literature in this area entitled. Managed Care: Does It Work ?
The report concluded that these characteristics are among those
shared by the more effective programs:
o A tightly knit network of providers, who are chosen
based on their ability to manage health care resources
cost -effectively ;
o Dedicated relationships and incentives to align the
goals of providers in the network to the goals of the
o A structure that strongly encourages beneficiaries to
stay within the managed network for all care; and
o Incentives for beneficiaries to engage in healthy
behavior, including seeking preventive and primary
care, and to consume health care services
These findings explain why we believe it would be a mistake to
require that all managed care plans in a reformed health care
system offer the point -of -service opt-out. It would be
counterproductive to limit access to the most cost-effective kind
of care for those businesses and individuals who would choose to
hold down their health care expenses to the greatest degree
Mr. Chairman, we have seen two significant changes in the
attitudes of our members in the past six months. The first is a
perceptibly growing realization that reform is going to happen -
and that's good, because hospitals are absolutely integral to the
reform process. The second, however, raises a caution flag for
your deliberations over the coming months. It is a growing
skepticism that our government will provide adequate resources to
make universal access a reality. A growing suspicion that
adequate financing of health care reform will become a political
football, tossed back and forth between opposing teams but never
making it across the goal line. The Administration's addition of
a subsidy cap; deep Medicare and Medicaid cuts; the failure to
move Medicare toward capitation; the retreat from integrated
delivery networks - all are disturbing steps in this direction
in the eyes of our members.
Need for an independent cosmlssion:
Here, too, we offer a solution. We have proposed that an
independent commission, insulated from the annual congressional
budget tug-of-war, is needed to protect health care reform from
the tyranny of short-term interests and political expediency.
Our concern with the National Health Board as proposed by the
President is that it is not truly independent, but an arm of the
In our view, the national board's primary objective should be to
stimulate a public debate on the proper balance between the
promised health care benefits and the available funds.
Reforming our health care system, one- seventh of our economy, is
a massive job. It's not going to get done all at once. It's not
going to be perfect from the beginning. It will need careful
adjustment and course correction along the way. An independent
commission, one step removed from immediate political pressures,
can do the best job of managing the on- going balancing act
between promised benefits and realistic financing that is going
to be the make-or-break nexus of health care reform.
Chairman ROSTENKOWSKI [presiding]. Thank you very much.
Mr. Bromberg, are you suggesting that we replace the adminis-
tration's combination of an employer and individual mandate with
just an individual mandate? Wouldn't we need a more generous
Federal premium subsidy at least in the short term imtil wages ad-
just, if individuals were required to purchase the entire amount of
their health insurance?
Mr. Bromberg. Well, I wasn't necessarily suggesting it for every-
one in America. I was suggesting it in lieu of a small employer
mandate, so let's start with that. If we take small employers and
compare the subsidy we have to give them, which in the Clinton
bill basically says if they have an average pajrroll of $24,000 that
their premium gets subsidized, versus doing an individual mandate
where we did an earned income tax credit or refundable credit or
a monthly advanced credit as you do under the EITC in the law
now, and we gave it directly to the individual, the employer could
withhold it from the payroll and use it for the premium, two things
You wouldn't be subsidizing the people that that employer em-
ployed who make more than $24,000 because that was his average.
You would only be subsidizing those below $24,000, and the money
would go direct to the insurance plan, and we think would be effi-
ciently administered and produce a cost savings to the plan.
Chairman RosTEhfKOWSKl. Mr. Morrison, in testimony presented
yesterday by Mr. Stark, he proposed that the health premiums im-
posed under the Health Security Act or any other health reform
proposals could be collected more simply and efficiently by the IRS
rather than by the regional alliances.
Would your members prefer this approach to the one proposed by
Mr. Morrison. Mr. Rostenkowski, I think that our members gen-
erally would prefer an approach that went more toward the indi-
vidual rather than the employer side of health insurance. If you are
asking them whether they would prefer to send their — in an em-
ployer-based system, whether they would prefer to send their check
to one quasi-governmental entity called a health alliance versus
one purely governmental entity called the Internal Revenue Serv-
ice, I don't think they would have a strong preference.
