By Chad Terhune and Keith Epstein

As the health reform fight shifts this month from a vacationing Washington to congressional districts and local airwaves around the country, much more of the battle than most people realize is already over. The likely victors are insurance giants such as UnitedHealth Group, Aetna, and WellPoint. The carriers have succeeded in redefining the terms of the reform debate to such a degree that no matter what specifics emerge in the voluminous bill Congress may send to President Obama this fall, the insurance industry will emerge more profitable. Health reform could come with a $1 trillion price tag over the next decade, and it may complicate matters for some large employers. But insurance CEOs ought to be smiling.

Executives from UnitedHealth certainly showed no signs of worry on the mid-July day that Senate Democrats proposed to help pay for reform with a new tax on the insurance industry. Instead, UnitedHealth parked a shiny 18-wheeler outfitted with high-tech medical gear near the Capitol and invited members of Congress aboard. Inside the mobile diagnostic center, which enables doctors to examine distant patients via satellite television, Representative Jim Matheson didn’t disguise his wonderment. “Fascinating, fascinating,” said the Democrat from Utah. “Amazing.”

UnitedHealth on Capitol Hill

Impressing fiscally conservative Democrats like Matheson, a leader of the House of Representatives’ Blue Dog Coalition, is at the heart of UnitedHealth’s strategy. It boils down to ensuring that whatever overhaul Congress passes this year will help rather than hurt huge insurance companies.

Some Republicans have threatened to make health reform Obama’s “Waterloo,” as Senator Jim DeMint of South Carolina has put it. The President has fired back at what he considers GOP obstructionism. Meanwhile, big insurance companies have quietly focused on what they see as their central challenge: shaping the views of moderate Democrats.

The industry has already accomplished its main goal of at least curbing, and maybe blocking altogether, any new publicly administered insurance program that could grab market share from the corporations that dominate the business. UnitedHealth has distinguished itself by more deftly and aggressively feeding sophisticated pricing and actuarial data to information-starved congressional staff members. With its rivals, the carrier has also achieved a secondary aim of constraining the new benefits that will become available to tens of millions of people who are currently uninsured. That will make the new customers more lucrative to the industry.

Matheson, whose Blue Dogs command 52 votes in the House, can’t offer enough praise for UnitedHealth, the largest company of its kind. “The tried and true message of their advocacy,” he says, “is making sure the information they provide is accurate and considered.”

Representative Mike Ross, an Arkansas Democrat who leads the Blue Dogs’ negotiations on health reform, also welcomes input from UnitedHealth. “If United has something to offer on cutting costs, we should consider it,” says Ross, a former small-town pharmacy owner. “We need more examples that work, and everything should be on the table.”

DEMOCRATIC WELCOME

Fifteen years after the insurance industry helped kill then-President Bill Clinton’s health-reform initiative, Ross is frustrating the Obama White House by opposing proposals for a government-run insurance concern that would compete with private-sector companies. The President argues that without a public plan, premiums and medical bills will remain prohibitively high. Ross and Matheson have given strong voice to the industry’s contention that such a public insurer would actually reduce competition by undercutting private plans on price and driving them out of business. “We have concerns about a public option if it’s not done on a level playing field,” Ross says.

Obama launched his Administration vowing to extend coverage to all Americans and help pay for it by reining in insurance costs. Seven months later, insurers and pharmaceutical manufacturers that appeared vulnerable to a regulatory crackdown have been welcomed to the negotiating table by the President’s own party.

The several competing bills pending in Congress would guarantee all Americans access to health coverage, addressing the plight of the 47 million who are now uninsured. Congress plans to achieve that by expanding Medicaid, the government program for the poor and disabled; requiring insurers to accept all applicants regardless of their health; and mandating that everyone purchase coverage. Government subsidies would make the obligatory coverage more affordable. The legislation would do little, however, to slow spending by Medicare, the public program for senior citizens, or cut overall medical costs. Congress is considering taxes on the wealthy and on benefits now provided to many white-collar workers.

During the UnitedHealth road show in July, Democrat after Democrat clambered into the company’s promotional vehicle beneath a sign declaring: “Connecting You to a World of Care.” Judah C. Sommer, who heads the company’s Washington office, looked on with satisfaction. “This puts a halo on us,” he explained. “It humanizes us.”

And that Democratic proposal to tax insurance companies? It seems to be fading after the industry said it would raise rates for workers and their families.

UnitedHealth’s relationship with Democratic Senator Mark R. Warner of Virginia illustrates the industry’s subtle role. Elected last fall, Warner, a former governor of his state and a wealthy ex-businessman, received a choice assignment as the Senate Democrats’ liaison to business. The rookie senator landed in the center of a high-visibility political drama—and in a position to earn the gratitude of a health insurance industry that has donated more than $19 million to federal candidates since 2007, 56% of which has gone to Democrats.

UnitedHealth has periodically served as a valuable extension of Warner’s office, providing research and analysis to support his initiatives. Corporations and trade groups play this role in all kinds of contexts, but few do it with the effectiveness of the insurers. In June, Warner introduced legislation expanding government-backed Medicare and Medicaid coverage for hospice stays for the terminally ill and other treatment in life’s final stages. The issue isn’t a top UnitedHealth priority. But the corporation wanted to help Warner with his argument that in the long run, better hospice coverage would save money. UnitedHealth prepared a report for lawmakers finding that 27% of Medicare’s budget is now spent during the last year of older patients’ lives, often on questionable hospital tests and procedures. Expanded hospice coverage and other services could save $18 billion over 10 years, UnitedHealth asserted.

When Warner went to the Senate floor on June 15 to offer his bill, he cited those exact figures. He thanked the company for its support and put a letter from UnitedHealth applauding him in the Congressional Record.

Warner acknowledges in an interview that he worked on the hospice-care legislation with UnitedHealth executives. But he stresses that he has long experience with health issues and has formed his own views. The senator echoes UnitedHealth’s contention that a so-called public option could be a “Trojan horse for a single-payer system,” meaning government-run medical care. Warner has heard from some of UnitedHealth’s largest employer clients, such as Delta Air Lines. Delta CEO Richard H. Anderson, a former UnitedHealth executive, has told Warner and other lawmakers that big companies don’t want government to limit their flexibility in crafting employee health benefits.

ACTUARIAL ASSUMPTION

Obama’s promise to boost competition and lower costs by having the government play a much broader role in health coverage has been steadily compromised because of the resistance of such Democrats as Warner. “There are different ways to skin this and get competition” in the insurance market, Warner says.

Warner and other opponents of a public plan have relied on an estimate by John Sheils, an actuary who says that 88 million people, or 56% of those with employer-provided coverage, would desert private insurance for a government-run program. That would destabilize the marketplace and potentially kill the private insurance industry, according to Sheils, who works for the Lewin Group, a corporate consulting firm in Falls Church, Va.

UnitedHealth lobbyists routinely cite Lewin’s work, as do Senator Orrin G. Hatch (R-Utah), the second-ranking Republican on the Senate Finance Committee, and Eric Cantor (R-Va.), the House Republican Whip. Left out of these testimonials or buried in the fine print is that a UnitedHealth unit owns the Lewin Group and thus is ultimately responsible for Sheils’ paycheck. In an interview, Sheils says UnitedHealth gives him and the Lewin firm complete independence: “We call it like we see it,” he adds.

Some Democrats differ. Says Representative Pete Stark, the liberal California Democrat who chairs the House Ways & Means health subcommittee: “The Lewin Group’s so-called analysis is suspect.” The nonpartisan Congressional Budget Office has stated that the Sheils-Lewin figure is far too high.

UnitedHealth brings a mixed record to its role helping to guide health reform. The company has repeatedly hit smaller employers and consumers with double-digit rate hikes in recent years, far greater than the overall rate of inflation. An investigation last year by New York’s Attorney General will force the company to stop running two huge databases used widely within the insurance industry. By allegedly setting medical reimbursements too low—that is, skewing statistics in favor of insurers by understating “usual and customary” physician fees—the databases had resulted in the overcharging of consumers by billions of dollars nationwide. In January, UnitedHealth agreed to resolve the situation by paying $400 million in a pair of agreements with the New York Attorney General and the American Medical Assn., although it didn’t admit any wrongdoing.

In a separate case last year, UnitedHealth was forced to stop selling “limited benefit” plans with capped payouts under the imprimatur of the senior citizen group AARP. It turned out that the policies provided very modest coverage, catching many customers off guard, according to Senator Charles E. Grassley (R-Iowa), who helped bring the practice to light. Grassley pointed out that UnitedHealth paid as little as $5,000 toward surgery costing several times as much.

Despite such episodes, UnitedHealth is generally well received in legislative circles in Washington. In late May its in-house point man on reform, Simon Stevens, hand-delivered a report to key senators detailing ways to save an estimated $540 billion in federal spending over 10 years. A week later, on June 4, Stevens accompanied UnitedHealth’s chief executive, Stephen J. Hemsley, to a meeting with Senator Kent Conrad (D-N.D.), an influential moderate member of the Senate Finance Committee. Conrad has since led an effort to create nonprofit medical cooperatives that would operate much like utility co-ops as a substitute for a federally run plan. With less heft than a proposed national plan, the state medical cooperatives would pose a far weaker competitive threat to private insurers.

Conrad says in an interview that the co-op idea evolved independently of any industry input. Skirmishing over the public plan could jeopardize efforts at reform, he warns. Co-ops, he argues, are “the only alternative that’s got much of a shot” to gain sufficient votes in the Senate.

BRITISH EXPERIENCE

UnitedHealth followed up on June 30 with another report for lawmakers pinpointing $332 billion in savings through better use of technology and administrative simplification. If enacted, those changes would potentially benefit UnitedHealth’s Ingenix data-crunching unit. Ingenix, with annual revenue of $1.6 billion, is poised to establish a national digital clearinghouse to ensure the accuracy of medical payments and provide a centralized service for checking the credentials of physicians.

UnitedHealth's Stevens

Stevens, an Oxford-educated executive vice-president at UnitedHealth, once served as an adviser to former British Prime Minister Tony Blair. In that capacity, Stevens tried to fine-tune the U.K.’s nationally run health system. Today he tells lawmakers that the U.S. need not follow Britain’s example. Concessions already offered by the U.S. insurance industry—such as accepting all applicants, regardless of age or medical history—make a government-run competitor unnecessary, he argues. “We don’t think reform should come crashing down because of [resistance to] a public plan,” Stevens says. Many congressional Democrats have come to the same conclusion.

UnitedHealth has traveled an unlikely path to becoming a Washington powerhouse. Its last chairman and chief executive, William W. McGuire, cultivated a corporate profile as an industry insurgent little concerned with goings-on in the capital. From its Minnetonka (Minn.) headquarters, the company grew swiftly by acquisition. McGuire absorbed both rival carriers and companies that analyze data and write software. Diversification turned UnitedHealth into the largest U.S. health insurer in terms of revenue. In 2008 it reported operating profit of $5.3 billion on revenue of $81.2 billion. It employs more than 75,000 people.

In 2006, McGuire lost his job after getting caught up in the manipulation, or “backdating,” of company stock options. UnitedHealth was forced to restate earnings over a 12-year period to reflect the extra compensation it had granted McGuire and other executives. McGuire’s chief lieutenant, Stephen Hemsley, took over as CEO in December 2006. Two independent inquiries concluded that Hemsley wasn’t involved with the backdating. Nevertheless he forfeited $190 million in past stock compensation and unrealized gains to resolve the matter.

CEO Hemsley

Hemsley, a former chief financial officer of the now-defunct Arthur Andersen accounting firm, generally shuns the spotlight. But when health reform became a central issue in the runup to the last Presidential election, company executives say they realized UnitedHealth needed to go on the offensive. Hemsley met with White House officials on May 15 and May 22 to promote his company’s prescription for cutting federal health spending.

In August 2007, the company hired Sommer, who previously headed global lobbying for Goldman Sachs (GS). He quickly built a new Washington team of former congressional aides and other K Street operatives. One key acquisition: Cory Alexander, former chief of staff for House Majority Leader Steny Hoyer (D-Md.), an influential moderate Democrat. Alexander had been lobbying for the huge mortgage financier Fannie Mae (FNM). Today, Sommer directs a team of nearly 50 people from UnitedHealth’s spacious Washington office on Pennsylvania Avenue, equidistant between the Capitol and White House. The company spent more than $3.4 million on in-house and outside lobbying in the first half of 2009.

Sommer has retained such influential outsiders as Tom Daschle, the former Democratic Senate Leader who now works for the large law and lobbying firm Alston & Bird. Daschle, a liberal from South Dakota, dropped out of the running to be Obama’s Secretary of Health & Human Services after disclosures that he failed to pay taxes on perks given to him by a private client. He advised UnitedHealth in 2007 and 2008 and resumed that role this year. Daschle personally advocates a government-run competitor to private insurers. But he sells his expertise to UnitedHealth, which opposes any such public insurance plan. Among the services Daschle offers are tips on the personalities and policy proclivities of members of Congress he has known for decades.

Conceding that he doesn’t always agree with his client, Daschle says: “They just want a description of the lay of the land, an assessment of circumstances as they appear to be as health reform unfolds.” He says he leaves direct contacts with members of Congress to others at his firm.

What people in Washington tend not to discuss, at least on the record, is the open secret that insurers are minimizing their forecasts of the eventual windfall they will enjoy from expanded coverage for Americans. UnitedHealth has given certain key members of Congress details about its finances and tax liability—both historical numbers and figures projected under various cost-sharing scenarios. But some on Capitol Hill are skeptical. “The bottom line,” says an aide to the Senate Finance Committee, “is that health reform would lead to increased revenues and profits [for the insurance industry]. … There will be [added] costs [to the companies], but we’re not sure the revenues and profits will be as low as they say.”

A fundamental question about the health overhaul is what minimum standards will apply to the coverage all Americans will be required to have. UnitedHealth has been exchanging a high volume of information on the topic with members of the Senate Finance Committee and their staff. Stevens, the former British health aide, regularly scans PowerPoint presentations generated by the committee staff that attempt to calculate the actuarial value of proposed benefit packages. Senators stung by the projected $1 trillion price tag are winnowing down the required coverage levels to cut costs.

