September 21, 2009

The Honorable Max Baucus

Chairman
Senate Finance Committee
219 Dirksen Building
Washington, D.C. 20510

Dear Mr. Chairman:

On behalf of America’s Health Insurance Plans (AHIP), I am writing to thank

you for your leadership in the health reform debate, acknowledge the important
contribution that you are making to advance the national reform discussion, and
outline our views on your Chairman’s Mark for the “America’s Healthy Future
Act.” We thank you for your efforts to lead an unprecedented and rigorous
bipartisan process. We view the introduction of your proposal as an important
milestone in this debate and stand ready to lend our technical expertise to help
create proposals that are workable and sustainable over time.

We agree with your overall approach of combining insurance market reforms

with the responsibility of individuals to obtain coverage and financial assistance
for low- and moderate-income families and individuals. We also appreciate that
your Mark recognizes the importance of shoring up the safety net for low-
income individuals and supports the critically important ERISA framework.
With this letter, we are offering our recommendations for strengthening this
structure to advance the goals of universal coverage, affordability, and quality
improvement. We also outline our concerns with key aspects of the proposal.

Our Commitment to Health Reform

We strongly support the concept of shared participation in health reform and our
members have committed to three major initiatives that have played an integral
role in advancing this year’s health reform discussions. Our members have
proposed and strongly support insurance market reform and, specifically, a
comprehensive overhaul of market rules that will provide security and peace of
mind for all Americans – regardless of their health status or medical history,
when such reforms are linked to individual coverage and premium assistance
provisions. In addition, health plans are making the legislation under
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consideration more affordable through their support of a system-wide

simplification effort to streamline administrative procedures and achieve cost
efficiencies for doctors and hospitals, as well as their commitment to help fund a
reinsurance mechanism during the transition to the market reforms that the
country wants and needs. Taken together, these contributions will decrease
costs across the health care system, reduce paperwork and duplication, and
ensure that everyone can get high quality coverage that is portable across the
entire system.

Making Health Care More Affordable

As the nation moves toward the enactment of meaningful health reform
legislation this year, it is critically important to ensure that the final legislative
package includes strong cost containment measures to ensure that coverage will
be affordable for individuals, families, employers, and taxpayers. To achieve
this objective, cost containment measures should have a system-wide focus that
recognizes the inter-connectedness of our health care system and confronts the
core problems that threaten affordability, such as the continued rise in
underlying medical costs and a lack of incentives to encourage best practices.

We commend the Chairman’s Mark for recognizing that delivery system and
payment reforms are critically important to creating a high quality, affordable
health care system. The proposed approach, however, could have an even
greater impact by focusing not only on public program costs but also costs
across the entire health care system. We strongly recommend that the
committee build on its proposal for a Medicare Commission by creating a
process that brings all stakeholders together to achieve system-wide cost
containment and, additionally, by taking steps to prohibit any Medicare funding
reductions from increasing cost-shifting, which already is a major contributor to
high health care costs for non-elderly Americans. According to a recent
Milliman study, an average family of four already pays a hidden tax of more
than $1,500 annually on their premiums because Medicare and Medicaid
significantly underpay hospitals and physicians, compared to their actual costs
of delivering medical care.

By taking this system-wide approach, Congress can align payment and delivery
reform proposals across the public and private sectors and facilitate the creation
of common market rules on issues requiring coordination between payers and
providers, including the alignment of definitions for bundled payments and
episode-based payments, encourage the operation of Accountable Care
Organizations across public and private markets, and establish uniform rules for
care accessed out-of-network to better protect consumers and promote the
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delivery of cost-effective, high quality care. Success in such a bold endeavor

would greatly simplify our health care system for consumers, physicians, and
hospitals, improve quality, and help build a foundation upon which all other
health reform goals ultimately depend.

Health plans have demonstrated their commitment to these goals by proposing

massive administrative simplification, focusing on the standardization and
automation of five key functions: claims submissions, eligibility, claims status,
payment, and remittance. The move to fully automate and standardize these
administrative transactions will create new efficiencies that enhance the patient
experience and allow physicians, hospitals, and other health care providers to
reduce their administrative costs substantially. This is a critically important
component of our nation’s overall strategy for containing costs and will generate
savings across the system if these efficiencies are captured as part of a national
strategy.

