Copyright 1999 Federal Document Clearing House, Inc.
Federal Document Clearing House Congressional Testimony
June 11, 1999
SECTION: CAPITOL HILL HEARING TESTIMONY
LENGTH: 3735 words
HEADLINE:
TESTIMONY June 11, 1999 CHARLES N. KAHN III HOUSE EDUCATION AND
THE WORKFORCE EMPLOYER-EMPLOYEE RELATIONS HEALTH CARE COSTS AND UNINSURED
PATIENTS
BODY:
Statement of CHARLES N. KAHN III
President HEALTH INSURANCE ASSOCIATION OF AMERICA Before the EMPLOYER/EMPLOYEE
RELATIONS SUBCOMMITTEE Of The COMMITTEE ON EDUCATION AND WORKFORCE U.S. HOUSE OF
REPRESENTATIVES The Relationship Between Health Care Costs and America's
Uninsured June 11, 1999 Introduction Chairman Boehner, Representative Andrews,
and members of the Subcommittee, I am Charles N. Kahn III, President of the
Health Insurance Association of America (HIAA). HIAA represents 269 member
companies providing health, long-term care, disability income, and supplemental
insurance coverage to over II 5 million Americans. I appreciate this opportunity
to appear before you today to discuss the relationship between health care costs
and America's uninsured. Study after study shows that the cost of health
coverage relative to family income is the most significant factor affecting
whether or not people have insurance coverage. In response to double- digit
health care inflation in the 1980s, employers became much more aggressive
purchasers of health coverage. Together with insurers, employers drove
innovation in the private market that benefited consumers (largely their
employees) through lower premium increases, new health plan options, and
enhanced coverage for preventive care and other benefits. Without these changes,
millions more Americans would lack health insurance coverage today. Despite this
progress, health care costs have continued to rise and will continue to rise for
the foreseeable future. Technological progress, breakthrough medical devices and
prescription drugs, improvements in medical procedures, as well as the general
aging of the United States' population all have contributed to this growth.
Managed care can help shield consumers from the impact of these cost drivers,
but there are some costs that will remain beyond the control of most employers
and insurers. Moreover, as both the states and the federal government more
aggressively pursue so-called "patient protection' legislation and other
mandates, there is mounting evidence that these "reforms" also have increased
costs and added significantly to the ranks of the uninsured. I should also note
that, while there is a symbiotic relationship between health care costs and
health care premiums, these concepts are not the same. The underlying costs of
care do have a significant and direct impact on premiums, but there also are
other factors that may exacerbate (or mitigate) premium trends. Employers and
Health Insurers Have Collaborated to Help Contain Costs and Improve Health Care
Quality Employers have been the driving force in helping to contain health care
costs and improve quality during the past decade. Large employers in particular
began demanding relief from double- digit premium increases they faced in the
1980s. As a result of employer demand and health plan innovation, the nation has
experienced a dramatic decline in the growth of health insurance premiums over
the past ten years. Double-digit inflation in excess of 20 percent in the late
1980s dropped dramatically to low single digit rates in the late 1990s, more in
line with general consumer price index trends. This decline in premium growth
during the 1990s coincides with dramatic increases in market penetration of
managed care. Enrollment in PPOs, HMOs, and other forms of managed care has
tripled during the past 10 years from 29 percent in 1988 to 86 percent in 1998.
It is estimated that the impact of lower insurance prices attributable to this
trend saved consumers somewhere between $24 billion and $37 billion in 1996.
This savings is projected to grow to between $125 billion and $200 billion by
the year 2000. In fact, without these savings, some employers would not have
been able to afford private insurance and would have been forced to discontinue
coverage for their workers. Lower premiums resulting from managed care has
reduced the current number of uninsured by between 3 and 5 million people. The
foundation for the current employment-based health care system was laid during
the Second World War. In response to wartime wage controls put in place to
prevent companies from raising wages, employers began offering more generous
health insurance and other non-cash fringe benefits to their employees and
deducting such costs as normal business expenses under section 162 of the tax
code. In 1943, the Internal Revenue Service ruled that employer contributions
toward premiums for group health insurance were not taxable to employees. This
ruling was codified in 1954. Passage of the Employee Retirement Income Security
Act of 1974 (ERISA) helped make it easier in many respects for large, multi-
state employers to manage benefits and further cemented the relationship by
which millions of workers receive health benefits through employer-sponsored
plans. One of the key reason that employers have been able to help spur
innovation and cost savings is the regulatory flexibility and national
uniformity provided through the ERISA framework. This committee played a key
role in enactment of that landmark legislation. As a result of a favorable
regulatory environment and private sector innovation and efficiency, the number
of people covered by group health insurance has grown from less than 12 million
in 1940 to over 152 million today. While the private employment-based health
care system is firmly rooted in its historic past, it has been overwhelmingly
successful in providing coverage to millions of Americans even during times of
rapidly increasing medical costs and swift improvements in medical treatment.
