Before the Subcommittee on Employer-Employee Relations of the Committee on Education and the Workforce of the United States House of Representatives
March 13, 2003

Chairman Johnson and Members of the Committee,

Thank you for this opportunity to share with you some thoughts on Association Health Plans and specifically H.R. 660.

I am Greg Scandlen. I am currently the director of the Center for Consumer Driven Health Care at the Galen Institute, a non-profit, non-partisan think tank specializing in health and tax policy and based in Alexandria, Virginia. I have worked in the past for the National Center for Policy Analysis, The Cato Institute, and my own consulting firm, the Health Benefits Group. Prior to this, I was the founder and CEO for four years of the Council for Affordable Health Insurance (CAHI), a trade association of small to mid-sized insurance companies that are active in the small group and individual insurance markets.

THE STATE OF THE MARKET
My most relevant experience is the twelve years I spent in the Blue Cross Blue Shield system, including eight years as the director of state research for the national association. In that capacity I worked hard to defeat the kind of state legislation that is now prompting the demand for association health plans. These included mandated benefits, of course, but also a whole universe of regulations and restrictions that are every bit as important as mandates – premium rating restrictions; premium taxes; restrictions on plan practices such as provider contracting, claims processing, contract language and appearances; market conduct audits; and a host of other petty but expensive requirements.

These regulations were difficult for Blue Cross Blue Shield plans to comply with. They were complex, and they tied our hands in our efforts to control health care costs. But I later discovered when I formed CAHI how much worse it is for multi-state commercial insurers. These companies try to do business in 20, 30, or more states. It is nearly impossible for them to even keep track of all the changing laws in so many states, let alone revise their contracts every year to stay in compliance. They have been forced out of many states because of incompatible and inconsistent regulations among them.

I was particularly involved with the National Association of Insurance Commissioners (NAIC) when it was on a campaign to “reform” the small group market. I said at the time that these misguided efforts would destroy this market, and I think time has proven me right. I was, and continue to be, especially concerned about community rating and other forms of rating restrictions. When a state arbitrarily lowers the cost of coverage for an older and sicker population and raises the cost for the younger and healthier population, the older people will think it is a bargain, and the younger people will think it is not worthwhile. Younger people will drop out of the market and older people will jump in, which raises costs across the board and creates a death spiral of selection.

The federal guaranteed issue requirements contained in the Health Insurance Portability and Accountability Act (HIPAA) which prohibit denial of coverage for even the very sickest of the population, aggravate the problem and speed up the death spiral.

In short, the small group market today is a disaster. It is impossible to overstate the problems. Carriers have dropped out, leaving only one or two insurers in many areas. Employers are being rocked with premium increases as high as 50 percent in a single year. Because there are so few remaining competitors, the carriers have a “take it or leave it” attitude with their customers. The sickest groups try to keep on paying and the healthiest groups decide it isn’t worth the cost and drop coverage altogether.

This is not a hypothetical problem. It is not a theoretical issue. It is happening right now. At this moment in your District there are employers who are telling their workers they can no longer afford to cover them. What else can they do? They can’t raise prices and still stay in business.

Association Health Plans are no panacea. At most, AHPs will be another tool small employers can use to secure coverage for their workers. They may lower costs some. More importantly, they will inject more competition, innovation and choice in a market that is approaching monopoly conditions. (See “Competition in Health Insurance,” AMA, January, 2003)

Greater competition should make health plans more responsive to the demands of their customers, improve service, expand benefit options, and increase the numbers of small employers who provide coverage.

They will need to be supplemented with some of the other ideas that President Bush has proposed, such as refundable tax credits, expanded medical savings accounts, allowing a roll-over of Flexible Spending Account balances, and medical malpractice reform. When you put all these things together you begin to have a comprehensive approach to solving these problems.

ILLIGITIMATE CRITICISMS
Let me address some of the criticisms that have been raised with AHPs.

“They will take only the good risks and leave the bad risks behind.” There is no reason to think that is true. In fact, in testimony before the Senate Committee on Small Business and Entrepreneurship, Len Nichols testified that in Arkansas just the opposite happened. The state had formed a purchasing pool for the state’s small employers, but no carrier was willing to take the business because they figured only the highest cost groups would join. Further, HIPAA already requires that all small groups be guaranteed issue, so no group can be denied coverage, and H.R. 660 requires that all options be made available to all employers.

