mentioned, i think i would echo the firm uncertainty in the growth levels mr. dennis highlighted, but if you step back and look at the affordable care act, it says, let us spend $10 trillion over the next five years and finance that by raising $5 billion in taxes, most of it paid by insurance and let's make insurance rates more expensive, and let's cut roughly $5 billion out of medicare, something they said is economically unrealistic and will make hospitals unable to serve those beneficiaries. so i take that with a grain of salt. what you have in the end, then, is higher taxes, much larger deficits in a recovery that's utterly unsatisfying, and i cannot conclude that's going to be beneficial for the hiring practices of small businesses. >> thank you, dr. eakin. i now yield to mr. altmire for questions.

>> thank you, and i'm glad our panel brought up the subject of taxes and the burden it places on small businesses. i want to ask mr. dennis and mr. vaughn, as you are aware, currently health benefits for employees is non-taxable, and some proposals have recommended requiring employees for the first time ever to pay taxes on health care benefits. and i was wondering from mr. dennis, how would a fundamental change like that impact a small business's decision to offer health care to its workers? >> the question is really equity in the whole thing. right now we have a system where, if i'm an employer and i contribute to $1,000 or $5,000 to help my employee buy their own insurance on the market, whether it's through the exchange or whatever, there is no tax deduction -- excuse me -- no tax exclusion for the employee where if i'm paying for

it, there is an exclusion. that clearly is inequitable, and really, i think in the long term, it's going to hurt smaller firms and their ability to provide this sort of thing is the fundamental inequity involved. you're not asking about the inequity, though. you're asking about whether or not the tax itself, you know, is important. and the question is, yep, it does lower the amount that you have to pay up front. long term, now, what it does is it encourages more people to use more services, and more services mean higher cost. long term, we just can't have that. we have to start being more parsimonious on these things. >> so you're in support of that policy change? >> of -- we would be in support of making it equitable. i am not sure that our

organization has taken the position on whether or not they would be in favor of -- how they would be in favor of handling the tax exclusion issue. >> thank you. mr. vaughn, as a business owner, what would your -- how would your employees react if they had to pay taxes on the health care benefits that you provide? >> well, that's a hypothetical and i apologize for really not having an answer to that. i can't predict how they would react, but there is something really important here that i don't want to get lost. small employers, let's define, what is a small employer, what is a large employer? the method that's being used right now, and frankly, i can't understand it, and what is a full-time employee and what is a part-time employee, i can't understand that, either. there was a study done recently by the university of tennessee funded by the likes of the burger king, mcdonald's and different ones to determine, what would be the best way to determine what a small business is and what can they afford?

have you heard about profit for employee? as opposed to this drawn-out, sort of complicated formula for figuring things out, it's a real simple formula. it's how much money do i make net divided by the number of employees. guess what it is in my industry? $1300. if i pay the penalty, it's $2,000. is that equitable? does that make sense? there are other industries, whether it's financial or insurance industries, they're $10,000 plus per employee, profit per employee. so my position is this. this thing has to be repealed. i mean, it has to be repealed, and if it's not repealed, at the very least, the regulatory aspect of it should be changed to a system-like profit per employee. i apologize for not answering it directly, i just really don't know how they would react. >> are you concerned to hear that that is a proposal? is that something -- if your representative came and sat down before you and said, hey, here's

something i'm thinking about supporting, taxing your employees' health care benefits? >> of course, i would be concerned about that. i'm for lower taxes for anyone. yes, absolutely. >> mr. jost, do you want to comment on what type of fundamental change like that, what the impact would be on the health market? >> i think it would destroy our employment-based health insurance system in this country. we have a long tradition in the united states that actually has been very successful in providing health insurance to people through their jobs. we're now trying to get beyond that to reach those people who are not covered through that, and that's what the affordable care act is going to do. but to pull the rug out from under employment-sponsored health insurance by removing the tax deductions and exclusions would destroy it and would throw our health care system into chaos. >> dr. holtz-eakin, do you want

to comment on that? you look like you have something to say. >> there are two aspects that were mentioned. one is it figures in this discussion how many employers will drop coverage of the affordable care act. the basic premise is how much cash is put out for lower paid workers to drop the coverage, pay the penalty, give them the employee wage, let them go get insurance. and another subsidy favors high wage workers. those who conclude there will not be an employee drop are counting on the fact that that tax subsidy for high wage workers will dominate, employers will continue to use it to pay their high-wage workers. i think that's a fantasy, quite frankly. be aware that in the end, all you're doing is playing a federal horse race between the

