including the cost of shunt and endoscopy equipment, we fun the up front cost to be almost the same. the cost benefit is there. >> actually, what happens to an infant, i mean, that goes untreated? in some remote village in a country where there is just no care? what happens? does it grow, does the child have excruciating pain, do they die after certain number of years? what is the life of an untreated person? . >> i can give you about three different scenarios. in uganda at least a baby with a growing head like that is often thought to be the result of a curse and sometimes those babies are killed.

so they die that way. we know that to be true. the second skenaire glow -- scenario is the child who has the progressive head growth. the mother does the best she can. the head gets very heavy. the child gets hard to handle. eventually dies either directly from the elevation and pressure in the head or dies from failure to thrive because of poor feeding and vomiting and sort of the general effects of being so debilitated. the third scenario is the child that actually survives the early childhood hydrocephalus, the course arrests itself but the patient, the person has a very large head, is quite cognitively disabled, usually or often blind, and spastic. much like a person that you might see that's severely involved with cerebral palsy.

i'll never forget visiting one village when i first moved to uganda and before we opened the hospital i was trying to get a feel for how things were, and i visited an area where i was told there was a patient with hydrocephalus. this was a teenage girl with a head about the size of a basketball whose mother dragged her out and put her on a mat under a tree every day and gave her a mango to chew on. her mother took very good care of her. she was totally disabled and unable to communicate or do anything. so there is death and then there is tragedy beyond death. >> thank you. yield back. >> recognize henry buerkle, just by way of background, combines a unique background. she's assistant, former assistant new york state attorney general, so she's a lawyer. but she's also a registered nurse. >> thank you, mr. chairman.

thank you for organizing and hosting this extremely important hearing today. i'm much prouder of my background in nursing. i have to leave it at that. but in my profession as an attorney i represented a hospital so i spent my life in health care. so this is certainly of importance to me. i have a couple of questions. mr. cohick, this is for you but anyone else who might have an answer to it. we hear our country is a very generous country, and we fund hiv-aids, malaria, many other diseases throughout the world. and as you-all know, you have suffered through these debt negotiations and all that's been going on here in washington, money is becoming much more of a premium. help us to justify this cause and funding for hydrocephalus.

>> i think i personally, and we all recognize we are in that situation, and it is a difficult time to indeed bring this type of scenario to you and what can be done. somewhat germane to one of the questions and answers given before, this is very cost-effective. the comparison between what we do in uganda and what is done in the u.s. is roughly a 5% our cost for the surgery looking at surgery, one surgery done in uganda versus one surgery in the u.s. is roughly 5% of what's done in the u.s. when you take into account the surgeries or the subset of those that can be helped by the e.t.v., c.p.c. where it may be one and done versus the shunts that are two or three or four

revisions that 5% grows -- i should asia rinks down to close to 1% -- i should asia rinks -- i should say sha rinks down to 1%. we are -- we have found partnerships to allow us to go forward with training when dr. warf was there and it continues on with dr. john mugamba, his successor, as well. we are eager to do what is the most effective and efficacious manner going forward. it is a difficult thing to ask for a substantial amount of money at this point in time, but we think and we believe and we feel it is strong evidence that

it is well spent and it brings value beyond its numbers. we also concur with those that have come out recently earlier this year that have noted that the public health emphasis on prevention, which is absolutely needed, needs to be balanced with those efforts to create better abilities, better capacity, i should say, for technology and for surgery that is wanting in areas. because that is a hard price to pay no matter what the economy is. >> thank you. doctor warf. >> thank you very much. i can actually give a few comparative numbers that might help put things into perspective a little bit. this is from a study that's in the press through our harvard medical school department of global health and social

medicine. we have been looking at the cost-effectiveness of treatment of hydrocephalus in uganda. partly based on our data from uganda. and extrapolating that. we depending on what kind of economic analysis you use, we have reported that sub-saharan africa if you use one economic model, human capital approach, the cost of hydrocephalus is around $1 billion. if one uses the value of a statistical life approach, which is that which i think is used by certain government organizations like the e.p.a., it's on the order of tens of billions of dollars. $1.4 billion to $56 billion in economic burden to sub-saharan africa. the other way that we gauge burden of disease and cost-effectiveness as i'm sure you know is the daily adjusted disability -- disability adjusted life year.

that's one year of healthy life lost. you can compare the graphity of different diseases by these kinds of assessments using the disability adjusted life year. so, for instance, when we look at treating hydrocephalus and the cost of treatment, it costs us about $37 to $80 per disability adjust the life year averted with the initial treatment. that's compared to about $75 averted for treating a person with aids. that's not prevention. prevention's always much cheaper. you can prevent aids with a dollar for disability adjusted life year. there are few examples of surgeries done in developing countries where these kinds ever analyses have been done. one is with trauma surgery.

in nigeria the published number is $17 averted, in haiti it's $223 for taking care of a trauma patient. this is versus about $50 for treating hydrocephalus. so we do have some hard numbers, as hard as they can get when you are working with economists. and it seems to be that there is an enormous burden and the cost benefit ratio we have determined to be a minimum of 7-1, cost to benefit, one to seven, but potentially as high as one to 50 in terms of economic benefit to society. so i think those kinds of things need to be taken into perspective when you are comparing them with the hydrofile diseases. >> thank you. dr. schiff, did you have anything to add? >> no. >> thank you very much. thank you for being here. i yield back. >> ms. buerkle, thank you very much.

did you run into problems with care, international effort on hydrocephalus children in uganda. for example, was there a disbelief, a lack of buy-in from the government? or were they open to the idea when you cited your hospital there? -- sited your hospital there? >> our hospital began in 2000 and actually we were -- there's a lot of, as you can imagine, preparation done before the site was selected and actually all those arrangements were made for where we would build and the funding for that as well. i guess to answer your question, dr. warf was there at the beginning, and i participated with him as well as the other leadership in overseeing the hospital. our first goal was to be part of

the medical community and the continue yume of -- continuum of medical education. we realized we were bringing something new and different and i think that became very -- more evident as discussions were held with district and others, districts, officers of the medical system and others. but i could allow a segue to dr. warf to probably explain better. his focus on making sure that he was -- his presence and his desire to be part of the community not only in rendering care but teaching and education i think was well received. might have been a little skeptical at first because of others that may have promised similar things, but with his genuine and consistent manner in

staying there and doing what he had promised and had looked to share his expertise with those of us that were part of the hospital and hospital system, as well as those in the medical teaching community, were well received and became -- our efforts certainly were much more than what were inside of our hospital walls. >> let me just briefly ask you, ministries of health, do they show profound interest in what you are doing? do they just allow you to operate? or do they embrace it? when we talk about the number of physicians, there's clearly a capacity problem. i think you have said at least on -- previously, in previous conversations that obviously the

skills that a neurosurgeon will require are applicable to a whole host of other trauma and head injuries that might occur. again, desperately lacking in africa. so not only are hydrocephalus children going to get lifesaving and life enhancing treatment, others will benefit as well. i hope that's appreciated both in our government, which has yet to act, and n.g.o.'s that could be fill lanthopic n.g.o.'s that could be help tulful. this is a whole area of health care that has been ignored. you have paved the way. you have done the hard work of proving the model, particularly in uganda, and now the bugs are out of it and it seems to be replication should be the action word. let's grow this everywhere. but if you could, how many doctors, the applicability of the skills to other trauma and problems? >> well, so to address your

first question, which was about ministry itself. we started from the beginning in uganda with a memorandum of understanding with the ministry of health and worked with them. we worked with them on education and referral from district and regional hospitals. after about four years it was recognized that we were sort of the national referring center for hydrocephalus and other neurosurgical problems in children and in recognition of that the parliament included us in their budget which amounted to about one month of running costs, but it was quite gratifying not so much from just the financial end of it, but the fact that they had embraced us as a part of their -- acknowledged part of their medical service. what we always did, and i was the only nonugandan physician there, we had an all ugandan nursing staff except for some people that came for periods of

time for training. we had -- we hired people out of medical school and internships to come and work with us and train. and we fostered their training as we -- as we go forward. so i think that that was -- we became sort of an integral part of that. other ministries of health are interested in what we are doing. we are currently in some conversations over the government of rwanda and i met with their minister of health and so forth. i think that ministers of health againly -- generally do value what we are doing as part of the bigger picture. >> would anybody else like to add anything? mr. payne? >> only that i certainly commend you for the outstanding work that you all are doing. i do know that you are in the right country to move forward in medical attention.

as you know the 30, 40, 50 years ago, or even longer, uganda was known for having an outstanding medical school. where doctors or potential doctors from, in particular east africa and community, would go there to study. i first visited there about 40 years ago and did hear about the medical school. other east african countries, i think kenya had the school where you wanted to be a good lawyer, would you go there. but uganda was the place to go for good medical attention. i'm glad that they have continued and at least tried to give the support. and also just have some appreciation about what uganda's