This is in part because employer groups- particularly large employer groups--do
a very good job of pooling health care risks, encouraging large percentages of
employees and dependents to participate in their health plans, and spreading the
costs of coverage among both healthy individuals and those that incur greater
health costs. Overall, the employment-based system has been remarkably effective
in covering working Americans and their dependents. Nine out of ten firms with
more than fifty employees offer health coverage as an employee benefit. Even
among smaller firms, one out of two offer health care coverage as an employee
benefit. Despite growth, in health care costs, employers efforts to control
health care costs by fostering price competition have directly benefited
workers, especially those low-wage workers who otherwise would be unable to
purchase coverage. Employers also have a key role in ensuring the quality of the
health care purchased on behalf of their employees. As Roger Evans, manager of
the health services evaluation section at the Mayo Clinic notes, " r eform is
being driven by progressive employers, by those concerned about quality ... They
are the ones driving positive changes and those changes benefit not only the
employers involved, they also help improve the entire care- delivery system for
everyone."' Employers are involving themselves in the health care system in a
variety of ways, both direct and indirect. For examples, General Motors Corp.,
Fort Motor Co., Chrysler Corp. and the United Auto Workers recently collaborated
in a six-month effort to develop a common quality report card for health plans
offered to employees of the Big Three automakers,' and the Pacific Business
Group on Health has made strides to improve quality by negotiating specific
performance guarantees with health plans.' Many other examples of quality
improvement initiatives initiated by both business coalitions and individual
employers are available.' Many employers, recognizing the business value of
healthy employees, are going beyond the traditional health benefit program to
establish worksite health promotion programs, employee assistance programs,
health and productivity management programs, and even in some cases worksite
primary care centers. Despite Private Sector Innovations and Cost Containment,
the Number of Uninsured Continues to Climb Despite recent innovations in the
marketplace that have expanded consumer choice, improved quality, and provided
lower cost insurance options, the number of Americans without health insurance
coverage has continued to climb throughout the last decade. Currently, 168
million nonelderly Americans enjoy the security of private health insurance; and
the vast majority gets its coverage at the workplace. But for too many
Americans, private health insurance is unaffordable, and often, government
programs like Medicaid do not cover these needy adults. Today, there are over 44
million uninsured Americans. By the end of the next decade that number will grow
to at least 53 million - one in every five nonelderly Americans. If the economy
sours, one in four working-age Americans and their families could find
themselves without health insurance coverage." Clearly, this is a disturbing
trend that we, as a nation, cannot afford to let continue. Last month, the HIAA
Board of Directors approved a major initiative to help address this issue. The
Insure USA plan to increase health coverage combines targeted subsidies, tax
incentives, cost-control measures, and education. Importantly, it builds on the
foundation of the private employer-based system while recognizing that
government also has an important role. We already have provided a copy of our
plan to all members of Congress, including members of this subcommittee.
Additional information about the plan and about the uninsured may be found at a
special website we have developed, www.InsureUSA.org. And, of course, HIAA staff
would be happy to meet with members of Congress at any time to discuss our
proposal, and other ways to expand health insurance coverage, in more detail.