This is good news for UnitedHealth, which benefits when patients pick up more of the tab. In late spring, the Finance Committee was assuming a 76% reimbursement rate on average, meaning consumers would be responsible for paying the remaining 24% of their medical bills, in addition to their insurance premiums. Stevens and his UnitedHealth colleagues urged a more industry-friendly ratio. Subsequently the committee reduced the reimbursement figure to 65%, suggesting a 35% contribution by consumers—more in line with what the big insurer wants. The final figures are still being debated.

Stevens says UnitedHealth and its corporate clients want to steer Congress toward benefit levels and cost sharing that can help control overall health spending: “We are providing another resource of actual modeling and advice on how proposals in the committees are structured and some potential unintended consequences of going down certain routes.”

Perhaps more than any other insurer, UnitedHealth is poised to profit from health reform. Its decade-long series of acquisitions has made the company a coast-to-coast Leviathan enmeshed in the lives of 70 million Americans.

United’s AmeriChoice unit is the largest government contractor administering state Medicaid programs for the poor and federally sponsored plans for children. AmeriChoice’s revenue rose 34% last year, to $6 billion, and it has 2.7 million people enrolled. Those numbers should continue rising under reform since congressional Democrats are proposing an expansion of Medicaid to help achieve universal coverage. More of the working poor would qualify for Medicaid, and AmeriChoice can sell itself to states as the leading service provider.

HEALTH COACH AT THE OFFICE

Another of the big beneficiaries among UnitedHealth’s stable of subsidiaries is OptumHealth. It’s the company’s one-stop shop for managing the chronically ill, offering wellness programs and guiding consumers on treatment options. Even before the reform debate, these services were growing in demand as big employers, state and local governments, and others tried to curb health-care spending by supervising patients more aggressively.

OptumHealth provides a broad range of services, from a 24-hour hotline where nurses can suggest the best hospital for a transplant to “health coaches” who dole out meal plans, to-do lists, and motivational messages. Some OptumHealth clients bring coaches into the office or onto the factory floor to teach about diet and exercise. Many of the cost-containment strategies Democrats are pushing call for more of the preventive care that OptumHealth sells.

“We are extremely well positioned for a much broader adoption,” says Dawn Owens, OptumHealth’s chief executive. Her division, based in Golden Valley, Minn., already boasts $5.2 billion in annual revenue.

Stevens argues that while UnitedHealth will likely benefit financially from health reform, the company will also aid the cause of reducing costs. He cites what he says is its record of “bending the cost curve” for major employers.

During a media presentation in May in Washington, Stevens said medical costs incurred by UnitedHealth’s corporate clients were rising only 4% annually, less than the industry average of 6% to 8%. But that claim seemed to conflict with statements company executives made just a month earlier during a conference call with investors. On that quarterly earnings call, UnitedHealth CEO Hemsley conceded that medical costs on commercial plans would increase 8% this year.

Asked about the discrepancy, Stevens says the lower figure he is using in Washington represents the experience of a subset of employer clients who fully deployed UnitedHealth’s cost-saving techniques, including oversight of the chronically ill. “These employers stuck at it for several years,” he says. “We are putting forward positive ideas based on our experience of what works.”

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Questions About Golden Rule

A UnitedHealth subsidiary draws heat on the Hill

By Chad Terhune and Keith Epstein

Even as UnitedHealth Group has helped shape the reform debate, some lawmakers have accused it of harming consumers. Several members of the House Energy & Commerce Committee chastised UnitedHealth during hearings on June 16 and July 27 for the conduct of its Golden Rule Insurance subsidiary.

Acquired by UnitedHealth in 2003, Golden Rule has sold individual and family policies for more than 60 years. State regulators have repeatedly fined and disciplined Golden Rule for allegedly deceptive practices. In 2002 it resolved a nine-state investigation by paying $660,000, but it denied wrongdoing. Since taking over, UnitedHealth has let Golden Rule continue one of its most controversial methods: selling individual policies through a nonprofit group. This gives some buyers the misimpression they are getting group coverage and better value, regulators allege. But states have only rarely taken formal action.

House members scolded Golden Rule and other insurers for allegedly rescinding coverage entirely after sick policyholders make credible claims. Richard Collins, Golden Rule’s CEO, defended such cancellations, prompting Representative John Dingell (D-Mich.) to say: “This is precisely why we need a public option [to compete with private insurers].”

Collins responded that rescissions, used sparingly, root out fraud by dishonest consumers. That’s only fair, he added, to families who play by the rules.

Presidential brother makes hay from education reform

BusinessWeek – October 16, 2006

By Keith Epstein

Across the country, some teachers complain that President George W. Bush’s makeover of public education promotes “teaching to the test.” The President’s younger brother Neil takes a different tack: He’s selling to the test.

The No Child Left Behind Act compels schools to prove students’ mastery of certain facts by means of standardized exams. Pressure to perform has energized the $1.9 billion-a-year instructional software industry.

Now, after five years of development and backing by investors like Saudi Prince Alwaleed Bin Talal and onetime junk-bond king Michael R. Milken, Neil Bush aims to roll his high-tech teacher’s helpers into classrooms nationwide. He calls them “curriculum on wheels,” or COWs. The $3,800 purple plug-and-play computer/projectors display lively videos and cartoons: the XYZ Affair of the late 1790s as operetta, the 1828 Tariff of Abominations as horror flick. The device plays songs that are supposed to aid the memorization of the 22 rivers of Texas or other facts that might crop up in state tests of “essential knowledge.”

Bush’s Ignite! Inc. has sold 1,700 COWs since 2005, mainly in Texas, where Bush lives and his brother was once governor. In August, Houston’s school board authorized expenditures of up to $200,000 for COWs. The company expects 2006 revenue of $5 million. Says Bush about the impact of his name: “I’m not saying it hasn’t opened any doors. It may have helped with some sales.” (In September, the U.S. Education Dept.’s inspector general accused the agency of improperly favoring at least five publishers, including The McGraw-Hill Companies, which owns BusinessWeek. A company spokesman says: “Our reading programs have been successful in advancing student achievement for decades; that’s why educators hold them in such high regard.”)

The stars haven’t always aligned for Bush, but at times financial support has. A foundation linked to the controversial Reverend Sun Myung Moon has donated $1 million for a COWs research project in Washington (D.C.)-area schools. In 2004 a Shanghai chip company agreed to give Bush stock then valued at $2 million for showing up at board meetings. (Bush says he received one-fifth of the shares.) In 1988 a Colorado savings and loan failed while he served on its board, making him a prominent symbol of the S&L scandal. Neil calls himself “the most politically damaged of the [Bush] brothers.”

While hardly the first brother to embarrass a President — remember Billy Carter’s Billy Beer or Roger Clinton’s cocaine? — Neil could be the first to seek profit from a hallmark Presidential crusade. And also that of a governor: Jeb makes school standards a centerpiece in Florida, too.

Neil says he never talks shop with his brothers. He attributes his interest in education to his struggles with dyslexia. His son, Pierce, also had difficulties in school, he says. “Not one of our investors has ever asked for any kind of special access — a visa, a trip to the Lincoln Bedroom, an autographed picture, or anything.”

BusinessWeek Cover Story

February 12, 2009

By Brian Grow, Keith Epstein and Robert Berner

The bad mortgages that got the current financial crisis started have produced a terrifying wave of home foreclosures. Unless the foreclosure surge eases, even the most extravagant federal stimulus spending won’t spur an economic recovery.

The Obama Administration is expected within the next few weeks to announce an initiative of $50 billion or more to help strapped homeowners. But with 1 million residences having fallen into foreclosure since 2006, and an additional 5.9 million expected over the next four years, the Obama plan—whatever its details—can’t possibly do the job by itself. Lenders and investors will have to acknowledge huge losses and figure out how to keep recession-wracked borrowers making at least some monthly payments.

So far the industry hasn’t shown that kind of foresight. One reason foreclosures are so rampant is that banks and their advocates in Washington have delayed, diluted, and obstructed attempts to address the problem. Industry lobbyists are still at it today, working overtime to whittle down legislation backed by President Obama that would give bankruptcy courts the authority to shrink mortgage debt. Lobbyists say they will fight to restrict the types of loans the bankruptcy proposal covers and new powers granted to judges.

The industry strategy all along has been to buy time and thwart regulation, financial-services lobbyists tell BusinessWeek . “We were like the Dutch boy with his finger in the dike,” says one business advocate who, like several colleagues, insists on anonymity, fearing career damage. Some admit that, in retrospect, their clients, which include Bank of America, Citigroup, and JPMorgan Chase, would have been better off had they agreed two years ago to address foreclosures systematically rather than pin their hopes on an unlikely housing rebound.

In public, financial institutions insist they’ve done their best to prevent foreclosures. Most argue that giving bankruptcy courts increased clout, known as cramdown authority, would reward irresponsible borrowers and result in higher borrowing costs. “What we’re trying to do now is target the bill to make it as narrow as possible,” says Scott Talbott, a lobbyist for the Financial Services Roundtable. On the defensive, the industry nevertheless benefits from one strain of popular opinion that home buyers who took on risky mortgages—even if the industry pushed those loans—don’t deserve to be rescued.

AN INDUSTRY IN DENIAL

However the skirmish ends, the industry’s contention that it has done as much as possible to limit foreclosures seems hollow. Some statistics it cites appear to be exaggerated. Even pro-industry figures such as Steven C. Preston, a Republican businessman who headed the Housing & Urban Development Dept. late in the Bush Administration, concede that many lenders have dragged their heels. “The industry still has not stepped up to the volume of the problem,” Preston says. One program, Hope for Homeowners—which Bush officials and banks promised last fall would shield 400,000 families from foreclosure—has so far produced only 25 refinanced loans.

Meanwhile, an already glutted market sinks beneath the weight of more foreclosed homes. Borrowers whose equity has evaporated have nothing to tap into if the recession costs them their jobs. Some lawmakers and regulators are calling for a foreclosure moratorium. “People are falling through the cracks,” Preston says. “That’s bad for communities, bad for the individuals losing their homes, and bad for investors.”

In early 2007, as overextended borrowers began to default on too-good-to-be-true subprime mortgages, housing experts sounded an alarm heard throughout Washington. Christopher Dodd (D-Conn.), chairman of the Senate Banking Committee, wanted to push a bill requiring banks to modify loans whose enticingly low “teaser” interest rates soon give way to tougher terms. But he knew that with Republicans strongly opposed, he lacked the muscle, according to Senate aides. So Dodd did what politicians often do. He convened a talkfest: the Homeownership Preservation Summit.

A who’s who of banking executives gathered on Apr. 18, 2007, behind closed doors in an ornate hearing room in the marble-faced Dirksen Senate Office Building. Dodd told them they needed to get out in front of the foreclosure fiasco by adjusting loan terms so borrowers would continue to make some payments, rather than stopping altogether. Foreclosure proceedings typically cost banks about 50% of a property’s value. That’s assuming the home can be resold—not a certainty when empty houses multiply in a neighborhood. “What are you doing?” Dodd asked the executives. “What do you need me to do to help you modify loans?”

Some from the industry denied a foreclosure problem existed, including Sandor E. Samuels, at the time chief legal officer of subprime giant Countrywide Financial. They vowed to continue selling loans with enticing introductory rates as well as those requiring minimal evidence of borrowers’ income. “We are going to keep making these loans until the last second they are legal,” Samuels later told a fellow participant.

On May 2, 2007, Dodd’s office issued a “Statement of Principles” stemming from the summit. It outlined seven vaguely worded industry aspirations, such as making “early contact” with strapped borrowers and offering modifications that could include lowering loan balances. The principles had no effect, some summit participants now concede.

Senate Banking chairman Chris Dodd

Much of Dodd’s attention shifted to his campaign for the Democratic Presidential nomination. Senate Banking Committee spokeswoman Kate Szostak says Dodd aggressively pursued the foreclosure issue, but “both the industry and the Bush Administration refused to heed his warnings.” The lawmaker accepted $5.9 million in contributions from the financial-services industry in 2007 and 2008.

Asked about his role at the summit, Samuels confirmed in an e-mail that he “did speak—formally and informally—about the performance” of subprime loans. But he declined to elaborate. He now works as a top in-house lawyer for Bank of America, which acquired Countrywide in July 2008.

A major reason financial institutions and investors are so determined to avoid modifying loan terms more aggressively has to do with accounting nuances, say industry lobbyists. If, for example, a bank lowered the balance of a certain mortgage, there would be a strong argument that it would have to reduce the value on its balance sheet of all similar mortgages in the same geographic area to reflect the danger that the region had hit an economic slump. Under this stringent approach, financial industry mortgage-related losses could far surpass even the grim $1.1 trillion estimated by Goldman Sachs (GS) in January. A desire to postpone this devastating situation helps explain lenders’ intransigence, says Rick Sharga, vice-president of marketing at RealtyTrac, an Irvine (Calif.) firm that analyzes foreclosure patterns.

By mid-2007, Bush Administration officials were deeply worried about the financial industry’s unwillingness to confront the growing catastrophe. Even banking lobbyists say they realized that their clients had lapsed into denial. The K Street representatives agreed that Treasury Secretary Henry Paulson needed to step in, says Erick R. Gustafson, then the chief lobbyist for the Mortgage Bankers Assn. “It was like an intervention,” he says. “We had to get Treasury involved to get the banks to give us information.”

That summer, Paulson, a former CEO of Goldman Sachs, summoned industry executives to the Cash Room, one of Treasury’s most elegant venues. There, beneath replica gaslight chandeliers, Neel T. Kashkari, a junior Goldman banker whom Paulson had brought to Treasury, urged industry leaders to move swiftly to keep more consumers from losing their homes. Bankers know how to adjust interest rates, extend loan durations, and, if necessary, lower principal, said Kashkari, who has temporarily remained in his post. A couple of months later, Paulson summoned the executives again, this time to his conference room. “We told them we need to get over the goal line,” recalls a former top Treasury official. “Cajoling is a euphemism for what we did. We pounded them.”

One product of the Treasury conclaves was the Hope Now Alliance, a government-endorsed private sector organization announced by Paulson on Oct. 10, 2007. Lenders promised to cooperate with nonprofit credit counselors who would help borrowers prevent defaults. Faith Schwartz, a former subprime mortgage executive, was put in charge.

