TESTIMONY OF BRADFORD P. CAMPBELL DEPUTY ASSISTANT SECRETARY FOR POLICY EMPLOYEE BENEFITS SECURITY ADMINISTRATION U.S. DEPARTMENT OF LABOR BEFORE THE SUBCOMMITTEE ON LABOR, HEALTH AND HUMAN SERVICES, AND EDUCATION COMMITTEE ON APPROPRIATIONS UNITED STATES SENATE
April 2, 2003
Introductory Remarks
Good afternoon, Chairman Specter. My name is Bradford Campbell, and I am the Deputy Assistant Secretary for Policy of the Employee Benefits Security Administration. Thank you for inviting me to Norristown today to discuss the Administration's staunch support for Association Health Plans (AHPs), a key element of the President’s plan to increase access to quality, affordable health benefits for working Americans. Mr. Chairman, I would like to thank you, on behalf of the Administration, for your cosponsorship of S. 545, the Small Business Health Fairness Act. S. 545 is the Senate version of the AHP legislation passed by the House of Representatives on a strong bipartisan basis. The President called on Congress to pass AHP legislation in his State of the Union Address, and we appreciate your support of the bill, which will give working Pennsylvanians more health insurance options in what is becoming an increasingly concentrated insurance marketplace.
I am testifying before you today on behalf of the Employee Benefits Security Administration, or EBSA. EBSA is the federal agency that will oversee AHPs. Our job is to protect the employer-provided health and retirement benefits of millions of Americans, and I can assure you, Mr. Chairman, that we are committed to working with the Congress to make sure that AHPs are a secure and well-regulated option for employers seeking to offer high quality and affordable health benefits. EBSA has firsthand experience dealing with group health plan regulation as well as combating insurance fraud. We administer the Employee Retirement Income Security Act (ERISA), protecting approximately 2.5 million private, job-based health plans and 131 million workers, retirees and dependents. Of these, 275,000 plans covering 67 million individuals are self-insured, and therefore are subject exclusively to EBSA oversight. These include large, self-insured multiemployer plans (established and operated jointly by a union and two or more employers), which cover more than 5 million participants, not counting their covered dependents.
Small Businesses and the Uninsured
Despite being the driving engine of our economy, small businesses face many obstacles, and finding affordable health insurance is one of the most significant. Secretary Chao has met with small business men and women around the country, including here in Pennsylvania, and they have consistently expressed to her their concerns about finding good health insurance at a reasonable price. The numbers behind the uninsured statistics highlight the need for AHPs—85 percent of Americans without health insurance are in working families, and approximately 60 percent of them work for small businesses with less than 100 employees. That’s why AHPs will be especially effective in getting more Americans insured—they are targeted squarely at small businesses who are trying to provide affordable health benefits.
Although most working Americans receive health insurance from their employers, firms with fewer than 100 employees find it particularly difficult to offer benefits. Just 49 percent of these small businesses offer insurance, compared with 98 percent of larger firms with 100 or more employees.
Many small employers want to offer health insurance, but circumstances make it difficult for them. Let me spend just a minute to discuss the barriers small employers face when it comes to health insurance. I will then describe how AHPs will help.
First, cost. For a variety of reasons, insurers typically charge small firms more per employee than large firms for comparable coverage. According to the General Accounting Office , insurers incur higher marketing, underwriting and administrative costs when providing health care coverage to small employers than to large employers – and they pass those costs on to small firms. Small company premiums are 20 percent to 30 percent higher than those of large self-insured companies with similar claims experience. And the cost of these policies continues to rise—small businesses recently have faced double digit premium increases from year to year.
Second, overhead: When a small firm decides to offer health insurance, it must take on administrative tasks, including identifying available insurance policies; comparing their prices, benefit packages and other features; assembling plan descriptions, enrollment materials and other forms; and educating and enrolling its workforce. This takes staff time and money.