Mr. Chairman, from research sponsored by HIAA and others, we know that
low-income Americans are particularly likely to be uninsured. Almost two out of
every three uninsured Americans (57%) below the age of 65 lives in a family with
an income that is less than two times the federal poverty level. Many uninsured
do not qualify for government assistance; and two out of three uninsured
Americans live in a family headed by a full-time worker. Some work for small
firms, which are unlikely to offer coverage; others have access to
employer-sponsored coverage but cannot afford the employee contribution. While
the uninsured have many faces, the major reason that Americans are uninsured is
because they simply cannot afford coverage. As Dr. William Custer noted in a
December 1998 study on behalf of HIAA, the primary reason for the increase in
the number of Americans without health insurance over the last 15 years has been
the increase of health care costs relative to family income. Just as national
health care expenditures have increased as a proportion of Gross Domestic
Product so have personal health care costs increased as a proportion of family
budgets. As these health care costs increased, families decreased their purchase
of health care services-especially of health insurance." Other researchers have
reached similar conclusions. Health Care Cost Drivers As noted above, the number
of uninsured would be even higher without the growth of managed and other
private sector innovations that have occurred primarily in the employment-based
market during the past decade. Yet, even though rates of growth have slowed,
health care costs continue to climb. Improved health care technologies,
procedures, and pharmaceuticals, combined with immutable demographic trends,
have contributed to inexorably climbing health care costs. Let me briefly
discuss a few of the most significant cost drivers we as a nation, and as health
insurers, are confronting. The Growing Importance and Cost of Pharmaceuticals
Pharmaceuticals contribute to improving the lives and health of many patients,
and new research breakthroughs in the coming years are likely to bring even
greater improvements. At the same time, the rapid increase in both the price and
utilization of outpatient prescription drugs (and projected increase) could make
pharmaceutical coverage in particular and health insurance in general less
affordable. Prescription drug expenditure growth now outpaces other categories
of health spending, including hospital and physician costs, and is expected to
comprise over nine percent of all personal health expenditures by 2007-almost
double what it was in 1980. Moreover, hospital and physician costs have
continued to climb despite increases in drug spending. As the rates of increase
in health spending in most categories of expenses have declined, the rate of
growth for pharmaceuticals and, especially, for prescription drugs has
increased. Prescription drug expenditures now outpace all other major categories
of health expenses, increasing at over 14 percent in 1997. Advances in
Technology While managed care has given purchasers some control over price
growth in health care over the last decade and economy-wide inflation continues
to decelerate, growth in non- price factors continue at essentially the same
rate. Growth in volume and intensity of use per capita has remained the same
throughout the 1990s, representing about 35 percent of the increase in the
growth of per capita health spending between 1995 and 1997. The introduction of
new medical technologies have the potential to improve health outcomes and,
eventually, to decrease spending in other areas over time. However, new
technologies almost always have the immediate effect of increasing services and
potentially costs for an area of services. For example, MRIs (which may detect
certain conditions earlier than other types of tests) cost about twice as much
on average as CAT scans, yet both are now considered essential as diagnostic
tools. Laparoscopic procedures replace traditional surgical procedures at
greater surgical costs (e.g., cholecystectomies, or gall bladder removals
average $1,800 by traditional methods compared with $2,200 by laparoscopic
method) but often result in shorter hospital stays. Other new technologies do
not replace other methods of care or service at all, but add entirely new costs
(and benefits) for society. For example, mapping human gene codes through the
research sponsored by the human genome project has the potential to help doctors
detect and treat disease earlier. This activity also will lead to increased
utilization of care and, hopefully, better preventive care in the future.
Similarly, improved hearing screening tests for
newborns have the potential to save children years of therapy,
but will add immediate costs to the system. The Aging, Society The aging of the
U.S. population also has contributed to growing health care costs. Per capita
treatment costs tend to increase with age, and the U.S. population is steadily
aging. Median age has increased from 30 years in 1980 to 34.9 in 1997. The
percentage of the population in age cohorts that have traditionally increased in
size (ages 35 to 54) will start to decline with increasing population
percentages in older age cohorts. Fifty-five to sixty-four year olds will
increase from 8.2 percent in 1997 to 1 1.9 in 201 0, almost a 50 percent
increase. While the greatest impact of an aging society may fall on the Medicare
and Social Security programs, it also has important cost implications for
employer- sponsored and retirement health plans. Litigation Costs and Defensive
Medicine Estimates of the cost of defensive medicine, tests and procedures
performed or ordered by physicians to protect themselves from malpractice
claims, ranging from $5 billion to $50 a year, amount to roughly 3 percent of
health care spending. A Stanford study in 1995 concluded that in states that
adopted reforms limiting liability awards, hospital outlays slowed appreciably,
lowering such expenditures by 5 percent to 9 percent relative to the levels
reached in other states with no reforms. A May 13, 1996 Business Week article
reporting on the 1995 Stanford study wrote "... the recent slowdown in U.S.