Unintended Consequences of New Taxes and Certain Provisions

Given the country’s strong interest in cost containment, we have concerns that
the Chairman’s Mark includes a series of provisions that would interact in such
a way as to make coverage less affordable. Even as Americans who are
currently insured gain the security of the important new market protections, they
may confront a trade-off that makes it more difficult to retain existing coverage.
For example, without system-wide cost containment provisions, the proposed
new taxes on high cost plans and the proposed new taxes on key components of
health expenditures would cause many Americans to spend more on coverage.
Taken together, we believe it is crucial that the committee reconsider these
provisions, as well as how the proposed coverage requirement compares to what
individuals and employers are purchasing today. We are concerned that these
provisions will increase costs.

For example, in the absence of true cost containment, the new tax on health
insurance providers would cause an increasing number of consumers to be
impacted by the 35 percent excise tax on high cost health plans, since the
thresholds for this tax are indexed to the annual increase in the CPI, even though
health care costs are rising at a much faster rate. Given this dynamic, raising the
thresholds would only impact how quickly consumers would hit the cap.

It is also notable that both the new tax on health insurance providers and the
high cost health plan tax would not be deductible, unlike most other excise
taxes. The effect of this feature and the fact that health plans are already taxed
at multiple levels means that the effective rate of the high cost health plan tax
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would be dramatically higher. In a 1994 report to the Senate Finance

Committee, the Congressional Budget Office (CBO) raised these issues in its
analysis of a then proposed 25 percent tax on high cost health plans, concluding
that the effective rate of a 25 percent tax could be as a high as 62.5 percent (the
effective rate of the tax proposed in the current bill would exceed this level by a
significant amount). The conclusion of this analysis is that at these rates of
taxation, any benefits subject to the high cost health plan tax could likely no
longer be offered, which is the implicit conclusion of the CBO score. This will
prove highly problematic for individuals and their families, an increasing
number of whom would likely be impacted by the tax. Recognizing that the
creation of new taxes is at odds with the goals of cost containment and quality
improvement, we strongly urge the committee to strike these provisions.

If these provisions cause more Americans to be exempt from the individual

coverage requirement because their premiums would exceed the 10 percent
affordability threshold, that would lead millions of Americans to defer obtaining
coverage, result in higher premiums for those who have coverage, and
undermine the goals of the coverage requirement. Weakening the coverage
requirement would create a premium spiral, similar to what has been
experienced by many states that previously enacted market reforms without a
coverage requirement, potentially leaving many Americans without coverage
and, at the same time, subject a greater portion of those with coverage to the
proposed tax on high cost health plans.

Concern About Government-Created Cooperatives

We have strong concerns about the proposal for new, untested government-
created health insurance cooperatives. While we appreciate that there has been a
sincere effort to try to level the playing field for the so-called “public option,”
the proposed cooperatives would retain key advantages that would only result in
a slower march toward a government-run plan.

For example, the proposal would provide startup funding for the cooperatives in
the form of “free” loans and grants. Because the grants available to meet
solvency requirements would not have to be repaid, the cooperatives would have
a competitive advantage compared to a start-up health plan, which would have
to raise funds in the capital markets. Second, the government would continue to
act as a “player and referee” with the Secretary of HHS serving as Chair of the
“advisory board,” thus precluding level competition and leading to a political
environment that could change the rules to favor the government-created plan
(e.g., lowering rates through a system of administered pricing when costs exceed
projections).
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By contrast, market reforms that build on the current system would provide
more stable and secure choices for the American people, while ensuring that
they can continue to benefit from the innovative programs health plans have
pioneered to improve the quality and affordability of health care coverage.
These initiatives, to name just a few, include supporting evidence-based
medicine, using health information technology to promote transparency and
improve consumer information, partnering with providers and employers on
quality measurement, pursuing administrative simplification projects, managing
treatment for patients with chronic conditions, and implementing pay-for-
performance initiatives.

