Secretary of Labor Elaine L. Chao

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Testimony Before the Committee on Small Business
U.S. House of Representatives
Washington, D.C.
March 5, 2003

Introductory Remarks

Good morning, Chairman Manzullo, Ranking Member Velazquez, and members of the Committee. Thank you for inviting me to discuss the Administration’s initiatives to expand health insurance coverage, and specifically our support for Association Health Plans (AHPs) to increase coverage offered by small employers.

More than 41 million Americans lack health insurance, and fully 85 percent of the uninsured are in working families—with most working at firms with fewer than 100 employees. In fact, workers in small firms and their families comprise 60 percent of the working uninsured.¹ To increase health insurance coverage, the President has proposed a comprehensive reform agenda that includes tax credits for the purchase of individual coverage, expansion of the availability of medical savings accounts (MSAs), greater access to state-based high-risk insurance pools, medical malpractice reform, and AHPs.

As we all know, a great deal of work needs to be done, and I applaud the leadership of this committee for focusing on the health care needs of small employers and their employees. I especially want to thank both the chairman and the ranking member for their leadership on AHPs. I look forward to working with you to pass this important legislation.

The Uninsured and Small Businesses

Although most working Americans receive health insurance from their employers, small 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. The picture is especially troubling at “low-paying small firms” (defined in a study as firms with fewer than 100 employees where more than half of the employees earn less than $9.50 per hour) where only 34 percent offer insurance to their employees.²

The difficulties that small businesses face in trying to offer quality, affordable health insurance explain a significant part of America’s uninsurance problem. Small firms employ 42 percent of all workers. Yet these workers and their families comprise 60 percent of the working uninsured.³

We know that small employers want to offer health insurance to their workers and their families. Among 600 small businesses responding to a recent survey, less than one-third currently offer insurance, but about three-fourths said they would be “very” or “somewhat likely” to participate in an AHP that offered lower prices, more choices, or less paperwork.⁴ Small business employees also value health insurance. According to a recent survey, health insurance was ranked as “very important” by 89 percent of small business employees.⁵ AHPs can help make coverage a reality for more small businesses—the challenge we face is how to make AHPs a reality.

While tax credits, MSA expansion and other policies will all help increase coverage, AHPs are aimed squarely at the gap in coverage among small businesses. In order to understand why AHPs are part of the solution to expanding coverage, it’s important to understand the barriers that prevent many small employers from offering coverage today, as well as the harm they have experienced because of health insurance fraud.

Small Firms Face Numerous Barriers to Coverage

Cost is clearly the biggest barrier for small employers that want to provide health insurance. For a variety of reasons, insurers typically charge small firms more per employee than large firms for comparable coverage. Small company premiums are 20 percent to 30 percent higher than those of large self-insured companies with similar claims per covered employee.⁶ Cost drivers include small businesses’ administrative overhead, insurance company marketing and underwriting expenses, adverse selection, state regulatory burdens, and vulnerability to insurance fraud. Small firms are likely to offer less generous benefits and more of their premiums are consumed by administrative costs.

In addition, small employers’ costs are rising more rapidly than those of larger employers. Total costs per employee increased by 18.1 percent at firms with 10 to 500 employees in 2002, compared with 11.5 percent at larger firms.⁷

Employees in small businesses bear the brunt of these cost increases, according to a recent survey by the Blue Cross Blue Shield Association (BCBSA), the Employee Benefit Research Institute (EBRI), and the Consumer Health Education Council. Of the businesses that changed their health benefits, 65 percent increased workers’ copayments and deductibles, 30 percent raised the percentage of premiums paid by employees, and 29 percent cut back on the package of benefits offered.⁸

Rising health insurance costs are a significant barrier for employers to hire workers and keep their businesses afloat. According to a recent Conference Board poll of 120 chief executives, health insurance costs were cited as the greatest impediment to adding workers in 2001 and 2002.⁹ Almost 82 percent of 1,017 members surveyed by the Connecticut Business and Industry Association in 2002 said rising health insurance costs were “an important factor” in decisions about whether to add workers.¹⁰ In April 2002, the Small Business Association of Michigan commissioned a poll on the impact of rising health care costs on small businesses. They found that nearly a quarter of all small business owners (and 40 percent of women and minority-owned businesses) fear the high cost of health insurance will force them out of business.¹¹

Employer Expenses: When a small firm decides to offer health insurance, it must undertake numerous 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. Small firms must pay for these activities with typically fewer resources than large firms, and the cost of these activities for each covered employee is higher.

Insurance Company Expenses: According to the General Accounting Office¹², insurers incur higher costs when providing health care coverage to small employers than to large employers. Insurers must market and distribute their policies to a very large number of unconnected employers. They typically 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—and smaller employers generally tend to change insurers more frequently.

