costs, only the distribution of costs among groups.

Subcommittee Member Bills

Mr. Chairman, I am pleased to note that bills introduced by yourself and other members of this subcommittee share the same important goals as the President for reforming the private insurance market. And, in many areas, we agree substantively on the steps necessary to make insurance affordable and reliable for Americans. Mrs. Johnson is to be commended for being the early leader in drafting provisions important to small market reform.

It is clear we all agree that we must address the common insurance practices related to issuance, renewability and preexisting conditions that exclude so many Americans from coverage.

For example, Mr. Chairman, the provisions included in your bill, Mrs. Johnson's bill, and that of the Committee Chair's are quite similar and have been included in the President's program.

We also agree that costly State requirements must be curtailed such as mandating medically questionable minimum benefits also targeted by you, Mr. Chairman, and your Committee Chair. Although the provisions vary, we all support the concept that employees of small markets should have available a medically appropriate minimum benefit.

The President's concept of HINS is quite similar to Mr. Chandler's bill to provide incentives to small groups to band together to obtain the benefits of large group purchasing and built on the successful program in Cleveland called the "Council of Smaller Enterprises."

We all share concern over excessive premium increases and offer methods that would introduce more stability into the market place.

Conclusion

In conclusion, I want say that reform of private insurance for small group and individual markets is important. As we have all learned, changes in one segment of health care eventually, if not immediately, bring about changes in other segments. The President's comprehensive health reform program would introduce broad changes and refinements in the total system that are designed to interrelate and coalesce to bring about the cost savings and expanded access Americans are seeking.

Thank you for the opportunity to testify. I will be glad to answer any questions.

Chairman STARK. Let me tell you one of the fears that I would have enacting a bill, whether it is indeed the administration's suggestion-and I say that absent a bill-or any other small insurance reform bill.

If I could see the whole program, that I know you are working on, I might be very comfortable with how the small insurance reform fits into that. But I can see bills that have been introduced by Democratic Members of the legislature where, if I had to take just their insurance reform out of it, I would be reluctant to do so because it might prejudice the future decisions that we would make.

I think it is fair to summarize your bill by saying that it really has no mandate for anybody to be covered. It would lower the premiums for some, indeed it would raise it for others. But if we passed it, then we would walk away and say, well, I guess we have done our job. That is it. We have passed the bill, and we would still end up with probably 15 million people without insurance. That costs all of us something.

How do you deal with that? Are we able to have a comprehensive plan, not necessarily a bill, that we can debate and compromise on before we take pieces of it?

Mr. MOLEY. Mr. Chairman, if I thought that the small market reform and some of the additions to it would compromise the larger debate as to the direction we should go, which is obviously going to be conducted over the next many months, I would agree. But I think the small market reforms, and other portions of the President's plan that we would encourage being passed, do not compromise the larger debate as to whether we should go to a total Medicare or Canadian style or play-or-pay or any other option, including the President's, that is being offered.

Chairman STARK. OK. Let me just outline, then, I guess what would be the other end of the scale. If we said no medical underwriting, none, nor age adjustments, nor sex adjustments, so we basically force a community rating, open enrollment, and guaranteed renewal. That is basically the Rangel bill that was proposed for the Blues to qualify for tax exemption. Empire Blue Cross, I think, provides for that, but is sort of going broke doing it. I guess if every insurance company had to meet those standards, could the administration live with a bill like that?

Mr. MOLEY. Theoretically, Mr. Chairman, we, or at least the great majority of us, are all in agreement that we want to move to at least some flexible form of community rating.

I would suggest what you have described is a more pure form of community rating. I have seen figures on a sample of the Blue Cross/Blue Shield indicating that in their smaller group market, 20 percent of the companies that small employers are covering would face rate increases in excess of 70 percent, if we were to do that. As you know, Mr. Chairman, one of the only immutable laws of Washington is that of unintended consequence. The last thing we want to do is support something that has as a distinct possibility of eliminating coverage for somebody-making it less, not more, affordable.

Chairman STARK. I am afraid any plan that doesn't mandate coverage in effect does that. Pieces of any plan I have written could do

that, if you didn't have cost containment or you didn't require it become available. So that is a risk we run when we do a partial plan, I believe. Now, how many people we offend is the question. When you say flexible community rating, do you say that based on no medical underwriting? Do you deal with that?

Mr. MOLEY. Absolutely. We are absolutely opposed to medical underwriting.

Chairman STARK. Then, I would spot you community rating geographically, you are saying, by statistical area or some other-is that part of your flexible idea?

