On behalf of the New Jersey Business and Industry Association's more than 23,000 members, I would like to thank Senators Joseph F. Vitale and Stephen M. Sweeney for the opportunity to appear before you today.

Roughly two-thirds of New Jerseyans, or 5.3 million people, get their health insurance through their employer. In other words, most employers are doing the right thing for their employees. Even many small employers, who are least able to afford premiums, provide a benefit.

So, why doesn't everybody provide coverage? Quite simply – cost.

The cost of health insurance has exploded in recent years. Costs are rising two to three times faster than the overall inflation rate, making it too expensive for some New Jersey companies.

As a consequence, the percentage of private-sector employers providing health insurance coverage for their employees is beginning to fall. Unfortunately, r esearch has shown that if healthcare costs continue to increase at a significantly faster rate than income, more people will become uninsured.

One thing is clear; the number of the uninsured continues to grow. The reasons for this are complex and include the state of the overall economy, the rising cost of healthcare and the lack of affordable health insurance.

The problem of financing healthcare in this country is complex. But one thing is clear: mandating that employers buy coverage – especially at artificially high rates – will not address the underlying problems in the system.

We urge you to build on the employer-based coverage. The business community is struggling to find ways to pay for escalating healthcare costs. The cost of health insurance has consistently been the top concern of NJBIA's membership for years now. Employers want to provide good benefits available to their employees, they just cannot afford it. We need the Legislature to partner with us on solutions.

In the past you have asked that we come to today's hearing with solutions. We have done that today. But, first I would like to put our comments in context by reviewing a few statistics about healthcare in New Jersey and the United States.

Let me start by summarizing the business community's experience with the cost of health insurance for the past twenty-five years. During the late 1980's and early 1990's, when many consumers were covered by traditional fee-for-service health insurance, private insurance premiums rose between 15% and 20% annually. In that traditional fee-for-service environment a covered person could go to any doctor or hospital they wanted, whenever they wanted. The covered person was generally required to pay a coinsurance of 10% to 20%. While consumers generally enjoyed this freedom, they were not necessarily getting the best possible care because it was uncoordinated care. This freedom led to healthcare costs that were spiraling out of control.

The solution to these spiraling costs was managed care. Managed care was designed to coordinate care and catch illnesses early, when they are less expensive to treat. The advent of managed care held down healthcare cost inflation for much of the 1990's. For a variety of reasons – consumer dissatisfaction, legislative restrictions on the ability of managed care to contain costs, higher utilization -- healthcare cost began to grow at double digit rates by 2000.

Today there are fewer options to contain costs. Managed care wrung out all the savings available and employers are opting for less restrictive insurance products, which their employees prefer.

Consequently, healthcare costs are once again out-of-control. Numerous economic indicators illustrate the significant increase in health spending in the United States. Consider these facts:

•  The NJBIA annual Health Benefits Survey found that the average cost of employee health coverage soared by 11 percent to a record $7,307 per employee in 2004. This followed a 13 percent increase in 2003 and a record 15 percent increase in 2002. The cumulative increase over the last four years was about 55 percent, outpacing both wages and inflation.

•  The 2004 Mercer Human Resources Consulting national survey reports that New Jersey employers continue to pay the country's highest health insurance costs .

•  In fact, the rate of increase of health insurance premiums in 2004 grew about two-to-three times the rate of increase in workers wages or general inflation.

•  The average annual premium for employee-only coverage is over $4,000, while premiums for family coverage topped $10,000 per year. (Source: 2005 Kaiser Family Foundation and Health Research and Education Trust.)

•  Put in terms of family income, it would take 14 percent of the 2003 median family income for a family of four to buy health insurance coverage, up from 9.6 percent in 1999. (Source: State of the States, January 2006)

•  In 2003, about 86.4 percent of the New Jerseyans had some healthcare expenses. The average expenses of these individuals are $2,745 calculated per capita. The per capita average in 2003 was $2,370. (Source: Medical Expenditure Panel Survey Statistical Brief #06)

•  The United States spends more than 15% of its Gross Domestic Product on healthcare, more than any other country. It is projected that healthcare spending will grow from the current level of $1.9 trillion per year to reach $4 trillion per year by 2015. In other words, one out of five dollars in the U.S. economy will be spent on healthcare .

