. Employers could then provide additional coverage to supplement and fill in benefits not provided by this safety net. A basic catastrophic plan would guarantee that no citizen would be without minimal medical coverage. Such insurance might make it easier to deal with some of the other coverage gaps.

Current Coverage Gaps Weakens Employment-Based System - Although we are cognizant that covering the uninsured may provide a disincentive for companies to continue to offer health coverage, the gap must be closed. Ad hoc or non-treatment of this group places a significant financial burden on those that are paying for coverage in the current system (cost-shifting). In the interest of equity, fairness and efficiency, the problem of the uninsured must be resolved. This will lighten the burden on the employment-based system.

Conclusion

We recognize the complexity of shifting from the current employment-based system. The longer the current system flounders and fails to appropriately address its inherent problems of cost, access and quality, the more people will look toward the federal government to come up with a solution and perhaps, be the "provider of last resort". Since the political and financial costs of totally abandoning the current system are immense, change needs to happen gradually and thoughtfully. And changes must not only preserve and enhance the protection currently provided through employer provided medical coverage, but must also move our system in the direction of some form of protection for those Americans that currently fall through the cracks. A joint public/private system for the delivery of health care may best address these needs.

Summary of Testimony Received

April 10, 2001

Testimony of Paul Fronstin, Ph.D.

Employers offer health coverage to promote health, increase productivity and as a part of compensation. By 1999, approximately seventy three percent of all employees had healthcare coverage. The number and the percentage of Americans without healthcare coverage fell during the 1990's.

In addition to the increased coverage, there has been an increase in the benefit, regarding lifetime limits, co-insurance and deductibles. Retiree health benefits have changed due to FASB 106. In some cases, employers are not offering retiree health benefits to new employees. Some employees do not know if their employer offers retiree health benefits.

The Internet has had an effect on the demand for health care, due to the availability of information about health issues. The argument that early diagnosis leads to cost savings is believed to be very long-term, and has not been realized yet. The impact of longer life spans may offset potential savings from early diagnosis. Better health care may also identify health issues that may have otherwise gone undetected.

Research is not available that measures the impact of healthcare spending on the financial benefit to the employer, such as fewer missed days of work. One survey attempts to estimate the general impact on the economy due to longer life spans, attributable to improved medical technology.

Looking to the future, health benefit costs will continue to increase. There is uncertainty about potential liability that could be imposed on employers via a Patient's Bill of Rights. Impacts of defined contribution health plans are uncertain because there is no common approach to their design, and they are not prevalent.

Regarding a profile of today's uninsured: eighty five percent are in homes with a worker; most work for small employers; they are mostly young; about thirty percent have access to an employment based health plan but don't take it.

Stakeholders for the employment based health care system are employers, employees, the uninsured, and representatives of each. Adverse selection is an issue. Economic comparisons with international competitors regarding relative product prices and the impact of employer based health insurance costs are not clear.

May 4, 2001

Testimony of Mark V. Pauly, Ph.D.

The current system involves analyzing the Employer versus the Employee and family choice and the issue regarding who bears the financial costs: employers, employees (indirectly through lower wages) and government through tax deductibility for employer cost and no recognition by the Internal Revenue Code of employment related health coverage as income.

The challenge is to provide efficient insurance, which matches workers' demands (needs?) and answering the question of whether the employment-based system is most efficient.

The second challenge is to foster coverage for lower income persons and their families efficiently and equitably. The option of employment related mandates was not discussed. Rather, the system of whether the emphasis is on tax credits, which in effect are public subsidies to lower wage workers (and arguably their employers).

Administrative loading, that is, the cost overhead of providing coverage is substantially lower for employment related group health coverage than when compared to individual insurance for larger groups, but only modestly lower for smaller groups. The availability and attractiveness of lumping together the smaller groups was not discussed extensively.

Employer costs of job based health insurance is deductible. This is a form of tax subsidy by means of the Internal Revenue Code. The subsidy is not capped as to wage levels or costs of health insurance coverage.

The employment nature of the relationship and the tax deduction to Employers does encourage employees (outside of the collective bargaining context) to let the Employers pick insurance for them. Depending on larger employer motivation focused on both cost and benefits and level of service, this may be advantageous or disadvantageous to covered workers' and their families and/or society. However, smaller employers are often not particularly proficient at the task of choosing the most desirable insurance at the lowest cost. The current system is thus "non-transparent." That is, who pays for it, what the tax subsidies are and who benefits from it are not clear. Certainly the current employment-based system, unrestricted as to premium levels and hence employer contributions with the tax deductions not based on age or family size and tends to give greater subsidies to persons in the employment relationship and dependents, making greater use of the health care system due to chronic illnesses and perhaps due to age.

There is concern that the employment tie to health care coverage restricts labor mobility. Certainly (outside of the collective bargaining context) if an employer changes its mind about providing and paying for health insurance, the employees are at risk. Likewise, despite COBRA, there are inherent risks in the transitions from one job to another and one health insurance system to another, amounting to at least the possibility of administrative confusion.

The "appearance" of employer payments and the tax subsidy to employers has encouraged workers to obtain employment based insurance. However these factors appear to have reached their upper limits (subject to some fluctuation) based on labor market conditions at this time.

Professor Pauly and Professor Herring have developed through their study new and challenging theories regarding employment based health insurance. They contend that job based insurance does not pool the risk associated with age, that is, it does not redistribute the risk from the young to the old. Further, the Professors contend that individual or one family only health insurance provides a substantial redistribution from the healthy (at a given age) to the sick because of guaranteed renewability and surprisingly sophisticated insurance shopping assistance by families with chronically ill members.

Although premiums for both individual and group health insurance vary substantially, chronic health conditions do not appear to generally lead to higher premiums or loss of coverage in individual markets. There are questions regarding the impact the State and community rating laws have in this regard.

Individual health insurance costs do increase very substantially with age but not apparently with chronic health problems.

"The problem with individual health insurance is not that it overcharges high risks, but that it overcharges everybody." (Individual health coverage is inefficient because of higher administrative loading.) Is this fixable by regulatory or legislative action?

Responding to panel questions regarding the possibility of transforming employment-based health coverage from a defined benefit to defined contributions approach is very little used regarding employment-based health coverage and he suspects that it is an unrealistic hope by employers who are looking for a way to stabilize or cut the cost of employment related health coverage.

Professor Pauly concluded by observing that the "perfect is the enemy of the good" and that for a system to work perfectly in regard to coverage or indeed at a higher level than has currently been reached by the employment related system, it would be necessary to have government mandates for employer-provided coverage.

