Testimony

Statement by
Michael J. O'Grady
PH.D.
Assistant Secretary for Planning and Evaluation
U.S. Department of Health and Human Services

on
Presidents Proposal for Making Health Care More Affordable

before
The Committee on Small Business
U.S. House of Representatives

March 2, 2005

Good morning Mr. Chairman, members of the Committee, I am Michael J. O'Grady, the Assistant Secretary for Planning and Evaluation at the Department of Health and Human Services (HHS). I am honored to be here today to discuss the President's proposals for making health care more affordable, and to highlight how small businesses and their employees can benefit from these proposals.

As you know, small business is the engine that drives our nation's economy. Small firms with fewer than 500 workers, the definition used by the Small Business Administration (SBA), employ 50 percent of all private sector employees. And according to the SBA, small firms generated 60 to 80 percent of the net new jobs annually over the last decade. Unfortunately, the strength of small business is being directly affected by escalating health care costs and health insurance premiums. Small businesses and their employees need help.

Impact of Health Care Costs on Small Business

Health care insurance premiums continue to increase at levels above general inflation and above the rate of increase in wages. Health insurance is more expensive and the costs are more volatile for small firms as compared to larger firms. From 2003 to 2004, premiums increased by 11.2 percent for all firms, but for very small firms, those with 3 to 24 workers, they saw their premiums increase by 13.6 percent.

The escalating costs of premiums are forcing many small business owners to make tough choices. According to research on employer benefits (Kaiser/HRET), for firms that offer coverage, many have had to reduce their contributions towards their employees' health premiums. Other small business owners have had to make the difficult decision to drop coverage. Fifty-two percent of small firms with fewer than 10 workers offer health insurance, compared to 74 percent of small firms with between 10 and 24 workers, and 99 percent of all large firms. Because of rising premiums, the offer rate of small firms has decreased from 58 percent in 2001 to 52 percent today. Geographic regions and industries particularly hard hit with larger than average increases in premiums are the West and Midwest and industries such as manufacturing, transportation, communications and retail.

Because of the high cost and volatility of health insurance premiums, workers in small firms are not only less likely to have health insurance offered to them as compared to those employed by large firms, they are also less likely to be able to afford to buy it if it is offered. Workers in small firms with fewer than 10 employees have uninsured rates of 30 percent. This compares to uninsured rates of 11 to 12 percent for workers employed by large firms with 500 or more employees.

The President is committed to driving down the costs of health insurance for small business owners and their employees, who are disproportionately affected by the high costs of health insurance. The Congress and the President have already taken a first step in making coverage more affordable by enacting legislation that created Health Savings Accounts.

Administration's Accomplishments: Health Savings Accounts

The Medicare Prescription Drug, Improvement, and Modernization Act (MMA) of 2003 created Health Savings Accounts (HSAs), which are used in conjunction with high deductible health plans (HDHPs) to provide individuals with more choice, greater individual control over health care, individual ownership and lower health insurance premiums. Employer-sponsored HDHPs, which provide coverage for major medical expenses, and HSA contributions and withdrawals, which are used to pay for other eligible medical expenses, are tax-free. HSAs, combined with HDHPs, provide a much more affordable, consumer-friendly product for businesses to offer their employees. The National Federation of Independent Businesses (NFIB) reports that some small businesses have saved up to 42 percent on their health care costs through these products.

Employer contributions to HSAs are deductible from employer income and excluded from employee income for income tax and employment tax purposes. Individual contributions to HSAs are deductible in computing individual adjusted gross income. Contributions to an HSA may be made when the individual is covered under an HSA-eligible HDHP. The maximum annual contribution to an HSA is the amount of the deductible up to an indexed statutory limit of $2,650 for single coverage and $5,250 for family coverage in 2005. In 2005, the minimum HDHP deductible is $1,000 for single coverage and $2,000 for family coverage and the maximum out-of-pocket costs for a qualifying HDHP is $5,100 for single coverage and $10,200 for family coverage.

HSAs are portable from one employer to another and unused funds can be carried over from one year to the next to pay for future medical expenses. This allows HSA owners to accumulate savings to offset medical expenses as they age and when they may need it most. In addition to HSAs, the President is proposing other measures to bring affordable heath care coverage to more Americans.

Administration's Proposals

The President's FY 2006 budget outlines a strong set of proposals to make coverage more affordable and available for small businesses and the uninsured. The President's budget invests $125.7 billion over 10 years to expand insurance coverage to millions of Americans through tax credits, state purchasing pools, tax deductions, and rebates to small employers contributing to HSAs. These investments are in addition to the President's other health care proposals including Association Health Plans, medical liability reform, and the 'Cover the Kids' campaign that will also help expand coverage and reduce health care costs. Taken together, we estimate that 8 to 10 million additional people will gain health insurance over the next ten years, and many of these individuals work for small employers.