WINDOW DRESSING?

The alliance got off to a shaky start. An early press release contended that there had been more foreclosures nationally than the Mortgage Bankers Assn. was conceding at the time. “We looked like the Keystone Kops,” says an industry lobbyist. Soon it became apparent that the program was primarily a public-relations effort, the lobbyist says. “Hope Now is really just a vehicle for collecting and marketing information to the Treasury, people on the Hill, and the news media.”

In a press release last Dec. 22, Hope Now said it had prevented 2.2 million foreclosures in 2008 by arranging for borrowers to catch up on delinquent payments and, in some cases, easing terms. But the data don’t reveal how many borrowers are falling back into default because many modifications don’t, in fact, reduce monthly payments. The alliance doesn’t receive this information from banks, says Schwartz.

There’s reason for skepticism. Federal banking regulators reported in December 2008 that fully 53% of consumers receiving loan modifications were again delinquent on their mortgages after six months. Alan M. White, a law professor at Valparaiso University, says the redefault rates are high because modifications often lead to higher rather than lower payments. An analysis White did of a sample of 21,219 largely subprime mortgages modified in November 2008 found that only 35% of the cases resulted in lower payments. In 18%, payments stayed the same; in the remaining 47%, they rose. The reason for this strange result: Lenders and loan servicers are tacking on missed payments, taxes, and big fees to borrowers’ monthly bills.

Consider the case of Ocbaselassie Kelete, a 41-year-old immigrant from Eritrea who called Hope Now last fall. Kelete, a naturalized U.S. citizen, bought a $540,000 townhouse in Hayward, Calif., in November 2006 with no down payment and 100% financing from First Franklin Financial, a subprime unit of Merrill Lynch. At the time, he and his wife earned $108,000 a year from his two jobs, with a pharmacy and an office-cleaning service, and hers as a janitor. Kelete says First Franklin and his realtor convinced him that he could afford a pair of mortgages, one with a 7.5% initial rate that would rise after three years, and a second with a fixed 12% rate. His monthly payment would total $3,600.

“WORK WITH ME”

“The realtor said, ‘Just make sacrifices for two years. Home prices will go up, and you can refinance at a lower rate,’ ” Kelete recalls. He regrets signing a mortgage he couldn’t afford—a mistake many people made during the subprime craze. Home prices didn’t go up. He lost his office-cleaning job. First Franklin modified his loans, but added on property taxes it had failed to collect earlier. Kelete’s monthly bill rose to $3,900. In October 2008, he called Hope Now. A counselor set up a conference call with First Franklin. The lender’s representative said Kelete should get another job or give up the house, the borrower says. Kelete responded that he’d already lost his second job cleaning offices and couldn’t find another in a faltering California economy. “Why don’t you work with me?” he asked First Franklin. The lender declined. The Hope Now counselor said there was nothing more to do. “Foreclosure is the only future I see,” Kelete says. A spokesman for BofA, which acquired Merrill in December, declined to comment, citing the borrower’s privacy. After BusinessWeek’s inquiries, however, First Franklin contacted Kelete about lowering his monthly payments.

Hope Now’s Schwartz acknowledges she is fighting an uphill battle. By her calculation, 45% of the borrowers her organization advises still end up in foreclosure. “If I seem frustrated,” she says, “it’s because we are dealing with nothing but an exploding problem.” She has a full-time staff of four in Washington; 500 counselors participate in the industry-funded hotline. “You shouldn’t take it lightly, what we have achieved,” Schwartz says. She bristles at suggestions that the statistics she disseminates are misleading. “I print what I know,” she says, noting that some of her bank members aren’t forthcoming about loan modifications. “It’s like herding and juggling cats.”

By early 2008 it was obvious that Hope Now wasn’t halting a significant percentage of foreclosures. Democrats in Congress began gathering ideas for a government-sponsored remedy. Many of those ideas came from the industry. Lobbyists and congressional aides referred to one concept as “the Credit Suisse plan.” Another, “the Bank of America plan,” would allow borrowers to refinance mortgages with loans guaranteed by the Federal Housing Administration. Representative Barney Frank (D-Mass.), the chairman of the House Financial Services Committee, had solicited BofA’s advice via an old Boston acquaintance, Anne Finucane, the bank’s chief marketing executive and a politically active Democrat. He assigned several aides, including Michael M. Paese and Rick Delfin, to work out the details.

Francis Creighton, a Democratic former staff member on the Financial Services panel who had gone to work as a lobbyist for the Mortgage Bankers Assn., negotiated with Paese and Delfin. Creighton’s Republican colleague Gustafson huddled with aides to such GOP lawmakers as Representative Spencer Bachus and Senator Richard Shelby, both of Alabama.

Before long, the anti-foreclosure provisions were being altered in ways the industry favored. Shelby, the ranking Republican on the Senate Banking Committee, along with other Republicans insisted on the pro-industry language in exchange for their support, aides say.

In the end, the program included stiff up-front and annual fees and a requirement that homeowners pay the government 50% of any future appreciation in the property’s value—all of which made it much less attractive to borrowers. Moreover, the banks’ participation was made entirely voluntary; there was no way to pressure them to cooperate.

Congress approved Hope for Homeowners on July 26, 2008, as part of a larger measure imposing restrictions on the mortgage finance firms Fannie Mae (FNM) and Freddie Mac (FRE). At the Mortgage Bankers Assn., lobbyists gathered in Gustafson’s corner office to lift plastic cups of wine in celebration.

Those familiar with Hope for Homeowners anticipated that its fine print would discourage all but a few borrowers. “We knew it was likely to have limited appeal,” says Preston, the former secretary of HUD, which oversees the FHA. George Miller, executive director of the American Securitization Forum, a Wall Street trade group, calls the program and its 25 refinanced loans “useless” because of the onerous details.

BROKEN BILL

Shelby, for his part, never expected Hope for Homeowners to accomplish much, according to Republican Senate aides. He agreed to it to gain Dodd’s support for greater regulation of Fannie and Freddie—and only when assured the program wouldn’t drain tax dollars. “My consistent aim throughout this crisis has been to protect the American taxpayer,” Shelby told BusinessWeek in a statement. He accepted $565,000 in contributions from the financial-services industry in 2007-2008.

Frank, whose industry contributions totaled $948,000 over the same period, says he became skeptical Hope for Homeowners could achieve its initial goal of helping 1 million people. But he expected much more progress than the mere 25 refinancings that have occurred so far, according to HUD. He blames Republicans and the industry for undercutting his legislation. “I didn’t have the votes to do more,” he says.

The Massachusetts liberal hasn’t given up hope of repairing Hope for Homeowners. He is working on changes that would cut borrowers’ up-front fees and provide bonus money for mortgage servicers that agree to participate in the voluntary program. Frank aides Paese and Delfin aren’t assisting with the fixes: They have left their congressional staff positions for lobbying jobs with the Securities Industry & Financial Markets Assn. in Washington. They say they are observing the one-year federal ban on speaking with their former boss about business they did on the Hill.

In the first days of 2009 it appeared that progress might be possible on a different front. A slumping Citigroup came back to the Treasury Dept. for a second round of bailout money. Bowing to pressure from regulators, Citi broke ranks with its rivals and dropped its opposition to bankruptcy cramdown.

Senator Dick Durbin (D-Ill.), who since 2007 had led unsuccessful efforts in Congress to give bankruptcy judges authority to modify home loans, dispatched his senior economic policy adviser, Brad J. McConnell, to talk with lobbyists for JPMorgan Chase and Bank of America. “Each agreed to take [the idea] back to their folks to see what they could do,” says a person familiar with the talks. Citi’s concession, the imminent Obama inauguration, and intensifying public hostility toward big banks contributed to an atmosphere Democrats assumed would be conducive to compromise.

TALKING POINTS

By the time McConnell talked to the JPMorgan and BofA representatives the next day, however, “they had gone on full defense mode and started to complain about how lousy a deal Citi had struck,” says the person familiar with the exchanges. Bank opposition, Durbin says, “was very shortsighted in light of the mess they have created in our economy.”

In the following weeks, banking lobbyists launched a renewed attack on the cramdown legislation, enlisting as an ally Republican Representative Lamar Smith of Texas, among others. Apart from Citi, “the industry remains united in that bankruptcy cramdown would destabilize the market” by creating widespread uncertainty about the value of numerous troubled mortgages, says Steve O’Connor, senior vice-president for government relations at the Mortgage Bankers Assn. His group is distributing talking points to key congressional aides laying out reasons why “Congress should defeat bankruptcy reform legislation.” These include the argument that if lenders can’t be confident that loan terms will survive, they will raise rates and reject riskier borrowers. Industry lobbyists are organizing home state bankers to pressure moderate Democrats they hope will be receptive to limiting the kinds of loans eligible for cramdown. One target: Senator Evan Bayh of Indiana.

Stefanie and James Smith of Santa Clarita, Calif., fear they may need the help of a bankruptcy court if they are to keep the subdivision home they bought for $579,000 in November 2005. Stefanie, 37, a university human resources coordinator, and James, 40, a federal law enforcement agent, borrowed the entire amount in two subprime loans that required a total monthly payment of $3,000. A representative of their lender, Countrywide, told them not to worry, says Stefanie: They would be able to refinance in a year.

By mid-2007 they were running late on payments, and refinancing options had dried up. With their monthly bill scheduled to jump to more than $4,000 this January due to a rising mortgage rate, Stefanie contacted Countrywide last summer. She asked for a loan modification so they could avoid default. In December the lender said it would be willing to increase their payment by $600. That was better than the scheduled rise of $1,100, so the Smiths agreed.

But now they are struggling to pay the higher amount. Countrywide’s parent, BofA, declined to comment, citing the Smiths’ privacy. After BusinessWeek’s questions, though, Countrywide called them to discuss cutting their payments.

“We knew when we bought that the payments would be a stretch,” says Stefanie. She regrets assuming they would be able to refinance at a lower rate. “We are not deadbeats,” she adds. “All we want is a mortgage we can afford.”

(Text to come)

Media General News Service
April 25, 2004

By KEITH EPSTEIN

WOOSTER, Ohio – Joe Tomassetti’s last day on the job felt like the end of his life.After 17 years with one of America’s best-known companies, Tomassetti got 14 weeks of severance pay and his box of tools – for machines he won’t be fixing any more.

“I don’t know what I’m going to do,” he said just before his final shift last month. He checked the clock with a look of dread.

“This is something you read about in the newspaper, isn’t it? It happens to the other guy. It happens in other towns,” he said.

At 40, the single father of two boys had lost his $20-an- hour paycheck because Rubbermaid Corp. decided to abandon the town it built.

Tomassetti and his family – father, uncle, brothers, sisters – worked at Rubbermaid a total of 200 years. They thought it would be there always, even after a tornado ripped off the roof in November. Employees labored all night to get the factory running the next day.

` `That place is half my life. It’s all I know,” Tomassetti said, turning away to hold back the tears. “It makes me want to cry, you know? Life’s suddenly so uncertain. What am I going to do tomorrow?”

Economic Insecurity

He had lived the working- class dream, securing a steady job with a high school education, a job good enough to see a man through to retirement.

Suddenly, he was unemployed, apprehensive – and ready to take out his frustration in the election between President Bush and challenger John Kerry.

“I’ll take my chances with John Kerry,” he said. “This country needs a big change.”

That feeling could prove pivotal in Ohio, where, as in Florida, the margin between the candidates looks razor- thin.

Four years ago, Bush won Ohio, population 11.4 million, by 166,735 votes. Since then, the state has lost about 223,000 jobs, a chunk of the 2 million lost nationally.

Pollsters speculate that economic insecurity could make Ohio “the new Florida” – a populous state where a few voters could tilt the presidential race.

Some workers, such as Tomassetti, blame both political parties along with corporate greed. President Clinton, a Democrat, opened doors to U.S. companies exploiting cheaper labor overseas; Bush, a Republican, hopes a rallying economy and talk of retooling workers will save him from vengeful voters.

Tomassetti has heard the president’s assertions that jobs are being created as old ones vanish.

He doesn’t think they’re the kind of jobs his town found at Rubbermaid.

“Where am I going to go, Burger King?” he said. “Is that where jobs are being created?”

Ohio and Florida are not alone this year. Pollsters and strategists envision tough fights and close calls in at least 15 other states where the vote split narrowly four years ago.

Those states are Arizona, Arkansas, Iowa, Maine, Michigan, Minnesota, Missouri, Nevada, New Hampshire, New Mexico, Oregon, Pennsylvania, Washington, West Virginia and Wisconsin.

The fiercest campaigning is under way in these states. On a political map awash with states clearly favoring Bush or Kerry, these are the states that, once again, could go either way.

`The No. 1 Issue’

Bush may benefit in Florida from a statewide economy that has gained 236,000 jobs since his election. In Ohio, conversely, the loss of well-paid manufacturing jobs could spell trouble for the president.

“It’s the only issue,” said Jim Ruvulo, Kerry’s Ohio campaign chairman.

“It hurts us,” acknowledged Bob Bennett, Ohio’s Republican Party chairman. “Economy is the No. 1 issue, and if we’re still faced with large unemployment [at election time], that’s going to affect things. That’s people’s pocketbooks.”

Even if the economy improves, Democrats will try to exploit anxieties over lost wages and rising prices, blaming Bush for his economic policies and for hiding the true costs of war.

“The loss of jobs is having a profound effect on the quality of people’s lives,” Kerry said one recent afternoon between forays to Great Lakes states hit hard by manufacturing struggles.

“In Ohio,” Kerry said, “you’ve got this incredible job loss where pain is being felt.”

Four years ago, Democrats infamously abandoned their strategy in Ohio, packing up Al Gore’s campaign and yanking television advertisements just weeks before the election. They piled their chips on Florida and rolled the dice.

Bennett concedes that his Republican Party got lucky.

“Did we dodge a bullet in Ohio? We probably did. We almost lost it,” he said.

Had Gore won the state’s 20 electoral votes, he would be president today.