Third, state regulatory burdens: The states have been very aggressive in regulating small-group insurance markets, overseeing rates and imposing benefit mandates that leave employers without affordable options, and a very limited ability to design benefits that best suit their needs. Indeed, benefit mandates are responsible for one of every five small employer decisions not to offer coverage. As a result of different benefit mandates and policy approval processes across the 50 states, small businesses generally are not able to join together across state lines. It is expensive and difficult to develop an insurance policy that meets the requirements of more than one state, and the resulting costs from this complexity tend to make such policies unaffordable.
Taken together, these factors put small employers at a big disadvantage in the insurance marketplace. And because the cost and complexity of offering coverage makes small employers eager to shop for bargains, there is one more factor that hits them hard – health insurance fraud.
How AHPs Would Work
In an AHP, small businesses could join together across state lines through their trade and professional associations to purchase health benefits, reducing the market and financial barriers that they face. Small businesses would enjoy greater bargaining power, economies of scale, administrative efficiencies, and more uniform regulation, giving them more access to affordable coverage.
To ensure that unscrupulous promoters cannot operate AHPs, only bona fide trade or industry associations that have been in operation for at least three years for purposes other than providing health benefits will be allowed to sponsor these arrangements. Before an AHP can begin operating, EBSA will examine the plan sponsor and certify that they meet rigorous statutory eligibility standards, as well as the applicable tough solvency and membership requirements.
Bargaining Power and Economies Of Scale: By grouping small employers together to purchase coverage, AHPs will be able to act more like large employers and offer lower cost coverage to employers, employees and their families. If the AHP chooses to purchase insurance, it will be in a better position to negotiate with insurers regarding the terms and costs of coverage than a small employer acting individually. AHPs will also enjoy economies of scale in the administration of plans. They will give insurers a vehicle to market and distribute policies to many small employers at once. By offering a well-selected and stable choice of policies to members, AHPs can help slow small employers’ otherwise costly movements from one insurer to another.
Streamlined Regulation: AHPs will allow small businesses to enjoy a more uniform regulatory system. 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. It is important to note, however, that the pending AHP legislation leaves in place major elements of state insurance regulation. Much as in the current group health marketplace, insurers selling policies to AHPs are regulated by the states. The AHP legislation passed by the House preserves important state consumer protections for these insurers, including solvency standards and prompt pay laws. AHPs that offer self-insured coverage will be subject to a single, effective, national certification and oversight process administered by EBSA. The legislation provides strict new solvency standards for these plans to protect consumers.
Pooling Risk: 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. An employer with high claims experience would be offered the same coverage options as other employers within the sponsoring association. 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.”
Broader Choice of Coverage: Associations will be able to fashion coverage options that best meet their members' needs. By offering broader choices, AHPs will encourage small business workers who are currently uninsured to purchase coverage and pay into the premium pool. Expanding health insurance coverage to include more of the uninsured not only improves their lives, but it reduces costs across the system by broadening the risk pool.
Cost Savings and Increased Coverage: Small businesses obtaining insurance through AHPs could enjoy significant premium reductions. According to the Congressional Budget Office (CBO), the average savings would be 13 percent and could be as much as 25 percent per employer. CBO further estimated that, because insurance will be more affordable, as many as 2 million Americans whose employers do not offer insurance today will be brought into the employment-based health insurance system.
Wide Availability and Greater Access: Dozens of well-known small business groups are eager to offer coverage to their members, and support enactment of AHP legislation, including organizations such as the National Federation of Independent Business, the United States Black Chamber of Commerce, the United States Hispanic Chamber of Commerce, Women Impacting Public Policy, the American Farm Bureau, the Associated Builders and Contractors, and the National Restaurant Association, to name just a few. Protecting Workers by Offering Better Options Because of the obstacles small businesses face in obtaining affordable health insurance, they are especially vulnerable to scams that promise low-cost health coverage but fail to deliver. Many of these arrangements turn out to be multiple employer welfare arrangements (MEWAs), although they are usually not marketed under that name. MEWA is the legal acronym for arrangements that provide health benefits to employees of two or more unrelated employers who are not parties to a collective bargaining agreement.