Synchronizing the Reforms

Another crucial priority in this debate is to strike the right balance on issues
surrounding insurance market reforms, design of benefit packages, premium
subsidies, and an individual coverage requirement. Recognizing that these
issues interact with each other in a variety of ways, we urge the committee to
synchronize the Title I provisions to ensure that implementation of the final
reform package is successful in expanding access to affordable coverage –
without putting premiums beyond the reach of more Americans. This means
that benefit packages should give consumers flexible options to meet diverse
needs and be aligned with the level of premium subsidies provided by Congress,
and that the coverage requirement needs to avoid creating incentives for healthy
people to forego the purchase of coverage.

Strengthening the Coverage Requirement

Establishing an enforceable coverage requirement is particularly important to
the success of the bill’s insurance market reforms. Experience at the state level
suggests that if the individual coverage requirement provides inadequate
incentives to get everyone in, individuals and families who are covered in the
individual market are likely to experience unintended consequences similar to
those experienced in several states where insurance market reforms were
enacted in the absence of universal coverage in the 1990s. In September 2007,
AHIP released a report by Milliman Inc. that examined eight states that enacted
various forms of community rating and guarantee issue laws in the 1990s,
without establishing an individual coverage requirement. A significant number
of individuals responded to these reforms by deferring coverage until after they
encountered health problems and, as a result, the Milliman report found that
these states experienced higher premiums for those with insurance, saw reduced
enrollment in individual health insurance coverage, and had no significant
decrease in the number of uninsured.
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To avoid this outcome with the federal health reform bill, we urge the
committee to strengthen the proposed coverage requirement.

Improving Quality
We support provisions of the Chairman’s Mark that would direct the Secretary
to establish a national quality improvement strategy after taking into
consideration the recommendations of a broad stakeholder group. Your
proposal recognizes that it is important for health reform to build on the
momentum that has been generated by public-private collaborative activities
already underway to promote improvement in health care quality and
affordability. To achieve our shared goal of making high quality, affordable
health care available to all, we need to build on current activities to create a
sustainable infrastructure to support and improve the nation’s capacity to set
priorities for quality improvement, develop new quality measures, assure that
measurement is a constructive tool to foster quality improvement, and establish
efficient data collection processes.

Balancing Federal and State Responsibility

The success of the bill’s market reforms depends on achieving balance in the
regulatory structure that is based on national standards created by the federal
government and adopted and implemented by the states – without any
duplication of regulatory authority. Greater consistency of rules is crucial to
ensure that consumers are not unfairly disadvantaged for living in a particular
state. Lack of consistency decreases competition and increases costs. We also
believe the proposed rating rules should provide sufficient flexibility to make
premiums affordable for all purchasers while also bringing everyone into the
system. Specifically, we recommend that the NAIC’s model regulation should
be established as a standard, and not as a floor, for rating requirements.
Otherwise, current inconsistencies across the states will leave uneven and
confusing rules across the country.

In addition, we would urge the committee not to consider incentives offered by

health insurance plans in connection with wellness programs as premium
variations prohibited under the new rating rules. This clarification is consistent
with existing law and the protections already in place with respect to the
operation of “bona fide wellness programs” and consistent with proposals in the
Medicare and Medicaid sections of the proposed legislation. It is notable in this
regard that the Chairman’s Mark promotes the creation of incentive-based
healthy lifestyle programs in Medicare and Medicaid that address issues such as
high blood pressure, high cholesterol, obesity, and diabetes. Evidence
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demonstrates that these programs can play an important role in improving

health. We support what is being proposed for Medicare and Medicaid, and
urge you to extend these provisions to all payers.

Grandfathered Plans
While the Chairman’s Mark proposes to phase-in rating reforms for
grandfathered small group policies over a period of five years, it is not clear
what the Mark envisions with respect to non-group coverage. Just as a
transition is required for small group coverage, a transition also is needed for
those with existing non-group coverage. This would help create a balance
between meaningfully preserving existing choices for those who already have
coverage, while promoting a smooth start for those obtaining coverage under the
new market rules. To do otherwise would substantially negate the policy intent
behind the purpose of the grandfathered plans provision.