two. second thing is, most people who talk about changing the insurance are looking at revenue tax reforms that broaden the base, thus bringing in subsidized coverage for health insurance, and it's about having a tax system that is fair across the low-end and high-wage workers and provides better growth incentives because margin rates are better. >> last question. i wanted to give you a chance to answer that because i thought i knew what you were going to say. sgrz it w >> it was a shocking question. >> the question i want to ask you and you're not here to pontificate upon taxes, but you bring a lot to the debate and your involvement in the past. i ask, just out of interest, given where we are, this is the law.

the bill has passed, it's the law. the supreme court may or may not rule absent knowing what's going to happen there. repeal has failed in the current political environment. we don't know what the future holds there. what would, to the degree you're comfortable assessing it, what would you suggest that congress do as far as tweaking the current law, assuming this is a fact, this is going to continue, or continue to push for repeal even though it doesn't look like it's a viable option? >> wow. and i have five hours instead of five minutes? >> well -- >> briefly, i think you can point to a couple things. there are some provisions in law that i think universally have garnered some suspicion, i'll use that word, and i think the class act is first among those and probably should go away. it's something ill designed and dangerous to the american taxpayer. the second would be in the array of coverage expansion, the heavy reliance on an unreformed

medicaid program, i think many people find problematic. we know medicaid beneficiaries have much more difficulty finding primary care physicians and seeing specialists to simply put more americans in a substandard health care system is problematic, and i think there is just too much money on the table for exchanges. in terms of the coverage expansion pieces, i think you have to look at all that. i won't say a lot about the regulatory issues. i think making them cleaner, they're getting them done in a fashion that doesn't leave people so perplexed. entirely beneficial. and on the delivery system reforms, i think there are two very big concerns. one would be the role of the independent payment of the advisory board which, as structured, appears to be inevitably led to productions instead of quality improvements. just can't get there. it's got a one-year target on probably the most expensive new

therapies. that's detrimental for health care. i would worry a lot about that, quite frankly. and the acos appear to be a respite for industry compensation, not better care. so i think there is work to be done on improving the delivery system and expansion coverages and making sure this thing hangs on budgetarily, of which i deep concerns. >> are there things in the bill that you worry about in isolation that should be kept? >> i've always been a proponent for exchange type amenities. a better opportunity to shop, compare and pursue health insurance, i think every economist would like that, and i certainly do, so the design of those and exchange decision making i think needs to be part of this law. >> i would now like to recognize mr. king for his questions.

>> thank you, madam chair, i thank all the witnesses for being here to testify. i admit my schedule didn't allow me to hear all in depth, so i hope i don't duplicate anything raised before this panel. first i think i would make a statement as to, if anybody wornds whe wonders where i stand on this issue, and i've looked at it from a whole number of different perspectives. i just don't think this is arguable whether it's sustainable or whether it will improve our health care or improve development rationalizing. i think i understand thoroughly that we're not going to see health care at a cheaper price that's more acceptable or more available. you'll see different people that have access but perhaps it's a shn within the p ship within the population. i began my working life as a small businessman.

i started a construction company in 1995, and we provided not the first day because i didn't have employees the first day, but over time, as we began to accumulate employees, i took on the responsibility to voluntarily provide them health insurance. and when i've watched this debate be shifted here in this country, so health care in health insurance, had those meetings inflated. i think it was dishonest, i think it was disingenuous, and i think it was willful, a strategic effort to try to blur the efforts. i remember then governor of iowa, governor cull ver, coming to this capital meeting and saying, 40,000 kids in iowa don't have health care. i don't know how many times i had to ask him what that meant before i could get through to him that health care and health

insurance are two different things. i make the point that i don't believe an employer has -- if they choose to accept a responsibility to provide health insurance for their employees, that's a competitive position in the marketplace, but not a moral obligation for the employer. to hire good people and keep good people is the motive. when the federal government decides to impose an employer mandate, then that sets another standard, and in the minds of people now, they think it's an entitlement that goes with a job. and i think that's a mistake, i think it saps some of our vitality. but i wanted to take this down to the constitutional aspect of it, and just noticing that we had a law professor here, mr. jost, and that's the part that grates on me the worst. we can talk about policy all day long. i've drawn the conclusions i'm at and i've also drawn them on the constitutional side of this. but i take it down to the individual mandate rather than