Small Employer Tax Credit for Contributions to Employees' HSAs

Nearly one half of the uninsured are small business employees and their dependents. To help these workers and their families, the Administration has proposed providing $19.2 billion (over 10 years) in tax incentives to small business owners to offer HSAs, linked to HDHPs for their employees. The proposal would create a subsidy in the form of a refundable credit to small nongovernmental, for-profit employers for contributions made to HSAs owned by their employees. A small employer would be defined as an employer that normally employs fewer than 100 employees on a typical business day. Sole proprietors, partners and S-corporation shareholders would be eligible for the credit to the extent their business is a small employer. Refundable tax credits of up to $200 for employer contributions to an HSA for single coverage and $500 for family coverage would be available under this program. In order to receive the credit, the employer would be required to maintain a high-deductible health plan accessible to all employees, but the employer would not be required to make contributions toward employees' premiums. The tax credit would not be included in employer income and would not be subject to general business tax credit rules. This proposal targets small business and relies on private market forces - - making consumers more cost conscious and more likely to spend health care resources wisely.

Provide an Above-the-Line Deduction for High Deductible Insurance Plans

In addition to the small employer tax credit, the President's budget includes a $28.5 billion tax incentive (over 10 years) to make HDHPs more affordable. Under current law, individuals who purchase their own health insurance do not receive the same tax-favored treatment on their health insurance premiums as do employees who receive insurance through their employer. An individual purchasing insurance on their own may claim an itemized deduction for premiums only to the extent that premiums, when combined with other unreimbursed medical care expenses, exceed 7.5 percent of adjusted gross income (AGI). On the other hand, employees in firms that offer health insurance may pay their share of health insurance premiums on a pre-tax basis.

In order to level the playing field and encourage the purchase of health care coverage through HDHPs, the Administration has proposed an above-the-line deduction for premiums paid by individuals to purchase an HSA-eligible HDHP. Both the contributions made to an HSA (as under current law) and the premium paid to purchase the HDHP would be eligible for an above-the-line deduction.

Tax Credits to Purchase Health Insurance

Over half of the uninsured have incomes below 200 percent of the poverty line, and many of these persons are not eligible for employer coverage or public insurance. The Administration proposes to invest $74 billion over 10 years to provide a refundable tax credit that will help these individuals directly purchase health insurance. Individuals under age 65 who are not enrolled in public or employer sponsored health plans would be eligible. The credit would be refundable and could be paid in advance directly to the health plan.

This health insurance tax credit would pay for 90 percent of the cost of standard coverage, with a credit of up to $1,000 per adult and $500 per child for up to two children. Under the President's proposal, eligible families with two or more children and incomes up to $25,000 could receive up to $3,000 in credits to cover as much as 90 percent of the costs of purchasing health insurance. The credit phases out for families with incomes of $60,000. Eligible individuals earning up to $15,000 annually would receive up to a $1,000 tax credit, with the credit phasing out at an income of $30,000. Since the credits are refundable, they are available for those with limited or zero tax liability.

A modification to the health insurance tax credit introduced this year would allow individuals to use a portion of the credit to purchase a high deductible health plan while putting the remaining portion of the credit into an HSA. The President has proposed giving low-income families up to a $1,000 contribution made directly to an HSA, while using the remaining $2,000 refundable tax credit to help purchase a HDHP. Low-income individuals could receive up to a $300 contribution made directly to an HSA and $700 to purchase a HDHP. The money in the HSA belongs to the individual and can be used to pay for medical expenses while unspent funds can be used to pay for out of pocket medical costs in succeeding years. It provides greater choice and affordability of insurance products and encourages saving for future medical expenses.

These proposals will provide choices and subsidies to lower-income working families who must currently purchase expensive, non-employer health insurance. The credit will significantly increase participation in non-group health insurance markets, but not come at the expense of employer group markets.

State Purchasing Pools

In order to facilitate the use of the tax credit, the President has proposed $4 billion (over 10 years) in grants to encourage states to create insurance pools to ensure low-income Americans get the most out of the tax credit. States could provide the power of group purchasing through state-sponsored purchasing pools as the refundable tax credits would allow individuals to directly reduce their monthly premium payments. Options for these arrangements could include state employee purchasing pools or state high risk pools. The health credits could also be used in privately-sponsored non-employer health insurance purchasing groups.

Association Health Plans

In addition to the different tax proposals, the President also supports legislation that provides for the creation of Association Health Plans (AHP). AHPs enable small employers and others to provide better and more affordable health care coverage options for their employees, like those that many large employers and labor unions can offer. AHPs would allow bona-fide business or professional associations and other groups that have existed for at least three years for purposes other than providing health benefits to pool their members together to purchase health coverage.