This time, neither party is taking anything for granted. Republicans are trying to sign up one volunteer for every 50 voters. Democratic-allied labor unions are mobilizing members with a ferocity unseen for years.

“The intensity of their turnout is probably as unified as I’ve seen it since I’ve been chairman,” Bennett said. “There’s no question, their base is fired up.”

Bush and Kerry frequently visit the state, stopping even at towns generally neglected since the days of Presidents Hoover and Truman.

At Ironton, a once-bustling industrial center of blast furnaces and smokestacks now down to 11,000 residents, Bush appeared in front of a banner that said: “Strengthening America’s Economy.”

“As the economy changes,” he said, “people need to change with it.”

Jay Nolan/Tampa Tribune

`Mouse On A Wheel’

Some 250 years ago, the area that became Ohio was a wilderness rich in resources and ready for the taking. Bear, deer and elk roamed deep forests. Buffalo foraged in pristine meadows.

Explorer Christopher Gist, drawn to the “river-ribboned land” of the Miami Valley, said it “wants nothing but cultivation to make it a most delightful country.”

Today, at the confluence of the same Miami and Mad rivers that Gist exulted, the delight has darkened.

In Dayton, a city of idled factories, shuttered shops, dozens of food banks and hundreds of rundown homes, some highly qualified and connected people pine for work.

Donna Riddlebargar solved other people’s problems for 14 years by plowing through government bureaucracies as a caseworker for the area’s congressman, Tony Hall.

Since his term expired in January 2003, Riddlebargar has been unable to find work, even as a temporary hire.

She’s pulling money out of her retirement account, incurring tax penalties, to make car payments and buy groceries.

“I was always the helper. Now look at me,” she said. “You feel like a mouse on a wheel after awhile.”

Since Bush took office, the Dayton area has lost 15,000 jobs.

McCall’s ceased its magazine publishing.

Nabisco took its famous crackers elsewhere, leaving an empty factory that looms over a crime-ridden housing project.

Even cash registers, which were invented in Dayton and stuffed the city with dollars, are gone. The factory that first made them is an empty lot without so much as a historical marker.

Delphi Corp., a General Motors spinoff, and NCR Corp., successor to the National Cash Register Co., have eliminated thousands of jobs. Where a factory once stood, signs on a fence remain: “Support your job. Buy G.M.”

“What job?” asked Herman Panstingel, staring at broken windows in the vacant Frigidaire complex where he once made air conditioning parts for General Motors.

`The Company’ Departs

Wooster felt immune to such pain for a long time.

An oasis of Victorian homes and conservative values in northeast Ohio, Wooster had watched for years as other communities endured manufacturing slowdowns and shutdowns.

The name of a local outlet store almost defined the town: “Everything Rubbermaid.”

Over eight decades, “the company,” as it was known, created a global brand for plastic household products. It helped build schools, an arts center, a fitness center, an ice arena, a library and an alumni building at the College of Wooster.

People raved about the good living.

But the company that struck it rich with garbage pails and ice cube trays eventually found wages and benefits too costly in unionized Wooster. Other companies made similar products more cheaply, often abandoning U.S. factories for inexpensive labor overseas.

Rubbermaid was sold, altered, streamlined. It started making bath mats, for example, in Mexico. Still, sales foundered.

Today, nearly a quarter of the U.S. plastic industry’s injection molding machines – the kind of machines Tomassetti kept running – sit idle.

The ripple effects of Rubbermaid’s pullout are obvious. An elementary school is being closed in anticipation of lower tax revenues. Thefts are on the rise. There’s a moral backlash against an entrepreneur who tried to make money in a novel way for conservative Wooster: renting pornographic videos.

“It’s been devastating,” said Mike Kendall, vice president of United Steelworkers of America Local 302. “All the restaurants, the gas stations, the outlet stores they shop at, all of them will pay.”

Tisha Klopfenstein is one of many who don’t blame the president for such changes, but she recognizes the divisions among customers at the downtown store where she clerks.

“Instantly you can tell from the look in people’s faces who has been laid off,” she said. “It’s like their life is over. It’s like, what does their life mean now?”

Karen Redick, a quality auditor sent packing after 28 years with the company, echoes the familiar theme.

“For a lot of us, we grew up with Rubbermaid. It’s in our blood,” she said. “You want to get a good-paying job there right out of high school, and you plan to retire there.

“But maybe we just weren’t seeing the whole picture.”

`This Glorious Future’

Life in Ohio is not grim everywhere, of course.

Even Dayton boasts examples of prosperity, mostly involving engineering and technology related to military contracts at Wright-Patterson Air Force Base. The base is the state’s fifth-largest employer, with 22,000 workers.

As with Tampa’s MacDill Air Force Base, however, local leaders worry because of the federal effort to close and consolidate some military bases.

Bob Taft, Ohio’s Republican governor, likes to say that the Buckeye State – once dominant in agriculture, then in manufacturing – has simply entered a new era.

A “third frontier” is opening with high-paying technology jobs, Taft contends. Some suburbs of Cleveland, Columbus and Cincinnati appear as flush with disposable income and reliable employment as Brandon or New Tampa.

Yet the transformation to a technology economy has a long way to go, cautions Robert Adams, political science professor at Wright State University in Dayton.

“There is insecurity and fear about when this glorious future will arrive,” he said.

Sometimes Leslie Smith drives to the house she used to have, a three-bedroom ranch in the country outside Dayton, the type of place where she always wanted to live. She sits in her car at the end of the driveway remembering joyous family times, and she cries.

Then she returns to the gritty area where she lives now, where she has lived most of her life – a place she escaped, briefly.

“Having something, then losing it all and starting over,” Smith said, “you can’t imagine how awful it is to have your dream for 4 1/2 years, and then it all gets taken away in 30 seconds.”

That’s how long she recalls it took bosses at International Harvester in nearby Springfield to give her the bad news in March 2002. She was a supervisor on the truck maker’s assembly line for radiators, earning $100,000 a year.

“I was the breadwinner of the family,” she said. “Suddenly we had no benefits, none of that money coming in. I had 12 weeks’ severance pay, but that went by in no time. No matter where I looked, there just weren’t jobs.

“And, well, that’s when you call your father and say, `What am I going to do? I lost my home. I lost my dream. I had to file bankruptcy. What now?’ ”

`Not So Sure Anymore’

There was a time Smith’s father could have helped a lot of people.

As leader of Ohio’s second- largest labor union council, Wesley Wells is almost a microcosm of the state’s modern labor movement, fighting to save just a few jobs.

Every day, unemployed union members call looking for work, often any kind of work.

“It’s heartbreaking,” said Wells, the AFL-CIO regional labor council director. “I have to say, `There are no jobs out there.’ ”

As recently as 1980, Local 87 represented 8,000 workers. Today there are 1,517, and many auto parts are being made elsewhere, including overseas.

“I’ve never seen it this bad in Dayton or Ohio, where people can’t find a job,” Wells said. “A lot of my members are on welfare.”

His daughter works in his office as his secretary. She earns one-fifth of her old income: $20,000 a year.

The labor woes don’t guarantee an electoral shift for Ohio, though.

“It’s not so bad here yet that anyone with a `D’ after their name will automatically win,” said John Green, director of the Ray C. Bliss Institute of Applied Politics in Akron.

In a culturally conservative state, job losses create “a great opportunity for Democrats,” Green said, “but Bush still has strong support.”

That is why both parties are working so hard across Ohio, which has voted for the winner in every presidential election since 1964.

No Republican has lost the state and won the presidency. Only two Democrats, Franklin Roosevelt and John Kennedy, lost Ohio but gained the White House.

One recent poll showed Bush and Kerry neck-and-neck statewide, and Kerry ahead in Franklin County, which includes Columbus and has voted Democratic only recently.

There was a time in Delaware, just north of Columbus, when the parties “could run Jesus on the Democratic ticket and Hitler on the Republican ticket, and Hitler would win 3- to-1,” said local antiques seller Robert Tuttle.

Today, “a lot of people seem to be fed up with Bush,” said barber Joy Stewart, who voted for him in 2000 but has doubts about his strategy in Iraq, where her nephew is a military helicopter pilot.

“All the pastors seem to want Bush,” she said, “but people are not so sure any more, including me.”

Minorities and the poor — the largest group of uninsured Americans — suffer disproportionately from health problems. But would guaranteed coverage make everything better?

The short answer: No.

According to a little-noticed finding in a recent Institute of Medicine report: “Health insurance by itself will not eliminate ethnic and socioeconomic disparities in health.” [2]The conclusion is based on a University of California at San Francisco analysis of research spanning 16 years.

“While health insurance may alleviate financial barriers to care and improve the choice of providers,” the analysis said, “it does not address other individual and societal determinants of poor health experienced by ethnic minorities and the disadvantaged.” [3]

In short, the authors cautioned, the United States “should not be content to focus only on insurance [to correct] social disparities in health.” Scandinavia, Japan and the United Kingdom, for example, have failed to erase socioeconomic differences despite their well-established systems of universal health coverage. [4]

Less affluent persons might use a free health system more often, but that hardly guarantees the health outcomes enjoyed by the better off. For instance, a study of death rates among English civil servants — all covered by health insurance — determined that unskilled laborers and clerical staff had the greatest risk of dying within 10 years, while professionals and top administrators could be expected to live longer. [5]

In the United States, many assume that disadvantaged minorities would substantially benefit from equal access to medical practitioners, prevention and treatment. After all, racial and ethnic minorities with incomes below the federal poverty level represent a substantial proportion of the uninsured. Hispanics are three times more likely than whites to lack health insurance, and African-Americans twice as likely. [6]Indeed, some researchers suggest that racial and ethnic differences in health are due mostly to differences in socioeconomic status. [7]

Yet the University of California team showed that better care frequently failed to improve the health of minorities, the poor or the lesser educated. A study of 5,986 men, women and children with one of 17 chronic illnesses, all receiving free care or sharing in the cost, found that the poor were less likely to receive “appropriate” care than their better-off counterparts. [8]

Other studies suggest that the rates of receiving hospitalization and preventive care from health professionals depend not solely on whether people have insurance but also on race and ethnicity. Insurance also could narrow but not close the substantial gaps between the races in mortality — whites live an average six years longer than non-whites. Even when adjusting for differences in income, one-third of the difference in the mortality rate remains. [9]

Several factors tend to offset the potentially positive impact of free insurance on a person’s health, including low literacy skills, which make it harder to either understand a doctor’s instructions or choose between treatments. A person’s health beliefs, lifestyle practices and environmental influences can also affect his health. [10]People who are less educated may be less capable of communicating with a doctor, understand possible risks, appreciate the significance of symptoms, schedule an appointment or manage their conditions. [11]

The prejudices of medical professionals, cross-cultural communication failures and overt discrimination also may play a role, experts say. Other studies suggest an association between poor health and crowded neighborhoods, exposure to stressful life events and the inability to take time off from work to see a doctor.

Said Harold Freeman, president of the Ralph Lauren Cancer Center at New York City’s North General Hospital and for three decades a surgeon in Harlem: “Giving everyone an insurance card won’t solve health disparities.” [12]

[2] Committee on the Consequences of Uninsurance, Institute of Medicine, “Care Without Coverage: Too Little, Too Late,” May 2002. Copies also available athttp://www.nap.edu/.

[3] Jennifer S. Haas and Nancy E. Adler, “The Causes of Vulnerability: Disentangling the Effects of Race, Socioeconomic Status and Insurance Coverage on Health,” Institute of Medicine, October 2001.

[4] A.E. Kunst and J.P. Machenbach, “The Size of Mortality Differences Associated with Educational Level in Nine Industrialized Countries,” American Journal of Public Health, June 1994, pp. 932-937.

[5] M.G. Marmot, M.J. Shipley and G. Rose, “Inequalities in Death: Specific Explanations of a General Pattern?” Lancet, May 1984, pp. 1003-1006.

[6] Institute of Medicine, “Coverage Matters: Insurance and Health Care,” 2001. See also J. Rhodes and M. Chu, “Health Insurance Status of the Civilian Non-Institutionalized Population: 1999,” Agency for Healthcare Research and Policy, 2000.

[7] Paul D. Sorlie et al., “Mortality in the Uninsured Compared with that in Persons with Public and Private Health Insurance,” Archives of Internal Medicine, November 1994, pp. 2409-2416.

[8] The study, known as the “Rand Health Insurance Experiment,” is by R.H. Brook et al.., “Quality of Ambulatory Care: Epidemiology and Comparison by Insurance Status and Income,” Medical Care, May 1990, pp. 392-433.

[9] Jan E. Mutchler and Jeffrey A. Burr, “Racial Differences in Health and Health Care Service Utilization in Later Life: The Effect of Socioeconomic Status,” Journal of Health and Social Behavior, December 1991, pp. 342-356.

[10] Haas and Adler, op. cit., p. 26.

[11] S.K. Behera and Marilyn Winkleby, “Low Awareness of Cardiovascular Disease Risk Among Low-Income African-American Women,” American Journal of Health Promotion, May/June 2000, pp. 301-305.

[12] Quoted in Gabriele Amersbach, “Through the Lens of Race: Unequal Health Care in America,” Harvard Public Health Review, winter 2002.

Tampa’s Do-It-Yourself Health Care

Faced with overburdened emergency rooms and sharp drops in state and federal funding for the poor, some local governments are providing health care for their uninsured residents — in some cases with surprising success.

Florida’s vast Hillsborough County — a community the size of Rhode Island — raised its sales taxes to buy medical coverage for 29,000 uninsured low-income residents in the Tampa area. The scheme has dramatically lowered hospital admission rates and reduced complications from treatable ailments, such as diabetes and asthma. It also saves the county $50 million a year in property taxes that finance local public hospitals.

The county’s benefits “package” — including preventive care, pharmaceuticals, referrals to specialists, hospital services, home health care and vision and dental coverage — rivals the most expensive plans of private health insurers. And yet it costs taxpayers virtually nothing.

Meanwhile, the emergency rooms at Tampa General Hospital are no longer overrun. And the county’s costs for covering the uninsured are down from $600 a year per uninsured patient to $262, and average hospital stays are down to only five days — about half what they used to be. Complications from asthma, which accounted for nine in 10 visits to emergency rooms, now amount to fewer than one in 100 visits. Diabetes also is being detected earlier.