•  Total compensation costs of U.S. firms rose about 3.7 percent in 2004, according to the Bureau of Labor Statistics. But salaries increased just 2.4% while benefits cost rose 6.9%. Employer costs for insurance (including life, health & disability) averaged $1.68 per hour worked.

The leading national experts on healthcare see little cause for optimism because the underlying causes driving costs up are expected to remain unchecked.

What is driving these costs increases?

Healthcare costs are being driven by increasing utilization of healthcare services, rising provider fees, increased pharmaceutical costs, reduced cost-containment practices as managed care continues to retreat, increases in technological advances, lifestyle choices and an aging population.

A study by the Center for Studying Health System Change found that these costs increases were largely driven by hospital services, which make up the largest portion of health costs. These increases were fueled in part by higher labor costs due to the nationwide nursing shortages, as well as lower Medicare and Medicaid payments.

New research also suggests that spending is being driven by increases in treated disease prevalence. That means that costs are being driven up because the number of cases being treated is increasing, not because each case is more expensive than in the past. In other words, we are diagnosing and treating more diseases than ever before. In particular, the treatment of chronic diseases is a significant cost driver.

It has also been suggested that another factor contributing to mounting costs is the underlying healthcare payment systems. With the advent of managed care and lower co-payments, consumers become somewhat removed from the true cost of the healthcare services they receive. Some suggest that this leads consumers to use more services than they would if they had to pay more or knew the true cost of each service. This has lead to a focus on consumer-directed healthcare as a possible solution to spiraling costs.

High costs impact everyone. As costs rise, employees, not just employers, end up paying more. If you look at how costs are divided the proportion of the total cost, the amount of the cost borne by employees has remained stable -- at about 20% of the total cost, according to the Towers Perrin employer survey. Thus, as premiums rise, both employer and employee costs escalate.

The cost of healthcare in the U.S. is making American business extremely uncompetitive with our global counterparts. In this country the cost of healthcare has been rising at double digit rates for several years. Consider this:

•  A survey found that one-in-four top executives at large companies said healthcare costs may force lower wage increases. One in five expect to slow hiring of permanent employees. (Source: Price Waterhouse Coopers 2005 Barometer Surveys)

•  According to the Business Roundtable's CEO Economic Outlook Survey, the cost of healthcare is the biggest challenge to increased economic growth. Litigation and energy prices are other concerns.

High costs affect small employers the most because they have the least ability to absorb escalating costs. In recent years an alarming trend has developed, the percentage of employers offering coverage has steadily declined. This trend was documented by the NJBIA Health Benefits Survey which found that in response to exploding costs, a declining percentage of survey respondents provided coverage in 2004.

The draft committee substitute for S-477 attempts to respond to the increase in the uninsured by making businesses pay more. This is backwards. If you want more people to get coverage, make it more affordable for business to buy insurance. Lower costs, not mandates, will expand access.

The real issue is the skyrocketing cost of health insurance. As I have mentioned, no matter how you look at it, employers have sustained massive increases in the cost of healthcare and have continued to find a way to sponsor health benefits plans for their employees.

NJBIA strongly opposes any attempt to require employers, large or small, to provide health care coverage. Although the vast majority of employers provide coverage to their employees, it is a voluntary benefit. Employers are looking to the Legislature to assist in providing more affordable health care options, not to add new taxes that further drive up costs.

And that is exactly what the draft committee substitute would do. It would impose a huge tax on employers with more than 1,000 full and part-time employees – even those who provide generous medical benefits.

The effect of the measure would be to require an employer to spend $8,673 annually for those working 40 hours per week or pay a tax. Since single health coverage costs for large employers average about $5,000 per employee, employers will be subject to a new healthcare tax of around $3,600 per employee simply because the cost of single coverage does not exceed $8,673 .

The Healthcare Tax will hurt New Jersey businesses and the economy. The skyrocketing cost of employer-based coverage has begun to have a profound and negative impact on many companies' ability to compete. This measure will certainly influence companies' decision to locate or to expand in New Jersey . This will be just one more reason why NJ is less competitive than our neighboring states.

