Copyright 1999 Federal News Service, Inc.
Federal News Service
JUNE 11, 1999, FRIDAY
SECTION: IN THE NEWS
LENGTH:
4586 words
HEADLINE: PREPARED STATEMENT OF
CHARLES
N. KAHN III
PRESIDENT
HEALTH INSURANCE ASSOCIATION OF
AMERICA
BEFORE THE HOUSE EDUCATION AND WORKFORCE COMMITTEE
EMPLOYER/EMPLOYEE RELATIONS SUBCOMMITTEE
SUBJECT - THE RELATIONSHIP
BETWEEN HEALTH CARE COSTS
AND AMERICA'S
UNINSURED
BODY:
Introduction
(NOTE: Tables not transmittable)
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 115 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.1
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-- 0 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 often 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.3
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."4
Employers are involving themselves in the
health care system in a variety of ways, both direct and
indirect.
5 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,6 and the Pacific Business Group on
Health has made strides to improve quality by negotiating
specific performance guarantees with health plans.7 Many other
examples of quality improvement initiatives initiated by both business
coalitions and individual employers are available,s 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.9
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.10 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 InsureUSA 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.11
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.12 Other researchers have reached similar
conclusions.13
Affordability Has Fallen
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.
Prescriptions drug
expenditures are projected to climb to over 9% of all personal
health expenditures, almost double what they were 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.
Prescription drug expenditure growth now outpaces other categories of
health spending.
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 nonprice 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 heating
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 11.9 in 2010,
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.14 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.15
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: 15 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.
State Reforms Have
Contributed to the Likelihood of Being Uninsured. Other studies
have reached similar results. 16
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 often 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.7 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.18 It is important to note that while proponents
of these legislative initiatives argue that they are intended to reform "HMOs,"
in fact, 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.
FOOTNTOES:
1 Sheils, John F. and Haught, Randall A., "Managed Care
Savings for Employers and Households: Impact on the Uninsured,"
June 1997, The Lewin Group, Inc. for the American Association of
Health Plans.
2 Employment-Based Health
Insurance: Medium and Large Employers Can Purchase Coverage, But Some Workers
Are Not Eligible, GAO/HEHS-98-184
3 Kronick, Richard and Gilmer, Todd
(1999): "Explaining the Decline in Health Insurance Coverage,
1979-1995", Health Affairs, 18(2), 30-47
4 The Business
Roundtable, The Spillover Effect: How Quality Improvement Efforts by Large
Employers Benefit Health Care in the Community, The Business
Roundtable Health and Retirement Task Force, June 1998,
http://www.brtable.org/pdf/160.
pdf
5 Christianson, Jon B., "The Role of
Employers In Community Health Care Systems",
Health Affairs, 17(4), 158-164
6 White, Joseph B., The Wall
Street Journal, October 19, 1998
7 Schauffler, Helen Halpin; Brown,
Catherine; and Milsrein, Arnold, "Raising the Bar: The Use of Performance
Guarantees by the Pacific Business Group on Health", Health
Affairs, 18(2), 134-142
8 The Business Roundtable, The Spillover Effect: How
Quality Improvement Efforts by Large Employers Benefit Health
Care in the Community, The Business Roundtable Health and
Retirement Task Force, June 1998, http://www.brtable.org/pdf/160.pdf
9
Grosch, James W. et al., American Journal of Health Promotion,
September/October 1998 American Productivity & Quality Center and The
MEDSTAT Group, Best Practices in Health and Productivity
Management, 1998 Pruter, Robert, "Primary Care Centers: A New Concept in
Employer- sponsored Health Care Facilities", Employee Benefit
Plan Review, March 1998
10 Custer, William S., "Health
Insurance Coverage and the Uninsured," December 1998, Center
for Risk Management and Insurance Research, Georgia State University, for the
Health Insurance Association of America.
11 Custer, Ibid.
12 Custer, Ibid.
13 In the March/April 1999 issue of
Health Affairs (Volume 18, number 2), there are two pieces that
argue that declines in coverage are due to increases in per capita
health care spending relative to per capita incomes. The first,
entitled "Explaining the Decline in Health Insurance Coverage,
1979-1995", is by Richard Kronick and Todd Gilmer. The primary conclusion of
this study is that "the sharp declines in insurance coverage among workers from
1979 to 1995 can be accounted for almost entirely by the fact that per capita
health care spending increased more rapidly than income over
this period." The second article on this topic is a Datawatch piece by Kenneth
Thorpe and Curtis Florence, entitled Why are Workers Uninsured?
-- Employer-Sponsored Health Insurance in 1997. The authors
review the Contingent Worker Supplement (CWS) to the February 1997 CPS. The key
fact provided by the study is that "(o)f the 2.5 million
uninsured workers eligible for employer-sponsored coverage,
nearly 68 percent cited high cost as their reason for rejecting it."
Interestingly, only 1.1 percent of workers who were unable to obtain coverage
cited a pre- existing health condition as the reason.
14
See also, General Accounting Office, "Private Health Insurance:
Continued Erosion of Coverage Linked to Cost Pressures," July 1997,
GAO/HEHS-97-122.
15 It is important to note that an inability to qualify for
coverage as a result of poor health is not the primary reason
people lack health insurance. Donelan, Karen, et al, "Whatever
Happened to the Health Insurance Crisis in the United States,"
Journal of the American Medical Association, October 23/30, 1996, vol. 276, no.
16. Among the key results of the study is that "(c)ost and the lack of employer-
provided coverage are the principal reasons for being
uninsured." Only one percent of the uninsured
reported that they were unable to obtain coverage due to a preexisting medical
condition.
16 Marsteller, Jill et al., "Variations in the
Uninsured: State and County level Analysis," June 1998, The
Urban Institute.
Schriver, Melinda and Amett, Grace-Marie,
"Uninsured Rates Rise Dramatically in States with Strictest
Health Insurance Regulations," August 1998, The Galen
Institute/Heritage Foundation.
Buchanan, Joan and Marquis, Susan, "Who Gains
and Who Loses with Community Rating for Small Business?" This study concludes
that "(u)nder community rating, those in poor health tend to
insure, while those in better health go bare. The opposite
occurs under experience rating, the healthy buy insurance and the sick go bare.
Our estimates suggest that the increase in the coverage of the sicker families
under community rating may be at the cost of an overall decrease of about five
percentage points in the number of working families participating in employer
group plans."
17 AAHP, Barents Group "Impact of Four Legislative Provisions
on Managed Care Consumers: 1999-2003, April 1998.
18 Medical Necessity" and
Health Plan Contracts," March 1999, Health
Insurance Association of America.
END
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