“Shady operators will come in and steal the money like they did with Multiple Employer Welfare Arrangements (MEWAs).” Fortunately, humans learn from experience. MEWAs were unregulated by either the states or the federal government. H.R. 660 includes a number of protections to prevent this sort of problem, including the need to get certified in advance, the requirement that only bona fide associations be allowed to offer coverage, and a number of solvency and reinsurance provisions.

“Important consumer protections will be lost.” This is perhaps the most cynical argument, coming as it does from organizations that vehemently opposed these “protections” when they were passed. Every employer is currently free to escape all of these provisions by self-insuring their benefits. There is absolutely no restriction in law or regulation preventing them from doing so. Smaller employers have been reluctant to self-insure only because of their size, but it is not unusual today to see an employer with as few as 100 workers self-insuring their benefits. Why does a firm with 100 employees that buys insured coverage need more “protections” than one that self-insures the exact same benefits?

“AHPs won’t actually save much money.” That may be true in the short term, in which case they won’t be very popular. Escaping mandated benefits and premium taxes might save 10% – 20% of premiums. Far more important is that AHPs will invite new competition in the small group market, which will foster innovation and potentially lower costs. Employers will have a new array of health plans and benefit designs to choose from, and there will be an incentive to provide better customer service. This may be the real fear of the critics who have become unaccustomed to competition.

LEGITIMATE CRITICISMS
There are a couple of legitimate criticisms of AHPs that need to be considered. Many insurers have told me that if regulatory relief is needed, we should give it to the carriers, and let them do the job. I happen to agree with this. It is excessive regulation that has destroyed the small group market. It would be far better to roll back those regulations so that all insurance providers can operate on a level playing field.

Further, I notice that H.R. 660 appears to defer to the states on premium rating restrictions (sec. 805(a)(2)(B)(ii)). This would be a huge mistake, and I urge you to reconsider. These rating restrictions have been far more important than mandated benefits in wrecking this market. Rating restrictions drive out the healthiest groups and raise rates for the remainder. We need to encourage participation by people and groups who are healthy so they will help subsidize the costs of the sick. Driving them out of the market does no favors to higher-risk people.

CONCLUSION
Overall, I applaud your work on AHPs and H.R. 660. I urge you not to expect miracles from this legislation. It will help change the current trend of more and more groups dropping coverage and will inject some competition to a market that is devoid of it. In combination with some of the other proposals before the Congress, it could make a significant improvement.

I will be happy to answer any questions you might have.

Before the Subcommittee on Employer-Employee Relations of the Committee on Education and the Workforce of the United States House of Representatives
March 13, 2003

Chairman Johnson and Members of the Committee,

Thank you for this opportunity to share with you some thoughts on Association Health Plans and specifically H.R. 660.

I am Greg Scandlen. I am currently the director of the Center for Consumer Driven Health Care at the Galen Institute, a non-profit, non-partisan think tank specializing in health and tax policy and based in Alexandria, Virginia. I have worked in the past for the National Center for Policy Analysis, The Cato Institute, and my own consulting firm, the Health Benefits Group. Prior to this, I was the founder and CEO for four years of the Council for Affordable Health Insurance (CAHI), a trade association of small to mid-sized insurance companies that are active in the small group and individual insurance markets.

THE STATE OF THE MARKET
My most relevant experience is the twelve years I spent in the Blue Cross Blue Shield system, including eight years as the director of state research for the national association. In that capacity I worked hard to defeat the kind of state legislation that is now prompting the demand for association health plans. These included mandated benefits, of course, but also a whole universe of regulations and restrictions that are every bit as important as mandates – premium rating restrictions; premium taxes; restrictions on plan practices such as provider contracting, claims processing, contract language and appearances; market conduct audits; and a host of other petty but expensive requirements.

These regulations were difficult for Blue Cross Blue Shield plans to comply with. They were complex, and they tied our hands in our efforts to control health care costs. But I later discovered when I formed CAHI how much worse it is for multi-state commercial insurers. These companies try to do business in 20, 30, or more states. It is nearly impossible for them to even keep track of all the changing laws in so many states, let alone revise their contracts every year to stay in compliance. They have been forced out of many states because of incompatible and inconsistent regulations among them.

I was particularly involved with the National Association of Insurance Commissioners (NAIC) when it was on a campaign to “reform” the small group market. I said at the time that these misguided efforts would destroy this market, and I think time has proven me right. I was, and continue to be, especially concerned about community rating and other forms of rating restrictions. When a state arbitrarily lowers the cost of coverage for an older and sicker population and raises the cost for the younger and healthier population, the older people will think it is a bargain, and the younger people will think it is not worthwhile. Younger people will drop out of the market and older people will jump in, which raises costs across the board and creates a death spiral of selection.