MEWAs are subject to a mix of state and Federal laws and regulations. While some MEWAs operate successfully and provide reliable benefits to participating employers and their workers, unscrupulous promoters have exploited complexities in their regulatory and oversight structure to operate Ponzi schemes that collect premiums but intentionally default on their obligations to pay claims.
Health insurance fraud artists take advantage of small employers by marketing generous coverage using slick brochures and promising cheap premiums. The scam artists delay state and Federal law enforcement authorities by raising jurisdictional issues while they collect premiums and sign up new customers. Sometimes these promoters present themselves not as MEWAs, but as other “ERISA plans,” not subject to state oversight. Fraud increases the cost for everyone, and the fear of being taken in deters many small employers from offering coverage at all.
EBSA employs a three-pronged approach to fighting insurance fraud. First, we work hard to educate small employers about how to spot fraud in the marketplace to prevent people from falling victim to scams in the first instance. Second, we have a vigorous civil and criminal enforcement program, conducting active investigations and cooperating closely with state insurance regulators to find scam artists, shut them down, recover monies to pay benefits, and send criminal perpetrators to jail. Third, we support the enactment of Association Health Plan legislation, which will provide a secure, well-regulated, and affordable health coverage option for small businesses.
Let me be clear that we regard health coverage scams as a top enforcement priority, and will continue to do so until these unscrupulous operators are stamped out. The President’s proposed budget for FY 2005 includes a request for 30 additional investigators, 10 of who will be criminal coordinators in our regional offices—their job will be to work with state and Federal prosecutors and law enforcement entities to make it harder for criminals like these to slip through the cracks.
In the end, however, the best way to protect the public from these scam artists is to change the environment in which they operate. Small employers are more vulnerable to fraud because they have few options for health insurance in most states. High cost and limited choice make employers more receptive to deals that are too good to be true. AHPs will change this environment by providing an attractive, cost- effective alternative to fraudulent health plans that is certified, regulated, and closely monitored by the Department of Labor. There will be no confusion over jurisdiction, and no question as to the Department’s authority to shut down bad actors. And, for small employers, the Department’s certification will serve as a “stamp of approval” signifying that an AHP will provide reliable, affordable health insurance coverage. By making these real choices possible, AHPs make it harder for scam artists to find people desperate enough to try anything to get the coverage they and their workers need.
Conclusion
Thank you, Senator Specter, for the opportunity to testify today. The Administration strongly supports AHPs, and stands ready to work with you to help pass and effectively implement legislation that expands access to affordable quality health insurance coverage for working Americans and their families.
Footnotes
1. Department of Labor estimates of working families' health insurance status, based on the Census Bureau's annual March Current Population Survey.
2. U.S. General Accounting Office, Private Health Insurance: Small Employers Continue to Face Challenges in Providing Coverage, GAO-02-8; and Private Health Insurance: Number and Market Share of Carriers in the Small Group Health Insurance Market, GAO-02-536R. Insurers must market and distribute their policies to a very large number of unconnected employers. Insurers also must compensate agents for each small policy sold or renewed. Some costs, such as the cost of collecting detailed medical histories for purposes of medical underwriting, are layered on each time an employer changes insurers.
3. Actuarial Research Corporation. Cost drivers include small businesses’ administrative overhead, insurance company marketing and underwriting expenses, adverse selection, and state regulatory burdens.
4. Gail A. Jensen and Jon Gabel, “State Mandated Benefits and the Small Firm’s Decision to Offer Insurance,” Journal of Regulatory Economics; 4:379-404 (1992).
5. Congressional Budget Office, "Increasing Small-Firm Health Insurance Coverage through Association Health Plans and Healthmarts," January 2000.