the employer mandate side of this and ask this question. if the federal government can constitutionally commandeer a portion of a person's paycheck or a portion of the revenue of an employer, for that matter, if they can commandeer that and assign it to a government-produced or government-approved product, which is premiums for health insurance that is approved by the federal government, then what limitation would there be on the commandeering of that revenue stream beyond health care? is there a constitutional line here i don't understand, or could it also be for a car or an appliance, buying certain types of health food or a member in a health clinic -- excuse me; perhaps a gymnasium. is there a constitutional line beyond that? if the supreme court rules in favor and upholds this bill, this act, this law of the land as mr. altmire referred, i

believe, if they do that, what can the rest of the workers in america look forward to being commandeered? where is the line? >> again, i only have five minutes rather than five hours, probably less than that. i would refer you to an excellent opinion on this topic written by judge sutton of the sixth district, a very well-known conservative judge who, in fact, has been prominently mentioned as a supreme court potential nominee. what judge sutton said and what the other federal-federal judges, a majority of federal judges who have considered this question said, in favor of the constitutionality in the statute, and number one in the constitution, commerce has authority to regulate commerce. under earlier decisions commerce must regulate economic decisions. it cannot regulate non-economic conduct. but what judge sutton and the other federal judges have found

is that the health care marketplace and often the insurance marketplace are interstate commerce. in fact, it's the largest sector of our economy -- >> excuse me. if an individual doesn't engage in purchasing health insurance, then they're not engaging in commerce with the purchase of health insurance, and if you expand the argument to utilizing health care services, if an individual is born and dies in a state and doesn't cross the state line and doesn't use medical care of any kind, and that happens, it's always happened in every generation, how is it that they're engaging defacto in interstate commerce? >> well, what judge sutton said is on its face the statute is constitutional. he has implied there may be some situation where somebody will come forward who says, i have never used health care in my life, i will never use health care in my life, i can prove it, the law should not apply to me, and that might be a different

case. we'll cross that bridge when we come to it. >> we have come to it, because the constitution has to apply to everybody. >> right, but a statute -- the first question is, has congress written a statute that is facially constitutional? could it be constitutional as applied to some people and as applied to 99.999% of the population people use health care. >> you say the statute presumes that everyone does use health care and it presumes that health insurance is an obligation that's a component of health care, and if it presumes that everyone is utilizing, then the constitutional rights of those who do not are directly, then, incorporated into that. so they don't have their constitutional rights unless they assert them. we have to pass legislation that constitutionally protects everyone. that's the point i would make, and i went way past my time, i'm sorry, but i appreciate the indulgence and i yield back the balance of my time. >> thank you. that was a very interesting exchange, so i appreciate that

question and the line of questioning. i think those are definitely some of those issues that as we move forward that really does need to be discussed. so even though we went over, that was -- i can say it's all right. do you have any other questions at this time, and mr. altmire, do you have any? i have a couple questions i would like to ask starting with dr. holtz-eakin. you have said in the health care law that it's a threat to the health of small businesses and the mandates and penalties are a financial burden. do you think small firms disproportionately affected by the various mandates, penalties, and taxes in the law, will this affect their ability to increase employee wages, purchase equipment and hire new workers? >> absolutely. if you think of the smallest of

the small businesses that the proponents of the law like to say, look, they get the credit and they're exempt from the mandate, so it's all going to be good. the reality is they will face the upward premium pressures that inevitably come from the benefit mandates that already have begun to be implemented and have drawn premiums up. the taxes that will be imposed on insurers and others, i've walked through the arithmetic of this, this is $5,000 for a family in five years. every time those premiums go up, they come up at expensive wages. there's no way around that. so even those ostensibly spared the greatest cost burden and even were temporarily helped, although i'm not a fan of that credit, i think it's a bad deal. >> thank you. mr. vaughn, i have a question for you. you currently have 30 full-time employees, is that correct? and a number of part-time

employees, so 30 full-time and a number of part-time. with the employee mandate in the health care law, is it likely you will create any additional full-time positions? >> well, as i mentioned earlier, it's not likely. it's likely that i'll cut to fewer full-time positions. what's interest about what m mr. -- i want to pursue this without tax exempt dollars. this thing is extreme. mr. jost said earlier the large firms, they're not worried about it. it's probably not even on their radar screen. that's just the cost of doing business for them, but again, it's clearly, in my case, going to create more part-time jobs, and frankly, people more dependent on the government and