Testimony of Professor David A. Hyman

Employment related health care is the dominant form of health care with over 150 million Americans receiving their health coverage through employment related plans. Employers are significant players in the health care coverage and delivery markets. By selecting the plans offered employees, employers determine the scope and nature of the cost/quality and the plan access trade-offs their employees can make. A sizable minority of employers offer only one health care plan or offer multiple plans but only one insurer.

But Employers, as private payers (as opposed to public agencies) have greater power to bargain regarding provider costs than public payers because the public payers unlike private employers are subject to political and lobbying pressure and due process requirements with the consequent delays, which worsen the problems of non-insurance (self-insurance) employment related health coverage by eliminating the traditional sources outside oversight in the form of state level regulations, state cases and tort suites due to the ERISA preemption doctrine.

The essential question is not whether the employment based system is perfect, but whether it is on balance in terms of cost, quality, and coverage, preferable to any achievable alternative. Additionally, the disarray from switching from deeply ingrained employment based system to another system causes grave concern.

The employment based system has the clear advantage of offering group coverage with its efficiencies of scale in regard to an administrative and marketing costs. Insurance purchased by employees through large employers cost about one-third less than the equivalent coverage in the individual insurance market (assuming that is available).

Cross-subsidization within the employer group, that is for age and chronic illness, on an internal basis, compares favorably with the difficulty the states and federal government have encountered in mandating or maintaining such cross subsidization's. A non-employment based system, unless insurance purchase was mandated upon individuals and families, for healthier people and those with lower income, will tend to drop coverage levels. The risk of "red lining" is also excessive.

"…any given 'reform' will not solve all the problems found in the employment-based market and it may well make some of them worse…"

Testimony of Dale H. Yamamoto

Retiree health benefits continue to be an important benefit to both employees and to retirees. In recent years, coverage has diminished, eligibility requirements have become tighter and retirees have seen increases in their cost-sharing and contribution requirements.

Retiree health care plans are expected to continue changing. The impact of a restructured Medicare program could be profound. Depending on the specifics of any change to Medicare, we could expect either a safety net created for retirees or incentives created for employers to cut back retiree health care coverage. For this reason, policy review during Medicare reform discussions should look closely at the interaction between employer sponsored retiree health coverage and Medicare coverage.

Employer provided health benefits are the primary source of coverage for active employees and their families. Employer retiree health plans are the largest source of supplemental health insurance for Medicare beneficiaries. Additionally, employer plans are the largest source of prescription drug coverage for Medicare beneficiaries.

When looking at a constant sample of nearly 500 employers, from 1991 and 1998, several trends emerged. Fewer employers offered post retirement health benefits; employers require retirees to contribute for health benefits; financial caps are often placed on the employer's obligation; eligibility has tightened; and more employers offer Medicare managed care plans.

Accounting rules issued by the Financial Accounting Standards Board (FASB) are usually cited by companies that changed their retiree health plans in the early 1990's. Financial Accounting Statement No.106 (FAS 106) is an accounting standard that requires employers to accrue the cost of retiree health and other post-retirement benefits during the working careers of active employees.

While the majority of the large employers in the constant sample database offered retiree medical benefits, there was a nine percent decline in sponsorship for age 65+ retirees in the period 1991 to 1998. When large employers have terminated retiree health coverage it has done so, in the vast majority of cases, prospectively, that is for future retirees. In most cases, current retirees and those close to retirement were grandfathered.

Growth in employer sponsorship of retiree managed care slowed considerably in the latter part of the 1990's. Health plan withdrawals and service area reductions caused increased uncertainty, affecting current retirees willingness to switch to Medicare+Choice.

Prescription drug coverage was extensive. More than eighty six percent of people with access to employer sponsored health benefits coverage had prescription drug coverage; more than ninety five percent of the large employers studied provide prescription drug coverage.

Prescription drug expenses in an employer plan for Medicare eligible retirees range in estimated costs between $1,000 and $2,000 per person, with employers commonly paying ninety percent of the cost. Prescription drug expenditures for the 65+ population represents forty to sixty percent of their retiree plan cost. Utilization of prescription drugs by the age 65+ retirees is more than double the utilization rate for the active employee population.

Almost ninety eight percent of employers who provide health coverage to Medicare eligible retirees also provide prescription drug coverage to these retirees. These employers responded to a survey, indicating that they would seriously consider modifying their retiree plans in the next 3 to 5 years. Eighty one percent would consider increasing premiums and cost sharing for 65+ retirees. Approximately half of respondents would consider a defined contribution approach. Half would consider only offering a managed care plan as an option. Forty percent would consider cutting back on prescription drug coverage for 65+ retirees; sixty percent would not consider this. Thirty percent of employers would consider prospectively terminating 65+ coverage; seventy percent would not. Eight three percent of respondents would not seriously consider adding to or improving coverage for retirees.

When surveyed by Hewitt Associates about their reaction to the proposed addition of Medicare prescription drug coverage by the Clinton Administration, eighty percent of the employers would retain, and not eliminate their retirees' drug coverage. Fifty five percent of employers would retain prescription drug coverage as a supplement to Medicare coverage and twenty five percent would retain drug coverage and accept the subsidy from Medicare.

Testimony of Tracy Cassidy

Testimony stated that it is harder for employers to manage benefits today. In a competitive labor market environment, employer provided benefits have become part of an employee attraction and retention strategy. Complexities include increasing healthcare costs, choice of plan offerings, consolidation of health plans, and changes pending in the regulatory and legal environment.

The ten year trend in medical costs showed medical inflation reaccelerating in the late 1990's. HMO costs actually rose more rapidly than PPO costs in recent years.

Quality issues lack accountability. Litigation concerns among employers are high. Survey results show that changes in legislation would lead some employers to drop health benefits. Challenges to the current system were summarized by: rising health care costs; rising administrative costs and frustrations; quality concerns; liability fears; dissatisfied employees; lack of confidence in managed care plans; absence of alternatives to the group market.

Plan sponsors are thinking about alternatives such as: defined contribution approaches; technology solutions and employee self service; outsourcing of benefits administration. A recent survey of employers' concerns, priorities and views on potential solutions to health care benefits identified the following key issues in order of importance: controlling employer's cost; employees' satisfaction with: health care quality; customer service and problem resolution; overall health benefits; employee costs; choice of plans. Other survey results, focusing on additional employer priorities identified: supporting employee attraction; supporting employee retention; simple administration; avoiding risk of litigation; employee productivity and absence management. The survey also identified employers' views on emerging initiatives, and their likelihood of implementing various initiatives.