-- but they have provided about 8,000 troops to somalia where the ugandan forces are assisting the transitional federal government of somalia which is weak. and without the u.n. support for the ugandan and some burundi troops i think the al qaeda forces of al shabab would probably have taken over somalia which would just wreak havoc on the whole horn of africa. i do as a matter of fact, as you may recall, there was a bombing during the world cup at a restaurant in uganda. and that was primarily because the uganda troops were there in somalia, much of it supported by

the u.s. through peacekeeping through the u.n., and so it's a long stretch, but the al qaeda people felt that they should do harm and about 20 or 30 people were killed because the ugandans were supporting the government of somalia which we support and therefore indirectly should be penalized. i do appreciate your work there in uganda. i have to work a little bit with the president, but we are doing so. and i tell him sometimes, you know, he's a farmer and i tell him why don't you go back to the farm? he said i still visit the farm on the weekend. why don't you visit it all the time. but i do really commend you for the great work that you are doing. thank you. >> ms. buerkle. >> thank you, mr. chairman. i just have one question in these developing nations.

how many centers do you think would it take to address this problem adequately? >> i would probably have to do a little bit of arithmetic, but i would say probably two per country. depending on the size of the country, a place like congo would need more, more like half a dozen. smaller countries maybe one. but it depends on the size of the country. the population density. and how bad the infrastructure is for transportation, obviously. but i think that a huge impact would be made by starting with a goal of one center per country. and more in the bigger countries like congo. >> part of our plan is to -- and

to continue, to expand the training we have where there are treatment centers in place because of the those surgeons that have been trained. as we have the capacity to allow those that have the desire, willingness, and abilities to become training centers themselves, obviously helping that whole scenario. so somewhat akin to what dr. warf said. >> what we are not envisioning is building more centers. what we want to do is come into existing government hospitals with what you might call a vertical program and you train and equip the people that are there that have a commitment to taking care of these children anyway and don't have the tools. and we have done some of that. and hope to do more of that. >> dr. schiff. >> i also might add that we would also envision a very similar sustainable way of

allowing countries to do the appropriate discovery of their organisms, surveillance, and institute both better treatment of the sick infants as well as prevention strategies. without having to rely on what is a very large scale at present effort to do that. and i think that's very doable. one could attack both the children who need surgery and simultaneously and paragraph lell with that address the root -- parallel with that address the root causes. >> thank you, if you did what you were talking about and found existing centers and you dropped in the vertical program, have we talked about how much that costs? >> for the record we submitted a plan and it is scaleable. the plan itself as presented is

multiyear and multimillions of dollars. but results in over 100 surgeons being trained and going on and over that course of time close to 27,000 surgeries having been done at that point but having an ongoing rate of at least 10,000 at that point. and obviously growing more if it were to continue on its course. but that is at least the plan that is in consideration. again it's scaleable to become the right size as needed. >> thank you. i just want to echo my colleague, mr. payne, in thanking all of you for your efforts and hard work and for undertaking this and for paving the way and giving these children a chance to -- an opportunity to survive and to live normal lives. so thank you very much. thanks for being here today as

well. i yield back. the speaker pro tempore: -- >> thank you. the ranking of the countries of africa, do you have a sense of what countries have the most compelling need that goes unmet? >> yes, sir. the d.r.c. to my knowledge as one neurosurgeon that i have met who told me he was the only one. i know of two mission hospitals in congo that see a stream of these children and don't have the wherewithal to treat them. so that's one place. >> what do they do when a child presents? well, send them away. say there is nothing to do. >> object krausely we have a huge challenge of capacity building. >> yes, sir. >> and prioritization within our own government and i think the

n.g.o. commupet which again you have provided -- community which again you have provided extraordinary leadership on for years which has done underrecognized i would say by congress and by the white house and by the state department. no matter who is at the helm. >> of course once again not anything to do with the hearing here, but i'd like to certainly commend you all for your testimony. but i would just -- was just looking at a ugandan little league team that was -- qualified for playing in williams port -- williamsport, they defeated a saudi arabian team, they played in poland on july 16, which is my birthday, and they won. kids supposed to be 11 and 13. and our state department just declined to allow them to come to play in the world series.

it's a real world series because now they bring in taiwanese kids usually win the championships as we know. we watch these games. but i'm going to dash off a letter to state department to ask them why are they denying these young kids from uganda if there is a question about aids? sometimes that becomes an issue. but they won't disclose what the issues are. and they come from the reverend john foundation, so it can't be any better than that, i guess. whoever reverend john is sounds good to me. so i'm going to follow up to try to find out why are these little leaguers, i think it would be great to finally have an african baseball team to go back to their country. and also i think it's a great experience for third world kids to get an opportunity to visit our country because sometimes that's the greatest ambassador for democracy. when they get back and see how

it is here, then they can be ambassadors in their country. but once again let me thank you and thank you, mr. chairman, for calling this important hearing. >> thank you very much. again, anything you would like to add before we conclude? >> i would like to say how much we all appreciate this. it's the kine of thing i never -- kind of thing i never thought i would have a chance to do. i'm hum blingd by the whole thing and want to tell you thank you. >> i'd certainly like to echo dr. warf's sentiments. >> thank you. >> add my thanks. thank you so much. >> thank you. again, you are path finders. you are saving lives each and every day. we need to expand capacity and i know this subcommittee stands readyle to leave no stone unturned in trying to help kids suffering from this debilitating but preventable and treatable issue known as hydrocephalus. thank you so much. the hearing is adjourned.

[captioning performed by national captioning institute] [captions copyright national cable satellite corp. 2011] >> coming up here on c-span, a senate banking subcommittee looks at the overall soundness of the american financial

industry this afternoon. witnesses include nobel prize winning economist joseph stig hits, he'll analyze the amount of debt u.s. companies are holding. you can see that hearing live coming up at the top of the hour, 2:00 eastern here on c-span. president obama turns 50 tomorrow. he's heading to chicago for his birthday. tonight he'll hold a fundraiser there. chicago natives jennifer hudson and herbie hancock are scheduled to perform. proceeds will go to the president's re-election campaign. live coverage starts tonight at 8:15 eastern here on c-span. again a senate banking committee hearing on the stability of the american financial industry coming up at 2:00. and to get us there a round table discussion on the 2012 presidential candidates and their remarks on the debt ceiling from this morning's "washington journal". "washington journal" continues. host: our topic for the next 45 minutes, how the debt deal will play o in that election.

joining us, mike glover, a senior rorter with the associated press. and james pindell, with wmur- tv. let me star with mike glover. how is it playing in iowa? guest: most of them, you're right, have come o against it. it plays, depending on where you are looking in the political spectrum. you have to remember, these people areot running an electorate, they are running in the very activist wing of the republican party, and the very activist wing of the republican party does not like the deal. all of the republican candidates are running against the debt deal, anthat sells pretty well with the wings of the republican party that will show on caucus night. host: and it shows up well with

iowa conservatives? caller: yes, e iowa conservative -- the iowa conservatives are more conservative than the mainstream republican party. host: and in new hampshire? caller: i am coming to you that does not -- i am coming to you from a state that does not have a state tax. obviously the independent voters can vote in the primary. people are not really engaged -- for those presidential candidates, except for -- jon huntsman has been in the state all week and has supported the pl. everyone else has not. when they're not supporting it, they say theyeed a deal, but

we just need a different, more conservative deal. that is the thing, right down the center before the political mainstream is. host: huntsman is one of the top tier candidates that came out and said i think this debt deal is a good one. does that hurt him in new hampshire? guest: he has to find a way to stand out. he is finding a way to stand out and say he was for it. when the freeze is he kept repeating here in new hampshire about the deal was the -- one of the ways he kept repeating -- one of the words he kept repeating here in new hampshire about the deal was the word quote reasonable," versus of quote ideological -- vs. "ideological."

host: how does that compare with what he said in iowa? caller: it was the same thing, to do what we can to accomplish at we are trying to accolish. the problem is that the base of the republican party in this state is not interested in reasonable solutions. they are interested in a fairly hard core ideological solution to things, and that is not what they are after. i do not think it sells very well here, i do not think it goes over very well here, and i do not think it works with the elements driving the republican party in this state. host: michele bachmann and ron paul voted against it. michele bachmann, out with a new ad about the debt deal. here it is. >> i will not vote to increase the debt ceiling. it goes completely contrary to common sense and how i grew up in iowa. so here is congress, watching

these people borrow more money that they do not have so that my children can be further in debt it. we have to deal with the economic reality, and i have the will and the courage to see this through. i am michele bachmann, and i approve this message. host: mike glove how is she doing in ohio -- in iowa? caller: she is doing well. michele bachmann and mittomney are tied for the lead. michele bachmann spent almost nothing here. but she is almost tied with him for the lead among republicans, and she has touched off a sense of excitement amongst conservative elements of the republican party. she is doing quite well. i do not know how you can explain it in rational terms. she engenders a sense of enthusiasm, of spunk, whatever.

she had a lot of republicans excited, and she is near the top of the field and all the polls i have seen. host: mitt romney is still doing well in iowa, despite having low profile. from what we are reading, a low- profile across the country. but there has been talked about him not being able to do that well in iowa, yet he is still at the top. guest: he is still right near the top of the polls. all that is based on the millions of dollars he spent in the last election cycle campaigning in iowa. he i very well known, has high name identification. he has kind of put a lot of moderate republicans -- he is seen as a moderate republican who can chaenge barack obama.