i will be cutting even more jobs. >> do you feel you might have to cut wages also? now, especially, of course, we have minimum wage, but as far as like potential increases in wages, do you think you may have to draw back on that as well? >> i think so. obviously, someone mentioned earlier that wages should be a function of competition in the market. and i think those of us that are in this business, we're all pretty much in the same situation. we're in a pennies business, and our margins, literally, you know, we said this thing about burger king and people look at us as very wealthy and very rich. out of a dollar, we keep less than a dime at the end of the day. and so there is just no way we could afford it, absolutely none. >> thank you, mr. vaughn. and my last question -- i have two questions, actually, for professor jost.

if the forthcoming mandates minimum essential benefit package requires employers to offer a base amount of coverage, that package will undoubtedly exceed the coverage that the small businesses currently offer, aren't the premiums likely to increase for the employer or the individual or both? >> i'd like to refer to a study that was published last month by the urban institute in which they projected that the firms for small employers, average employer contribution per person covered would in fact decrease by 7.4% after the affordable care act is fully implemented. and the reason for that is the exchanges. right now small employers have to deal with individual insurance companies, and they don't have the economies of scale large employers do. they often have risk pools that are less favorable than large employers, and they're on their own. even if they get a good rate this year, they could be canceled next year or they could

get a higher rate next year. in the exchanges, their business is going to be pooled with the business of all the other small employers, and there's going to be lots of competition in the exchanges, there's going to be national insurers as well as the domestic insurers, maybe some of these new cooperatives that they're going to be talking about today, and so the projection is that, in fact, costs will go down. now, with respect to the essential benefits package in particular, i had always assumed that small businesses provide less rich benefits than large businesses, but i tried to check on that the other day and found out that, in fact, if you look at the national compensation survey, the benefits are pretty much comparable. they cover pretty much the same things. and the reason, again, is because of the state mandates that require in many states employers to cover a lot of the same benefits, insured employers. so the essential benefits package only covers benefits. it doesn't prescribe cost sharing. and right now a lot of the game is in trying to increase cost

sharing in various ways. that's probably one of the reasons why health care costs are going down, because employees have more skin in the game, and i think that under the essential benefits package, number one, it isn't going to change that much what the benefits employers are going to have to offer, and number two, they'll still have the ability to do considerable adjustment in the cost sharing to try to save costs. >> can you just describe to me the difference -- you mentioned national insurers and domestic insurers. can you identify for us what you mean by that? >> yeah. under the affordable care act, the office of personnel management is supposed to come up with at least two, maybe more, national multi-state insurance plans that will be available in every state. it's going to be like the insurance you have, congresswoman, where, through the federal employees self benefits package where you have a choice of national insurers as

well as local hmos or other small carriers at the state level. and that's going to introduce more competition into the insurance market. again, i've been looking at all these adjustment requests that come through, and what you see is in many states, you have what you have in my market, where you have 80% of the share of the market. well, they set the price. nobody else can really compete with them. but we're going to see a number of insurers competing and competition brings down prices. >> and so can you describe to me, then, the domestic insurers? >> by that i meant insurers that are already there that are licensed in the state. >> and when you describe the national, are those private insurance companies, or would that be the government plan? >> no, they have to be private insurance companies. they have to be a company licensed in the state. >> okay, well, thank you all so much for your participation.

if you did have another question, i'm more than welcome -- we'll definitely approach that. this subcommittee will continue to closely follow the issues related to this implementation of the health care law. it's very important that we stay on top of this as it moves forward, especially since things seem to be evolving as we go along. i ask unanimous consent that three articles be submitted for the hearing record, an article from cranes new york business dated june 23, 2011 entitled "health reforms, grandfathering rules likely to raise costs." an article from forbes dated july 4, 2011 entitled "health care tax credits are having a miniscule impact," and an article from the hill, which i had mentioned earlier, dated

july 21, 2011 entitled "health care law could leave families with high health care costs." without objection, so ordered. all those in favor, signify by saying aye. all those opposed signify by saying nay. the ayes have it, the request is agreed to. i ask unanimous consent that legislators have five business days to submit materials and support for the record. without okbjection, this hearin is now adjourned. thank you so much.