Employer strategies were described, including shifting costs; vendor or offering consolidation; PPO strategy using best in class components; purchasing aggregation; network segmentation. Longer term strategies described were reengineered care processes and "active consumerism." Issues regarding defined contribution approaches were discussed, along with probable impacts on employers and employees.

June 12, 2001

Testimony of Rick Curtis

Employment based health insurance is highly correlated to income. As income increases, an increasingly larger share of adults have employment based health insurance coverage. Also, at income levels above 133% of poverty level, over 25% of all uninsured adults have access to employment based health insurance. In some cases, covered workers decline coverage for their children when there are higher worker contribution requirements for family coverage.

Almost half of all uninsured workers are employed by firms with 25 or more employees. Strategies to reach uninsured workers need to take this into account. Self-employed workers, or those who work less than full time or full year are much less likely to have employment based health insurance, and are twice as likely to be uninsured. When they do have coverage, it is often through their working spouse's employer.

Size of firm, based on number of employees, also correlates with coverage. 87% of workers employed by firms that don't offer coverage at all work for small firms (firms with fewer than 50 employees). 56% of workers at firms that don't offer coverage at all work for very small firms (firms with fewer than 10 employees).

A substantial share (43%) of workers not eligible for coverage offered by their employer are part time employees. "Decliners" represent about 25% of workers who are not covered by their own employer.

The testimony contains a number of slides including the following:

• Number of full time full year workers and their percent with and without employment based insurance, correlated with federal poverty guideline income levels.
• Number of adults other than full time full year workers with and without employment based insurance, correlated with federal poverty guideline income levels.
• Percent of uninsured people who had access to employment based insurance, correlated to federal poverty guideline income levels and age.
• Percent of uninsured workers by sector and size of firm.
• Number and percent of working age adults with insurance and without insurance.
• Distribution of all workers by insurance coverage status and by firm size.
• Distribution of workers who declined insurance coverage offered by their employer, correlated with size of firm, average wage level at firm, full time or part time work status.
• Percent of workers not eligible for insurance coverage at an employer who offers coverage, correlated with average wage level, full time or part time work status.
• Percent of workers whose employer does not offer insurance coverage, correlated with establishment size, average wage and full time or part time work status.
• Percent of all workers not covered through their own employer, correlated with establishment size.
• Selected state data on percent of workers not covered by their own employer, correlated with reason for noncoverage and establishment size.
• Family income compared to federal poverty guidelines, by marriage and parental status.
• Employment based insurance status correlated with family income levels and parental status.
• Employment based insurance status correlated with earnings and parental status.
• Percent of full time full year adult workers correlated with employment based insurance status and family income.
• Percent of full time full year adult workers who have employment based insurance through their own employer, correlated with earnings and family income level.
• Percent of children and adults with employment based insurance correlated with low and moderate family income compared to federal poverty guidelines.

Testimony of Christine Paige

Kaiser Permanente is the largest private, non-profit provider of health care services in the United States, with approximately 8.2 million members.

The Employer-Based Health Care System - Employers in the United States have successfully integrated the lion's share of health care spending into their business costs. In 1999, about 66% of Americans under the age of 65 were covered by employer sponsored group health plans.

Having health care financing rely in large part on employer sponsorship provides a number of critically important advantages:

Risk Spreading - Employers provide a "natural group" for risk pooling because the group has been formed for a purpose other than the purchase of health insurance. These "natural groups" all allow lower-risk individuals to subsidize the cost of high-risk individuals within the group and mitigate the overall problem of adverse selection.

Group Purchasing Efficiencies - Group purchasing provides economies of scale and a lower average premium. Employers have more leverage in negotiating discounts on the premiums than individuals on their own. An employer can also serve as an effective advocate for the individual if there is a dispute between the health plan and the enrollee.

Delivery Innovation and Health Care Quality - The employer has greater leverage to monitor the quality of health care and provide better comparative information on various plans than an individual in the same circumstance. Public regulations, on the other hand, tend to be rigidly enforced with little discretion. As powerful purchasers with significant resources, employers are uniquely situated to promote higher quality.

Matches Existing Public Preferences - The public seems to prefer the current system.

Problems to be addressed in the Employer-Based System:

Significant Gaps in Coverage - Other than Medicare, Medicaid and the SCHIP programs, public subsidies for health care coverage generally do not extend to the self-employed and other individuals not covered by employers.

Limits on Coverage Choices - Particularly in the small group markets because it is impractical to have more than one plan underwrite such a small risk pool.

The Link to Employment Means that Coverage Is Not Fully Portable - When people change jobs, their coverage generally changes.

Employer group health plans integration with the Medicare program is problematic to the extent that the plans employers contract with may not offer Medicare coverage, causing displacement.

Problems Posed by an Individual-Based System - There would be continued need for sponsorship under an individual choice model to avoid segmentation of the risk pool, promote efficiencies in selection and assure health plan competition. This would involve the creation of an entirely new and untested "market model" whereby a regional or state sponsor would act in the capacity that employers fill today.

Further, strong market conduct rules around guaranteed issue and rating would have to be established to prevent risk skimming. In absence of a highly unlikely individual mandate to purchase insurance, young and healthy individuals currently participating in the employer-based model would opt out of the risk pool.

Finally, delinking health insurance coverage from employment would likely come with it a significant reduction in subsidization of health care benefits. This too would discourage pooling of risk, and eliminate the ability of society to cross subsidize those with significant health care needs. It is not all clear that taxpayer-financed subsidies would provide the level of subsidy that employers today provide.

Rather than discard the employer-based system, we should be promoting efforts to address the gaps in the employer-based system. This involves at least in part (1) promoting subsidies for those not eligible for employer-based coverage, (2) improving sponsorship in the small group market, and (3) promoting portability across market segments.

Testimony of Neil Trautwein

The National Association of Manufacturers represents 14,000 members (including 10,000 small and mid-sized companies) and 350 member associations serving manufacturers and employees in every industrial sector and all 50 states.

The NAM is a strong supporter of the federal ERISA law (the Employee Retirement Income Security Act) and the uniformity it fosters. One of the central purposes of the 1974 ERISA law is to encourage employers to voluntarily provide benefits to their employees. Employers gained the ability to have uniform plans across state lines in exchange for their assumption of fiduciary responsibility for operation and management of these plans.

Regarding what background information my organization or I have to help frame your working group's study, I offer you and your colleagues access to the NAM's Health Care Subcommittee.