Underwriting and Adverse Selection: Under current law, many small employers face higher premium costs based on insurers’ underwriting practices. In underwriting an insurance policy, the insurer estimates its cost to insure the employer’s workforce, by looking at the group’s demographics, past claims experience, and/or health status and other factors. Small groups have few participants among whom to spread the risk, and, as a result, a few unhealthy workers or dependents will skew the claims experience and may force the employer to pay much higher premiums.

Faced with high premiums and limited budgets, small employers often share the costs with their employees. In the worst-case scenario, healthy workers will balk at higher costs and may not accept the offer to purchase insurance, thereby either obtaining private individual coverage or joining and increasing the ranks of the uninsured. When healthy workers give up health insurance, sponsored by a small employer, only higher-risk individuals remain, leading to a predictable spiral of ever-increasing premiums and declining coverage as the insured group becomes less and less healthy. The small-group market is particularly vulnerable to this perilous outcome.

State Regulatory Burdens: Some state laws further impede small employer coverage. Because some states have been very aggressive in regulating small-group markets, many insurance carriers have withdrawn from those markets, leaving employers with little choice in plan design or cost options. Five or fewer insurers control at least three-quarters of the small-group market in most states. In some states, insurance for certain small firms is available only through a state-operated risk pool or from one insurance carrier.¹³

Additionally, small employers are sensitive to the cost of state benefit mandates (such as requiring coverage for hair transplants, or treatment provided by acupuncturists) that drive up the cost of the small group coverage. Such mandates are responsible for one of every five small employer decisions not to offer coverage.¹⁴ Another study reported that mandates raise premiums by four to 13 percent, and that up to one-quarter of uninsured Americans lack insurance because of state mandates.¹⁵

Vulnerability to Fraud: Small employers are also especially vulnerable to health insurance fraud—scams that promise low-cost health coverage, but fail to deliver. Many of these arrangements are multiple employer welfare arrangements (MEWAs). MEWAs are arrangements that provide health benefits to employees of two or more unrelated employers who are not parties to collective bargaining agreements. MEWAs are subject to a complex mix of state and federal laws and regulations. While many MEWAs operate successfully and provide reliable benefits, unscrupulous promoters have exploited MEWAs’ complex regulatory and oversight structure to operate Ponzi schemes that collect premiums but intentionally default on benefit obligations. Fraud increases the cost for everyone, and the fear of being taken in deters many small employers from offering coverage at all. AHP legislation will help protect against this type of abuse.

Current Anti-Fraud Activities of the Department of Labor

Let me take this opportunity to focus on the Department’s current efforts to combat health insurance fraud. AHP legislation will help address this serious problem by providing an attractive, cost-effective alternative to fraudulent health plans.

The Department combats health insurance fraud through both education and enforcement. By educating small employers, we can alert them to ways they can protect themselves and their employees from fraudulent health insurance schemes. The Department also devotes significant resources to enforcement efforts. Our efforts have been effective in closing down fraudulent health plans and, in some cases, recovering money for their victims.

Education and Outreach: Through our outreach, education and assistance programs, the Department’s Employee Benefits Security Administration (EBSA, formerly the Pension and Welfare Benefits Administration) has made educating small employers a top priority.

The Department provides guidance to small employers on how they can avoid purchasing health coverage from fraudulent MEWA operators. In an effort to educate small businesses about these risks, I recently wrote to over 80 business leaders and associations requesting them to distribute and follow simple tips drafted by EBSA, entitled How to Protect Your Employees When Purchasing Health Insurance. These tips, which are also highlighted on EBSA’s website, offer important warning signs for small businesses to consider about coverage that is “too good to be true.” Checking simple information can alert small employers to fraudulent schemes. I encourage interested small employers and employees to visit the EBSA website at www.dol.gov/ebsa or call EBSA’s toll-free hotline at 1-866-444-EBSA (1-866-444-3272) for further information about protecting themselves against fraud.

The Department also has published technical assistance materials for employers and service providers. Materials include a publication explaining current federal and state regulation of MEWAs, and guidance on what to do when health coverage offered by a MEWA is lost. EBSA has also issued numerous advisory opinions to assist state prosecutors and regulators in the enforcement of state insurance laws against MEWAs.

Enforcement: In addition to education efforts, the Department continues to devote significant resources to enforce existing health laws and to work with state insurance departments and the National Association of Insurance Commissioners (NAIC) to protect workers and their families. In particular, EBSA is actively investigating and litigating issues connected with abusive MEWAs. The Department’s primary goals are to shut down such scam artists quickly, to appoint independent plan fiduciaries in order to protect plan assets, and to recover money for victimized workers.