michele bachmann is almost tied with him, having spent very little and done almost nothing here. host: what about new hampshire? how is michele bachmann doing there? guest: the more interesting question is who is in second? that has fluctuated. pulling back into february, different folks have had that slot, for rudy giuliani to ron paul, even, trump at one point. right now on it -- right now michele bachma is in second place. she is around 12%, 13%. after that, we go into single digits. michele bachmann -- host: go ahead, james. guest: michele bachmann has been sort of day howard dean

type figure. can she pulled together the full howard dean type infrastructure? howard dean was a prodigious fund-raiser, was able to have a huge infrastructure in this state that allowed him to continue to be a player after a disappointing finish in iowa. michele bachmann, frankly, does not have that infrastructure here. clearly her focus right now has beenn it -- host: 90 show you this quote from john huntsman, from fox news, trying to explain what he meant when he said that michele bachmann makes good copy, "i wish we could all be that photogenic." what do you make of at? guest: i do not think this is getting a lot of play. had john huntsman been in second place or in first place, average

everyday voters would know more about thisuote then they really do. host: if you want to participate in this conversation, we set aside a specific number. does what jon huntsman said hurt voters in ia? caller: iowa is a funny state. it is one of two states in the nation that has never said a woman to congress' war -- to congress or had a woman as governor. it will be fascinating to see how that plays out among republican voters because republican voters tend to be those who have built that gender -- filled that gender gap.

i think one of the lessons to be learned is it is all abo political organization. i think michele bachmann has generated a lot of interest, a lot of enthusiasm amongst the republican base. however, i think one of the things she has not done to date yet is she has not put together the type of organization that drives those people to the caucus next winter. she has to do that. she has crossed the first hurdle. she has built the enthusiasm, the interest among the republican base. now she has to put together the kind of organization to deliver those people to the caucus next winter. host: here is "politico" with their story out of iowa. tim pawlenty today released the names of 29 iowa county chairs to underscore his ground game in advance of the ames strawoll.

the list suggests a level of organization that should result in pawlenty holding his own at ames, despite low balling of expectations by his team." guest: the need to do well there. they have based their campaign onoing well in iowa. if they do not do well in the straw poll, their campaigns will be on fragile ground. they will bring a lot of interest, interest, and focus on the straw poll. we'll see if they can turn those people all. if ty do not, their campaigns will be in danger. host: what should viewers be watching over the next month, in the fall, in new hampshire?

guest: guest: who will be the challenger to mitt romney? the magic is the last -- next leader of the free world has to talk to people in town meetings, answer questions on taxes, what to do about their kid that is in afghanistan or iraq? that magical moment has not happened in any of these early primary states. as the campaign matures, we could see more of these magical moments between a candidate and a real voter that will shake up the narrative. you mentioned before, raising money and profile, mitt romney will not be participating. he is on vacation this week. host: does the straw poll

have an impact on new hampshire? >> it doe? guest: it does in terms of setting the field. in terms of ideology, it really does not. it does lead to a slow, le july and august. some of the candidates are spending all of their time in iowa. some are not the dissipating in iowa as much and focusing more on new hampshire. host: we will go to henry a democratic caller in iowa first. caller: my question is for mr. james pindell and the other gentleman. i heard the comment that iowa and new hampshire are everyday people. i really do not know anyone that lives in these two states.

they hold these primaries and everybody is held hostage by what these people in states nobody lives in thanks. host: mike glover, i will go to you first. guest: because life is not fair. iowa and new hampshire have been first for a longime. candidates have to talk to people. if t first date was california, if you did not have $50 million, you could not run the campaign. in iowa and new hampshire you could go door-to-door, talk to real peoe, and get your campaign off of the ground. it is a system that is worked pretty well for a long time. it has helped nominate a number of people that have gone on to be successful. host: here are the key dates in the 2012 election -- august 13, the iowa republican straw poll.

if host: here is a story that was published on fox news -- early arizona primary could shake up the calendar. it's as if the governor of arizona, jan board, if she has her way could move the primary up to january. james pindell, what is it looking like for the primary calendar? guest: times are you spend all the time explain the states because it is probably no going

to happen. the arizona governor has the capability to move the primary to whenever she wants, but she has to do it with 150 days notice. she would have to make up her mind by a september. new hampshire and iowa will begin the process. they are much more nimble. iowa has a republican chair. it is a nimble process. four years ago, we did not decide whethe new hashire primary would be until the thanksgiving holiday. these two states will start off the process. what day? i do not know. host: when will that be decided? guest: again, much later, probably late-fall. iowa before new hampshire. thus tt -- secretary of state is the last person.

it is his duty. it is the state law. we have the first primary in the country. he is duty-bound by law. he usually makes his mind up sometime in the fall. host: will go to ellen, a republican in houston, texas. itler: let's not get twisted. mitt romney has zero chance of winning. neither does bachmann. neither did she hold any weight in any sort of throwback to republican ideas. ron paul is a year should be talking about, and at the very least you should consider rick perryas a threat. let's get this weekend in houston. we have the prayer weekend and the fasting, and all of the stuff. this is posturing.

if you are worried about the tea party, he is more scary than anything you can think about. let's go, ron paul. host: ron block -- mike glover, ron paul, chances in iowa? guest: he is much stronger than the previous times. i guess you could call him sort of a naysayer to what is going on in politics right now. that seems to be selling pretty well among tea party folks and those kind of folks. he is running third last i checked, which is much better than he has done before. he is a serious candidate and will run pretty well. he have something that is very important in iowa which has caucuses that require a level of commitment, he has very, very loyal, committed supporters.

he might not have as many as someone else, but the supporters he has are very committed, in twos, and committed to showing up next winter. host: this is from james. host: if you look to paul will -- if you look at "the " this morning --his mornin his schedule to spend two days campaigning in iowa and will hold fund-raisers.

host: he has amassed an monetary advantage and kept his lead, but the potential competition from the governor of texas are likely to change the contours of the race. it might be the strongest challenge yet to mitt romney's front-runner status. guest: i did not think anybody has a wrap up. the thrust of that is pretty good. mitt romney is probably a front- runner. in that is what the polls tell us. -- that is what the polls tell us. rick perry comes in as the governor of texas with a very, very large support among right- wing angelico and christians. he is a very -- evangelical chriians. he has hired staffers in iowa. he has a staff on the ground. i think it is not a settled

deal. one of the things we do least well in our business is we do not really do well and deciding how somebody is going to revolve as a candidate, roh into the le. rick perry, on the face, is all you need to have to be a republican candidate. as he moves into the race, will he rolled into that role and become an effective presidential candidate? by all accounts, he probably can, but let's see. host: was go to new hampshire, grace, a democratic caller. caller: yes. are allshire people are original people from new hampshire.

if we do not ask questions like boxers or briefs we ask questions of what the corporate tax rate should be. that give this a clue about how one form they are, and that they're not as informed as we are. host: james pindell? guest: that is true. 70% of the state was born somewhere else. they have all of the population boom along the southern tier of the state, largely in the boston, manchester market. is interesting to comes to town hall meetings. why do iowa and new hampshire began the process? no state would be perfect, but one thing these states doo-doo do is they allow for a marketplace of ideas -- do do is they allow for aarketplace of ideas. you really have these town hall

meetings in new hampshire and iowa where you get to see how candidates react under pressure and have honest debate. that is something that adds to the process before going to bigger states. host: i want to getour thoughts on rick perry and new hampshire. here's a story out of the eight teeth that says the texas governor has organized a prayer, a seven-hour cursed and atonement. it'a sincere scheduled the event he has become the most talked-about almost-candidate in the presidential field, but with only a thousand rsvp's for a stadium that seats 80,000 people, the event has become potential risk.

guest: i read that this morning. probablyry would be - the biggest threats to mitt romney. every couple of months we talk about somebody else that could enter the race. now, we are obviously talking about rick perry. rick perry and sarah palin are the only two candidates that would seriously shake this place up. rick perry has a natural advantage. he has arguably the top political strategist in the state, and in the country, his righhand man, david carney. he would be a major player if he were to become a candidate, not just in iowa, where he would find natural constituencies, but even here, in new hampshire. host: maria, an independent in new jersey. caller: do you think ron paul is

the only candidate that is potentially a nationalist? he is against the trade agreement's death of put up of $311 billion deficit every year. with the illegal immigration year -- issue, i would like to see all of the candidates address these and protect us. also, what governor rick perry'sob performance, a lot of times what the let the department of labor accounts for a job could be a lot less than the job they had previously. i wish we could he honest numbers. host: mike glover, what do you make of her comments about how ron paul views the issue is and how that might play god? guest: ron paul taps into -- might play out. guest: ron paul taps into a lot

of frustration that a lot of peoplen this country face, things that are out of their control. they see that things are going in a direction they do not like, and ron paul taps into the frustration. they see a world situation that is not going in a direction they like, an economy that is not going where they wanted to go, their jobs are not always there for them, and ron paul taps very effeively into that frustration by saying i am matt s. heck, and i am not willing to take it anymore. that accounts for a lot of his success. he is third in most of the polling i have seen, so he has been effective. host: why not if you are ron paul, run as a third party candidate? here is a story in n "the usa today."