Chairman Rostenkowski. Well, the IRS doesn't like to be a col-
lection agency for anyone, and I am somewhat in line with that
kind of thinking.
Are there any other questions to be asked?
Mr. Kleczka. Let me ask a clarification question of Ms.
Your testimony indicates that you are opposed to folding work-
men's comp into the health care reform, but under the President's
bill that is not done, as you are aware. Do you have any objection
to changing the payment system for workmen's comp as outlined
in the President's proposal?
Ms. Williamson. I am not sure I understand your question.
Mr. Kleczka. OK, Do you not oppose folding workmen's comp
into the health care bill?
Ms. Williamson. We would not like to see a fold-in which would
eliminate the risk adjustment but we don't have any objection to
folding the payment in.
Mr. Kleczka. OK, that is what the President's bill does. You
have no problem with that?
Ms. Williamson. That is correct.
Mr. Kleczka. OK. For the American Hospital Association, Mr.
Davidson, you oppose caps, but my recollection is that over the
years when health care was going up 12 to 14 percent, hospitals
around the Nation, and I am not saying they all are in this cat-
egory, had profits ranging 8 to 10 percent.
You might dispute that, but nevertheless, they were quite profit-
able. Give me more rationale why you would oppose caps which, as
the President's proposal indicates, would be limited to CPI in the
Mr. Davidson. Well, first of all. Congressman, in terms of our
history, profit margins at the times we are talking about certainly
didn't average anywhere near that. It is true that there were some
institutions who, in fact, did have profit margins that were that
high. On average, however, they were much, much smaller than
that, more in the range of from 3 to 5 percent.
Second, with regard specifically to your question about caps, any
time we make some arbitrary determination about an expenditure
level and then work backward from that, absent a consideration of
what the costs are going to be locally, what changes may take place
in technology, what new disease categories may emerge, we surely
handicap ourselves in terms of our flexibility.
Finally, this system, a large part of the Ainerican health care de-
livery system is made up of an infusion of technology and creative
ways of doing things. To the extent that any kind of a cap on pre-
miums stifles that, we don't think that is going to be in anyone's
Our view is the way that you ultimately bring about savings is
to eliminate the schizophrenia over whether we are going to have
a regulatory system or a market-based system. And our view is
that we need to try the market-based system.
Mr. Kleczka. That is the system we are under now and clearly
it is deficient, to say the least.
Mr. Davidson. But we don't have a market-based system cur-
rently. The kind of market-based system we are talking about talks
about competing organized delivery systems who will have a new
form of incentive under capitated payment — in essence be a form
of fixed payment — but not some artificial cap that is derived on the
basis of a formula with economic forecasts many years out without
anyone understanding what may be happening to the economy in
Mr. Kleczka. What are your views of introducing into the legis-
lation certificate of need so every hospital in the Milwaukee area
or Wisconsin doesn't end up with an MRI and things that could be
shared versus individually owned?
Mr. Davidson. Well, what we found with certificate of need laws
over time is that they haven't stifled the growth of medical services
because many medical services have been outside of those laws,
and we have seen a proliferation of those. Again, we have to
Mr. Kleczka. Specifically address the equipment feature of cer-
tificate of need.
Mr. Davidson. We think the notion of certificate of need has
come and gone, and that the way to reallocate resources in the
community is to rebuild the delivery system community-by-
community, forcing community providers together to begin to work
on these issues and make determinations in the community on
where the resources ought to be. These ought to be community-
based decisions, not necessarily through some kind of a State regu-
Mr. Kleczka. I do want to compliment the hospital association
for the support of many of the aspects which will be helpful to us
when we finally put together a product. I also want to highlight the
fact that your association — I have very serious reservations about
the early retirement provisions of the bill, and clearly we will be
addressing those. Last, when you talked about taxing adding other
items above and beyond cigarettes, you did not mention beer, and
I appreciate that. Thank you.