Mr. MOLEY. Yes, it is, Mr. Chairman. As you know

Chairman STARK. OK, I can deal with that. I will let you guys fight on the sex classification. It is very clear as to how those costs are allocated that way and we have had that argument, I think with auto insurance in California, is that fair or isn't it fair. An easy political answer is to not have different rates for men and different rates for women, but I will let the administration take the heat on that one.

The one that concerns me is age rating, which I assume is part of your plan. My concern is, hypothetically, this: The Silicon Valley Software Co. that is a startup, but starts up with 150 computer programmers who arguably all have to be young-because old guys like me don't know anything about computers and they are all great Californians, so they are health fanatics, health food fanatics, and they exercise and pray the way Dr. Sullivan would suggest we do. So they have a young base because they have young employees. The problem is they get older and the company merges or goes out of business, as some companies do, and we have to pick up in the system these folks at a later time.

That is not fair. Somehow those problems of age get loaded onto the system. Could you live with a system that would require those employers-now I would say it should be a Government trust fund, but let us say it is some other kind of private pool-that makes them establish enough of a reserve so that if they decided to go out of business, that reserve could travel with the younger people and they could afford to stay in the system? That is my only quarrel with the age problem. With age adjustments certain groups will have a temporary benefit, and the rest of us will have to pay more eventually, if not right away, to cover it.

I guess that is my concern in a system when you make that part of the rating. How do you deal with that?

Mr. MOLEY. I think a version of that, Mr. Chairman, is probably going to have to be part of the solution. We have used the term "health risk adjustor." That is not a perfect solution, at least at the present time. We are doing some research on this. One of the problems, I might add, is that some of the age-sex differential in rates is appropriate and some is inappropriate. Rates for some small groups may be inordinately low. For example, for the Silicon Valley firm that at first glance looks like a company only employing Olympic swimmers. But those rates only hold so long as their experience continues to be good. In the current markets, as soon as someone comes down with an asthmatic condition, heart condition, cancer, or any kind of chronic condition, those rates for the entire firm are very liable to skyrocket.

At least as an initial first step, we believe we need some rating bands. We would not go quite as far as a community rating because, frankly, we think that would inordinately discriminate against those kinds of companies. But we want to bring more of the risk to the norm rather than this enormous spread we have currently between inordinately low rates and disproportionately high rates.

Chairman STARK. OK. The President's plan appears to rely, I guess, solely on managed care, or some form thereof, to achieve cost containment. The only specific action that is recommended, however, in encouraging managed care, is increasing payments to medicare HMOs. So I will ask a two part question: Do you have other actions that you are going to recommend, and what do you do about the 60 percent of the market today in Medicare?

Mr. MOLEY. Yes, we do, Mr. Chairman. Let me, if I might, direct my attention to the second part of the question first, about what are we doing to encourage what we are calling "coordinated care,' because we consider it to be a much broader spectrum than just the traditional HMOs with which most of us are much more familiar.

The fact is those are not for everybody in the first instance. People want more choice than is normally afforded in the traditional staff or group model HMO. Subsequently, we see growth in the private sector in the point of service options whereby you can go to a list of preferred providers and pay little or no deductible or copay. Or if you go outside the system, you pay a much higher copay or deductible, but you have that choice.

Straight preferred provider types of organizations and in rural areas, quite frankly, where the economies of scale are not available a case management has proved effective, particularly in neonatal and other types of efforts to reduce infant mortality.

That whole range of coordinated care options is encouraged under the President's plan. In Medicare, you are correct, the principal method of doing that, quite frankly, is paying HMOs or other coordinated care entities on what we would consider to be a fairer basis than is currently the case at 100 percent, for instance, if AAPCC and COBRA are at 95 percent.

When the law was enacted, 95 percent was probably appropriate or maybe even more than appropriate when in the early 1980s we were paying on what amounted to basically a reasonable or customary straight fee-for-service basis.

As we have increasingly tried to reduce potential deficits under Medicare, we have put in kind of-I don't want to be as blunt as I am straining to be "managed fee for service system." And, as a result, paying 95 percent probably is keeping out of the marketplace for Medicare beneficiaries other types of HMOs and coordinated care that might be willing to play.

Chairman STARK. I come from an area where we probably have about as high costs as anywhere-and my HMOs, I don't recall an HMO coming in and asking for the hundred percent. Kaiser, in particular. I don't know why you guys are offering it. In a sense, they haven't asked you yet, and it isn't going to buy you any votes. I am serious. I was always puzzled.

Mr. MOLEY. We are acutely aware of that.