i's as history says no, but if the debt crisis further alienates voters, all bets are off. guest: i did not think he will the republican nomination. i think mitt romney, rick perry are the front-runners, michele bachmann is playing into that. if he does not get the republican nomination, i do not think there is any doubt at all he will run as a third-party candidate. i think that is a likely scenario. if i were him, th would be a good way to go. host: james pdell, other any candidates that are in the race or not ithe race that could make it viable third-party run? guest: michael bloomberg is a big figure. he clearly has the money, the credibility, and he has been

talking about running and being this independent voice. he and arnold schwarzenegger at one. declared they would leave the republican party to be this independent voice. besides him, and there could be scenarios where that could work, i could not see how anyone could be this credible voice. people are disgusted with politicsnd washington, but i just do not know how long the sentiment about is the titular moment, the debt ceiling, will really provide an opportunity. i think there is a stream of populism that goes under- reported that could be grabbed up on. there is populism against some sort of elite. however you define that a lead, whether it is the folks in washington, or the educated

elite, there is an economic populism that is sitting there that any candidate could find highly successful. host: there is donald trump possibly starting with a third- party bid as well. eric, a republican in west virginia. caller: i am a member of the tea party, i am 72 years old, and i did not consider myself a terrorist or extremists. i worked hard all my life. i think we are at a crossroads where we are either going to be a socialist country or a free enterprise country. i'm just hoping it does not go to the left. i liked rick perry because, well, statistics speak for themselves. he has created a i think of all the jobs that have been created, he is treated 40% of them, and

for the woman that says there menial jobs, in this time, but job is a job. host: texas is doing well with jobs. here is a "pittsburgh post- gazette" page. 45% appred of the handling of his job for the president. combine that with what you heard from the caller about rick perry and his job performance. guest: the president fes a big challenge. he is head to steer the nation through two or three significant crisis eased. one was the one we went through. is that in a tough calls that are not popular. -- he has had to make tgh calls that are not popular. having said all of that, i have to tell you it is very, very

difficult toet a sitting president who is paying attention to his politics, and this president is paying attention to his politics. his poll numbers are down right now, however look at the money, the organization. i think we will have a mpetitive campaign. host: what is his organization might in the midwest and iowa for 2012, and how is the debt deal playing with democrats in that state? guest: democrats, right now, the biggest problem that barack obama faces -- you have to go back to the night he won election in chicago, and a million people let were gathered, cheering, shouting, talking about hope. are they as confused as they were back then? his problem is not -- enthused as they were back then? his problem is not with his base. are they excited enough to turn

out, or are they disappointed and not likely to show what? -- show poup? host: debbie, a democra go ahead. caller: iave an issue with james pindell. are you telling the people that property taxes start at $5,000 to $10,000 for an ordinary house? we are over-taxed, are you telling them that? and mitt romney, why do you tel about the big dig, the collapse, and the woman that was equipment, ashoty big did that went on for ever, and there was a woman that was killed. host: debra referring to when

mitt romney was the governor of massachusetts. go ahead, james pindell. guest: my point is that we do not have an income tax because taxes the fine politics. all we are left with is the property tax. there have been efforts to overturn that. there have been efforts to have an income tax. the most serious debate was in 1998 during the education funding crisis. in the big dig, of course mitt romney did not begin the big dig process. he was governor. there was some shoddy equipment. people had been fired. there were lawsuits. he did oversee debt. he did not oversee the entire project. host: steve, ill., democratic line. caller: i want to just let you

know. i'm going to be voting for president obama. host: you think the deal helps the president? caller: yes, i do. host: mike, dover, ohio. caller: i would like to welcome everyone from dover, ohio. i fail to understand why iowa has a big importance as been the first caucus or whatever. my understanding is they have a straw poll, a caucus, and a primary later. the straw poll and the caucus are strictly people that have been paid to show up. they are given transportation and whatever. host: mi glover, a little clarification there?

guest: the straw poll is an event where candidates do bus people to the straw poll to vote for them. they pass out tickets. so, it is a competition. who can turn out people to show off at a particular place, at a particular night, to vote for a particular candidate? the reason i like is first is because history, tradition, by what is a place where you have to come and talk to real people. you have to go out ancampaign. you cannot just throw a bunch of money at things. it is a flawed process, obviously, but it is a process over time that has prove you have candidates best to come out and deal with real people, and i think -- that have to come out and deal with real people, and i think that is an important thing

to have been a political campaign. host: john is a republican in woodland, texas. caller: i like to comment on rick perry. i do not think you understand how farmers and ranchers paid rick perry. he spent $140 billion to build a highway that would have bypassed every major city in texas. it would have taken millions of acres of farmland and ranch land to build it, and it was defeated. kay bailey hutchison came out against it. he need to start telling the facts about rick perry. i do not see ron paul elected either because he has extreme views on illegal drugs. host: you can see this entire segment at c-span.org.

we'll leave this to go to a senate banking hearing looking at the soundness of the financial banking industry. joseph stiglitz will analyze the amount of debt holding companies have. this is live at the dierkson building. >> we will -- i will do an opening statement. the questions and answers may be a little more free flowing. i'll probably ask you to respond to each other's assertions and statements and observations. all four of you are highly respected in these fields and have thought a lot about this and reflected a lot about this. it should be an interesting discussion for an hour or so. the recent debate that we just concluded is fixated on the national debt but it was more than just the national debt we

should be worried about. too many people in washington seem to be forgotten about the debt that put us in this deep recession and cost this country and almost everyone in it so much and that's the debt of the financial sector. c.b.o. estimates the entire cost of rescuing our failing banking system, the bailouts, the decreased tax revenues, new spending programs in response to the troubled economy and interest payments will cost our nation some $8.6 trillion, meaning $8,000,000,000,000,000, that's more than 57% of our g.d.p. we cannot allow collective amnesia to obscure the role of financial debt caused the deepest recession since the great depression and that's really the purpose of this hearing. in the last century and a half, capital ratios declined from about 25% and all of you have written and thought about this a lot. declined from 25% to around 5% of folet assets. in the last two decades, the 10

largest banks nearly doubled their leverage. that is they have haffled assets, if you will, that they have available to pay off that debt. the time of the financial crisis in 2007-2008, four of our five largest investment banks were leveraged 30, 35 and one case 40-1. that means when their assets declined by even the smallest amount they were unable to cover, to pay their debts. they were essentially insolvent as we know. borrowing from other businesses makes the financial system so interconnected, so interdependent that the failure of one firm can bring down the entire sector if not the entire economy. the impolicity assumption that the government will backstop their losses will give companies an incentive to engage in what two economists have called looting. they can risk bankruptcy at the expense of the rest of society instead of bearing the losses themselves. according to one, the 20 big

banks are more leveraged than their competitors, if i can use the word competitors in that case. they are able to borrow more cheaply than they otherwise would because it is assumed the federal government will step in to prevent them from failing. as a result, the largest banks make bigger profits than those that do not enjoy government subsidies of one form or another. they're least able to weather an economic downturn because of that significant leverage. and not surprisingly the largest banks are often bigger than before. prior to the -- prior to 2006, the 10 largest banks held 68% of total bank assets. by the end of 2010 they held 77% of total banking assets. simply future, were there not another economic calamity, bailing the banks again would impose a higher cost on taxpayers. this is not capitalism in the sense of the word. we need to require banks to hold increased capital reserves. capital buffers allows banks to fund themselves using their own

money instead of other people's money. last tuesday the ranking member of the full committee, senator shelby, said the importance of maintaining strong capital requirements, especially for large global banks. i couldn't agree more. the least we could do is ask the financial sector to have a prudent amount of its own money to cover its own losses. we require as much of our community banks, much less a threat to our system and the same rule should apply to everyone. that's why we're having this hearing today and testifying are some of the nation's greatest economic minds that have great insight into all of this. let me introduce each of the four of you and then we will then call on all four of you and work our way across. joseph stiglitz born in goirks indiana, in 1943. he taught at princeton, stanford and m.i.t. he's now university professor at columbia and chair of columbia's committee on global thought.

co-founder of the initiative policy dialogue there. he was awarded the nobel prize in economics 10 years ago for his analysis of markets with asymmetric information. he was part of the report of the intergovernmental panel on climate change which shared the 2007 nobel peace prize. stiglitz was part of the economic advisors in the clintor years and served as chair from 1995 to 1997. then became chief economist and senior vice president of the world bank from 1997 to 2000. joseph stiglitz, thank you for joining us. edward kane from boston college. for 20 years he chaired the economics of ohio state university and had the bad judgment to leave. currently consults for the world bank and is a senior fellow in the federal deposit insurance corporation center for financial research. previously dr. kane's consulted with numerous agencies including i.m.f., components of the federal reserve system and three foreign banks.