Chairman Rostenkowski. Mr. Running.
Mr. BUNNING. Thank you, Mr. Chairman, I would just like one
question for Mr. Davidson.
Mr. Davidson. Yes, sir.
Mr. Running. You mentioned in your testimony about the Na-
tional Health Board and the potential of political problems with it.
You would prefer an independent board. How do you make it inde-
Mr. Davidson. Well, you make it independent by statute, but
you also make it independent in terms of having an adequate pro-
cedure for administrative determination and due process and all of
the rest. We have looked at independent bodies in our society.
There are some that have been successful and some that perhaps
have been less successful.
This is an area where we think that we need to have a single
public platform where we make the hard decisions about how much
money is going to be available and what that might buy. Then have
that body make a connection to the Congress and force decisions
either up or down on what we have to spend. This is what it can
provide. We should not tinker on the margins.
What happens with us on so many bills is that we tend to get
them into the political process and all of the vested interests are
able to influence pieces of them, and sometimes they don't come out
in the best way for service to the public.
Mr. BuNNiNG, Then you would be willing to turn one-seventh of
our economy over to an independent board to do that?
Mr. Davidson. I don't think the independent board is going to
have total authority over all these things except to make a set of
recommendations for the Congress to eimer approve or disapprove.
Mr. BUNNING. That is not the way it is written into the Presi-
dent's proposal, as you know.
Mr. Davidson. Well, we would recommend changes in the lan-
guage in the powers and authority of the independent board.
Again, we think it is essential that we have a single place where
you can debate these issues publicly.
Mr. BuNNlNG. That is what this committee usually does, and es-
pecially on the cost factors, and that is why we were getting your
testimony. I have difficulty with the independence of the board and
also turning over the decisionmaking process to that board and al-
lowing them to set rates to allow things that are very important
to our health care delivery system to be done in a single entity, and
I assume that that is what you are saying as far as the independ-
ent board is concerned.
Mr. Davidson. That is what we are sa3dng,
Mr. Running. Thank you.
Chairman RosTENKOWSKl. If there are no further questions,
thank you very much, lady and gentlemen.
Mr. KoPETSKl. The next panel is, we have David Raboy from the
Smokeless Tobacco Council; Herbert Middleton from the Pipe To-
bacco Council; Theo Folz from the Cigar Association of America,
and from the board of directors of the Virginia Farm Bureau Fed-
eration, Jordan Jenkins.
Chairman Rostenkowski. Welcome to the panel, gentlemen. It
is always a pleasure for us to entertain our citizens. We are looking
forward to your testimony. I would like to recognize Mr. Payne to
introduce one of his constituents.
Mr. Payne. Thank you very much, Mr. Chairman. I want to wel-
come this panel and I particularly want to welcome Jerry Jenkins,
who is a constituent and a friend and a real leader back home in
our Fifth District of Virginia. We appreciate him being here and all
of you being here to testify. Thank you, Mr. Chairman.
Chairman Rostenkowski. Since there is a personal interest of
one of our members in your testimony, I think, Mr. Jenkins, we
will allow you to lead off. If you will please identify yourself and
the association you represent for the record, we would appreciate
that. Mr. Jenkins.
STATEMENT OF JORDAN M. JENKINS, MEMBER, BOARD OF
DIRECTORS AND CHAIRMAN, FLUE-CURED TOBACCO
COMMITTEE, VIRGINIA FARM BUREAU FEDERATION
Mr. Jenkins. Good morning, Chairman Rostenkowski, and I
thank you for the opportunity to appear before this committee
today. My name is Jordan M. Jenkins. I am a tobacco farmer from
Lunenburg County, Va. I am also chairman of the Virginia Farm
Bureau Federation Flue-Cured Tobacco Committee as well as a
member of the Virginia Farm Bureau Federation's board of direc-
I know firsthand the economic importance of tobacco to my fam-
ily, my neighbors, and my country. Our farmers know that we live
in a culture of change, and there is no way to perpetuate the status
quo. Change is inevitable, and we support change in the health
care system. However, we do not support asking tobacco farmers to
finance this change. So today I would like to share with you some
of my thoughts about tobacco production and the tax proposal that
would destroy the production of tobacco, which is a historic, legal,
and economically significant commodity.