About the strengths and weaknesses of the employer based health benefits system, perhaps its greatest strength is that it offers most workers easy access to affordable health benefits at their point of employment. The employer-based system has the advantage of naturally pooling workers without regard to their risk profiles. In most instances, employer-sponsored coverage is offered voluntarily to attract and retain qualified workers.

Without question, the employer-based system is under significant stress today. The cost of coverage is increasing by 13% on average, with many employers experiencing far greater increases.

What can be done to strengthen the current employer based health benefits system? One of the most important steps government can take is to address the problem of the affordability of coverage. Refundable health insurance tax credits that are useable in the workplace would go a long way to making coverage more affordable both to those eligible or not eligible for employer-sponsored coverage. In addition, we would respectfully urge that government - whether federal or state - touch as lightly as possible on health care. In our experience, the more government is involved in the regulation of health benefits, the more expensive those benefits become, the fewer the employers who offer coverage and the fewer the workers who accept that coverage. That is a prescription for disaster, and one that we would urge government to avoid.

What alternatives are there to employer based coverage? In our view, the arguments in favor of national health insurance have long been overshadowed by the changing demographics of our society, the consequent pressures that it will place on existing entitlement programs, the conspicuous problems suffered by foreign national health programs, and the revelation that the long-touted administrative cost savings under Medicare are greatly overstated.

There is much discussion today about potential changes to help consumers take charge of their individual health insurance needs. Medical savings accounts have been one positive facet of this debate. Others support the idea of individually owned health policies. In the NAM's view, the individual insurance market is far from ready to absorb large numbers of workers seeking to purchase coverage.

Regarding defined contribution health benefits, there is a certain level of interest among NAM members, particularly in response to rising health care costs and the prospect of health care liability. However, many of these same NAM members are also aware of the challenges of individually owned health policies. There are no easy answers.

What does ERISA need to do? In the NAM's view, ERISA can best continue its role as the backbone of the employer-based health care system. ERISA is in need of modernization on the health care side. But, such changes should be made with care to ensure that health coverage is not priced beyond the reach of employers to offer and employees to accept coverage.

July 18, 2001

Testimony of Janet Stokes Trautwein

The National Association of Health Underwriters based in Arlington, Virginia has 18,000 members and related products. Because NAHU members have direct hands on experience, we have access to a significant amount of information on both positive aspects as well as the challenges of health insurance markets. NAHU has a significant amount of research on markets, including two recent studies for the GAO and one very recent study for the Kaiser Family Foundation, as well as numerous internal studies.

Reports of increases in the cost of health care are increasing, and with the resultant increases in the cost of health insurance, employers are becoming more concerned that they need greater health care expertise to manage their plans, that they have little control over health care costs and that they face increasing potential for liability for the actions of their health plans. In spite of this, a recent Towers Perrin study indicates that most employers remain committed to being actively engaged in providing health care benefits to their employees.

Employers report that workers have a sense of entitlement regarding health benefits and are insulated from the cost of insurance and the cost of health care. At the same time, a long range look at the labor market indicates that it is tight in many areas and that the problem will only get worse as baby boomers age into retirement. For this reason, employers want to continue to offer benefits to attract and retain good employees and to be sure they have a healthy workforce.

The primary reason employers continue their financial contributions to health plans is their belief that if they can offer an employer sponsored plan of good quality, they will be able to attract and retain good employees.

Would employers continue to contribute financially to health insurance policies if their employees purchased them outside the employer's plan? Many would find it to be a burden to remit premiums to the variety of health plans in which their employees might choose to participate.

As for what types of coverage might be available in the individual market, there is considerable difference from state to state. In general, the number of policies an individual can select from in the individual market is fewer, and the plan designs are more restricted.

NAHU provided the research for a recent Kaiser Family Foundation study on underwriting in the individual health insurance market. The study showed the difficulties less than healthy individuals have in obtaining standard coverage, and some individuals in obtaining coverage at all. Although high-risk pools have been helpful in providing a safety net for some of these individuals, they are not yet available in every state.

In recent years, one of the ways employers have maintained their health plans is through the use of managed care. Although managed care has been effective in holding down costs in the past, it appears that some of those savings may be eroding away as the cost of health insurance spirals due to an overall increase in the cost of health care.

Is Defined Contribution a Solution? - Defined contribution as it relates to health insurance coverage is the concept of employers giving employees a set amount of money and letting them buy a health plan according to their needs.

Many employers recognize the differing needs of their employees and now offer multiple plan options for employees. Others are considering this most popular form of defined contribution. Under this arrangement, an employee is given a sum of money that can be used to select from among the health plans offered by the employer. This allows employees who like HMO's to select that option and those employees who prefer more flexibility and choice to select a PPO or indemnity plan.

Another type of defined contribution would require that employers allow employees to take the dollars the employer would normally use for health insurance and purchase coverage in the individual health insurance market.

The bottom line is that defined contribution approaches are most likely to be successful if maintained under the employer umbrella. Although the idea of providing more choice for employees is a good one, the realities of the individual market as well as the basic concept of evaluation and pricing of insurance risk make more aggressive models less likely to be successful.

Finally, regardless of the approach taken, serious consideration should be given to the cost of coverage in any setting, whether through the individual health insurance market or through an employer plan. Because health care costs in general have gone up so much, low-income individuals are increasingly being priced out of health insurance coverage. Many of these individuals can't pay their share of employer sponsored health insurance premiums, much less afford the cost of an individual policy on their own. A refundable tax credit should be provided to these individuals to help with the cost of purchasing coverage either through their employer or in the individual market. This is essential not only to ensure that they receive adequate medical care, but is also necessary to prevent additional cost shifting to those who are already insured as a result of uncompensated care.

Testimony of Frank Cummings

I was one of the designers - perhaps the original designer - of the early Javits Bill that led to ERISA.

What Are the Strengths & Weaknesses of the Employment-based Health Benefits System?

Here is the most I can say in favor of the current system:

• From an employee's viewpoint, if you have it, it is considerably better than nothing. If it comes with a drug card, that is a major advantage.
• From an employer's viewpoint, if you can afford it, it will help some of your employees and some of their beneficiaries, somewhat, some of the time, if they can afford the copayments and deductibles.

But the employer-based health benefits system, viewed as a "system," is a system which, in my judgment, may well be doomed to failure. It is failing now.

• The cost now seems out of control.
• Employer efforts to resist cost escalation are now effectively precluded by the risk of liability under state and inevitably-federal "patients' bills of rights."
• Employers are generally unwilling to set up new retirees' medical benefit plans, because the long term financial exposure is too great.

