Chairman STARK. Why did you wait?

Mr. MOLEY. In other areas of the country, quite frankly, we see a lack of penetration by HMOs. We account for this, in our conversations, by their unwillingness to come in, their unwillingness to trust both the payment rate currently and, what they expect it to be in the future. But we are

Chairman STARK. I have one other concern, and that is that I am afraid there are areas of the country, as I say, in my county, half the people who are in any program are in Kaiser, not just HMOs in general, 500,000 people in a county of 1.2 million. But there is a lot of disagreement over it. You can get in a fight in any bar in town as to whether that care is better than private care. But there are still people who will not join one.

I think in some States, maybe it is Maryland, there are a few States where HMOS just have not caught on.

Mr. MOLEY. We never want to be in the position of forcing people to join an HMO.

Chairman STARK. And I don't see, I guess what I am not seeing there is what we do in those cases. Arguably, it would be wonderful in underserved areas because it would be more efficient. Basically, you could have one group. You can call it an HMO if you want, but I just worry about how we encourage people to join.

I think it has to just grow. I don't think there is any legislative or administrative way that we can encourage-I am afraid we may encourage some bad apples to get in the barrel, and, on the other hand, I think the best HMOs are HMOs that have evolved, have taken on the patina of a community institution and not-and I don't mean to denigrate those that are proper ones. There have been a few bad fast-buck artists who have been in and out, but I think if we let it alone it will evolve. But I have not been able to figure out a way to encourage it. That is why I say I am not sure paying them 100 percent isn't just throwing good money away that we could save and spend otherwise.

Let me recognize the presence of my ranking member, who has just been over trying to balance his checking account. It is so big it takes him longer than the rest of us. Let me see if he would like to make a statement or inquire at this point.

Mr. GRADISON. I have my letter of exoneration, but now I have been told you can't even count on that. True.

Mr. Secretary, how small a group can self-insure these days, as a practical matter, if the group goes out and buys catastrophic coverage?

Mr. MOLEY. Actually, quite small, Mr. Gradison. The fact is companies as small as 10 or 15 lives can assume part of the burden for their insurance while at the same time buy aggregate or individual, or aggregate and individual stop loss in some cases for the higher risk event.

In other words, they could choose to cover the first couple thousand dollars per person out of their own cashflow, and then, by using that as a $2,000 deductible, for instance, self-insuring that amount under the $2,000, and providing aggregate and individual stop loss through an insurance company for the amounts over that. We would still consider those kinds of mixed models between self-insuring the first dollar benefits that are often occasioned by

the everyday run of medical expenses and at the same time covering against the catastrophic illness through true insurance. That is increasingly becoming a model even in the small group market.

Mr. GRADISON. The reason I ask is that it seems to me that if we try to regulate the small group market too strictly in terms of the band of the high and the low rates, it would seem to me the groups which at least temporarily are lower cost, the true Silicon Valley Olympic swimmer group, are going to self-insure, and, therefore, that the average cost of insurance for those who buy insurance will tend to go up because the less expensive cases will tend to drop out. So it seems to me there is a self-defeating aspect to the proposal that these bands should be quite narrow, and, indeed, it would seem to me the notion of community rating is just kind of an idle dream. It is like trying to turn the clock back to something which cannot be reconstructed.

Unless you were to say that small groups are prohibited from self-insurance, which I can't believe we are going to do, then it would seem to me we have to be concerned to try to have a sufficient choice so that the lower cost groups, and there are such, don't opt for self-insurance as a way to protect themselves.

Do you have any comments on that?

Mr. MOLEY. Mr. Gradison, I remarked a little earlier to the chairman that we agree. We know by a sample survey we have seen from Blue Cross/Blue Shield that they believe if you went to pure community rating you would find 20 percent of the firms they are currently covering would suffer a 70 percent or higher increase. Obviously, that is unacceptable and it would lead some of those companies to drop their coverage or go to a higher self-insured kind of a circumstance.

On the other hand, we do believe the rating bands that are in the President's plan-which are similar to the ones in the small market reform portion of S. 1872 on the Senate side-to some will be too narrow and, clearly, to others, will be too broad. In the end result, we do not find them to be the total answer at all.

We think, in fact, the problem of the small group market, quite frankly, is that it suffers from the lack of the law of large numbers. To address that, we have another proposal as part of the President's plan to create these group purchasing mechanisms which we are calling "health insurance networks."

But in the small group market, after putting in the rate bands in the President's plan and in S. 1872, we would hope to move in the third year to something called a "health risk adjustor." There is initial work going on on that. It takes into account that a portion of the premium for any individual should be, in part, determined by his or her predetermined risk for becoming ill. It puts an incentive on the part of the insurer to keep those people who have an identified risk from becoming ill.

Right now the reinsurance market works just the opposite. You set aside a portion of everybody's premium and then pay it retrospectively on the basis of who actually becomes ill. This would put the incentive on the front end to try to keep the higher risk people from becoming ill. We know there is a lot of excellent work in the prevention area that can be done with respect to that.

Mr. GRADISON. My own sizeup, and I say this as a supporter of small group reform, is that it will increase the price, the cost, the premium for self-insurance. Indeed, it would seem to me, it has to, because to the extent you are required to provide coverage for people with expensive current conditions or risky preexisting conditions, there are going to be more costs that have to be borne.

How large an increase in the average premium would you expect would arise from your recommendations or Chairman Rostenkowski's or Chairman Bentsen's recommendations? Have you looked at these different small group packages to arrive at an estimate of how much they cost in terms of insurance premium costs against current law?