Benefits
We are concerned that the new national benefit standards – taking into account
both the actuarial value requirements and provisions that provide unlimited
access to any and all services – would impose higher costs on consumers by
raising the cost of benefit packages and requiring them to buy more expensive
coverage, even if they are satisfied with their current plan. The proposed 65
percent actuarial value figure is more expensive than the standard in place in
Massachusetts where, according to a Congressional Research Service (CRS)
report, the standard for the “Bronze” plan is roughly 56 percent and where
underlying health care costs continue to impose substantial affordability
challenges. The Chairman’s Mark does not address the issue of state benefit
mandates and, by proposing to prohibit annual limits on “any” benefits, risks
exacerbating the cost these mandates can impose on coverage.

Other congressional committees have proposed measures that would require

states to reimburse the federal government for the cost of mandated benefits if
they result in a net increase in the premium assistance provided to individuals.
We would recommend that consideration be given to this approach or other
approaches that would provide health plans with some flexibility to protect
consumers from the additional costs that unlimited benefit mandates could add
to their coverage.

Additionally, to promote the use of evidence-based preventive services,

coverage of preventive services should be linked to the recommendations of the
U.S. Preventive Services Task Force (USPSTF) and the Advisory Committee on
Immunization Practices (ACIP).
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Finally, the link between the benefit option standards and the new taxes
proposed by the Chairman’s Mark also needs to be considered. All of the
measures proposed – the actuarial values, new benefit requirements, cost
shifting as a result of compression in Medicare, new proposed taxes on health
insurance and health care services, and the lack of any controls on benefit
mandates – will put upward pressure on coverage costs. This in turn triggers
greater tax liability and greater costs, creating a vicious cycle that will not
benefit consumers.

Supplemental Issues
To preserve the ability of consumers to be able to keep their current coverage
and to promote consumer choice, we believe the requirement in the Chairman’s
Mark for coverage for pediatric dental and vision benefits should be clarified so
this requirement can be met with consumers’ current dental coverage or through
stand-alone dental and vision products in the Exchange. The relevant consumer
protections in the Exchange will need to be considered to make sure they
appropriately apply to dental and vision coverage. For example, dental plans
typically provide coverage for a specified number of routine examinations and
cleanings, and these types of scheduled benefits would need to be reconciled
with the requirement for unlimited annual benefits.

We also urge the deletion of provisions of the Chairman’s Mark that would
require Medigap Policies C and F to include cost-sharing. These products, as
currently structured, are valuable options that provide financial security to
seniors and help them achieve predictability in their out-of-pocket health care
costs. A study released by AHIP last week confirms that Medigap supplemental
coverage is an important option for low-income and moderate-income seniors
and those living in rural areas. Moreover, recognizing that other Medigap
policies already provide supplemental coverage with cost-sharing, we are
concerned that Medicare beneficiaries would be poorly served by restrictions
that take away their existing options.

While we previously have emphasized our strong opposition to the new taxes
proposed by the bill, we also urge the committee to ensure that all HIPAA
“excepted benefits” (e.g., supplemental products such as dental, vision, and
other supplemental coverages) are excluded from these proposed taxes. These
products are intended to augment, not replace, major medical insurance. Federal
tax policy should recognize this important distinction.
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Mandate-Free Benefit Packages

We believe there is value in allowing federally specified benefit packages to be
offered across the country on a state mandate-free basis to all plans including
those that participate on a national, regional and state basis which would allow
for additional flexibility and competition in the market. State benefit mandates
add to the cost of coverage having the effect of increasing premiums for
individuals and families. Recognizing that the Chairman’s Mark proposes to
allow “national plans” with uniform benefit packages to be offered across state
lines, we believe Congress should consider the potential impact of this provision
and ensure that the issues, potential impacts, and unintended consequences are
carefully understood before legislating in this area.