consulted for the congressional budget office, the joint economic committee and the office of technology assessment. when we had one in the u.s. congress. eugene ludwig is founder and chief executive officer of prom tori financial -- promontory. he was senior control of bankers trust deutsche bank. earlier he served as five years as comptroller of the currency, he headed the office of the federal agency responsible for supervising the preponderans of bank assets in the u.s. prior to being in that he specialized in banking law. last, paul pfleiderer received b.a., master of philosophy and p.m.d. degrees from yale all in the field of economics. he's been teaching at stanford for some 30 years, is that right? his research much of which is jointly pursued with another professor of finance at the

g.s.b. is generally concerned with issues arrived when agents acting in financial markets are differentially informed. his current research is corporate governance. professor flederer has been involved in -- neederer has been involved in portfolio managers. if you'll begin. >> the question of the financial structure of the banking industry, which i believe iseer sention to the future stability and prosperity of the american and global economy. let me thank you, senator brown, for holding these hearings. two fundamental an lytic insights buttress from some impeercal observations should have our thinking br capital requirements and risk taking. the first is when information is imperfect and risk markets is incomplete, that sauce, there is the presumption that

-- the reason is the actions give right to consequences that are not borne by those undertaking them. there is a systematic misalignment of private and social returns. this result is of central importance in banking and finance because the very rational of the sector arises out of the information necessary for the efficient allocation of capital. the consequent excessive to the bankses is manifest. it's not the cost of the bail yuentsd the millions of americans who have lost their homes but the literally trillions of dollars of lost output, the gap between the economy's actual and potential output. the resulting suffering including that of 25 million americans who would like a full-time job and can't get one is incalculable. the budgetary problem are no small measure as a result of the decline and increasing expenditures that follow.

it's well-known that recovering from financial crises is painful and slow. the importance of comma economists call agency problems, those like bank officials who are supposed to take actions on behalf of others and who have a fiduciary responsibility all with incentives that benefit themselves at the expense of those they are supposed to serve. the second fundamental insight is that increased leverage in general does not create value but simply shifts risk. increased risk is placed on the equity base. this is the central insight of the miller term in 1960's and 1970's i showed the result was what miller thought. there are limitations most which gained excessive leverage. if there are real costs to bankruptcy, which they are, then -- in the financial sector, the social cost are -- of increased leverage are even

greater because of the societal costs associated with things i said earlier. the misalignment is more in the case of too big to fail banks, banks so large that the potential consequence of allowing them to go bankrupt poses an unacceptable risk. the key impeercal observation is that markets are not rational at assessing risk. this is true even of the so-called experts but more so those that are unsophisticated. alan greenspan expressed his surprise that the financial markets are not managed risk as well as he had expected. but while he was correct in the conclusion the financial markets had done a miserable job of managing risk i was surprised at his surprise. after all, anyone looking at the incentive structures confronting key decisionmakers should realize they had short

sided behavior. greenspan made another error. if i am irrational in my risk analysis, my family and i will suffer. if a bank and especially a very large bank mismanages risk the macro economy can be affected. it is these that explain why self-regulation simply won't work. it is deeply troubling when the country's major financial regulators do not understand the rationale. it would demand compensating differentials. as we see banks striving to increase their leverage there may be uncertainty about what is driving this. is it because in doing so they increase the impolicity subsidy from the government? s is it because they do not -- is it because they do not understand the fundamentals of risk? is it because they understand the fundamentals of risk but real rise that their bondholders and shareholders do

not so they can extract more money for themselves? excessive leverage has large societal costs. banks and especially the big banks need to be restrained. indeed the analysis said there are no societal costs in doing so and considerable benefits. it's not that leverage somehow manufacturers resources out of thin air. lending is risky. the risk has to be born somehow. it's borne by equity holders to lending institutions to the extend is not shifted to the government, fdic, bondholders or depositers. it is better to give it to the large equity base. recent impurecal research has provide views such as those expressed here. if there is lending costs as a result of increased requirements those costs have to be offset against the benefits. there are very large societal cost for bank failures, as i said before, and these can be

substantially reduced by higher equity requirements. even if it makes sense in the long so to increase risk requirements, doing so in the short term would be risky. at most this is an argument for a pace increase in capital requirements and one which would not allow any dividends or share buybacks until the desired capital ratios are reached. one should at the same time be aware of the large risks, especially under the current circumstances of delay. it is precisely because the economy is fragile, banks of inadequate capital and the banking sector and the aftermath of the crisis is more concentrated than before the -- than before that the risk of a financial catastrophe, the kind we experienced in 2008, is so great today. the downside risk of not doing something are especially grave now.

i focused my remarks this afternoon on increasing banks' equity capital. there are a number of other factors affecting the risk the economy pose by the banking and financial sector. i have noted the risk of too big to fail banks. we should not allow any bank to grow to a size that poses a systemic risk to the economy. yet, in the aftermath of the crisis, as you pointed out, the banking sector has become more concentrated and the risk posed by too big to fail banks has, if anything, increased. we saw two in the crisis of the risk posed by nontransparent transactions such as over-the-counter sheet assesses. one of the reasons for the financial system freezing is no one could know the true financial position of most banks. while the dodd-frank bill improved matters it went no far enough. the problems continue. as long as they continue our economy is at risk. we may fully never protect the economy against the risk of another crisis such as the one we have been through but this

much should be clear. our economic and financial system is badly distorted. resources are misallocated -- misallocated before the crisis. no government has ever wasted resources outside war on the scale that has resulted from the failures of america's financial system. we may have begun the work of making our financial system once again become the serpent of society it is supposed to serve but there is a long way to go. lending, especially to small and medium-sized enterprise contrained. activities that pose risk to our economy continue. we cannot realign the self-restraint or self-regulation of financial markets. we learned that lesson in the aftermath of the great depression and the decades following world war ii with the strong regulatory system were among the most prosperous this country has experienced. the question is, will we relearn that lesson in the aftermath of the great recession of 2008?

>> thank you, dr. stiglitz. dr. kane. >> thank you. it's an honor and privilege -- >> is your microphone on? >> should i start again? >> go ahead. >> the effects of making taxpayers back up, treasury and federal reserve bailouts are insolvent and ungrateful financial institution. during the housing bubble and our representative of democracy, the interest of foreign and domestic financial institutions was much better served than the interest of society as a whole, as joe stiglitz has been saying. but why were taxpayer interests poorly represented is because of regulatory capture. the financial industries saw huge loopholes in the capital requirements and risk that then and now are supposed to keep financial instability in check. the dodd-frank act left many

issues open. it did not try to define systemic risk or to confront the ongoing foreclosure mess in fannie and freddie disasters. and the implementation of the regulation and for disciplining elite institutions has left to regulators. the keating five episode tells us how hard it will be for regulators to write rules that truly crack down on politically influential firms. sadly, the same gaps in issues exists in reform efforts unfolding in bosul and the european issue. the issue before us is to put it on a more promising path. to mean governments must do three things. redefine the supervisory missions of the regulatory industries, reform and refocus reporting responsibilities for regulators and for protected institutions on the value of taxpayers' safety net support. unless these duties are

embraced explicitly and enforced in an operational and accountable way, it is unreasonable to believe that authorities will adequately measure and contain systemic risk during future booms and busts let alone in this bust. the first step would be to strengthen training and recruitment procedures for top regulators. as you know, most top regulators leave behind them under current appointment and procedures a trail of debts they have to service, political debts. if it were up to me i would establish the equivalent of an academy for financial regulators and train cadets from around the world. among other things, students would be drilled in the duties they owe the citizenry and how to overcome the political pressures elite institutions exert when it has when they become undercapitalized. the public recognizes that the fad fed and treasury programs have heavy burdens on the citizenry.

evaluating fed and tarp circumstances, high officials tell us that their bailout programs were necessary to save us from an economic depression and actually made money for the taxpayer. both claims were false but in different ways. bailing out firms indiscriminantly and that was the point, it was indiscriminant, hampered rather than promoted economic recovery. it evoked reckless gambles for resurrection among rescued firms and created uncertainty of who would finally bail out the extraffic get cost of these programs. it continued to disrupt the flow of credit and investment that is necessary to trigger and sustain economic recovery. the claim that the fed and tarp programs actually made money for the taxpayer is half true. the true part of the proposition is that thanks to the vastly subsidized terms of these programs most institutions who were eventually able to repay the formal obligations they incurred but the other half of the story is that these rescue programs forced taxpayers to provide undercompensated equity

funds to deeply troubled institutions and that the largest, as you said, and most influential of these firms were allowed to make themselves bigger and even harder to fail. government credit support -- transferred to taxpayers, fresh losses at protected firms. authorities chose this path without weighing the full cost of indiscriminant rescues against the cost of alternative programs such as prepackaged bankruptcy or temporary nationalization and without documenting differences in the way each deal would distribute benefits across the population of this country. going forward, the crucial problem is how to relate it to systemic risk. we have to weigh them but relate them to systemic risk. acting in concert, a firm to carry a capital position that outsiders regards the risk it takes. taxpayers become involved in capitalizing major firms because creditors regard the