So what can be done to improve access to affordable insurance?

Some of the forces driving health insurance costs higher are national in scope, such as an aging population, new medical technologies and treatments, and greater utilization of healthcare services. However, many of the forces driving costs higher in New Jersey are specific to this state, and they often are a direct consequence of outdated or misguided State laws and regulations.

NJBIA supports the following concepts:

•  Improve the Quality of Healthcare in New Jersey
Systemwide changes have the potential reduce healthcare costs by promoting quality and efficiency for all employers, large and small. The Legislature should act to promote evidence based medicine, reduce medical errors, promote health IT, and the greater use of report cards. Among the steps that can be taken:

•  Expand Health Information Technology
New Jersey needs to implement a computerized health records system. A paperless system has the potential to reduce healthcare costs by providing more efficient and higher quality care.

•  Public Reporting of Cost and Quality Data.
The State should encourage the development of quality information that can be used to guides consumers to better health plans and providers, and make that information available on a comprehensive website. Numerous states have created public reports on the quality of care provided by health plans, hospitals and nursing homes. Minnesota has lead the way on this.

•  Pay for Provider Performance on Quality and Efficiency.
The State should support pay-for-performance activities—rewarding physicians and hospitals for delivering high-quality care should be advanced in New Jersey . The State should act to encourage evidence based medicine protocols, as well as the financial incentives to use them, as a critical step to create a high benefit-lower cost approach to delivering high quality healthcare.

•  Provide Direct Tax Incentives:
One way to assist employers in their efforts to provide employees with healthcare coverage is to provide direct tax relief to employers that provide employee health coverage. Employers should be allowed to deduct the full cost of that coverage from their state income taxes or they should be given a state tax credit.

•  The Legislature should repeal the 1 percent tax on HMOs.

•  HSAs: New Jersey has amended its insurance laws to allow high deductible health plans that meet the federal guidelines, but New Jersey should go further to encourage the purchase of health savings accounts (HSAs) by making contributions to these accounts tax-deductible under state income tax law.

•  Hold the Line on State-imposed Health Coverage Mandates:

Through the years, the State Legislature has passed dozens of laws mandating costly insurance coverage of previously uncovered medical treatments and services. Often these mandated benefits are not based in good medical science, but rather are adopted based emotional appeals of affected parties. These mandates add an estimated 20 percent or more to the cost of health insurance (about $1,500 per employee). Many new mandates are pending.

•  Reform the Small Employer and Individual Markets

Since small employers are least able to afford to provide coverage, reform of the State regulated programs for individual (IHC) and small-group insurance (SEH) are essential. These programs must be overhauled to give purchasers more choice and flexibility in plan design. Components of reform should include the following:

•  Allow Small Employers More Flexibility in Designing Their Own Plans: Reform must allow small employers and sole proprietors more flexibility in the plan design.

•  Create a “Basic” Health Plan: To ensure that small businesses and the self employed have access to affordable health insurance a new basic health plan should be allowed in NJ that provides basic health coverage.

•  Reduction in the Number of Standard Plans: Reduce the number of standard health plans (to three from five) that all HMO/insurance providers must offer. Too many standard plans drive up administrative and insurance costs.

•  Reform the Rating of the Individual Market: The rating system in the individual market has led to skyrocketing rates and dropping enrollment. Movement toward modified community rating (premiums offered within a defined range) would allow products to be priced more appropriately, making insurance more affordable over time.

•  Eliminate the Assessment in the IHC: In order to end the needless litigation that has plagued the Individual Health Coverage Program, the current assessment system to reimburse carriers for excessive losses should be eliminated. Instead a carrier that participates in the Small Employer Market should be required to participate in the Individual Health Coverage Program.

•  Reinsurance: The Legislature should explore increasing the affordability by creating some mechanism that pays “catastrophic costs”. Several states have pursued this strategy with success.

Thank you for the opportunity to testify today. We look forward to working with you to provide more affordable heath insurance available to New Jersey businesses.