I am proud of my heritage. The development in Virginia in 1619
of a type of tobacco for which there was great demand in Europe
soon became the only medium of trade available. It would serve as
not only the foundation of Virginia's economy throughout the colo-
nial era, but would later become a vital element in the State's in-
To quote historian Virginus Dabney, "It was around those to-
bacco fields that the entire economy revolved. This staple guaran-
teed not only the permanence of the Virginia settlement, but of also
I am a professional in my chosen endeavor. I am proud of my
profession. I am proud to be a tobacco farmer, a part of the 2 per-
cent of our Nation's population that provides food and fiber for the
other 98 percent. However, I could not contribute without tobacco
which pays the bills and enables me to diversify into other crops
More importantly, without tobacco I could not put food on my
table or yours. My children could not have gone to college, and I
could not have provided the quality of life my family deserves.
In recent months I have read news articles that have quoted
antismoking advocates as clearly believing that raising excise taxes
on cigarettes to higher levels to be the most effective way to reduce
consumption, and the administration has indicated that raising the
excise tax on cigarettes by 75 cents a pack is an acceptable and
convenient way to pay for health care reform.
In a somber mood, I ask myself— is this action rational? Will it
accomplish anything? And how will it affect tobacco growers in the
Nation's economy? In this context I would like to relate what Can-
ada has experienced since raising excise taxes on cigarettes.
Five years ago more than 3,000 farmers grew tobacco in the
province of Ontario. Today there are less than 1,000. One Canadian
farmer stated that "a lot of us have suffered tremendous losses in
the viability of our properties and I am now growing 65 acres of
tobacco where it used to be 300 acres, and attempts to grow other
crops have not been successful."
One result of the Canadian tax increase has been the develop-
ment of a new industry — smuggling of contraband cigarettes. The
illegal sale of contraband and tobacco affects every Canadian,
In 1992 the Federal Government lost an estimated $863.8 million
in revenue as a result of the sale of contraband tobacco products.
Provincial governments lost approximately $717.1 million, and re-
tailers lost a total of $2.3 billion in sales, including taxes, to black
market tobacco products.
Government figures claiming high Canadian taxation has led to
a huge drop in consumption do not take into account the increase
in contraband consumption. When this is taken into account, it is
clear that the steady decline in consumption over the past 30 years
has not been accelerated by high tobacco taxes. Yes, Canadians
continue to smoke, but they may not be smoking Canadian-made
products in contraband cigarettes.
Ironically, Quebec Revenue Minister Savoie recently stated that
his province is willing to reduce the excise tax if the Ottawa gov-
ernment reciprocates. Savoie claims that cigarette smuggling has
forced his government to examine the possibility of cutting the cig-
Much Hke our Canadian neighbors, Americans are beginning to
voice their concern that social engineering tactics employed by
their governments are invading their rights and freedoms, rights
and freedoms that our governments have a mandate and respon-
sibility to protect. As the pendulum begins to swing across both
borders of the United States and Canadian countries, their govern-
ments should reflect on statements made by Abraham Lincoln.
These being, "You cannot build character and courage by taking
away a man's initiative and independence." And, second, "You can-
not help men permanently by doing for them what they could and
should do for themselves." Unfortunately, today these statements
may not be politically correct.
Before leaving, I would like to zero in on what I consider the
most important aspects of these hearings, and that is my future,
and when I say my future, I can include hundreds of thousands of
people just like me.
I am 56 years old. I have been involved in tobacco production al-
most all my life. If this tax increase comes about, I feel certain as
I sit here that I will be out of business.
We have heard discussions of diversification. I think the facts
have been laid before you that this is not a practical alternative.
One thing that hasn't been stressed that I would like to leave be-
fore this committee, there is a surplus of almost all known agricul-
tural products in the world today. If thousands of tobacco farmers
tried to venture into some other type of agriculture production,
then we just shift the problem to some other segment of our soci-
ety. It does not solve our problem.