“We give better health to more people for less money,” says Toni Beddingfield, community relations director for Hillsborough County’s Department of Health and Human Services. “We’ve saved property-tax dollars — and we’ve saved lives.”

Local officials from around the country began taking note of the Hillsborough HealthCare program even before the federal Health Resources and Services Administration two years ago endorsed it as a “model that works.”

Similar experiments are under way in other urban areas that have large numbers of uninsured citizens, including Miami, El Paso, Texas, Augusta, Ga., and Kansas City, Mo.

Communities are trying other approaches as well. In Jackson, Miss., and Washington state, public health programs for the poor are financed with money from the $246 billion settlements in the huge 1998 class action lawsuit against tobacco companies. [1]In Portland, Maine, and Detroit, hospitals pool their money to provide primary care — keeping people healthier and out of hospitals.

But Hillsborough is trying to make do with money from the sales tax alone. Since 1999, the Robert Wood Johnson Foundation has been encouraging other communities to follow suit, as have the Ford Foundation and the National Association of Counties.

Tampa’s program grew out of the increasing burden of providing care for an estimated 117,000 uninsured residents — nearly 14 percent of the county’s population. With health-care costs escalating 17 percent annually, community leaders worried that property taxes would not be able to support the care of the poor forever.

In 1991, the state legislature agreed to a half-cent increase in the sales tax to start the new program. Despite a drop in funding to a quarter-cent after the program reported a surplus in 1997, it still manages to serve the same number of patients, who can earn no more than the federal poverty level — $8,500 for an individual, $14,500 for a family — in order to qualify.

Chief among the beneficiaries are men and women who don’t qualify for federal and state medical safety nets like Medicaid and Medicare — mainly mothers of children, young working men and middle-aged women.

All receive care through a network of five hospitals and 1,700 physicians. Generally, doctors are reimbursed at 75 percent of Medicaid rates. The doctors and hospitals bill the county directly.

County officials say the biggest fear when the program started — that it would attract people with HIV, sapping the system of resources — never materialized.

Beddingfield acknowledges that because of politics and other factors most communities may find it difficult to start a local health-care program by raising sales taxes. And yet, she argues, they should try.

“What’s the alternative? Raising property taxes? Letting all these people fall between the cracks? Filling emergency rooms and ending up having to spend far more money than you could save?” Emergency room care is far more expensive than primary or preventive care in a doctor’s office.

Back in his days as a state legislator, U.S. Rep. Jim Davis, D-Fla., enthusiastically backed Tampa’s program. Now, he says proudly, “It’s really working. It’s made the difference we all expected to see.”

[1] For background, see Kenneth Jost, “Closing In on Tobacco,” The CQ Researcher, Nov. 12, 1999, pp. 977-1000; and Kenneth Jost, “High-Impact Litigation,” The CQ Researcher, Feb. 11, 2000, pp. 89-112.

The quest for guaranteed health care is an old one. Reformers have sought major changes five times during the last century, and at astonishingly regular intervals. From the sweeping pronouncements of Theodore Roosevelt at the dawn of the Progressive Era to President Clinton’s foundering attempts led by first lady Hillary in the mid-1990s, the story mostly repeats: Proposals to expand coverage are often considered but rarely enacted, and then only on a piecemeal basis.

Every 15 years or so, movements arouse great enthusiasm, only to fail spectacularly. [47]In the end, peripheral improvements have benefited specific populations — the elderly, the disabled, low-income children and certain low-income adults. But universal coverage, though enticing to both politicians and the body politic, is as elusive as the Holy Grail.

Theodore Roosevelt’s “Bull Moose” Progressive Party made national health insurance, modeled on workmen’s compensation, a main plank in its party platform in 1912. One of the most sweeping health-reform attempts ever advanced by a presidential candidate, it called for employers, employees and society at large to pay for safeguarding Americans “through insurance” from “the hazards of sickness, accident, invalidism, involuntary unemployment and old age.” [48]

Like every major plan to follow, it went nowhere. And yet certain ideas were set in motion. By 1917, model health-insurance bills began popping up in state legislatures, and in 1929 the forerunner of Blue Cross emerged, establishing the pattern: Major proposal, major defeat, small steps forward.

After Social Security was created in 1935, supporters began urging a second step — a national health-insurance system.

In 1945, President Harry S. Truman sought to include universal health insurance with Social Security, noting that “in a nation as rich as ours, it is a shocking fact that tens of millions lack adequate medical care.” [49]

In a stirring speech four years later, he again declared his commitment: “We need — and we must have without further delay — a system of prepaid medical insurance which will enable every American to afford good medical care.” [50]

Yet Truman faced formidable foes. The AMA branded his plan “socialized medicine.” Enemies kept asking his physician, Wallace H. Graham, “are you a socialist, doctor?” [51]By the end of his time in the White House, Truman had given up his vision of universal coverage.

During World War II, health insurance had become a common employee benefit, primarily as a way to attract workers in a tight labor market. During the four decades after the war, the number of Americans with some form of health insurance increased dramatically. In the 1960s, unions made health benefits a key demand in collective-bargaining negotiations. Many experts believed that because so many workers now could visit the doctor without ever seeing a bill, health insurance actually drove up demand for medical services.

Perhaps because of the growing popularity of health insurance, Truman’s idea of insuring Social Security beneficiaries persisted. In 1965, President Lyndon B. Johnson signed legislation launching Medicare in a ceremony held, as a tribute, in Truman’s hometown of Independence, Mo. It was the cornerstone of Johnson’s so-called Great Society program to end poverty.

Johnson also signed Medicaid into law, providing health benefits for low-income pregnant women and children, disabled Americans and low-income elderly needing long-term care. “No longer will older Americans be denied the healing miracle of modern medicine,” Johnson said. “No longer will illness crush and destroy the savings they have so carefully put away over a lifetime.” [52]

President Richard M. Nixon briefly revived the idea of universal health insurance when he proposed making comprehensive, high-quality health care “within the reach of every American.” In his 1974 State of the Union address, he suggested expanding Medicaid and Medicare to provide health insurance “to millions of Americans who cannot now obtain it or afford it.” [53]His proposal got serious attention in Congress — only to be doomed by the Watergate scandal that engulfed his presidency.

Meanwhile, skyrocketing hospital costs had caught the government’s attention. Nixon and another Republican president embraced HMOs as a way to control costs. In 1973, Nixon signed the Health Maintenance Organization Act, requiring businesses with more than 25 employees to offer at least one HMO as an alternative to conventional insurance. Then, in 1982, President Ronald Reagan gave Medicare patients the option of signing up for an HMO. Managed-care organizations composed of loose networks of doctors began to proliferate, and by 1995, nearly three-quarters of covered workers were insured by an HMO. [54]

Clinton Debacle

Suddenly, in 1991, health care resurfaced as a potent political force. Harris Wofford, an upstart Democratic Senate candidate from Pennsylvania, declared: “If a criminal has a right to a lawyer, working Americans have a right to a doctor.” His message had such appeal that he resoundingly defeated a popular two-time governor.

On the advice of Wofford’s adviser, James Carville, then-Gov. Clinton appropriated Wofford’s thunder, riding the health-care theme to the Democratic nomination in 1992. In his acceptance speech, Clinton vowed to “take on the health-care profiteers and make health care affordable for every family.”

In 1993, Clinton unveiled his “Health Security Act,” a plan largely crafted under the direction of Mrs. Clinton. Employers would pay 80 percent of the premiums to insure all workers, while the government subsidized coverage for everyone else. Clinton said he wanted “to reform the costliest and most wasteful system on the face of the Earth.” [55]

Yet the president’s own party fractured badly. Some Democrats proposed a “single-payer” government system, similar to Canada’s, which would pay private health-care providers. Others sought a scaled-down version of managed competition, which would have failed to guarantee coverage to many Americans. Republicans, meanwhile, preferred compelling every American to buy insurance, using government dollars only to help the poor.

Congressional Republicans accused Clinton of trying to establish yet another inefficient, expensive and uncaring big-government bureaucracy. Hillary Clinton, too, attracted criticism, in part for her secretive management style. A single, compelling television ad, part of a $17 million campaign by the Health Insurance Association of America, also helped torpedo the plan. Its simple message — in which a fictitious couple, Harry and Louise, tried to make sense of the 1,342 pages of details — preyed on public anxieties. Would people still be able to choose their own doctors? Could employers afford to cover workers? Would health-care decisions be left up to government bureaucrats?

Yet some of Clinton’s ideas have been adopted by managed-care plans, helping them achieve some efficiencies and savings. [56]Enrollment exploded between 1986 and 1995, from nearly 26 million to 58 million, according to the American Association of Health Plans — yet people grew disenchanted with having to change doctors, being refused services and losing access to specialists.

Managed care’s unpopularity led to the “patients’ bill of rights” legislation passed by the House last August, which would allow patients to sue their HMOs, but on a limited basis.

Deep-rooted ambivalence underlies America’s stance on health care. It is viewed as a social good, but also a market commodity. Americans seem to consider it a basic need to which everyone is entitled, but also something to be earned that should be subject to free-market forces. One commentator has described the conflict in health care as the “struggle for the soul of health insurance.” [57]

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[47] Jacob S. Hacker and Theda Skocpol, “The New Politics of U.S. Health Policy,” Journal of Health Politics, Policy and Law, April 1997, pp. 315-38.

[48] See Nathan Miller, Theodore Roosevelt: A Life (1992).

[49] State of the Union address, Jan. 5, 1945.

[50] State of the Union address, Jan. 5, 1949.

[51] See Niel M. Johnson, oral history for the Harry S. Truman Library, March 30, 1989.

[52] From a speech at Truman’s home in Independence, Mo., July 30, 1965.

[53] State of the Union address, Jan. 30, 1974.

[54] For background, see Sarah Glazer, “Managed Care,” The CQ Researcher, April 12, 1996, pp. 313-336.

[55] Address to Joint Session of Congress, Sept. 22, 1993.

[56] Health Research and Educational Trust, op. cit. Health-cost increases reached a low in 1996, but then began rising again. Average premiums increased nearly 5 percent in 1999, more than 8 percent in 2000 and 11 percent from mid-2000 to mid-2001.

[57] Deborah Stone, “The Struggle for the Soul of Health Insurance,” Journal of Health Politics, Policy and Law (1993), pp. 287-317. See also Rosemary Stevens, In Sickness and in Wealth: America’s Hospitals in the Twentieth Century (1989).

Drugs for the Elderly

Even before the distractions of national security, an economic slowdown and the deficits in federal and state budgets, few expected much to happen on the health-care front this year.

The Clinton administration’s blistering defeat fragmented and polarized Washington over the subject of health-care reform. With Congress so closely divided, only isolated, dike-plugging initiatives can survive, and action is more likely through the private insurance sector. Meanwhile, the numbers of uninsured undoubtedly will continue rising along with costs.

A longstanding barrier to change is the sheer clout of several players with a lot to win or lose. As commentator Robert G. Evans, a University of British Columbia economics professor, has pointed out, the U.S. health-care system is “inequitable, inefficient, unpopular and spectacularly expensive — but enormously profitable for some Americans.” [58]

The health-care industry, its profits severely diminished from the boom years of the 1990s, zealously guards its turf against any threat to the status quo. Health professionals so far have contributed nearly $58 million to the 2000 and 2002 presidential and congressional political campaigns, and the pharmaceutical industry has donated another $37 million. [59]

Another barrier to change is cost. Late last year, for example, while debating legislation to stimulate the economy, Congress avoided any discussion of extending coverage to all Americans, focusing instead on the less expensive option of providing coverage to those who lose their health insurance after losing their jobs.

But even that debate exposed an underlying fault line almost certain to keep Washington in gridlock. Democrats sought subsidies to help the newly unemployed keep their insurance or to cover them in the Medicaid program. Republicans favored giving the newly uninsured tax credits to help them buy insurance. The same philosophical debate underlies current sparring.

This year, at least one major health-care issue — the cost of prescription drugs for the elderly — appears to be emerging at the top of the political agenda. With both the House and Senate narrowly divided, the balance of power in Washington could rest in the hands of older Americans, who typically play a disproportionate role at the polls in midterm elections.

Winning seven more seats would give the Democrats control of the House; just one seat in the Senate would give Republicans control there. And though the issue certainly isn’t new, the volume at which it is being debated is a new wrinkle. Equally intense is the determination of skirmishing party leaders to pass a measure this year — or blame the opposition for the failure to accomplish anything.

“No senior should be forced to choose between putting food on the table or paying the rent or buying the medicines they need,” declared House Speaker J. Dennis Hastert, R-Ill., in May as he unveiled the Republicans’ $350 billion proposal to add a prescription drug benefit to Medicare. The same day, Senate Democrats unveiled their proposal, with a price tag of $400 billion to $500 billion. Other House Democrats and Senate moderates are working on alternatives, and President Bush has his own 10-year, $190 billion version.

A group supported by the drug industry, the United Seniors Association, launched a $3 million advertising campaign supporting House Republicans. The Democrats, meanwhile, released a video attacking a promise Bush made during the 2000 campaign to “help all people with prescription drugs.” Notes the ad: “By his own estimate, Bush leaves out more than two-thirds of seniors in need of prescription-drug coverage.”

A Republican campaign memo hinted at the reason for all the fuss: “Republicans passing a prescription-drug benefit would go a long way to leaving Democrats with very little on the table to try to use against us” in the midterm elections. [60]

Despite such traditional divisions, some compromise appears in the wind, given the coalescence of the once-adversarial special interests into the Covering the Uninsured coalition. The group, which includes older Americans, doctors, insurance carriers and hospitals as well as consumer and labor groups, is waging a huge media campaign urging an immediate solution to the problem of the uninsured.