To combat MEWA fraud and corruption, EBSA has implemented a two-pronged approach using both its civil and criminal enforcement authorities. Due to our enforcement efforts, almost $9 million was recovered in FY 2002 alone for innocent victims to assist them with unpaid medical bills. Most of the criminal MEWA investigations have been jointly conducted with other agencies including the Department’s Office of the Inspector General, the FBI and the United States Postal Inspection Service. As of September 30, 2002, EBSA was pursuing 90 civil and 17 criminal investigations of fraudulent health plans.

Examples demonstrating the level of fraud perpetrated by unscrupulous MEWA operators are numerous. In one recent prosecution, the Department obtained court orders to shut down an abusive MEWA called Employers Mutual, LLC, sixteen related entities, and the individuals who operate them. Employers Mutual offered health benefits in all fifty states and the District of Columbia, with over 22,000 individuals enrolled in its plans. After collecting over $14 million in employer premiums, Employers Mutual paid less than $3 million in claims. Nearly fifty percent of the contributions were diverted to the personal accounts of the principals and to pay administrative expenses. Through our timely enforcement actions, an independent fiduciary was appointed and the court approved an orderly method of resolving unpaid medical providers’ claims in order to protect the plan participants from being pursued by the health providers. Criminal sanctions are also being pursued.

The AHP Solution: Reduced Barriers and Fraud

Let me now turn back to our proposal to increase small employers’ access to affordable health insurance through AHPs. In an AHP, the current market and financial barriers that face small businesses would be reduced or eliminated. Small businesses would enjoy greater bargaining power, economies of scale, administrative efficiencies, and the benefits of a uniform regulatory structure.

To combat fraud, federal certification demonstrating that legitimate and financially sound sponsors operate AHPs would provide small businesses with the assurance that the Department of Labor has determined that the organization offering coverage is not a “fly-by-night” operation. Certified AHPs would be subject to rigorous DOL oversight.

An AHP is basically an arrangement where a group of small employers join together through a bona fide association to purchase or provide health insurance coverage for their employees. In essence, AHPs would give small employers many of the economic and legal advantages currently enjoyed by large employers.

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 potentially 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 the benefits of a uniform regulatory system. For AHPs that offer fully insured coverage, state insurance commissioners would be responsible for the solvency of the insurance company issuing the policy, just as they are responsible for insurance policies issued to group health plans today.

AHPs that offer self-insured coverage will be subject to a single, effective, national certification, solvency and oversight process that will be administered by the Department of Labor. Strict standards would be met to ensure solvency and protect consumers and there would be no confusion or uncertainty over whether the states or the Department of Labor regulate certain aspects of the entity. Fully insured AHPs would purchase insurance products with solvency standards and consumer protections regulated by the states.

Pooling Risk: AHPs would help ensure that small employers will not be denied insurance coverage or priced out of the market due to the health of their employees. As a member of a bona fide association, even an employer with high claims experience would be offered the same coverage options as those offered to other employers within the AHP. Large AHPs can spread the risk of insuring unhealthy groups or individuals among a larger population of health risks.

Broader Choice of Coverage: Associations will be able to fashion coverage that best meets their members’ needs, even choosing to offer more than one plan. By offering broader choices, AHPs will encourage healthy small business members to purchase coverage and pay into the premium pool, which, given the number of uninsured small business workers and dependents, should exert downward pressure on health care inflation.

Expected Results of AHP Legislation

Cost Savings and Increased Coverage: Small businesses obtaining insurance through AHPs could enjoy significant premium reductions. According to the Congressional Budget Office (CBO),¹⁶ the average savings would be at least 9 percent and could be as much as 25 percent per employer. CBO further estimates that, because insurance will be more affordable, as many as 2 million uninsured Americans will secure coverage. Indeed, CBO’s predictions may be too conservative. A study by the CONSAD Research Corporation foresaw larger gains, estimating that up to 8.5 million uninsured workers and dependents could gain coverage from AHP legislation.

Wide Availability and Greater Access: Numerous small business groups are eager to offer coverage and look forward to enactment of AHP legislation, including organizations such as the National Federation of Independent Business, United States Hispanic Chamber of Commerce, Women Impacting Public Policy, and dozens of groups representing small businesses and professionals. The Small Business Survival Committee (SBSC), representing nearly 100 existing associations and employer groups, believes that coverage will increase dramatically. According to the SBSC, “AHPs will empower America’s small employers with the tools needed to harness their entrepreneurial spirit and skills in providing working families with more health benefits, and more health plan choices, at affordable prices. “The American Society of Mechanical Engineers (ASME) looks to AHPs to help make health coverage more affordable for 19,000 of their members in nine states who have no access to the ASME group health plan due to the high cost of mandated benefits.