What Could Be Done to Strengthen the Employer-based Health Benefits System? - If the government wants to step in and really "fix" this system, then I think we will end up with mandated universal coverage, control of the content of plans, control of the delivery of benefits, and inevitably control of costs. But then we are no longer talking about an employee -based system.

What Are Alternatives to the Employer Based Health Benefits System? - There is no "free lunch." But I think the obvious and inevitable answer, eventually, is "single payer."

What Do You See in the Defined Contribution Health Benefits Area? - Defined contribution medical plans are an obvious, inevitable, and temporary expedient. Employers are dropping their defined benefit medical benefit plans and substituting what amounts to a subsidized cafeteria plan. As costs rise the employer-based system may very well collapse.

What does ERISA Need to Do? - ERISA is basically a consumer protection law. It says to the employer: You are free, as always, to provide a benefit, or not to provide benefit, as long as you define the benefit as required by law, describe the benefit fairly, and administer correctly. Even in those areas where ERISA tells the employer what must be included in the Plan, the employer is always free to terminate a plan.

Conclusion - ERISA was never designed to function as a categorical imperative: "Do this." Instead, it has always been a hypothetical imperative imposed upon a voluntary private system of benefits: "If you, the employer, decide to provide a certain employee benefit, then you must have a plan with these required features - but you are free to have no plan at all, assuming your business environment will let you be competitive without such a plan."

The advantage of using the hypothetical imperative is not merely that you maintain economic freedom. You also foster an environment where the better employer will provide better benefits to attract better employees who will do better work and make you a better competitor. True enough, if anyone can afford it. But in fact it appears that even the better employers have begun to rebel. It doesn't work.

There is no "free lunch." But I think the obvious and inevitable answer, eventually, is "single payer."

Testimony of Dr. Denny Dennis

The National Federation of Independent Business is the largest small business trade association in the country. We have over half a million members. The views and opinions that I express this morning are my own, but they clearly reflect much of what small business is thinking and of NFIB.

Employment-based health care financing doesn't work very well for small firms and we would like to see it changed. There are really four or five major reasons why it doesn't work.

The first one is significant coverage gaps are inevitable. If you take the 42 million people under age 65 who are not covered by health insurance, we find that small business hires approximately 56 percent of the employed uninsured and 46 percent of the adult uninsured. So, in effect, while small business clearly isn't the only one that's not providing insurance, it is disproportionately represented in that category. In survey after survey, the major reason for not providing health insurance, employer-based or employee health insurance comes in as cost.

As I explored it, I found a very strong positive relationship between owner income from the business and the propensity to provide employee health insurance. Small employers who are doing well tend to provide it. Those who aren't doing very well, tend not to provide it. This also held true with pension plans and wage levels.

Dr. Dennis was asked if he had any sense of where owners get health coverage? Dr. Dennis responded that many people are covered under the working spouse's health insurance. There are some who pick it up individually. But for the most part, an advantage of providing the employee health insurance is that the owner can also provide his or her own health insurance.

The second issue is that every year we have approximately 800,000 new employers in this country. You can't buy insurance the first year you're in business. Generally you can't buy it until after the second year. No one is willing to give you that kind of insurance. And when you think of the median life expectancy of an employing business as being five years, you see how important this churn and this turmoil is to business not being able to provide employee health insurance.

The third issue is that employee choice is limited in a small firm. We know that 91 percent of all small employers, in this case defined as 3 to 199 employees, offer only one option.

The small employer in effect can buy one plan and the employees have to take it or leave it. Also, small employers have the state mandates which require that they provide certain benefits whether they want them or not. Most small employers don't fit under the ERISA exemption. Therefore, they're subject to all the state mandates and have to buy the additional coverage.

The fourth thing is that small employers are not necessarily health care experts. Large firms have in-house experts that are purchasing and negotiating prices with certain providers. A small employee can't pay for someone to come in and just be his staff expert. So what do they tend to do? They tend to make some decisions internally, but when they get an expert, they are the insurance agents and brokers, the very people selling the policies! As you go a step further, they have no leverage with health care providers. A lot of large firms are able to negotiate with health care providers for prices.

Small business owners aren't educated in this topic The entrepreneur's time is his most valuable asset, particularly in the start-up and the growth phase. One potential solution is association health plans, which essentially allows a group of small businesses to get together under the auspices of some type of trade organization. Unfortunately, this has not been looked favorably upon by many members of Congress.

We can't prove, quite frankly, that there are cost inequities. The dollars that one spends on health insurance, whether it's in a large firm or small firm, per person coverage is about the same. It's slightly higher for small firms than for large firms. The difference, however, is the benefits involved. Large firms buy much more than small firms for the same dollars.

There are two directions to go if we change over from employer-based system. One is to single payer system and the other is to an individual based system. Small employers pretty much reject the single payer system. The reasoning is that the government would be basically in charge of the whole thing.

Essentially the individual based system is more advantageous for small employers than the current system because it gets them out from providing health insurance or being involved with health insurance in any way, shape or form. As a practical matter over time, there will still be a large number of small employers that will want to provide insurance.

Dr. Dennis was then asked if he felt an individual mandate from government would be necessary to make the individual market work? He replied that he thought it probably would be.

Testimony of Louis Saccoccio

The American Association of Health Plans (AAHP) is the principal national organization representing HMOs, PPOs and other network plans. Our member organizations administer or arrange health care services for over 150 million participants nationwide. The vast majority of this coverage is provided through employer sponsored health plans.

Employers have an interest in a healthy and productive workforce. The availability of health insurance benefits is also a significant factor in hiring and retaining employees, especially in tight labor markets.

A recent report by the General Accounting Office (GAO), noted that of the total nonelderly population, almost 67% have health coverage through their employer, about 11% are covered through public programs, 5% have other private insurance and 17% are uninsured.

However, the GAO report also indicated most of the adults without any health insurance (either private or public) are employed - 41.7% of uninsured adults work full-time and 33.6% are employed part-time. Most of these individuals work for small employers (those with 24 or fewer workers) or in certain segments of the economy. Income also plays an important role as over 54% of the uninsured had family incomes less than 200 percent of the federal poverty level.