value of off balancing guaranteed supply as an option. a taxpayer put that serves as a partial subsidy for onbalance sheet capital supplied by the firm's shareholders. city corp was capitalized too much with taxpayer options. so the root problem is the supervisory conceptions of capital and systemic risk failed to make government officials and protected firms accountable for the roles they play in generating adverse movements in either variable. policymakers knee jerk support of risk taking among the client firm they supervise and officials proclivity for absorbing losses in crisis situations makes sure that tough decisions favor interest s. systemic risk can be likened to a disease that has two symptoms. the dodd-frank act and the bos -- bossle three framework

treated three of these symptoms. it is to credit risks that might fly across the chain of connected counterparties. to be effective, the requirements once adapted to take full account of the firm's funding patterns and to treat a second and more subtle symptom. the second symptom is the ease with which actual or potential living debt institutions can use financial accounting trisks and inowe vavet -- tricks and innovative -- until their insolvency is so immense that they can extort life support from them. in good times and in bad, the existence of this taxpayer put allows elite private institutions to issue the equivalent of government debt and makes ordinary citizens uncompensated equity investors in such firms. my recommendations for regulatory reform are rooted in

the straightforward ethical contention that protected institutions and regulatory officials of fiduciary duties to taxpayers. the existence of the safety net makes taxpayers silent equity partners in major financial firms. not only are they silent partners, they're uncompensated or poorly compensated partners. the fact that investors, taxpayers are informed about the value of their side of the taxpayer put, consistent with u.s. securities laws, managers of important financial firms should measure and report under penalties for deception and negligence the value of taxpayers' stake in the firm on the same quarterly frequency that they report to stockholders and government officials should examine, challenge, aggregate and publicize this information. my two-piece conception of capital risk is that it's embodied in -- in the firms the safety net protects. the values of taxpayers' position varies with the risk that the institution might

sustain losses that exceed its ownership capital. it's often called p tail risk. the government is likely to absorb. it's one of these -- the institution wins and tails the taxpayer loses. define systemic risk is an unfavorably structured claim provides a metric for tracking systemic risk over time. that's the advantage of it. requiring authorities to calculate and disclose fluctuations in the aggregate value would make regulatory authorities more accountable for the quality of their performance. most existing measurement strategies incorporate the binear perspective of a study using this approach that regulators could attract the growing correlation of risk exposure as an early warning system for the current crisis. expanding the format for collecting information of institutions to include estimates of the potential variblity of the returns over

different horizeons and to improve the precision -- horizons and to improve the precision and accountability for regulatory and supervisory performance. accounting standards for recognizing emerging losses makes evidence of an institution's insolvency under current rules dangerously flow to surface. safety net management requires a more sophisticated informational framework than bank accounting and examination provide. to protect taxpayers and to enhance financial stability, examinations and bank accounting reports should focus not -- not focus narrowly on capital. they should report explicit values of an institution's claim on taxpayer resources. to hold financial institutions and regulators accountable for carrying out them out, they must assess the ethical constraints that would share with the public.

thank you, mr. chairman. >> thank you, mr. kane. >> thank you very much, mr. chairman, for having me here today. i'd like to commend you, chairman brown, ranking committee me, senator corkin, and other members of the committee for holding this hearing. they can take pride in having work hard to address the challenges posed by the financial crisis. you brought important congressional focus on the issues of financial stability, safety and soundness and the regulatory framework as a general matter and importantly here today. you passed landmark legislation in this area and continue to engage in serious oversight. we must never lose sight of the tremendous toll that the financial crisis has taken on our country. millions of americans are reeling from lost jobs, lost homes and lost life savings. this loss has hit our low and moderate income citizens the hardest.

it's a terrible tragedy for many families across america. as we continue to recover from the financial crisis, our challenge now is to successfully implement the very powerful postcrisis reforms enacted through dodd-frank. the bossle committee and the financial stability board. implemented correctly, these new rules will add marketedly to financial stability. however, if they're implemented without a sense of their cumulative impact on financial institutions and the system and without a sense of balance and proportion, these rules will put a drag on the financial system, our economy and on job growth. furthermore, if the implementation of these rules are excessive we can see the decrease in safety and soundness. i'd like to take a moment to discuss capital requirements, app issue i know is of -- an issue i know is of grave interest to this subcommittee.

clearly capital is critical to a safe and sound financial system. the dodd-frank act, and other reforms recognize the importance of capital and they've acted forcefully. we have capital levels that exceed previous requirements. under bossle three, u.s. regulators may add an additional countercyclical buffer of up to 2.5%. furthermore, most of the financial institutions particularly carry a buffer above the rirmed minute mums. this is over 300% increase before additional buffers and

revised risks are -- three times. 300%. very significant addition. this is an important change because common equity is the highest quality capital. although it's the most expensive for banks to raise. now, it's also important to note that prior to the crisis several of our largest institutions were -- postcrisis, due to major investments banks converting or to being purchased by commercial banks, and in part to the ability of the f stock to name nonbank financial institutions as systemically important, a number of institutions will see an even more marked increase in their capital requirements. so we're seeing a real uptick in the amount of capital in the system.

i believe we have achieved important reform involving capital and therefore i would not at this time advise any further increases in capital requirements are beyond the dodd-frank and tough bossle standards. what i would like to stress is that critically important to safety and -- how do you ensure that our regulators and regulations are both serious and meaningful but not so elaborate that they needlessly weigh down the economy? unfortunately there's no quick fix. first, constant and thoughtful congressional oversight. i think this committee is to be commended for this hearing. congressional oversight is enormously important for the regulatory mechanism to function correctly. bringing regulators up here, asking the right questions as you're doing here today is critical.

number two, support the work of the office of financial research and monitoring systemic research and promoting financial stability. the o.f.r. is one of the greatest steps forward in this piece of legislation. it creates a body of economists to worry independently the next financial bubble and it helps financial regulators to target their resources in the right direction. that gets started and moving forward is critical. number three, ensure that our regulators continue to be top professionals who are balanced in their views and devoted to safe and sound banking system that supports prudent innovation and economic growth. i certainly agree with professor kane that education in the regulatory field is critically important. today you can get a degree in almost everything in america but there is simply no degree program in regulation and supervision which i think is

terrible. number four, avoid waste and excess at all costs. in fact, many of our rules and procedures can be applied very well than much less waste that is current the case. it's not a matter of not having tough regulation but having effective regulation that's targeted. and waste actually decreases safety because it mistargets resources. number five, periodically review regulatory rules to make sure they're effective and cause the least burden possible. regulations tend to grow up around institutions like barncals on a ship and in order to keep the ship sailing one has to clear the barncals off from time to time. number six, impose international capital and liquidity rules for global banks on a level playing field basis. global standards must not put u.s. financial firms at a disadvantage. i think this is a very big issue.

we have tough regulators. tough regulations that the new dodd-frank rules are demanding. we need to impose them globally on a level playing field basis. number seven, properly regulate the shadow banking system which currently owns one quarter of the united states financial sector. this is a very big deal because if you look at the institutions that failed and triggered the crisis, it wasn't the commercial banking sector. the shadow banking sector which is loosely regulated is genuinely a danger. with that i look forward to answering your questions, mr. chairman. thank you very much for having me today. >> professor paul pfleiderer. >> thank you very much for having me today in what i think is a very important issue that is being discussed here. i want to start with a very simple proposition that i think is completely uncontroversial and that is the notion that the

government should not in any way encourage firms to take actions that have large social cost and produce little or no social benefit. and just to make this clear, imagine uranium processing firm that wanted to locate one of its plants in a crowded residential area. obviously we would have zoning regulations and other regulations that would prohibit that. but what if the government had a tax policy that encouraged the uranium processing plant to locate in a crowded area and above that -- and above that actually provided health benefits in terms of insurance protection for health claims against the uranium processing plant only if it low indicates in the crowded residential area. that would be a perverse policy clearly. we fortunately don't have a perverse policy for uranium processing plants but we do have a perverse policy when it comes to our banking sector.