Small Group Coverage

The Chairman’s Mark proposes to apply the same rating rules to the small group
market as it applies to the non-group market. These changes are to be phased in
over a period of up to five years, as determined by each state with approval from
the Secretary. We appreciate the work that the committee has done in this area,
but we remain concerned that these provisions may increase the cost of coverage
for the substantial majority of small firms offering coverage today. To address
this problem, we would recommend a modification under which the phase-in
period for states would be lengthened, and each state would be given the option
to choose to rely on a specified federal rate band alternative if the state
demonstrates that reliance on the non-group rating rules would create a hardship
for the substantial majority of small businesses in the state.

We also recommend that the Government Accountability Office (GAO) be

directed to conduct a study on employee choice of plans in the small group
market to provide Congress with data prior to the phase-in of the new rules. If a
small business chooses to provide coverage to its workers through the
Exchange, it is important that the potential impact of disaggregating existing
risk pools be well understood and that the potential for cost increases be
identified and mitigated.

Protecting Risk Pools for Those Who Offer Employer-Sponsored Coverage

The Chairman’s Mark provides that an employee who is offered coverage that
does not have an actuarial value of at least 65 percent or who is offered
unaffordable coverage by their employer can be eligible for a tax credit offered
in the Exchange. To better protect employer groups, we recommend that in
these instances the employee be able to use the premium assistance to help
purchase their employer-sponsored coverage. This would allow the employee to
September 21, 2009
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benefit from the convenience of the group coverage and help protect the
integrity of the employer group’s risk pool.

In addition, in those instances where an employee is offered employer-based

coverage that has an actuarial value that is less than the targeted amount, the
employee should be allowed to purchase supplemental insurance that brings the
value of the coverage up to the standard the committee decides upon and to use
the value of premium assistance otherwise available in the Exchange to pay for
this coverage.

Exchange Issues
To ensure a smooth transition to the new market rules beginning in 2013, it is
important that the functions of the proposed Exchange prior to 2013 be carefully
delineated to ensure that they are operationally feasible and that they do not
attempt to accomplish policy goals that can only be achieved in the context of
the full implementation of the legislation. We would recommend that the
principal focus of any Exchange activities conducted in this period be on
helping consumers better identify and understand their coverage options.

We also note that the legislation contemplates offering initial federal funding to
the Exchanges with the expectation that they would be self-sustaining in future
years. This approach opens the door to the imposition of new assessments on
health plans offering coverage through the Exchange at a time when new taxes
are being proposed on insurance and other health expenditures, when additional
taxes are being proposed for comprehensive plans that will be more costly with
the new taxes on expenditures, and when policies to clamp down Medicare
spending will shift additional costs to other payers. Layering another level of
costs on top of what has been proposed is not sustainable.

Medicaid
We appreciate the bill’s proposals to strengthen Medicaid eligibility. We also
suggest changes to the Chairman’s Mark to ensure that Medicaid and CHIP
health plans can continue to provide the full set of comprehensive benefits
needed by enrollees in these programs. The Mark would permit Medicaid
expansion populations to choose Exchange plans and requires that CHIP be
integrated into the Exchange by 2013. States would be required to develop
wrap-around plans to ensure Medicaid and CHIP enrollees in Exchange plans
are provided the full scope of benefits – including EPSDT for children in CHIP
– offered in these programs.
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Providing such benefits in combination with coverage offered through an

Exchange would mean that EPSDT benefits, for example, would need to wrap
around the other benefits that are offered and require coordinating EPSDT
benefits with the CHIP in each state. This structure would add administrative
complexity and create new challenges for providing coverage and care to
affected children. Instead, we recommend that beneficiaries obtaining coverage
from the state Exchange should be able to choose among Medicaid and CHIP
health plans that are designated by the state as meeting requirements for
covering Medicaid and CHIP benefits. This would address the complexities
associated with coordinating benefits while also ensuring that Medicaid and
CHIP health plans that have demonstrated success addressing the needs of their
enrollees can continue to serve them.

We believe another critically important step is to extend a provision of the

Deficit Reduction Act of 2005 that allows for the continuation of provider taxes
on Medicaid managed care organizations (MCOs) that states enacted before
December 8, 2005. In the intervening years, a number of states have been
relying on this grandfather provision to generate revenues, through taxes on
Medicaid MCOs, to support their state Medicaid programs. By extending this
provision, Congress can ensure that these states will be able to continue to use
these revenues to finance health care benefits for their Medicaid populations.