Tax Credits

President Bush proposes to help the uninsured buy private health policies by offering tax credits — $1,000 for adults and $2,000 for families — costing a total of $89 billion. But only individuals with incomes below $30,000 or families with incomes below $60,000 would be eligible. “Too many workers get no coverage at all with their jobs,” the president said. Americans should receive “the help they need when they need it.” [61]

Economists at the University of Pennsylvania and Yale University say Bush’s plan could reduce the number of uninsured by about 8 million. The administration estimates that it would help 6 million uninsured people buy health insurance each year, but the amount of the tax credit and its reach are widely viewed as inadequate. [62]

“It’s like throwing a 10-foot rope to someone at the bottom of a 40-foot hole,” says Pollack of Families USA. For instance, a healthy, non-smoking 55-year-old woman living at the federal poverty level — less than $8,860 in income — would still have to spend $4,000 to buy health insurance, he points out.

Moreover, some opponents worry that the president’s proposal could unravel the current employer-based system, which, in effect, indirectly uses premiums of the relatively healthy to cross-subsidize those needing more care.

However, even the most generous expansion of prescription-drug benefits for the elderly or tax credits for select populations would not tackle the larger problems of rising costs and America’s uninsured. Nor will they make up for ground being lost every day, as governments drastically scale back the existing social net.

Shrinking Safety Net

With dwindling discretionary reserves in the federal budget, money for Medicaid and CHIP has vanished, and many private doctors are refusing to accept new Medicare patients, because Medicare HMOs are paying them less. Some Medicare patients who can’t afford drugs are turning to the Veterans Affairs hospital system, where rising numbers of patients and pharmaceutical costs — which have nearly doubled since 1996 — are overwhelming an already strained system.

Recession-crippled state budgets, which partially finance and administer Medicaid and CHIP, are running deficits and anticipate fewer revenues. States are tapping rainy-day funds, laying off employees and making across-the-board cuts. The recession, the economic fallout from Sept. 11 and the explosion in Medicaid spending have caused a $40 billion to $50 billion shortfall — the largest ever — in more than 40 states. Thus, legislatures are trimming services and making cuts in the safety net just when the uninsured need it most.

In Illinois, for example, a “welfare-to-work” initiative during the late 1990s added 100,000 women to Medicaid — yet by the end of 2001 Republican Gov. George Ryan felt compelled to eliminate it. The action netted $17 million in savings and sent many of the women — who work in low-paying jobs that lack benefits — back to the ranks of the uninsured.

“Governors are dealing with unprecedented fiscal pressure,” said Raymond C. Scheppach, executive director of the National Governors’ Association. “The growth rate is simply unsustainable.” With Medicaid at a “breaking point,” states need more than money from Washington. “Absent serious structural changes to the program down the road, states will be unable to meet the needs of recipients.” [63]

Even in better economic times, the safety net misses many. Millions of low-income people who are eligible are not enrolled in government programs. Welfare reform, otherwise known as the Professional Responsibility and Work Opportunity Reconciliation Act of 1996, successfully moved people from cash assistance into jobs — but often into jobs without health coverage. Among women who have been off welfare for more than a year, only half have either Medicaid or private coverage. The other half seek care from strained safety-net institutions like faith-based charities. [64]

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[58] Robert G. Evans, “Sharing the Burden, Containing the Cost: Fundamental Conflicts in Health Care Finance,” in Theodore J. Litman and Leonard S. Robins, Health Politics and Policy (1997).

[59] Center for Responsive Politics, April 2002.

[60] Quoted in The Associated Press, May 9, 2002.

[61] From remarks Feb. 11, 2002, at Medical College of Wisconsin in Milwaukee.

[62] Some 25 percent of the uninsured would have enough money to obtain the policy they need, and another 25 percent would be able to buy policies by adding up to $169 a year per person, according to Mark Pauly and David Song, “Tax Credits, the Distribution of Subsidized Health Insurance Premiums, and the Uninsured,” National Bureau of Economic Research, Working Paper No. 8457, September 2001.

[63] Comments made in releasing the association’s Fiscal Survey of States, May 16, 2002.

[64] B. Garret and J. Holahan, “Health Insurance Coverage After Welfare,” Health Affairs, 19(1), January/February 2000.

The CQ Researcher • June 14, 2002 • VOLUME 12, No. 23
© 2002 Congressional Quarterly, Inc. All rights reserved.

The CQ Researcher • June 14, 2002 • VOLUME 12, No. 23
© 2002 Congressional Quarterly, Inc. All rights reserved.

BusinessWeek – June 11, 2007

How Iran and other nations routinely obtain restricted military technology from the U.S. Department of Defense

TO FRIENDS AND FAMILY, Reza Tabib had seemed an inspiration, proof an immigrant could launch life anew. The son of an Iranian judge, Tabib was a flight instructor at John Wayne Airport in Orange County, Calif. He spoke four languages and could be counted on for level-headed advice, and a laugh.

Agents with the Pentagon’s Defense Criminal Investigative Service discovered Tabib had another talent: procuring restricted aircraft and missile parts for the Iranian military. On May 7, a federal judge in Santa Ana, Calif., sentenced Tabib, 52, to two years in prison for trying to help Iran acquire components for the F-14 Tomcat fighter jet, the swept-wing plane once used by the U.S. and flown by Tom Cruise’s character in Top Gun. The pro-Western Shah of Iran, before his fall in 1979, had acquired 80 of the jets. Today Iran is the only country flying the aging planes, and the U.S. forbids anyone from shipping F-14 hardware to the Middle Eastern nation.

Law enforcement officials say Tabib and an associate easily obtained thousands of Tomcat components that originated from a surprising source: the online company that works with the U.S. government to auction off surplus military equipment to the public.

Defense and homeland Security Dept. investigators say they are pursuing dozens of similar cases in which restricted equipment has slipped through the military’s system of selling surplus equipment. Investigations of F-14 parts bound for Iran led law enforcement agents in March to four entire Tomcats housed at two California airfields. A nearby Navy installation had improperly sold three planes to a scrap dealer. Small museums eventually bought them. The fourth plane was sold for $4,000 to Paramount Pictures for use on the TV drama JAG. In case after case, investigators have found sensitive military equipment and parts in warehouses of front companies or the homes and briefcases of middlemen striving to make deliveries to potential adversaries. Despite precautions contained in policy and law, carelessness, antiquated record-keeping, and failures to confirm the identities and intentions of buyers have contributed to a glut of made-in-the-USA military goods on the global black market. Authorities say many parts have made it to Iran, as well as China and Syria.

One current investigation, triggered by a search in 2005 of a suspect building in California, casts an even more disturbing light on the Pentagon’s permeability. When Defense investigators moved in on their target, they found the expected cache of F-14 parts, apparently bound for Iran. But they were astounded to discover the components were the very ones intercepted during another investigation two years earlier. The parts even had evidence tags still attached to them from the previous case, in which three people were convicted of shipping aircraft and missile parts to Iran. Returned to the Pentagon, the F-14 hardware had been resold and once again was headed for Iran, says Rick Gwin, the Pentagon special agent heading the continuing investigation. “My reaction,” he says, “was extreme, to say the least.”

Each year, the U.S. military disposes of millions of excess items: boots, boats, computers, and plane parts among them. Those that aren’t destroyed because they’re too sensitive, or given away to other government agencies, are typically sold in eBay-like online auctions run by private contractor Government Liquidation. The Pentagon assigns each surplus item a unique 13-digit number and a code indicating whether it should be destroyed or sold. Some sensitive items can still be auctioned, but only to buyers willing to sign paperwork restricting how the purchase can be used and by whom.

The sorting, scrapping, and selling is handled by Government Liquidation and another unit of publicly traded Liquidity Services Inc., based in Washington, D.C. Since 2001, Government Liquidation has had the exclusive contract to sell military equipment the Defense Dept. no longer wants. Last year, the company auctioned off about 19 million items. Some 613,000 registered users, mostly small businesses, can bid on them at the Web site govliquidation.com. The company keeps up to 30.5% of the proceeds, which often amount to only pennies to the dollar of the military’s original cost. In the second quarter of 2007, sales and disposal of military surplus accounted for 58% of the parent company Liquidity Services’ revenue of $49.3 million. (Sales of surplus equipment from 350 corporate clients account for the remainder.)

Government Liquidation says that it scrupulously follows Pentagon regulations. But undercover investigators from a special unit of the Government Accountability Office, the investigative arm of Congress, have recently demonstrated just how easily a person can obtain sensitive parts from the Defense Dept.

In a report published last July, the GAO said its investigators made multiple purchases on Government Liquidation’s site that shouldn’t have been possible. They acquired body armor enhancements currently used by American troops, test equipment for guided missiles, and electronic components for the F-14. All told, the investigators identified thousands of instances in which restricted items that should have been retained by the military or destroyed had instead been sold to the public online. In other cases, GAO investigators posing as military contractors made purchases in person, walking out of the Defense Dept.’s surplus-property warehouses with metal mounts for shoulder-fired guided missiles and other sensitive equipment.

2,669 ‘SENSITIVE MILITARY ITEMS’

The GAO blamed both the Pentagon and its contractor. “Sensitive military equipment items are still being improperly released by the Defense Dept. and sold to the public, thus posing a national security risk,” the GAO report concluded. Government Liquidation, the GAO said, fails to verify the classifications of sensitive equipment and has sold items that should have been returned to the military or destroyed. The combined effect is that the government sometimes doesn’t know to whom it’s selling or what buyers intend to do with military technology.

Liquidity Services hinted at the extent of its potential liability in a 10-K filing with the Securities & Exchange Commission on Dec. 22, 2006. The company noted law enforcement investigations that could involve 79 buyers who purchased 2,669 items between November, 2005, and June, 2006. “These buyers may have acquired these sensitive military items from us,” the company stated. “If an investigation alleges that we engaged in improper or illegal activities, we could be subject to civil and criminal penalties.” The company nevertheless has denied any wrongdoing.

Responding to revelations about black market F-14 parts sales, the House of Representatives on May 17 passed legislation that would bar the Pentagon from selling any F-14 components. The Senate is expected to take up the measure in June. In an Apr. 9 letter to Senator Ron Wyden (D-Ore.), a co-sponsor of the legislation, Government Liquidation says it has decided to stop selling F-14 parts to “ensure that Iran does not receive such parts through any avenues, including the Defense Dept. surplus sales.” The letter adds that the company “always has sought to put national security ahead of commercial profit.”

The Pentagon, for its part, has asked Government Liquidation to develop better ways of tracking inventory. “They came to us and said, can you help us fix this?” says Government Liquidation spokeswoman Julie Davis. Bar code guns have replaced hand transcription of long classification numbers and paper records. New computer databases and centralized warehouses will help ensure more consistency, Davis says. “The systems in place are far superior to anything that’s been in place before,” she adds. Spokeswoman Dawn Dearden of the Pentagon’s Defense Logistics Agency agrees, saying safeguards are now adequate. The Pentagon has “significantly reduced the availability” of sensitive items and has tightened restrictions on who can walk away with parts, she says.

Representative Christopher Shays (R-Conn.), another supporter of the F-14 parts legislation, isn’t convinced. “They’ve got a long way to go,” he says. John P. Ryan, a former U.S. Secret Service agent who has overseen the GAO’s investigation of the Pentagon and Government Liquidation for four years, notices some improvement in surplus military sales. But sensitive goods can still fall too easily into the wrong hands, he says. “The system is vulnerable.”

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Also from Congressional Quarterly Researcher – June 14, 2002:

Universal Health Insurance: Not a Cure-All

Recurring Quest for Health Reform: First Enthusiasm, Then Failure

Local Health Reform: How Tampa Does It?

—————————————————————————–

It did not seem like a big thing. On the swing set at his rural North Carolina preschool three years ago, 5-year-old Dalton Dawes and a classmate bumped into each other. Then began his parents’ worst nightmare.

Dalton is a hemophiliac, and he began to bleed internally. Dalton had been receiving twice-weekly injections of a blood-clotting agent almost since birth. Now he would need them more often.

The drug would do more than simply allow him to live a normal child’s life, playing soccer and roaming the nearby woods. It would keep him from bleeding to death. Yet the family’s health insurer would not provide coverage. Nor could his parents, despite their good jobs, afford the $2,000 weekly expense — for years to come.

So Leonard Poe, a lawyer, and Heather Dawes, a paralegal, impoverished themselves. They sold off land and built a home from logs. They dispensed with the dishwasher and TV. By reducing their earnings to less than $23,000 a year, they qualified for Medicaid, the government health-insurance program for the poor.

After Dalton’s seventh birthday, his parents had to cut their income even further — to $15,492 — in order to remain eligible for Medicaid. Instead, they tried to enroll him in the Children’s Health Insurance Initiative (CHIP).

Congress passed CHIP in 1997 to tackle a worrisome statistic: the roughly 10 million American children whose families lacked health insurance. The largest single expansion of public health coverage in three decades, CHIP took direct aim at families too well off for Medicaid but too poor to afford private insurance.

Expensive medication makes a normal life possible for Dalton Dawes, a hemophiliac in rural North Carolina, but thecost forced his parents to impoverish themselves to qualify for Medicaid coverage.

Unfortunately, North Carolina’s CHIP program had run out of money by March 2001. And there were more than 23,000 other children besides Dalton waiting to join the program.

To keep up Dalton’s medication, his parents relied on drug-company charity and considered moving to a state with a CHIP program that was taking new clients.

By last September, when the North Carolina legislature restarted the program, Dalton had only three weeks’ worth of the life-preserving injections left. [1]

“It’s incredibly depressing,” Heather Dawes says. “The worst thing is, I wasn’t just fighting my own battle. There are millions of people in this county who are cut off from good medical care. They don’t deserve this. It’s awful.”

The United States spends $1.3 trillion on health care each year, more than any other industrialized nation, but it is the only developed country that does not assure universal access to basic health care. Unlike the British or Canadians, for instance, all Americans are not entitled to affordable medicine or treatment — or to keeping their existing coverage if their financial circumstances change. Partly as a result, the United States ranks 37th in the World Health Organization’s ranking of the world’s healthiest countries. [2]

Nearly one in seven Americans — 38.7 million people — lacks insurance, more than the combined populations of Texas, Florida and Connecticut. [3]Eight in 10 of the uninsured are members of working families — too well off for Medicaid and other public programs but too poor to pay private health insurance premiums.