medical expenditures may partly reflect the malpractice reforms adopted by many
states over the past decade - as well as the huge growth in managed- care plans,
which closely monitor physicians for signs of excessive use of tests and costly
treatments." Nonetheless, only a relatively small number of states have put in
place effective controls on malpractice lawsuit abuse. Therefore, this will
continue to be an area that contributes to health care growth into the next
century. Moreover, as my testimony below highlights, legislators increasingly
are seeking to expand the liability of health plans and employers. If these
effects are successful, they will further exacerbate cost pressures resulting
from litigation. Benefit mandates One of the major reasons for growing costs and
the resulting increase in the number of uninsured has been the proliferation in
government benefit mandates, particularly at the state level. According to a
recent study by Gail Jensen, Ph.D. and Michael Morrisey, Ph.D for HIAA, nearly
one out of every four uninsured Americans have no health coverage because of the
cost of state mandates." According to Jensen and Morrisey, there was at least a
25-fold increase in the number of state mandates on health plans between 1970
and 1996. These mandates have raised premiums by up to 13 percent for businesses
that offer health insurance to their employees, and the lion's share of the cost
of these mandates has been borne disproportionately by workers in small
businesses. Eighteen percent of small businesses without health coverage would
buy it in the absence of state mandates. The Jensen-Morrisey study also reviewed
the impact of specific mandates on employers offering health coverage. The study
found that, on average, premiums would increase: percent for mandated coverage
for routine dental services; 13 percent for mandated coverage for psychiatric
hospital stays; 12 percent for mandated coverage for visits to psychologists;
and 9 percent for mandated coverage for chemical dependency treatment for
employer-sponsored health plans that do not voluntarily provide coverage these
services. Similarly, the study by Dr. William S. Custer, noted above, found a
strong correlation between lack of insurance coverage in certain states and
certain types of regulation. That study shows that state regulations, primarily
coverage mandates and small group reforms, have contributed to the rising number
of uninsured Americans. For example, small group community rating along with
guaranteed issue increased the probability of an individual being uninsured by
28.5 percent. Small group rating bands along with guaranteed issue increased the
probability of an individual being uninsured by 15.8 percent. Community rating
along with guaranteed issue in the individual market increased the probability
of an individual being uninsured by 11.3 percent. And mandatory coverage of
mental health increased the probability of an individual being uninsured by 6
percent. Other studies have reached similar results." Legislative Threats,
Particularly Erosion of ERISA in So-Called "Patient Protection" Legislation
While the majority of adverse legislative activity has taken place at the state
level, members of Congress have become increasingly active during the past few
years in promoting legislation that would have significant detrimental impacts
for health care consumers, employers, and health insurers. So-called "patient
protection" legislation and other similar initiatives threaten to unravel the
employment-based private health care system itself by attacking its legislative
cornerstone-ERISA. HIAA continues to oppose any legislation in this area. We
believe that helping to insure more Americans by making coverage more affordable
should be "job one" for Congress. So-called "patient protection" legislation
would move us in the opposite direction. It would drive up health care costs,
increase the number of uninsured, and could destroy the fabric of the
employment-based system through which nine out of ten privately insured
Americans currently get their coverage. In particular, subjecting health plans
to expanded liability for state malpractice damages by removing ERISA preemption
would have devastating consequences. It would increase costs by eroding the
ability of health plans to employ effective utilization review and utilization
management. It also would reduce incentives to control costs by compelling plans
to cover inappropriate or unnecessary services to protect themselves from
liability. Expanded tort liability will cause health care premiums to rise
anywhere form 2.7 percent to 8.6 percent, depending on the type of health care
delivery system affected. Overall health spending would increase by $123 billion
over five years." A survey by the National Association of manufacturers found
that over half would reduce coverage or drop health insurance altogether if
ERISA preemption were modified to allow health plans to be sued for tort damages
in state court. We also have written extensively about the additional costs
consumers would be forced to bear if Congress gave physicians carte blanche over
"medical necessity" coverage decisions. 1 8It is important to note that while
proponents of these legislative initiatives argue that they are intended to
reform "HMOs," infact, liability and medical necessity legislation and other
"patient protection" mandates will increase costs for all types of health plans,
from indemnity carriers to PPOs, to HMOs. Conclusion The health insurance
industry, working with employers, has been extremely effective in recent years
in slowing premium increases, improving health care quality, and expanding
coverage in the employment-based market. Yet, without additional financial
support from the government, a growing number of low-income Americans will
continue to lack health insurance coverage. In addition, a series of legislative
initiatives being considered at both the state and federal level, would put
affordable private coverage out of reach for even more American. We look forward
to working with the members of this subcommittee, and other members of congress,
to help find ways to expand health coverage in months and years ahead. Mr.
Chairman, that concludes my testimony. I would be happy to answer any questions
you may have.
LOAD-DATE: June 15, 1999