I am too poor to quit and too young to retire. Therefore, I look
upon this tobacco that I produce as my earning power until I reach
a normal retirement age. Not only would I be deprived of this earn-
ing power for the remainder of this time, these actions would also
destroy the only equity I have, and that is in my production enter-
prise and farm which would become almost worthless if I were not
allowed to produce tobacco or someone was not allowed to produce
tobacco on my farm.
Therefore, I feel like I am on the spot, along with many other
people, and I would like for this committee to consider the power
over individual lives that are reflected in the actions that might be
taken here today.
In closing, I would say to you that tobacco producers are respect-
able, forthright and hard-working members of our Nation's econ-
omy, and I urge you not to turn your back on them by enhancing
the idea of increasing the Federal excise tax on cigarettes. Thank
you very much.
Chairman ROSTENKOWSKI. Thank you, Mr. Jenkins.
STATEMENT OF DAVID G. RABOY, PHJ)., ECONOMIC
CONSULTANT, SMOKELESS TOBACCO COUNCIL, INC.
Mr. Raboy. Thank you, Mr. Chairman. My name is Dave Raboy.
I am the chief economic consultant to the Washington law firm of
Patton, Boggs & Blow. I hold a Ph.D. in economics and am testify-
ing today on behalf of the Smokeless Tobacco Council, an Associa-
tion of Domestic Smokeless Tobacco Product Manufacturers.
I have been retained by the STC to study the economic effects
of excise taxes on smokeless tobacco products. My testimony today
will review the economic effects of the proposed smokeless tobacco
excise taxes contained in the Health Security Act.
President Clinton has advocated complete overhaul of our health
care system, and has proposed tobacco tax increases for the pur-
pose of raising revenue for health care. Proposed tax increases on
smokeless tobacco products, therefore, should be judged according
to four standard, readily accepted criteria for evaluating general
revenue raisers. Such taxes must be fair and equitable, provide a
stable source of revenue, be economically efficient, resulting in the
minimum disruption of the economy, and in addition, the taxes
ought to be regionally neutral, not falling disproportionately on any
I am hard pressed to think of examples in our history where ex-
isting tax rates on one product were increased by 10,417 percent
as proposed for chewing tobacco or 3,472 percent as proposed for
snuff. I would see if these taxes can stand up to the four standard
criteria for revenue raisers.
Fairness is one of the most important criteria used to judge tax
proposals. Regressive taxes are exactly what policymakers should
seek to avoid. In my view, the Health Security Act demonstrates
a disregard for tax fairness by imposing extreme tax increases on
products consumed in greatest concentration by blue collar Ameri-
It is a highly regressive proposal. This fact is confirmed in mar-
ket research data from various sources, as I discuss in my written
testimony. Further, any tax that falls disproportionately on one re-
gion of the country violates the principle of tax fairness.
The proposed tax on other tobacco products or OTP is unequivo-
cally a tax on the South. A dozen southern States bear the full
brunt of this proposal. In my charge I have evaluated the relative
tax burdens for each of these 12 States based on assumptions that
I believe are consistent with those employed by the Treasury De-
partment, although other assumptions are defensible.
Citizens of these 12 States will pay over 50 percent of the new
taxes associated with OTP tax increases, yet these 12 States ac-
count for onlv 25 percent of the Nation's population and more fun-
damentally these 12 States receive only 23 percent of the Nation's
For example, Mississippi will have a new tax share that will be
almost six times its percentage share of disposable income, and
North Carolina's percentage share of the new OTP tax is over three
times its percentage share of national disposable income.
This committee labored long and hard to achieve tax neutrality
during deliberations on the Tax Reform Act of 1986 and beyond,
yet the proposed excise tax increases, again measured in thousands
of percent, fall on only one small segment of the economy.
According to Treasury's own estimate, the new smokeless tobacco
excise tax will raise about $720 million a year. This on an industry
whose gross sales in 1992 were only about $1.4 billion. This is