There are a number of reasons why the employer-based health insurance system has been so successful for employers and for their employees:

• Tax Advantages - Employers can deduct from their income tax liability the cost of health insurance provided to their employees.
• Employer Premium Subsidies - Employers provide their workers with a significant portion of the total premium expense.
• Spreading Insurance Risk - The fact that a large number of employees choose to purchase health insurance coverage through their employers spreads the insurance risk among a large population.
• Access to Coverage for High Risk Individuals - Because most employer groups have workers with a mix of demographic and health characteristics, those employees with greater health risks do not pay higher premiums.
• Market Efficiencies - Typically, administrative expenses account for 5% or less of the health insurance premium costs for large employers. While such costs are higher for small employers, they are still well below those in the individual market.
• Quality Drivers - Employers base their health insurance purchasing decisions not only on cost, but also on quality standards, performance measures and the types of products that best meet the needs of their employees.

The Employee Retirement and Income Security Act of 1974 has had a significant influence on the delivery of employer-based health insurance coverage. Although ERISA was intended to bring uniformity to the regulation of employee benefits, health plans find themselves subject to a variety of state and federal laws governing how they operate. The interaction of state and federal insurance laws and ERISA can result in a confusing and sometimes contradictory regulatory environment.

AAHP agrees that the ERISA claims rules need to be updated. The conflicts between ERISA and other laws may take on greater significance if a Patient's Bill of Rights is passed by Congress. Also, should a Patient's Bill of Rights be enacted, it would become part of the growing trend toward federal regulation of health insurance.

How to Encourage Employer-Based Health Insurance:

• Strengthen ERISA's Preemption of State Laws - Employers, unions and health insurers should have a uniform, clear set of guidelines to follow in administering and providing insurance coverage.
• Avoid Multiple Sets of Regulatory Requirements - Even in situations where ERISA does not apply, health insurers and employers should not be subject to regulation by multiple jurisdictions. Conflicts between state and federal insurance requirements should be eliminated.
• Eliminate Insurance Mandates - The states and Congress need to reexamine existing insurance mandates and resist efforts to impose additional coverage requirements. These mandates add to the cost of health insurance and ultimately result in more people unable to afford coverage.
• Preserve Retiree Health Coverage - Federal law should not be applied by regulatory agencies in such a way as to undermine the ability of employers to provide health insurance benefits to their retirees.
• Encourage Resolution of Claims Disputes Through Appeals - Disagreements between health plans and participants should be handled through a fair and orderly internal and external appeals process rather than costly and time-consuming litigation.

September 12, 2001

Testimony of Marcia Angell

Americans have the most expensive health care system in the world. We spend on average twice as much per person as other developed nations, and the gap is growing. That is not because we are sicker or more demanding (Canadians, for example, see their doctors more often and spend more time in the hospital). And it is not because we get better results. By the usual measures of health (life expectancy, infant mortality, immunization rates), we do worse than most other developed countries. Furthermore, we are the only developed nation that does not provide comprehensive health care to all its citizens. Over 42 million Americans are uninsured - disproportionately the sick, the poor, and minorities - and most of the rest of us are underinsured, even while we sometimes receive far more of certain kinds of health care than we need. In sum, our health care system is outrageously expensive, yet inadequate and inequitable. Why? The only plausible explanation is that there is something about the system itself - about the way we finance and deliver health care - that is enormously inefficient. We simply do not get our money's worth.

In my view and that of many other critics of our system, the underlying problem is that we treat health care like a market commodity instead of a social service. Health care is targeted not to medical need but to the ability to pay. Most Americans receive tax-free health benefits from their employers, who pay insurers a portion of the premiums. But not all employers offer benefits - it is strictly voluntary - and when they do, the benefits may not be comprehensive. Higher salaried workers are more likely to be covered and their coverage is better. About one in five workers, mainly those with low salaries, turn down health benefits because they cannot afford to pay their portion of the premiums. The employment-based system is entirely voluntary. Any time employers decide they don't want to offer health benefits, or they want to pass more of the costs to their workers, they can do so. It is impossible to regulate a purely voluntary system, which is why efforts to reform the employment-based system are doomed to failure.

It is instructive to follow the health care dollar as it wends its way from employers toward the doctors and nurses and hospitals that actually provide medical services. First, private insurers regularly skim off the top a substantial fraction of the premiums - anywhere from 10 to 30 percent - for their administrative costs, marketing, and profits. The remainder is then passed along a veritable gauntlet of satellite business that have sprung up around the health care industry. These include brokers to cut deals, disease-management and utilization review companies, drug-management companies, legal services, marketing consultants, billing agencies, information management firms, and so on and so on. They, too siphon off some of the premiums, including enough for their administrative costs, marketing, and profits. It has been estimated that no more than 50 cents of the health care dollar actually reaches the providers - who themselves have high overhead costs to deal with the requirements of multiple insurers often bent on avoiding payment. Compare all that with the national program we are advocating today. Medicare is the most efficient part of health care system, with overhead costs of less than 3 percent. It covers virtually everyone over the age of 65, not just some of them. Medicare is not perfect, but it is by far the most popular part of the U.S. health care system, as evidenced by the resistance of Medicare beneficiaries to any changes.

The usual objections to the sort of national program we are calling for today are mostly based on a number of myths:

Myth #1 is that we can't afford a national health care system. A single-payer system would be far more cost-effective, since it would eliminate excess administrative costs, profits, cost-shifting and unnecessary duplication. Furthermore, it would permit the establishment of an overall budget and the fair and rational distribution of resources.

According to Myth #2, innovative technologies would be scarce under a single-payer system, we would have long waiting lists for operations and procedures, and maybe rationing. This misconception is based on the fact that there are indeed waits for elective procedures in some countries with national health systems, such as the U.K. and Canada. But that's because they spend far less on health care than we do. If they were to put the same amount of money as we do into their systems, there would be no waits and all their citizens would have immediate access to all the care they need.

Myth #3 is that a single-payer system amounts to socialized medicine. But in fact, although a national program would be publicly funded, providers would not work for the government.

Myth #4 says that the government can't do anything right. Medicare is far better at funding health care than the private sector.

A 5^th and final myth is that a single-payer system is a good idea, but politically unrealistic. In my opinion, the medical profession and the public would be enthusiastic about a single-payer system if the facts were known and the myths dispelled.

I want to mention one final and very important reason for enacting a national health program. We live in a country that tolerates enormous disparities in income, material possessions, and social privilege. But those disparities should not extend to denying some of our citizens certain essential services because of their income or social status. One of those services is health care.

Testimony of Geoffrey Gibson

Dr. Gibson, an epidemiologist, has worked with many ERISA-regulated health funds, both Taft-Hartley and employer funds. For the last 10 years he has been the Research Director and epidemiologist, designing and monitoring disease management and other clinical programs for the 1199 National Benefit Fund, an ERISA-regulated Taft-Hartley health fund covering 265,000 lives in the health care and human service industries in the metro New York City area, upstate New York and New Jersey.