and the reason for that is our government subsidizes debt and makes equity expensive. it does that in two main ways. first of all, there's a tax subsidy, debt provides a tax shield. it's available to all corporations but particularly available to banks. but the other subsidy is critical here. it's a too-big-to-fail subsidy, guarantees that are given in the government's safety net that basically subsidize firms when they issue debt and make equity expensive. it affects our entire financial system especially the too-big-to-fail banks and makes our system extraordinaryly fragile. and the evidence of what that can create is just a few years ago in our crisis and we're actually seeing that more play out in europe as we sit here

today. hiley leveraged banks with too little equity creates huge things that are negative in the sense they create the possibility of a crisis. there is a huge social cost to this. now a lot of people claim that equity is recollection spencive. that is based on a lot of fall is is and mistaken notions. the first notion is that banks hold equity. banks do not hold equity. banks hold assets. equity has to do with the right-hand-side of the balance sheet and in particular the promises banks make to those that are providing their funds. and the promise comes in two sorts of forms. one that is contractual obligationes that are made to debt providers. and then equity holders get whatever is left. so the problem, of course, if

you make too many promises to debt holders, debt funders of the bank you get into a situation such as what we had in 2008 where the system is teetering on the brink of insolvency and in fact is insolvent. so with little equity we have losses that are essentially socialized with more equity we have losses that are privatized. in a capitalistic system we want the latter, not the former. so one of the important things in this debate is to distinguish private from social costs. let's go back to the uranium processing firm. imagine that the uranium processing firm is closely to -- is located close to a highly populated residential area and the government says it must be moved. now, the owners of that plant could claim it's costly, they would say it's costly because

we are going to lose tax benefits and we're going to lose the insurance you were providing if we are in a highly populated area, we are going to lose that if we move the uranium processing plant. that's clearly a private cost. you're taking away subsidies. the analogy is perfect with the banks here. if we force the banks to move toward higher capital, to safety, we're taking away subsidies that they had, we're encouraging them to do bad things. that's not costly from a social cost point of view. now, there are a number of other fall is is that are brought up -- fallacies that are brought up in this. one is that banks require a specific return on equity and that this equity return that's required is fixed. somehow independent of how the bank is financed. and professor stiglitz, following up on work done by franco and miller showed this

is a basic fallacy. so that is an argument that's based not on science. it's based pretty much on wishful thinking about how the market might be fooled when you change risk exposures. another thing that we see in the marketplace is that a lot of compensation is based upon r.o.e. well, you can simply go through a very simple experiment. just a little back of the envelope calculation. let's imagine we had two managers. a very good manager and very bad manager and the good manager has 10% equity. not a lot but 10%. and manages the bank assets very well. 2% interest rate paid to its funders that's a 12% r.o.e. now, let's talk about a bad manager who has a much less safe bank with only 3% equity and earns only 2.5% return on

assets before interest. well, that results in a 10% r.o.e. if you're a bad manager you can make yourself look good than a good manager with having high leverage which is may very well be in part some of the incentives for the high leverage we see out there. one of the questions that's often asked is where will all this equity come from. well, that's an easy question to answer. first of all, it doesn't require new resources. it doesn't require new savings. it requires that the banks change the promises that they've been making. in fact, it can come very easily. it can be built up rather rapidly by just presenting banks from paying dividends or other payouts to shareholders. they won't do that voluntarily because it takes away the subsidy but they should be required to do that in the interest of the social good. there's also a statement that's made we should have a level playing field. i agree with that up to a

point. i certainly don't agree with that if it were leveling our playing fields by making our banks risky at taxpayers' expense. that is no way to run our financial system. so my analysis is quite simple. we need to get the government less involved in the financial sector. to get less involved we must require that the private sector put up more equity and bear the risk that the taxpayers are now bearing, that distorts the system and leads to financial crises. thank you. look forward to questions. >> thank you, dr. pfleiderer. i want to take another step. your uranium processing plant. in an article you wrote that fallacies are relevant facts, myths, why bank equities not

expensive. you reported that some systems have capital more than required by banks. you said the typical nonfinancial firm has equity that exseeds 50% of the assets while the medium capital ratio of banks is 8.5%. why -- two questions. why do we allow banks hold so much less of their own money? and is that sort of a long-term -- which sort of subsidizing, encouraging finance over other sectors perhaps manufacturing? let me pair theycally add before you answer, my state is the third largest manufacturing state in the country behind only states much larger, texas and california in terms of what we produce. in our country only 30 years ago we were about 25% of g.d.p. was manufacturing, financial services was 10% or 11%. that's slipped in the last 30 years.

is that part of the reason why we allow financial companies hold so much less of their own money in essence than we do other sectors of the economy? >> i think this comes about through several methods. first off, neither i nor my co-authors or anyone at the table is arguing that banks should have 100% equity. certainly some of the banks use to fund, in particular deposits and most particularly deposits have social value. it's used in the payment system. we are not arguing for 100% equity. there is a lot of things that the banks use that is just used basically to get additional funding that exploits the government subsidies that i mentioned. i think one of the things that has happened, especially probably after 1970 or so, is this notion of too big to fail has created subsidies to the banks in the sense that there's a bank stop, that the investing

public realizes is there that basically encourages debt. and the problem feeds on itself because a lot of companies out there would love to have the government insure nair debt as well because it would allow them to issue more debt and get a bigger tax advantage because of the tax advantage to debt. the only sector that can do that is the financial sector because they do have this impolicity subsidy. and that's what's cause -- impolicity subsidy because that's caused them to lever up. i think it's pretty easy to document because that has created incentives for the financial sector to grow par bigger than what -- far bigger than what is socially justified. the increase in the size has basically been to exploit this subsidy. >> dr. stiglitz, implicit subsidies, what are the distortions and implications for our economy? >> well, they are very severe.

following up what paul said, because of the implicit subsidy, the too big to fail banks can get access to capital at a lower cost. so you can see it in their cost to funding. so they get capital at lower costs than one of your manufacturing firms in ohio. and that leads them to expand. the second point is the too big to fail banks have lower costs than community banks and the too big to fail banks that often don't focus to lending at s.m.e.'s and the community banks, we get a distorted economy. so parts of the financial sector that are involved in small and medium-sized enterprise lending are relatively starve to funds relative to the big banks that are engaged in more speculative

activities. the net result of this is that our economy gets distorted in several ways. we've been focusing on the size. it's also the case that the kinds of activities that they engage in is distorted so that for instance if you have a government guarantee you're more willing to undertake greater risk taking. so rather than lending on the basis of solid information to small and medium-sized enterprises you start going into nontransparent c.d.s.'s and engaging in speculation knowing if you gamble big and you win you walk off with profits. if you gamble big and lose the taxpayers pick up the losses.

so the economy is distorted and once the crisis happens the economy gets -- bears an enormous price. this is what's been said by several people this afternoon. this isn't capitalism. you mentioned i think in your own remarks, when you have socializing losses while you're privatizing gains you get a distorted market. that's why economists of both the left and the right agree this is a very serious distortion in our economy. >> dr. kane, his comments about advantaging our disadvantaging various banks, large banks, small banks, you said that we've sewed huge loopholes in the capital requirements. talk through, if you would, the

fact that large banks are highly leveraged than community banks, how disadvantages big banks -- and dr. stiglitz talked about how they could borrow money obviously at less costs than other entities, i assume, talking about manufacturing and smaller banks. talk to me about the advantages that the larger banks enjoy as a result of that, if you would. >> sure. dr. stiglitz emphasized there was an implicit subsidy to risk-taking and the larger institutions can hire better accountants and better lawyers and better lobbyists to see that the way in which risk say sessed in the capital requirement system favors them -- assessed in the capital requirement system favors them. we see them fail even though they made the requirement for the capital risks weighted to assets because the risk weights

were all wrong and all of the riskiests assets were not being counted in the system and that's no accident. the industry is always here before congress and before the agencies telling them how devastating it would be if certain assets were treated in a more transparent way. most of the loopholes come from nontransparency. as i say a fixed weight system that once it's set in place it can be gained. almost a little bit like black jack where you have a fixed strategy on the part of a dealer and a variable strategy on the part of the strategy. and if the player plays optimally you will kill the house. >> can i make one more example of the nature of the difficulty? going back to the c.d.s.'s. one of the issues that was

debated in the -- before the dodd-frank bill was passed, and that was the issue of where the depository institutions that had a government guarantee, fdic institutions should be allowed to write c.d.s.'s. the extent to which they should be allowed to engage in nontransparent, over-the-counter gambles. they were called the insurance policies. if they are insurance they should be regulated by insurance. if it's peculiar, the government is -- whether the insurance are gambling, they're not a lending activity. so what are they doing inside a government-insured depository institution? but once you have an inside the depository institution with the government backing them, they have an incentive to engage in

this kind of trading. and that's why in the month after the crisis it was so clear, most of the profits they were making were associated with trading, not with lending. the american people were told the reason for the tarp bailout was to get lending started. but that never happened. but they used that basis and access to the fed window at zero interest rate, close to zero interest rate to undertake a high leverage and undertake very highly risky trading activities which they generated high returns. but with the government backstopping them. >> can i make a point about the high returns? one of the questions that comes up about the safety net, if you back in time, is that nobody seemed to lose money on these

gumbles. they were actually making money. but we see now in the crisis that this money was extracted from the taxpayer in advance. it wasn't profitable at all. it didn't help anyone. in fact, it hurt. >> thank you. mr. ludwig, i want to read a sentence written by a finance professor at stanford. she said, there's no credible way to get rid of bailouts except without capital. do you agree with that? >> i think that capital -- regulator would look at that as an unimportant tool. but i'd say a couple things about capital. first, the high leverage which has been rightly criticized by my fellow panelists, the excess 40-1 to which you referred, mr. chairman, was largely outside the banking system. i think it's excessive. it shouldn't exist. fortunately you and the rest of

the congress has put a lot of that to rest in terms of the banking system with very, very strong capital requirements. the second thing i'd say is that capital is only one tool. it's almost impossible to have so much capital that you can prevent failures of financial institutions. financial institutions, particularly commercial banks, typically fail not because of the lack of capital. they fail because of liquidity inadequacies. it's the nation of the banking system. fortunately, both -- dodd-frank has been focused a year-plus on the liquidity ratios that the banks maintain. but that's yet another tool in the toolbox. there are multiple tools, and what we lacked in the last decade was the utilization of those tools with sufficient vigor. again, fortunately because the new laws as well as the

