September 21, 2009 The Honorable Max Baucus Chairman Senate Finance

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 lowincome 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

September 21, 2009 Page 2 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

September 21, 2009 Page 3 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

September 21, 2009 Page 4 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 governmentcreated 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-forperformance 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

September 21, 2009 Page 7 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.

September 21, 2009 Page 9 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 Page 10 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.

September 21, 2009 Page 11 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

September 21, 2009 Page 12 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.

September 21, 2009 Page 13 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 outof-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