Mr. MOLEY. We are looking at a whole series of estimates, and later this morning I believe you will hear from the Academy of Actuaries. We know that insurance companies, Blue Cross/Blue Shield, and actuaries that we have talked to are not supportive of a pure community rating at this time. We would like to move to what I have called some form of "flexible community rating.'

We need to array better this information. But if I might make a point, Mr. Gradison, one of the problems currently in the small group market is there are some companies which have healthy people in them that have rates which, I would suggest, are inordinately low. And they are inordinately low because they are counting on providing coverage for people who are not assumed by the insurance company to become ill or become chronically ill, more importantly.

As soon as they do become chronically ill, their rates go up disproportionately higher than they would to take into account, quite frankly, that they have been carried at an inordinately low rate for competitive purposes in this totally unregulated marketplace. The system is broken.

So it is difficult to say, but I think it must be said, that some small employers are going to have to pay more under any plan that brings more fairness into the marketplace. Because they are, right now, suffering from disproportionately low rates, they will be clobbered if, in fact, one of their employees becomes sick at a time when he or she actually needs insurance.

Mr. GRADISON. Thank you, very much.
Thank you, Mr. Chairman.

Chairman STARK. Mr. Coyne.

Mr. COYNE. Thank you, Mr. Chairman.

Mr. Secretary, the President has suggested that State benefit mandates should be repealed, and much has been said about the cost of State mandates with insurers pointing to coverage for wigs and Chinese medicine and other such things.

However, is it not true that most of the cost of State mandates is for mental health and substance abuse benefits?

Mr. MOLEY. Much of it is. I might add there are other State-mandated benefits to provide coverage that I think the Secretary and the President want to keep in place-things for well-baby care, neonatal care, things that spending money on the front end is absolutely essential and which some insurance policies prior to some State-mandated benefits did not provide.

What our job will be is to differentiate between which of those State-mandated benefits are cost-effective and which, quite frankly,

are not.

Mr. COYNE. Do you believe that health insurance benefits should not include coverage for mental illnesses and substance abuse benefits?

Mr. MOLEY. I think that each State mandate must be looked at, because that is a broad category. Quite frankly, some of them are more focused toward some of the special interests among that community, for instance, on inpatient care as opposed to outpatient

care.

And I think a determination must be made, State mandate by State mandate, in the substance abuse and mental health area to see which of them are, in fact, cost-effective and which of them may be leading to unnecessary, undue longer psychiatric care stays. We see some extraordinarily long length of stay times for psychiatric care in some States, which may well, in fact, be resulting from these State-mandated benefits.

Mr. COYNE. Do you think it will be a priority of yours to make that differentiation as to what is essential and what is not essential?

Mr. MOLEY. It would be under the President's plan. The President's plan calls for the Secretary of Health and Human Services to make a determination as to which of the State-mandated benefits are cost-effective and which are not.

Mr. COYNE. Will you put emphasis on mental health care?

Mr. MOLEY. I think we have every reason to believe that mental health packages can be cost-effective. On the other hand, as I said, we have to assure ourselves that they are not leading to average lengths of stay longer than is necessary, and that the care is being provided, basically, in the most appropriate, most cost-effective setting.

Mr. COYNE. The President and others have made much of State antimanaged care issues and laws. Can you give us specific examples of these laws?

Mr. MOLEY. What we are talking about is generally what are regarded as any willing provider laws. And there are such laws in Texas, for instance, and other States. I can get you a list of those, Mr. Coyne. What they really do is, when a health insurer, a Kaiser, or even a Prudential or Aetna, or whoever, goes into an area and makes a determination based on their best information about cost and quality, as to which providers they want to deal with, they bring them into a network and give them a preference in terms of lower deductibles and copays for employees they are insuring. In some States, providers have an opportunity to go to the Prudential or the Kaiser and say, "No, you can't do that, I am a willing provider; I have to be able to be in your network." And that causes the disintegration of the more cost-effective elements of coordinated care.

Mr. COYNE. Will you provide us with the list of those laws that the States have enacted?

Mr. MOLEY. Yes, sir.

Mr. COYNE. Thank you.

[The information follows:]

The following is a summary of State "anti-managed care" laws proposed in 1990 and 1991, and enacted in 1990 and 1991. The categories, which have subtleties and varying degrees of impact on the system in each State, are listed as follows:

(1)

(2)

(3)

Anti-networking Provisions. This legislation restricts the growth and operation of provider networks, and encompasses the "any willing provider" provisions discussed above. Utilization Review Restrictions. These include laws which

O prohibit utilization review of treatments and
conditions;

require that utilization review be made by a resident
of the State in which the treatment is to be offered;
require the use of specified standards of health care
practice in such reviews, or require the disclosure of
the specific criteria used;

require payments to providers for the expenses of
responding to utilization review requests; and

impose liability for delays in performing reviews. Out-of-Network Differential Limits Some States limit the amounts a managed care plan can charge their enrollees if they go "out of plan." For example, a plan may provide an enrollee a list or panel of providers to choose from and then charge them a larger co-pay if they use another provider not in the plan. If a State prohibits this or limits the amount a plan can provide, this can hinder the plan's ability to "manage" care.

(4) Other Managed Care Restrictions - This can include such things as State mandated benefits; "any willing provider" legislation (for example: a State requires managed care organizations to contract with any pharmacist that meets the plans terms); etc.