Of particular interest to small business is that AHPs will allow small businesses to band together to purchase more affordable health insurance. AHPs will make health coverage more accessible and affordable by creating a level playing field for small business through greater bargaining power and administrative efficiencies. By grouping small employers together to purchase coverage, AHPs will be able to act more like large employers and labor unions and offer lower cost coverage to employers, employees and their families. The Congressional Budget Office (CBO) estimates that AHPs would allow small business to enjoy premium reductions of 13 percent on average with a range of between nine percent and 25 percent.

AHPs help spread risk and reduce the volatility of premiums for individual small businesses, particularly those whose employees may face high costs in a given year. AHPs will help ensure that small employers will not be denied insurance coverage or be priced out of the market due to the health of their employees. In fact, AHPs would generally be prohibited from setting premium rates based on health status, severely restricting AHPs' ability to engage in favorable risk selection, or so-called "cherry-picking." The Department of Labor would have to certify that an AHP meets strong standards to prevent fraud and protect consumers before the AHP could offer benefits to a single worker. The Administration supports measures to prevent companies from 'cherry-picking' the healthiest populations of workers.

Critics of AHPs suggest that these plans would not be subject to state insurance regulations. They also suggest that fraudulent activity is more likely, and that associations will not have adequate reserves, leaving enrollees without their claims being paid. To address these criticisms, current proposals would leave major elements of state insurance regulation, such as solvency and other consumer protections, in place for insured plans, and add a national certification and oversight process. Strong Federal certification and new solvency standards for self-insured plans will assure that all healthcare benefits promised by the new AHPs would be there when needed, and designing and offering requirements will assure that the associations provide consistent services to all eligible small businesses regardless of their expected medical costs. Just as large employers and unions are able to offer the same health plan to their workers and members regardless of which state they live in, AHPs will allow small businesses to join together across state lines to purchase uniform health benefits. Small employers will be able to achieve greater purchasing power, administrative efficiencies, and flexibility in benefit design. An additional aspect of this proposal is the extension of AHPs to civic and community organizations allowing them to provide, through negotiation, the same low priced health insurance to their members as large organizations.

Other Proposals to Increase Access to Affordable Health Care Coverage and Services

Other proposals the President has advanced to increase access to affordable health care coverage and services include building on our aggressive efforts to help those who are uninsured or underinsured by expanding the good work of community health centers. These centers provide quality, compassionate care to the patients who need help the most, regardless of their ability to pay. The FY 2006 budget request completes the President's commitment to create 1,200 new or expanded health center sites to serve an additional 6.1 million people by 2006. The request also takes the first step towards a new goal of helping every poor county in America that lacks a community health center and can support one.

The "Cover the Kids Campaign" will launch an aggressive, billion-dollar effort to enroll thousands of eligible children around the nation who are not currently enrolled in quality health care coverage through SCHIP and Medicaid. It will combine the outreach efforts of the Federal government, states, and community organizations, including faith-based organizations, to enroll more SCHIP and Medicaid-eligible children into these programs. By reaching families during the course of their everyday lives, and through their friends and neighbors, we stand a better chance of getting their children registered for health coverage.

The President is also proposing to create a 'national marketplace' for individual insurance products, which would allow individuals to buy the best coverage they can find anywhere in the country. This would enable individuals to get the best buy on the health coverage that best meets their individual needs. The President believes that creating a competitive marketplace across state lines can increase the availability of health care coverage and help drive down the costs for everyone.

In addition, the President believes we need to reform the medical liability system. Medical liability reform will limit frivolous lawsuits and excessive jury awards and will make health care more affordable and accessible for all Americans. The President is urging Congress to pass legislation that reduces the burden that frivolous lawsuits have on our economy. Lawsuits and excessive jury awards are driving many health care providers out of communities and forcing doctors to practice defensive medicine. The framework for addressing the medical liability crises includes securing the ability of injured patients to get quick unlimited compensation for their economic losses and ensuring recoveries for non-economic damages do not exceed a reasonable amount.

Conclusion

As I have just outlined, the Administration has an ambitious agenda to drive down health care costs and make insurance coverage more affordable for all Americans and for small business. In FY 2006, the President proposes to spend more than $125 billion over ten years to expand insurance coverage to millions of Americans through tax credits, purchasing pools, HSAs and other programs that I have summarized. I am happy to answer any questions you may have. Thank you.

Notes:
Data on premium trends comes from the Employer Health Benefits, 2004 survey conducted by the Kaiser Family Foundation and Health Research and Educational Trust.
Data on the uninsured are taken from the U.S. Census Bureau's Current Population Survey, 2004.

Last Revised: March 2, 2005