The lack of universal coverage, some critics say, stems from the government’s historically piecemeal approach to health insurance — a complicated patchwork of private and government-subsidized coverage more like a sieve than a shield. And while there has been some progress in recent years — establishing the CHIP program and allowing workers to change or lose a job without losing insurance — many people still fall through the cracks in coverage. [4]For example, only 6 percent of the children eligible for CHIP benefits are enrolled in the program. [5]

The absence of universal health coverage has been called “one of the great, unsolved problems facing the United States at the onset of the 21st century.” [6]

The problem affects Americans regardless of their age, education or place of residence. More than half the uninsured are full-time workers or their dependents. Nearly 20 million are white, 11 million are Hispanic and 7 million are black, according to the Census Bureau. [7] Only Americans over 65 are theoretically assured of health security, through Medicare. But Medicare doesn’t cover the cost of most drugs, and critics say rising drug prices mean seniors are not really protected if they can see doctors but can’t afford the drugs they prescribe.

And the ranks of the uninsured have been rising for most of the last 15 years — even during recent periods of record-breaking economic prosperity. [8]Seven of every 10 American workers depend on their employers for health insurance, but as health-care costs have skyrocketed in recent years, companies have begun asking employees to pay a greater share of the cost, or eliminating coverage entirely. [9]

In Florida, a Chamber of Commerce survey found that only 77 percent of businesses offered health insurance to employees in late 2001, down sharply from 91 percent in 1999. [10]Nationwide, another survey found that 44 percent of U.S. employers were “very” or “somewhat” likely to increase workers’ out-of-pocket premiums during 2002. [11]

Others have solved the problem by downsizing their staffs and outsourcing work to contractors, who by definition do not qualify for medical benefits. During last year’s recession and layoffs, 2.2 million Americans lost their insurance, and a third of them probably lost their health coverage at the same time. [12]

“We face a crisis, and we need to act,” said Yank D. Coble Jr., president of the American Medical Association (AMA). “The good health of our patients — and our security as a nation — depends on it.” [13]

Even before the recession, real income and purchasing power were lagging behind the double-digit rates of inflation for drugs, health services and insurance, which are expected to rise 13 to 16 percent this year. “If we have more years of double-digit increases, people will be priced out of the market,” said Paul B. Ginsburg, president of the Center for Studying Health System Change.

And the situation is likely to get worse. According to the Centers for Medicare and Medicaid Services, health spending will reach $2.8 trillion by 2011 — a staggering 17 percent of the gross domestic product. [14]

Cash-strapped state governments — which pay for the bulk of Medicaid — can’t keep up with spiraling health costs. “Our challenge is to find a way to not cut services when we have less money than we had the year before,” said Gov. Paul E. Patton, D-Ky., vice chairman of the National Governors’ Association (NGA). [15]

State governments, collectively billions of dollars in the red, have begun trimming Medicaid benefits, sparking protests from Hawaii to Arkansas. [16]Dozens of states are trying to force drug manufacturers to provide discounts for the poor. [17]In Mississippi, the Medicaid program ran out of money in March. At least 14 states are considering increasing the eligibility requirements for Medicaid and CHIP, thus reducing the number of people who qualify for those safety-net services.

The health implications of inadequate insurance are stark. The Institute of Medicine estimates that 18,000 Americans die prematurely each year as a result of not having health insurance — usually because they discover too late that they have a treatable disease. [18] Others never receive timely treatment for diabetes, mental illness and other conditions and eventually must be hospitalized, a far more costly solution than early care in a doctor’s office. [19]

“The hard truth is that Americans without health-care coverage live sicker and die younger,” Coble said. “It’s bad fiscal policy. It’s bad public policy. And it’s bad medicine.” [20]

“Charitable physicians and the safety net of community clinics and public hospitals do not substitute for real health coverage,” said Adam Searing, project director of the North Carolina Health Access Coalition. “Need a concrete example? Look no farther than Dalton Dawes.” [21]

The issue brought together two Washington lobbying groups usually on opposite sides of the health-policy debate: the U.S. Chamber of Commerce and the AFL-CIO. In February, they helped create the Covering the Uninsured coalition — along with business groups, consumer and family advocates and health-care providers — dedicated to solving the problem. [22]

Nearly a third of voters want the health-care system “radically changed,” according to Republican pollster Bill McInturff. [23]President Bush has proposed new tax credits to help the uninsured pay for health coverage, a change he said would “reform health care in America.” [24]And both political parties have suggested prescription-drug subsidies for the elderly. [25]

Across the country this year, people are peppering campaigners for Congress with questions about health care. A Colorado candidate for the U.S. Senate expected a coal company executive to quiz him on energy issues — only to have him complain about the company’s $10 million annual bill for retired workers’ prescription drugs. [26]

The problem is hardly new. In 1912, presidential candidate Theodore Roosevelt pledged to make employees, employers and “the people at large” pay for insurance against the “hazards of sickness, accident, invalidism, involuntary unemployment and old age.” His proposal — often repeated by other politicians over the years — was most recently squelched in 1994, when President Bill Clinton’s call for universal coverage foundered spectacularly.

The failure of Clinton’s health-care reform “still hangs like a dark cloud over contemporary health-care debates,” writes Harvard political scientist Jacob Hacker. [27]And this year Washington again shows every sign of deferring the issue. “We’re not going to deal with it in an election year, that’s for sure,” said a key health-policy player, Sen. John B. Breaux, D-La. [28]People of both parties are “scared of being labeled Clintonites,” explained Robert Reischauer, who ran the Congressional Budget Office in 1993. [29]

Thus, while employers, hospitals, doctors and governors clamor for help, health-care proposals now pending in Congress would offer only limited benefits. Lawmakers believe — despite the opinion surveys — that Americans prefer their health-care progress in small doses and do not think a large federal bureaucracy can solve the problem.

Yet, if the situation isn’t remedied, the coming convergence over the next decade of escalating costs, budget shortfalls and vastly increased needs could overwhelm the health-care system and increase the ranks of the uninsured to as many as 61 million. “We are heading for a social and health-care debacle of gigantic proportions,” warned Harold G. Koenig, a professor of medicine at Duke University. [30]

As Congress, the White House and local leaders grapple with the nation’s uninsured, these are some of the questions being debated:

Can America afford health insurance for all?

On the surface, the nation shows every sign of not being able to afford caring for the uninsured and disenfranchised. Community and public health centers, hospital clinics, inpatient facilities and emergency rooms all are showing stresses from government cutbacks. As spending spirals to new levels, states, Congress, employers and insurers all are in the mood to cut and constrain — not add to financial obligations.

The Balanced Budget Act of 1997, for instance, reduced payments to federally licensed community health centers, cut Medicare reimbursement rates to hospitals and prevented hospitals from challenging the adequacy of Medicaid payments. Since then, states have cut back on Medicaid payments, and some large health plans have pulled out of the Medicaid market altogether. Communities are seeking creative solutions, but few at any level of government or industry are saying they can afford more. [31]

But Don Young, president of the Health Insurance Association of America, believes they can. “It’s more of a willingness to pay — and that willingness will have to come from a number of places,” he says. The task could be accomplished with expansions in Medicaid, CHIP, tax credits and tax incentives. “If the American public wants to do it, it is certainly affordable.”

Ron Pollack, executive director of the national consumer organization Families USA, agrees. “Covering the uninsured has never truly been a question of cost,” he says. “We’re the richest nation in the history of the planet. The question is whether we have the political will for it.”

But Kenneth S. Abramowitz, a managing director of the influential Carlyle Group investment firm and a longtime health-industry analyst, says Americans already pay for universal coverage — through higher health-care costs for everyone else.

“When you or I buy insurance — or the company we work for does — we’re paying for the uninsured,” says Abramowitz. Most insurance premiums are inflated by about 12.5 percent, he says, to compensate for non-payment or underpayment by others — a system called “cost shifting.”

The uninsured are “freeloaders,” he says bluntly. “When someone shoplifts a sweater, the rest of us have to pay for the sweater because it costs us more. The [uninsured] are shoplifters.”

Young admits that hospital revenues run at about 114 percent of costs — so the excess can subsidize the uninsured. Also, Medicare and Medicaid compensate hospitals that serve predominantly poor populations at a higher rate than other hospitals. “Those hidden costs are there,” Young says. “The uninsured are being covered — they’re getting services, paid for by the government through tax dollars and subsidies from private insurers.”

Abramowitz estimates that half the cost of any hypothetical government program to cover the uninsured is already being spent on the uninsured. It would cost less, he says, to compel every citizen to buy health insurance, with the poor receiving government vouchers for part of the cost and the poorest receiving certificates covering the entire amount. Others would receive tax credits, and employers would receive tax deductions.

“It would be cheaper — and everybody would be covered,” he says, estimating a total cost of between $11 billion and $86 billion a year. [32]

Under the current system, the uninsured end up using emergency rooms for most of their care because they tend to wait until their condition is critical before seeking care at hospitals, which must treat them. Research for the National Health Policy Forum shows that about three-fourths of all emergency room (ER) visits in which patients are not admitted should have been treated elsewhere.

Because ER care is one of the costliest forms of treatment, the current system helps drive up health-care costs, critics say. The lack of universal coverage prevents the poor from getting treatment more cheaply — in a primary physician’s office when their ailments are in their infancy — thus fueling the increase in health-care costs.

When the uninsured cannot afford emergency care, hospitals, businesses, insurers and taxpayers pick up the tab. Hospitals alone absorb an estimated $19 billion per year in uncompensated care for the uninsured. [33]

Such uncovered care amounts to “an unlegislated tax,” says Peter Schonfeld, senior vice president for policy of the Michigan Health and Hospital Association. Because legislators don’t want to raise taxes, he says, “They shift the cost elsewhere, hiding it from the public.”

And the hidden “tax” is going up. The number of emergency room visits increased 15 percent nationally between 1990 and 1999, according to the American Hospital Association, largely due to a surge in uninsured visits. In California, 82 percent of the more than 9.2 million patients who are treated in emergency rooms each year cost the hospitals money — up to $48 in uncompensated care per visit. [34]

Because of the overuse of emergency rooms and state and federal cutbacks in hospital reimbursements for Medicaid and Medicare patients, hospitals nationwide have begun diverting patients to other facilities. A survey by the Democratic staff of the House Government Reform Committee found that overcrowded ERs are causing “substantial problems accessing emergency services” in 22 states — especially in cities with large numbers of uninsured residents. Some hospitals simply close their doors to those unable to pay and for whom the hospital could collect no compensation elsewhere. [35]

More than 90 percent of large hospitals with 300 beds or more report emergency rooms at — or “over” — capacity. Hospitals over capacity place patients in other areas, such as hallways. [36]

“Unless the problem is solved in the near future,” cautioned the Annals of Emergency Medicine, “the general public may no longer be able to rely on emergency departments for quality and timely emergency care, placing the people of this country at risk.” [37]

An unprecedented alliance of normally adversarial business and consumer groups known as the Covering the Uninsured coalition has launched a nationwide publicity campaign to raise awareness about the 39 million Americans who lack health insurance. Covering the Uninsured Coalition

Should Medicare cover prescription drugs for the poorest seniors?

If Congress does anything on health care this year, it most likely will involve a distinct population already receiving huge publicly financed benefits — seniors and disabled persons enrolled in Medicare. Currently, Medicare covers only a few drugs, such as certain cancer medications. Some seniors purchase supplemental coverage — such as Medigap or Medicare + Choice, and some states provide additional coverage for services or prescriptions.

President Bush, members of both parties in Congress and a wide range of interest groups want the government to subsidize the skyrocketing cost of pharmaceuticals for Medicare recipients. Their interest in the issue is not only a sign of the problem — but also of politics: The more than 10 million seniors and persons with disabilities who lack prescription-drug coverage could be critical to the outcome of midterm congressional elections this year, which could alter the balance of power in Washington.

Seniors and the disabled — among the nation’s most dependent users of medications — often must pay full price for drugs, while those with private group insurance plans often pay less because of their company’s purchasing power. For instance, a cholesterol-lowering medication can cost a senior more than $300 for three months, compared with only about $50 for someone with private insurance.

The big question for lawmakers is not whether to add prescription benefits to Medicare but how many seniors to give it to — in other words, how to pay for it. Facing a budget deficit, even the smallest new benefit would hit taxpayers hard.

The president wants to spend $190 billion over the next 10 years to provide free prescriptions to any Medicare recipient with an annual income under $11,610, or couples earning up to $17,415. The proposal is especially controversial because Medicare has never had salary caps before. Opponents say providing benefits only to the lowest-income seniors undermines Medicare’s original covenant with the elderly — to provide coverage to every person over 65, regardless of income. Otherwise, they argue, Medicare becomes a welfare program.

Nevertheless, House Republicans propose covering only the poorest seniors: The plan calls for the government covering part of the first $5,000 a year in drug expenses, and everything above $5,000. Seniors would pay $37 in monthly premiums. The plan would cost the government $350 billion and benefit only half the nation’s Medicare recipients. Couples with incomes over $18,000, or individuals earning above $13,000, would not be covered.

Republicans argue that in belt-tightening times — and when so much money is being diverted to fight terrorism — benefits should go to those who need them most. They point out that Medicare beneficiaries who can afford it already pay for supplemental coverage, some of which covers prescriptions. Providing free drugs for all seniors could “bankrupt the program,” hurting all Medicare beneficiaries, according to a GOP “Talking Points” memo prepared for House members. Instead, it suggested, any solution should focus on the 35 percent of Medicare recipients “who truly need a prescription-drug benefit.”

In the Senate, Democrats propose spending up to $500 billion, arguing that Bush’s plan only covers 3 million seniors — a third of those needing help. “The best way to help low-income seniors is to help all seniors,” says Rep. John D. Dingell, D-Mich. The president’s proposals are “temporary solutions” that “ignore the larger task at hand” — creating a universal Medicare drug benefit.

AARP, the influential seniors’ lobby, estimates it would cost around $750 million to cover prescription-drug benefits to every American over 65. Without it, the group says, millions of elderly Americans will continue the dangerous practices they now use to stretch their medicine budgets: skipping doses, splitting pills and sharing medications with friends.