Ensuring That AHPs Keep Their Promises

The Department of Labor has firsthand experience dealing with group health plan regulation, as well as combating insurance fraud. The Department of Labor currently administers the Employee Retirement Income Security Act (ERISA), protecting approximately 2.5 million private, job-based health plans and 131 million workers, retirees and their families. Of these, 275,000 plans covering 67 million individuals are self-insured, and therefore subject exclusively to DOL oversight. In addition, self-insured multiemployer plans (established and operated jointly by a union and two or more employers) are overseen exclusively by DOL. These plans cover more than 5 million participants, not counting their covered dependents.

Rest assured, I will see to it that the Department allocates the resources necessary to effectively carry out our AHP certification and oversight responsibilities with effective, efficient and timely regulation and enforcement. I am confident of our ability to administer the AHP program successfully.

Certification and Oversight: To ensure that unscrupulous promoters would not operate AHPs, only bona fide trade or industry associations that have been in operation for several years will be allowed to sponsor these arrangements. The Department will examine AHP sponsors and certify them if they meet this standard, as well as certain solvency and membership requirements.

Safeguards Against Insolvency: An AHP that offers self-insured coverage will be required to establish premium rates that are adequate to cover claims and maintain adequate reserves, as determined by a qualified actuary. Self-insured AHPs will also be required to keep additional funds on hand to cover unexpected losses. There will also be a funding mechanism in place to ensure that claims can be paid if an AHP becomes insolvent.

Insurance Market Safeguards: AHP legislation will include provisions to ensure that AHPs result in stable, reliable markets for health insurance. Spreading risk and costs across a large group of individuals is fundamental to effective health insurance. In the past, small group markets have sometimes been vulnerable to practices, such as adverse selection or “cherry picking,” that segregate good risks from bad. Such practices can make insurance unaffordable or unavailable for small firms when employees or their families become seriously ill. To prevent cherry-picking, AHPs and participating employers will not be allowed selectively to direct their higher-cost employees to the individual insurance market. AHPs must offer all available health policy options to all of the membership’s employers and individuals. Finally, legislation should also make clear that DOL has the authority to limit AHPs’ ability to vary the premiums for their participating employers.

ERISA, HIPAA and Other Laws: Like other group health plans, AHPs will be subject to the fiduciary requirements of ERISA, which sets high standards of behavior for health plan sponsors. In particular, the Health Insurance Portability and Accountability Act (HIPAA) would apply to AHPs. Under HIPAA, group health plans are subject to portability, pre-existing condition, nondiscrimination, special enrollment, and renewability provisions. These provisions also will limit the opportunity for cherry-picking. Other federal health insurance requirements that provide consumer protections such as COBRA, DOL’s claims regulation, the Mental Health Parity Act (MHPA), the Women’s Health and Cancer Rights Act (WHCRA), and the Newborn’s and Mother’s Health Protection Act (the Newborns’ Act) would apply to AHPs.

I am proud of the Department’s efforts to ensure that American workers and their families benefit from the important federal protections passed by Congress in the late 1990s. The Employee Benefits Security Administration announced on February 26, 2003, a new compliance assistance program to help group health plans successfully implement HIPAA, MHPA, WHCRA and the Newborns’ Act. The new compliance assistance program was announced jointly with the results of a statistically valid audit of health plan compliance with these laws. These recent efforts are the most recent example of the Department’s ongoing commitment to effective regulation, implementation and enforcement of federal health laws that benefit millions of Americans in both fully insured and self-insured health plans.

Conclusion

Thank you for the opportunity to testify today. Small business employers and employees are in critical need of new ways to increase health insurance coverage, and Association Health Plans are a responsive solution to this problem. We at the Department of Labor stand ready to work with members of Congress and this Committee to help pass and administer legislation that expands health insurance coverage for working Americans.

Endnotes

1 Department of Labor estimates of working families’ health insurance status, based on the Census Bureau’s annual March Current Population Survey.

2 Derived from Medical Expenditure Panel Survey, Insurance Component. Low-paying small firms are those with fewer than 100 employees in which more than half of employees earn less than $9.50 per hour.

3 Department of Labor estimates of working families’ health insurance status, based on the Census Bureau’s annual March Current Population Survey.

4 National Association for the Self Employed.

5 Transamerica Center for Retirement Studies.

6 Actuarial Research Corporation.

7 Mercer Human Resources Consulting.

8 The 2002 Small Employer Health Benefits Survey.

9 Conference Board, Business Executive’s Confidence, April 2002.

10 Connecticut Business and Industry Association, Annual Membership Survey, November 11, 2002.

11 Small Business Association of Michigan, EPIC/MRA Survey, April 2002.

12 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.

13 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.

14 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).

15 Gail A. Jensen and Michael A. Morrisey, Mandated Benefit Laws and Employer-Sponsored Health Insurance (Washington, D.C.: HIAA, 1999).

16 Congressional Budget Office, Increasing Small-Firm Health Insurance Coverage through Association Health Plans and Healthmarts, January 2000.

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