Local 1199 of the Service Employees International Union and affiliated with the AFL-CIO, collectively bargains every three years with the New York League of Voluntary Hospitals over wages, conditions of work, health and pension benefits. Employer contributions are currently 15% of payroll for the health fund, or about $465 million last year. The health fund, jointly trusteed by union and management representatives, is self-insured and self-administered, and offers life-long services. In fact to say the 1199 fund provides "cradle-to-grave" coverage would short-change 1199, since a pre-natal program is offered, in addition to hospital, medical, drug benefits, and short-term disability, camp, scholarship, home mortgage, and even a burial plot!

It is clear that employment-based health care can be a cost-effective method of ensuring and enhancing the health status of employees and their dependents, provided that certain conditions are met:

• Employees must be represented by a labor union capable of negotiating appropriate benefit levels.
• Employers must be willing to support work-site based health initiatives to maintain a healthy workforce and, therefore, quality service rather than merely cost reduction.
• Trustees (both union and management) must see their fiduciary responsibility as seeking the most cost-effective route to enhancing the employees' health status and monitoring quality standards.
• Health fund staff must develop their capacity to respond to employee needs.
• ERISA regulations ought to expect more from fund performance and funds from sensible quality mandates at the state level.
• DOL should expect more from fund trustees.
• The health care obligation that employers have to employees should not be shifted to the shoulders of the individual worker and set loose with a voucher in an incredibly complex, fragmented and over-priced system of commercial health insurance.

The 1199 fund has an overhead of only 7% and provided medical, hospital and drug coverage in 2000 for $4,126 per employee, compared with $4,965 for US employers as a whole. (And that is full family coverage without any co-pays or deductibles).

Labor unions see employment-based health care as a benefit to be collectively bargained. Shop stewards at the work site (after fund training) actively talk up the benefits of mammography and PSA screening, and refer colleagues into asthma, diabetes, prenatal and hypertension programs run by the fund.

Employers have a commitment to quality by allowing work-release time for employees to be screened for high blood pressure and high cholesterol by fund nurses. Over 15,000 employees have been screened, and about one-third were found to have uncontrolled hypertension.

If health funds contract out their medical and hospital coverage to vendors with 15 - 20% overhead, it is not surprising that only 70 cents of every $1 in employer contributions goes to the employee in benefits, and that a further price is paid in a lack of flexibility and responsiveness to member needs in a "one size fits all" approach.

DOL should expect more, Form 550 is potentially a powerful tool to raise expectations and monitored standards.

Finally, Dr. Gibson would urge that the collective responsibility of employers and unions, and employers alone in a non-union setting, to provide health insurance coverage not be abandoned. He would caution against a "defined contribution" approach as likely to lead to less coverage and more heartache by employees.

Such an approach is wrong, not because it would cost more to provide less and end up with fewer employees being covered, but because in a morally indefensible way it abandons an employer obligation that has worked well.

Additional Information Sources

Actual Transcripts/Executive Summaries for the Council's full meetings and working group sessions are available - at a cost - through the Department of Labor's contracted court reporting service, which is Neal R. Gross and Co., Inc. 1323 Rhode Island Avenue, NW, Washington, DC 20005-3701 at (202) 234-4433 or nealgross.com.

April 10, 2001: Working Group on Challenge to the Employment-Based Healthcare System

1. Agenda
2. Official Transcript
3. Potential topics/witnesses for the group's study
4. March 30, 2001 letter from the Health Insurance Association of America's Thomas F. Wildsmith, Policy Research Actuary, detailing HIAA's stance on the issue of employment-based system of health insurance.
5. Statement for the Council by Paul Fronstin, Ph.D., Senior Research Associate and Director, Health Security and Quality Research Program, Employee Benefit Research Institute as well as EBRI's Retirement Income Research: 2001 findings from the January 2001 Issue Brief
6. Health Insurance: Most California Employers Not Ready for Defined Contribution Plans, Survey Finds March 29, 2001 and Health Care Costs: EBRI Says Employers Becoming Interested in Defined Contribution Health Care Benefits from March 19, 2000, both BNA Pension and Benefits Daily.
7. HMOs failure to tame costs spurs quick-fix replacements March 16, 2001 USA Today.
8. Medical Savings Accounts Offer a Good Alternative in Health Coverage by Sarah Skidmore, Florida Times-Union, Jacksonville, April 2, 2001.
9. Retiree Health Coverage: Recent Trends and Employer Perspectives on Future Benefits, prepared by Hewitt Associates for the Henry J. Kaiser Family Foundation, October 1999.
10. Tax Credit Proposal to Expand Health Coverage Must Deal with Risk Selection, Experts Say - Tax Credits Alone Unlikely to Make Coverage Affordable for Older and Sicker Individuals on April 10, 2001, Center for Studying Health System Cha616nge. (Include in May packets)
11. Managed Care in Transition April 5, 2001, New England Journal of Medicine.

May 4, 2001: Working Group on Challenge to the Employment-Based Healthcare System

1. Agenda
2. Official Transcript
3. Slides from Testimony of Mark V. Pauly, Ph.D., Wharton School, University of Pennsylvania
4. Two Cheers for Employment-Based Health Insurance by David A. Hyman and Mark Hall, May 4.
5. Challenge to the Employment-Based Health Care System by Dale H. Yamamoto, Hewitt Associates, plus a copy of Survey Findings: Health Care Expectations: Future Strategy and Direction 2001 by Hewitt.
6. Benefit Trends and Employer Strategies for the Future by Tracy Cassidy, William M. Mercer
7. Defined Contributions: The Search for a New Vision Issue Brief 37, April 2001, Center for Studying Health System Change.
8. Defined Contribution Health Plans: The Shape of Things to Come? by David F. Ogden, FSA, and Michael Sturm, FSA, Milliman & Robertson - Benefits Perspectives, Spring 2001.
9. BNA Daily Labor Report Employers Exploring Defined Contribution Health Care Plans as Cost Saving Option by Simon J. Nadel, April 17, 2001.
10. Health Care Expenses Create Dilemma for Small Firms by Joe Manning, Milwaukee Journal Sentinel - April 15, 2001.