Some seniors go without pills entirely. In a 1995 survey, Medicare beneficiaries lacking drug coverage were less likely than those with drug coverage to fill prescriptions for anti-hypertensive medications needed to lower the risk of heart attack, heart failure, stroke and kidney failure. [38]

The average Medicare beneficiary with drug coverage fills 22 prescriptions per year, while those without it fill just 14. The ramifications are clear: Those in poor health take far fewer medications than their healthy counterparts. [39]

Price discrimination is not unique to the drug industry. Business travelers, for example, pay much higher airline fares than leisure travelers. In the pharmaceutical world, health maintenance organizations (HMOs) and benefits plan administrators negotiate price breaks.

HMOs and other “third-party” buyers account for more than 90 percent of all pharmaceutical sales. By purchasing large volumes of drugs, they can negotiate steep discounts, sometimes shaving 25 percent or more off the price of a drug. In addition, state prescription-drug assistance plans, programs sponsored by pharmaceutical companies and organizations like AARP offer discounts and other benefits to distinct populations. But uninsured consumers enjoy no such clout.

Meanwhile, average prescription-drug prices have doubled in the past decade. [40]Drug companies have resisted lowering prices, arguing that research, development and testing represent a huge investment, not to mention a high risk.

Clinical trials are more complex and costs have increased, noted an August 2001 Ernst & Young analysis for the Pharmaceutical Research and Manufacturers of America. One successful pill can represent 10-15 years and $802 million of research and development, as the medicine moves from the laboratory bench to the pharmacy shelf, says the analysis. Only three of 10 marketed drugs produce revenues that match or exceed average development costs.

However, rising drug prices could drive up the cost of an eventual Medicare drug benefit, making it impossible to calculate the long-term price tag for a new Medicare benefit. And once in place, such a benefit — despite its high cost or federal budget shortfalls — would be difficult to withdraw. Programs with such a large and influential constituency are not easily eliminated.

Thus, some policymakers have suggested imposing price controls on prescription drugs. The pharmaceutical industry opposes price controls, arguing they would have a chilling effect on the quest for cures and would impede free-market forces.

Adding a prescription-drug benefit to Medicare is widely viewed as in keeping with Medicare’s original intent of lessening the burden of health care for all seniors. Nevertheless, both supporters and opponents of Medicare benefits for prescription drugs lament that the nation’s biggest health problem — uninsured Americans — remains unaddressed.

“It’s really a shame the focus is so much on drugs for seniors,” says Chip Kahn, president of the Federation of American Hospitals, “when most of the uninsured are low-income working families. They’re the ones who are totally exposed.”

Should small businesses be allowed to band together to buy health insurance for their employees?

Ninety-nine percent of the nation’s big companies (those with more than 200 employees) offer tax-subsidized health benefits, which cost the average worker about $2,426 a year. Because large employers enjoy greater economies of scale and can pool their risk, their employees pay considerably less than if they purchased health insurance individually.

But small-business owners like John Nicholson, who operates a flower shop in Arlington, Va., have no such purchasing clout. Nicholson could not afford coverage for his 10 employees, and most insurers offered no policies appropriate for a small work force. Eventually, he signed up with a local HMO, paying $3,300 per worker. [41]

Soaring health-care costs hit small businesses harder than larger companies, and their premium rates are rising faster. But it’s not just a problem for employers. Since a large percentage of all employees work for small businesses, the lack of affordable health insurance among small businesses dramatically impacts the nation’s overall health-care costs. [42]In fact, a third of uninsured Americans work for employers that do not offer any health coverage, and 82 percent of the uninsured are members of families in which at least one person works part or full time. [43]

And the situation is getting worse: Small businesses’ cost of insuring employees is expected to jump as much as 20 percent this year — on top of a 10-12 percent increase over the last three years. In some parts of the country, the situation is even more severe. Annual premium increases for small-business owners in Florida were expected to go up 20-30 percent this year, according to the National Federation of Independent Businesses of Florida. [44]

After at least four years of aggressive lobbying for a change, small businesses and their employees may finally be close to having an alternative. Proposed patients’-rights legislation allows small employers to band together across state lines to buy health insurance, giving them greater power to bargain for prices and coverage. The legislation passed the House last August and is awaiting Senate action.

The proposed law would permit trade and professional organizations like the National Restaurant Association or the U.S. Chamber of Commerce to sponsor and negotiate not-for-profit health-care plans known as association health plans. In theory, efficiencies and savings would be passed along to employers and employees through lower premiums.

The measure faces formidable opposition in the Senate, which agreed to a patients’-rights bill — giving patients more of a voice in their treatment by HMOs — but excluded any provision for association health plans. Similar bills passed the House four times in recent years, only to languish in the Senate, where they couldn’t garner sufficient support because of pressure from the insurance industry.

This year, with intensifying pressure to tackle health costs, the tide finally may turn in the Senate. Association health plans are attractive to many, including President Bush, because — at least in theory — they promise to add working Americans to the ranks of the privately insured without spending a dime of public money.

“Before adding millions in new federal spending and more mandates, shouldn’t we look for free-market solutions that empower individuals?” Dan Danner, senior vice president of the National Federation of Small Business, asked the House in a letter a year ago. [45]

The Blue Cross and Blue Shield Association, the dominant small-business health insurer in at least half the states, opposes the measure. Danner told the House the group opposes it because “they’re against anything that forces them to compete for business.”

But Mary Nell Lehnhard, a Blue Cross senior vice president, called the current proposal for association plans “a shell game rather than a serious proposal for the uninsured.”

Because the House stipulated that the new plans should not be regulated by the states, they would provide only temporary savings and trigger a collapse of the state-regulated market, Lehnhard said, leading to a return to higher premiums and undoing years of reforms.

Pollack of Families USA said that without being subject to state rules, association plans could exclude mental health services or home health care and might engage in discriminatory underwriting. For example, he said, benefit packages could be designed to attract healthy people, while discouraging sick people from joining. As a result, Pollack says that while he supports businesses banding together to buy insurance, “the measure approved by the House could make the problems existing today even worse.”

The NGA supports the idea, but not the bill. State oversight is necessary, the governors say, “to protect consumers and small businesses from fraud and abuse and underinsurance.” [46]

But Kahn of the hospital federation counters, “Nothing that expands health coverage to more people will be ideal,” he says. “We’re not talking about Cadillacs here; we’re talking about Chevys, at best. But at least we’re talking about Chevys for people who now have no car at all.”

Just how many people would be newly insured? The Congressional Budget Office (CBO) foresees the innovation worsening conditions for four in five workers. It says 20 million employees would face increases in premiums, while insurance would be less expensive for 4.6 million. Meanwhile, only 330,000 of the uninsured would gain coverage, the CBO said.

But a public-policy research firm, CONSAD, estimates that the measure would extend benefits to 4.5 million workers at affordable rates. According to former Rep. Jim Talent, R-Mo., small businesses could save 10-20 percent in health-care costs.

The key, Talent said, lies in breaking the grip of the Blue Cross monopolies — and conventional wisdom. “Nobody questions that big businesses can offer comprehensive plans,” Talent said. “But for some reason, they seem to distrust small businesses.”

♦  ♦  ♦

Also in this issue of Congressional Quarterly Researcher:

Universal Health Insurance: Not a Cure-All

Recurring Quest for Health Reform: First Enthusiasm, Then Failure

Local Health Reform: How Tampa Does It?

♦  ♦  ♦

[1] Dawes’ plight is described in Trish Wilson, “Kids’ Insurance Needs CPR,” News and Observer, March 9, 2001, and Karen Tumulty, “Health Care Has a Relapse,” Time, March 11, 2002, p. 42.

[2] World Health Organization, “World Health Report,” 2000.

[3] “Health Insurance Coverage 2000,” U.S. Census Bureau, Sept. 28, 2001.

[4] Terminated workers can continue the same health coverage for 18 months under COBRA, the Consolidated Omnibus Budget Reconciliation Act of 1995, which became law in 1996.

[5] See Elizabeth Simpson, “State Reaches Out to Uninsured,” Virginian-Pilot/Ledger Star, March 7, 2002.

[6] Karen Davis, “Universal Coverage in the United States: Lessons from Experience of the 20th Century,” Journal of Urban Health: Bulletin of the New York Academy of Medicine 78 (March 2001), p. 46-58.

[7] Census Bureau, op. cit.

[8] John Holahan and Johnny Kim, “Why Does the Number of Uninsured Americans Continue to Grow?” Health Affairs, July/August 2000, pp. 188-196.

[9] Census Bureau, op. cit.

[10] Florida Chamber of Commerce Federation, Jan. 24, 2002.

[11] “Employer Health Benefits: 2001 Annual Survey,” Kaiser Family Foundation and Health Research and Educational Trust, September 2001.

[12] Jeanne Lambrew, “How the Slowing Economy Threatens Employer-Based Health Insurance,” Commonwealth Fund, November 2001. Paul Fronstin, “Sources of Health Insurance and Characteristics of the Uninsured: Analysis of the March 2000 Current Population Survey,” Issue Brief No. 228, Employee Benefit Research Institute, 2000.

[13] Press conference, Coalition to Cover the Uninsured, Washington, D.C., Feb. 12, 2002.

[14] Mary Agnes Carey, “Analysts See a Seismic Shift in Health Policy Debate,” CQ Weekly, March 23, 2002.

[15] Ibid.

[16] In their biennial reports, the National Governors’ Association and National Association of State Budget Officers blamed the recession, fallout from the Sept. 11 terrorist attacks and Medicaid cost increases for creating a record $40 billion to $50 billion budget shortfall in more than 40 states in fiscal 2002. Meanwhile, 28 states had combined deficits of $7.1 billion in their Medicaid budgets.

[17] A federal judge in March 2002 allowed Maine to force pharmaceutical makers to provide discounts of up to 25 percent for those with incomes 300 percent of the poverty level. Under Maine’s law, the state would leverage its buying clout — $210 million in Medicaid drug purchases — to negotiate discounted prices for the 325,000 residents who lack health insurance and are not covered by Medicaid. If the drug makers refuse, the state could impose price caps in 2003. The industry is appealing the decision in Pharmaceutical Research and Manufacturers of America v. Commissioner, Maine Department of Human Services. The 1st U.S. Circuit Court of Appeals in Boston is considering the earlier ruling by U.S. District Judge D. Brock Hornby.

[18] “Care Without Coverage: Too Little Too Late,” Institute of Medicine, National Academy of Sciences, May 2002.

[19] Paul W. Newacheck, “Health Insurance Access to Primary Care for Children,” The New England Journal of Medicine, May 15, 2000, pp. 513-519.

[20] Quoted in Vicki Kemper, “Unlikely Coalition Declares Health Care Crisis,” Los Angeles Times, Feb. 13, 2002, p. A30.

[21] North Carolina Health Access Coalition newsletter, op. cit.

[22] The coalition also includes the American Medical Association, Service Employees International Union, Business Roundtable, American Nurses Association, Health Insurance Association of America, Families USA, American Hospital Association, Federation of American Hospitals, Catholic Health Association, AARP and the Robert Wood Johnson Foundation.

[23] From a September 2001 survey for the Institute for Legal Reform and the U.S. Chamber of Commerce.

[24] Speech at the Medical College of Wisconsin in Milwaukee, Feb. 25, 2002.

[25] For background, see Adriel Bettelheim, “Drugmakers Under Siege,” The CQ Researcher, Sept. 3, 1999, pp. 753-776, and Julie Rovner, “Prescription Drug Prices,” The CQ Researcher, July 17, 1992, pp. 597-620.

[26] Tumulty, op. cit.

[27] Jacob Hacker, “Health Care Reform: A Century of Defeat,” Harvard Health Policy Review, fall 2000.

[28] Carey, op. cit.

[29] Quoted in David Wessel, “After a Few Years of Relaxation, Health-Care Costs Rise Again,” The Wall Street Journal, May 9, 2002.

[30] Quoted in Bob Condor, “Look Beyond Politics Before Writing Off the Faith-Based Initiative,” Chicago Tribune, March 18, 2001, p. C3.

[31] For background, see Adriel Bettelheim, “Hospitals’ Financial Woes,” The CQ Researcher, Aug. 13, 1999, pp. 689-704.

[32] The amount depends largely on the breadth of benefits that would be offered, he says.

[33] Cited in testimony by Mary R. Grealy, president, Healthcare Leadership Council, House Energy and Commerce Subcommittee on Health, Feb. 28, 2002. HLC members include CEOs of pharmaceutical companies and major hospitals and clinics.

[34] California Medical Association figures, as of November 2001, cited by Norman Label, president, Emergency Physicians Medical Group, writing in the Sacramento, Calif., Business Journal, Feb. 1, 2002.

[35] “Emergency Crews Worry as Hospitals Say ‘No Vacancy,’ ” The New York Times, Dec. 17, 2000. See also “Trouble in the ER,” National Journal, May 19, 2001.

[36] “Emergency Department Overload: A Growing Crisis,” The Lewin Group for the American Hospital Association, April 2002.

[37] Robert W. Derlet and John R. Richards, “Overcrowding in the nation’s emergency departments: Complex causes and disturbing effects,” Annals of Emergency Medicine, January 2000, pp. 63-68.

[38] Jan Blustein, “Drug Coverage and Drug Purchases by Medicare Beneficiaries with Hypertension,” Health Affairs, March/April 2000, pp. 219-230.

[39] J.A. Poisal and L. Murray, “Growing Differences Between Medicare Beneficiaries With and Without Drug Coverage,” Health Affairs, March/April 2001, pp. 74-85.

[40] AARP Bulletin, March 2002.

[41] See J. Gabel et al, “Class and Benefits at the Workplace,” Health Affairs, May/June 1999, pp. 144-150.

[42] Small Business Administration, www.sba.gov/ advo/stats/sbfaq.txt

[43] Catherine Hoffman and Mary Pohl, Health Insurance Coverage in America: 1999 Data Update, Kaiser Commission on Medicaid and the Uninsured, 2000.

[44] National Federation of Independent Business (nationwide data); for Florida, “Florida’s Small Businesses Struggle with Rapidly Rising Health Insurance Costs,” Florida Times-Union, April 8, 2002.

[45] Letter to House of Representatives, March 2001.

[46] National Governors’ Association, position paper. www.nga.org.

The CQ Researcher • June 14, 2002 • VOLUME 12, No. 23
© 2002 Congressional Quarterly, Inc. All rights reserved.