The federal guaranteed issue requirements contained in the Health Insurance Portability and Accountability Act (HIPAA) which prohibit denial of coverage for even the very sickest of the population, aggravate the problem and speed up the death spiral.

In short, the small group market today is a disaster. It is impossible to overstate the problems. Carriers have dropped out, leaving only one or two insurers in many areas. Employers are being rocked with premium increases as high as 50 percent in a single year. Because there are so few remaining competitors, the carriers have a “take it or leave it” attitude with their customers. The sickest groups try to keep on paying and the healthiest groups decide it isn’t worth the cost and drop coverage altogether.

This is not a hypothetical problem. It is not a theoretical issue. It is happening right now. At this moment in your District there are employers who are telling their workers they can no longer afford to cover them. What else can they do? They can’t raise prices and still stay in business.

Association Health Plans are no panacea. At most, AHPs will be another tool small employers can use to secure coverage for their workers. They may lower costs some. More importantly, they will inject more competition, innovation and choice in a market that is approaching monopoly conditions. (See “Competition in Health Insurance,” AMA, January, 2003)

Greater competition should make health plans more responsive to the demands of their customers, improve service, expand benefit options, and increase the numbers of small employers who provide coverage.

They will need to be supplemented with some of the other ideas that President Bush has proposed, such as refundable tax credits, expanded medical savings accounts, allowing a roll-over of Flexible Spending Account balances, and medical malpractice reform. When you put all these things together you begin to have a comprehensive approach to solving these problems.

ILLIGITIMATE CRITICISMS
Let me address some of the criticisms that have been raised with AHPs.

“They will take only the good risks and leave the bad risks behind.” There is no reason to think that is true. In fact, in testimony before the Senate Committee on Small Business and Entrepreneurship, Len Nichols testified that in Arkansas just the opposite happened. The state had formed a purchasing pool for the state’s small employers, but no carrier was willing to take the business because they figured only the highest cost groups would join. Further, HIPAA already requires that all small groups be guaranteed issue, so no group can be denied coverage, and H.R. 660 requires that all options be made available to all employers.

“Shady operators will come in and steal the money like they did with Multiple Employer Welfare Arrangements (MEWAs).” Fortunately, humans learn from experience. MEWAs were unregulated by either the states or the federal government. H.R. 660 includes a number of protections to prevent this sort of problem, including the need to get certified in advance, the requirement that only bona fide associations be allowed to offer coverage, and a number of solvency and reinsurance provisions.

“Important consumer protections will be lost.” This is perhaps the most cynical argument, coming as it does from organizations that vehemently opposed these “protections” when they were passed. Every employer is currently free to escape all of these provisions by self-insuring their benefits. There is absolutely no restriction in law or regulation preventing them from doing so. Smaller employers have been reluctant to self-insure only because of their size, but it is not unusual today to see an employer with as few as 100 workers self-insuring their benefits. Why does a firm with 100 employees that buys insured coverage need more “protections” than one that self-insures the exact same benefits?

“AHPs won’t actually save much money.” That may be true in the short term, in which case they won’t be very popular. Escaping mandated benefits and premium taxes might save 10% – 20% of premiums. Far more important is that AHPs will invite new competition in the small group market, which will foster innovation and potentially lower costs. Employers will have a new array of health plans and benefit designs to choose from, and there will be an incentive to provide better customer service. This may be the real fear of the critics who have become unaccustomed to competition.

LEGITIMATE CRITICISMS
There are a couple of legitimate criticisms of AHPs that need to be considered. Many insurers have told me that if regulatory relief is needed, we should give it to the carriers, and let them do the job. I happen to agree with this. It is excessive regulation that has destroyed the small group market. It would be far better to roll back those regulations so that all insurance providers can operate on a level playing field.

Further, I notice that H.R. 660 appears to defer to the states on premium rating restrictions (sec. 805(a)(2)(B)(ii)). This would be a huge mistake, and I urge you to reconsider. These rating restrictions have been far more important than mandated benefits in wrecking this market. Rating restrictions drive out the healthiest groups and raise rates for the remainder. We need to encourage participation by people and groups who are healthy so they will help subsidize the costs of the sick. Driving them out of the market does no favors to higher-risk people.

CONCLUSION
Overall, I applaud your work on AHPs and H.R. 660. I urge you not to expect miracles from this legislation. It will help change the current trend of more and more groups dropping coverage and will inject some competition to a market that is devoid of it. In combination with some of the other proposals before the Congress, it could make a significant improvement.

I will be happy to answer any questions you might have.