June 12, 2001: Working Group on Challenge to the Employment-Based Healthcare System

1. Agenda
2. Official Transcript
3. Job-based Coverage Increasing Despite Rising Costs, EBRI Says and Studies Find Small, Not Large Employers, Struggling With Continued Premium Hikes, articles appearing in the May 31, 2001 BNA Pension & Benefits Daily.
4. Copies of overheads provided by Rick Curtis, President of the Institute for Health Policy Solutions.
5. Written Testimony of Christine Paige, Vice President, Marketing, Kaiser Permanente California Division.
6. Written Statement by E. Neil Trautwein, Director of Employment Policy, National Association of Manufacturers.

July 18, 2001: Working Groups on Challenges to the Employment-Based Healthcare System

1. Agenda
2. Official Transcript
3. Written Statement from Janet Stokes Trautwein, Director of Federal Policy Analysis, National Association of Health Underwriters who also supplied: How Accessible is Individual Health Insurance for Consumers in Less-than-Perfect Health, a June 2001 study from the Henry J. Kaiser Family Foundation; a Towers Perrin study Facing Health Care Challenges in an Era of Change: 2001 Report of Key Findings; Employers' Study prepared by the NAHU by WB&A market Research on March 9, 2001; a letter to Ms. Trautwein from Art Jetter, Jr. about Medical Savings Account performance, dated July 23, 2001; and a February 1999 Health Care Reform - Threat Assessment Survey done for the National Association of Manufacturers.
4. Written Statement of Frank Cummings, Of Counsel, before the Working Group
5. Statement of Louis Saccoccio, American Association of Health Plans including an article in Health Affairs (Summer 1992), Inside the Black Box of Administrative Costs, by Kenneth E. Thorpe; Effects of Legislation Affecting Managed Care on Health Plan Costs, by the Barents Group, LLC, May 6, 1997; Impacts of Four Legislative Provisions on Managed Cared Consumers: 1999-2003, Barents Group, LLC, April 22, 1998; AAHP Research Highlights, March 2000; Congressional Budget Office cost estimate of S. 1052 (Bipartisan Patients Bill of Rights Act), March 2000.
6. Talking Points from a Speech Given by John D. Abraham on the Future of Defined Contribution Health Plans at the EBRI Policy Forum on May 3, 2001 (provided by Robert Patrician)
7. The Next Trillion Dollar Opportunity - Healthcare & Financial Services Convergence by Gary Ahlquist, Philip Lathrop & David Knott. E-insights by Booz Allen & Hamilton July 2001.
8. Packet of information from the National Center for Policy Analysis including a paper on meeting your health policy needs and a list of nationally recognized health care experts, as well as Four Years of MSAs: The Lessons So Far by Greg Scandlen July 6, 2000; MSAs for Everyone, Part I by John C. Goodman March 31, 2000; MSAs for Everyone, Part II by Greg Scandlen March 31, 2000; Making Medical Savings Accounts Better June 11, 1999; Patient Dissatisfaction January 31, 2000; Real Patient Protection Accounts: Personal, Portable & Affordable June 16, 1998; Health Plan for the GOP April 29, 1998; A Better Patients Bill of Rights April 19, 2001 Health Insurance: Letting Employees Choose July 6, 2000; Medical Savings Accounts - Obstacles to Their Growth & Ways to Improve Them by Greg Scandlen July 1998.
9. Health Costs Top List of Small Business Problems in the National Federation of Independent Business July 26, 2000.
10. U.S. Workers Face Barriers to Health Coverage: Study in Excite News.com on July 10, 2001.
11. Health Costs: Job-Based Coverage Increasing Despite Rising Costs, EBRI Says, BNA Pension & Benefits Reporter, May 31, 2001.

September 12, 2001: Working Groups on Challenges to the Employment-Based Healthcare System

1. Agenda
2. Official Transcript
3. Written Statement from Marcia Angell, former Editor-in-Chief of the New England Journal of Medicine and current lecturer at Harvard University's School of Medicine.
4. Employer's Face Sticker Shock on Health Costs, 8/29/01 Knowledge at Wharton Website.
5. Written statement from Geoffrey Gibson, retired research director, Laborers Union 1199.

October 16, 2001: Working Groups on Challenges to the Employment-Based Healthcare System

1. Agenda
2. Official Transcript
3. Draft outline of group's report/recommendations
4. Union Effects on Health Insurance Provision and Coverage in the United States by Thomas C. Buchmueller, John DiNardo, Robert G. Valleta for the National Bureau of Economic Research, April 2001.
5. October 2001 issue of HIU, Health Insurance Underwriter.
6. Comparing Health System Performance in OECD Countries: Cross-national comparisons can determine whether additional health care spending results in better outcomes by Gerard Anderson and Peter Sotir Hussey from Health Affairs, May/June 2001.
7. The Uninsured, The Working Uninsured, and The Public: Many Americans appear to be unaware of just how many workers still lack insurance coverage by Robert J. Blendon, John T. Young and Catherine M. DesRoches from Health Affairs, November/December 1999.
8. The Public Versus The World Health Organization on Health System Performance: Who is better qualified to judge health care systems: public health experts or the people who use health care? By Robert J. Blendon, Minah Kim and John M. Benson for Health Affairs Volume 20, Number 3.
9. Perspectives on the Pharmaceutical Industry: Granting all Americans access to prescription drugs that work should be a trivial economic challenge for this wealthy nation by Uwe E. Reinhardt, Health Affairs Volume 20, Number 5.
10. The Price of Progress: Prescription Drugs in the Health Care Market: Many drugs pay dividends to the U.S. health care system that far exceed their costs by J. D. Kleinke, Health Affairs, September/October 2001.
11. Health care consumerism will make workers pay more: When patients feel cost, they'll think twice about care, insurers think by Joe Manning for the Milwaukee Journal Sentinel, Oct. 16, 2001.
12. More employers may shift health insurance costs to employees by insure.com October 2001.
13. Defined Contribution Health Care: The Next Big Idea? Watson Wyatt Worldwide, October 3, 2001.

Advisory Council Members

1. Carl T. Camden, Chair
2. Ronnie Sue Thierman, Vice Chair
3. Evelyn Adams
4. Judith F. Mazo
5. Thomas M. McMahon
6. Patrick N. McTeague
7. Robert P. Patrician
8. James S. Ray
9. Michael J. Stapley, Chair of the Advisory Council
10. Rebecca J. Miller, Vice Chair of the Advisory Council

Footnotes

1. The Employer functions described here are performed by the plan in the case of a Taft-Hartley plan.
2. The economists who testified demonstrated that in the long run the employee pays these costs through the reduction in future salary increases. The perception, however, is that it is the employer that pays these increased costs.