Medicare Advantage
We have strong concerns about the proposed funding cuts in Medicare
Advantage. The committee’s proposal would help preserve choices in rural
areas and in areas where Congress made specific policy decisions to mandate
additional payments. Medicare beneficiaries in these counties – in states such as
Oregon, Washington, New Mexico, upstate New York, North Dakota, Utah,
Kentucky, Georgia, and Montana – would be at severe risk for a significant
reduction in benefits or loss of Medicare Advantage options under the House
bill, and we appreciate the work that the committee has undertaken to address
these specific needs. Unfortunately, beneficiaries would face major disruptions
in areas where plans are bidding under 100 percent of Medicare payments, such
as Florida, New Jersey, Nevada, Pennsylvania, Texas, Louisiana, California,
Alabama, Arizona, Kansas, and Mississippi. We support the efforts being made
to address this issue.

Another major concern we have with the Chairman’s Mark is the elimination of
the Medicare Advantage Open Enrollment Period (OEP). The OEP occurs from
January 1 – March 31 each year. During this period, Medicare beneficiaries
may switch among their Medicare Advantage plan options or choose the
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Medicare fee-for-service program, but they may not opt into or out of Part D.
The OEP provides an additional opportunity for beneficiaries to change options
if they decide that the selection they made during the Annual Election Period is
not right for them and acts as an additional safeguard in the event a beneficiary
did not understand the option he/she chose during the Annual Election Period.

Medicare Part D
We also strongly support reinstatement of the existing tax exemption for the Part
D retiree drug subsidy. The Chairman’s Mark would eliminate this exemption
and remove an important incentive for employers to continue to provide
prescription drug coverage for their retirees. The resulting increase in Medicare
costs runs counter to the cost containment goals of the Chairman’s Mark. We
urge you to amend the Mark to preserve this important element of the Part D
program.

In addition, we have strong concerns with the provision in the Chairman’s Mark
that would provide the Secretary with the authority to identify protected
formulary classes in the Part D program. The provision has the potential to
undermine health plan and pharmacy benefit manager efforts to make
prescription pharmaceutical coverage more affordable, and that have contributed
to the success of the program, demonstrated by beneficiary premiums and Part D
expenditures that are far below initial projections. We are particularly
concerned that the Chairman’s Mark could be construed to apply this provision
outside of the Part D context, again exacerbating concerns regarding the
interactive effect of numerous provisions in the Mark on affordability.

Long-Term Care Insurance

We strongly support a provision of the Chairman’s Mark that would enable
employers to offer long-term care insurance as an option under cafeteria plans
and flexible spending arrangements (FSAs). Enactment of this provision would
yield significant progress in increasing the number of Americans who protect
themselves against the high cost of long-term care.

In addition, we support amendments that would enhance consumer protections

for long-term care insurance policyholders based on NAIC model regulations
and, additionally, create an option for state Medicaid plans, based on the
“Community Choice Act,” to provide community-based attendant supports and
services to individuals with disabilities who are Medicaid eligible and who
require an institutional level of care.
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Flexible Spending Arrangements

The proposed limit on contributions to flexible spending arrangements (FSAs)
would be problematic for the approximately 20 million working Americans who
benefit from these accounts. This proposal would be particularly harmful for
individuals with chronic health conditions, since they typically face higher out-
of-pocket costs and would pay higher taxes due to the proposed limit on
contributions.

Conclusion
We believe that the Finance Committee proposal is an important milestone in
this debate. We are committed to working with you to enact bipartisan health
reform legislation, and we pledge to remain focused on ensuring that the
legislation fulfills its intended purpose of providing affordable coverage to all
Americans. We are committed to achieving these objectives and ensuring that
the new coverage extended to the uninsured is stable and secure. It is with this
objective that we have offered our detailed comments above for strengthening
and improving the Chairman’s Mark. Thank you for considering our
perspectives on this legislation and we look forward to continuing to work with
you.

Sincerely,

Karen Ignagni