Mr. Chair, Committee Members: My name is John Schwarz and I am with United Health System. I was an MCHA member for 4.5 years. I will address HF 3360 and MCHA assessment issues.

MCHA was created to solve a private market failure. There is not a failure with MCHA’s funding today; MCHA’s assessment represents only 0.31% of total Minnesota health care spending.

Baseline figures: 2004 Net Premium Base=$5 Billion, 2% assess rate, $100 million collected.

“The MCHA assessment now represents an additional 2% hidden “tax” to individuals’ and small businesses’ health premium because health insurers pass the assessment on to their insured customers.” (MCHA 2004 Annual Report)

1. It is speculation that insurers pass the assessment expense directly to their policyholders. This has not been demonstrated, and cannot be demonstrated with certainty. Two weeks ago I presented a handful of accounting theories regarding how insurers might alternatively fund the assessment expense to the Health Care Cost Containment Division. These include: paying from general revenue, shifting the expense to other product lines, and several market-competition driven policy-pricing methods. Seemingly universally believed the assessment expense is directly passed to policyholders, there are strong arguments why this might not be the case.

2. It is false to claim that the assessment is directly passed to, if at all, merely small employer and individual policyholders. 2004 premium revenue from those markets accounted for only $1.85 billion of total premium revenue for insurers of approximately $5 billion. The percent of small employer and individual premiums were roughly, rounded figures, 35-40% of all premium revenue. Additional premium revenue in 2004 came from public programs at 40%, federal workers health benefits at 6%, and other. This is roughly $2.4 Billion in publicly funded premium revenue out of the total premium base used to calculate the assessment of $5 Billion.

Out of the rounded amount of $100 million in assessments, only $40 million was based on small employer and individual funds, $45 million on public funds, and $15 million from other. Hence, if the standard assessment assumption is true, at least 45% of the assessment is already derived from taxes. With an enrollment base in the small employer and individual markets of approximately 700,000, the assessment calculates at about $57 annually—close to MCHA cited rate of $65. Assessment of these markets=0.12% of total Minnesota health care spending.

Why insurers should fund part of the assessment: MCHA exists in exchange for their ability to cherry-pick their customers and exclude high-risk individuals, hence reducing the disproportionate expense experienced by insuring these individuals. Why policyholders should bear—as is presumed—higher premium costs: Were high-risk MCHA enrollees insured traditionally by commercial insurers, those policyholders’ premiums would be higher.

Policymakers: Recognize the standard assessment assumption is merely an assumption; that small employers and individuals might not bear as much as, if any, of the assessment expense; Recognize: belief that the assessment and its expense are overwhelmingly derived from small employer and individual markets is extraordinarily mistaken—the true proportion is only 35-40%—($35-40 M). Recognize: 45% ($45 M) of assessment derived from public funds.

Total MN Spending Health Care 2002: $22.8 billion
MCHA Spending 2002 $141, 933,000. As percent of total MN: 0.6%
MCHA Assessment $2002: $71, 810, 000. As percent of total MN: 0.31%
MCHA Enrollee Premium $ 2002: $77, 282,000. As percent of total MN: 0.34%
Sources: HEP 2004; MCHA 2005; Commerce 2005; Author’s calculations based on cited figures.