increased energy of the financial regulators, those tools are being used vigorously now. i think our issue going forward is striking a balance so that we have a stable financial system, yes, which we must have. we got a financial system that can support the economy of the united states. i think right now the dangers we face are we're losing that balance and becoming excessive in the way we implement dodd-frank in the way to retard growth. >> let me follow up. you said earlier in your testimony you said we now have very tough capital standards because of dodd-frank. because of bossle three. let me ask if your seatmates to comment on that. but first tell me what you think the fed should do with these in terms of -- i assume you're saying the capital requirements of three are about right now. give me your thoughts on what the feds -- what the feds should -- what they should impose on the largest banks,

financial companies? should they go beyond? >> well, you know, it gives the national regulator a .5% capital cushion on top. >> you agree with that? >> it makes sense. what i would not go is beyond that. why, because the capital increases have been so significant. we're in new territory now. and they do have an impact on lending and on the ability of these institutions to support the economy. . we have multiple other tools and before we, i think, take additional steps, we want to see what the cumulative impact is on the implementation of those tools so we again have a tough regulatory environment, stable financial system and one that can support the economy of the united states. >> the pushback that i hear around, in ohio and here,

against capital requirements, significantly higher than basel iii, as high as some of you recommended on the panel, are two things, one is the competitive disadvantage with european banks and second it would cause banks not to lend if we required higher capital standards, especially higher equity standards. would the three other panelists comment on your thoughts about the pushback that higher standards would mean u.s. banks at a competitive disadvantage and would not lend to the degree we would like them to? >> i want to actually with your permission just address an issue that came up here. liquidity is potentially a problem, it's always been a problem in the banking system. but liquidity in our modern system is only a problem when there's a problem with insolvency. if a bank has a liquidity

problem but it's very solvent, in other words has a lot of equity, then there's no problem at all with going to the fed and pledging assets, taking a big haircut out of them and the liquidity. it doesn't put the taxpayer at risk. the issue in the last crisis was not just liquidity, it related to insolvency and understanding that potentially a counterparty may be below water. so the issue in terms of, first of all, competitiveness with european banks and also with cutting back on lending, first of all we don't want to be competitive if it requires that we put our whole economy in jeopardy. if banks require a subsidy and it's not clear that they do, but if banks require a subsidy, by all means we should give it in a way that doesn't require high leverage. we could have high capital

requirements and it does take away subsidies that banks are getting. if we decide banks need to be subsidized because they're doing something underproduced, we need to give those subsidies in a way that doesn't create a fragile banking system. just to tell us where we are right now with respect to these capital requirements, one thing i was going to mention in my opening remarks and didn't is that just a few weeks ago, moody's announced that the support rating it was giving to, say, bank of america, was five notches above what it would give without government support. so this indicates that looking forward, to the extent that rating agency is factoring things in correctly, the government support is moving the bank of america debt from what would be minimum investment grade up to very high quality. one way to answer the question of how much capital do we need,

well, one barometer, one monitor for that would be if we have enough capital so that players in the economy, including rate agency, don't see government support in there. in other words we're not subsidizing banks. >> does it bother you, dr. pl -- pfleiderer that it was said a couple of months ago that european banks fought against capital requirements. does that bother you as an observer of what it means for american banks and our competitiveness? >> it bothers me to the extent that we live in a global economy and we can't inflate ourselves from mistakes made in europe. we have an integrated economy and if the europeans run their banks such that they're very fragile, there's no doubt that problems created there can spill into our economy. >> they're more fragile than

ours? >> they certainly are. the goal is not to be at the bottom but raised to the top. we need global standards that are much higher. but we should do is sink to the low standards of the europeans so we put ourselveses in jeopardy as well as the europeans, rather we should figure out a way if we need to to subsidize our bank that doesn't require high leverage. that's a proposition that i don't think has been demonstrated, that banks need subsidies, but if we do, then do it in a way that doesn't jeopardize our economy. >> the mistakes being made in europe have come back to affect the credibility of the sovereign support. the banks were allowed to run up more debt under government guarantees that couldn't be collected from taxpayers. someone has to absorb those. europe is going to learn that

subsidizing that risk taking by their banks is going to ruin the economies for a while. so the notion that because they've been subsidizing in the past will take away business, i think one of the lessons of this crisis is that people will look through the banks at the sovereign and revelation and choose something they can trust. >> the primary lesson is higher capital requirements. >> i think the primary lesson is we have to deal with average versus marginal requirements. we talk about high average requirements in fighting them. but we have to be sure that the margin we're not subsidizing foolish risk taking. that has to be done around the world. we can have lots of options, but we want to make sure we're not encouraging people to hide their lack of capital. >> first of all, i want to

address the second question you raised about would banks not lend. i think i'm going to go back to my first remark which is that a change in the debt equity, a change in the financial structure of banks does not increase their costs except to the extent that there's a subsidy to the bank bailout. so that to the extent we can put aside the subsidy, the fact is that there would not be a higher cost and therefore there'd be no reason for u.s. lending. this is where -- >> do you agree with that? there wouldn't be higher costs for the banks? i'll get back to the rest of your answer, dr. stiglitz. >> i think the issue is a practical matter, raising equity capital is so costly and particularly at this time, they've raised so much to

increase their own capital positions that a number of banks will consider, instead of raising additional capital, shrinking their balance sheets in order to accommodate higher capital charges. >> will companies be more reluctant to issue dividends? >> dividends have been restrained by federal regulators. >> but they were distributed and there was some night from simon johnson and others that the banks, because of equity issues and they're saying they couldn't attract enough equity that they ought to hold on to their profits for a period of time for equity reasons. is that a line of thinking? >> it's a malter of balance. if they can't have reasonable dividends, they'll attract capital. it also seems to undercut the confidence the public has in institutions themselves. if they're not in position to pay a reasonable dividend, i think the public uses

confidence in the institution. i think it's a matter of balance and proportion. >> regarding just the opposite, if they have more capital, as i said in my testimony that in fact there is a problem of transition, how serious it is, it's hard to ascertain. but if there is that problem in transition, we should impose this requirement that they not pay out dividends, not pay out excessive bonus pools and that would allow them to recapitalize the banks and put it on a safer basis so we would not have the taxpayer underwriting them. the important point i wanted to emphasize though is the fact that, equity is not costly. that actually, when you have higher leverage, what you're doing is increasing the risk of

equity. it's not a fixed price. that's the fundamental flaw in those who emphasize the high cost of equity, when you go to high leverage, you're driving up the cost of equity and shifting risk. i want to make a couple of other points related to the question you posed. one of the most -- the issue of -- this is related that -- the discussion about -- this debate about liquidity versus solvency risk. the point here is that when there's a lower equity base, there's a higher probability of a bankruptcy, of a problem, and therefore, higher lick elect -- likelihood that no one will give money to the banks. that's what causes a liquidity crisis. if everybody knew the banks were solvent, there would be no liquidity problem. it's because they are atrade

whether the bank is solvent is why that do this. this undermines the economy and it's related to inadequate capital. on the issue of the competitive disadvantage, i want to agree with what was said. we have to prevent a race to the bottom. that's what has been going on. i guess there are two other points i'd also raise. first, the framework for regulation inside the united states should be national treatment. so that if we have companies, financial institutions coming into the united states we regulate them as national institutions, they ought to be, i think, incorporated if they become any significance and have a subsidiary, not a branch. this basic principle means that the united states is a large

market, banks will want to operate in the united states. and we can set the regulations that protect the american economy. that's you are first responsibility, protecting the american economy, protecting our jobs, protecting the stability of our society. the issue about can our banks compete abroad, well first of all, i'm not worried about that. but if it were the case, this is a small, in terms of our national economy, how many jobs are created in america by the banks operating in europe or in latin america? relatively few. this is not a major industry for the rest of our society. so in my view, we should be focusing on the united states and protecting the united states, not on creating some jobs in europe in which, yes,

there are some prospects that go into america banking firms but this is a minor issue for our economy. the final point is that to lock at it the other extreme, we should not have the regulations dick kated in the united states -- regulations in the united states dictated by the worst banking regulator in the world. we don't want iceland and ireland to dictate the terms of american banking regulation. so yes, the banks are always going to say there's some country that has been bought by the banks and is going to have low regulation and can do things that we can't do. but what we need to do is focus on what's good for the american economy. >> if i may say so, i couldn't agree with you more. but there are two things, three

things, we don't need to fight the old war. the fact is that the ba sell -- the basel committee, we have much higher standards, point one, and you were in two, we don't want to have a race to the bottom. we don't want to change what we have by way of regulation supervision. what we want to do is use our clout to ensure that the regulation and supervision abroad, particularly with respect to capital standards, are applied fairly. the reason is, if we have an anomaly abroad, it affects our economy so the issue in terms of come pet tyness, it seems to me is what is going on outside the united states. the third thing where i would take issue a bit with what a number of panelists have said is that the fact is, when a panic ensues, as you know, irrespective of the amount of capital, people get panicked enough, they withdraw funds.

the reason is in part the genius of banking is two-fold. one is the maturity transformation ability of banks. that is, they take in short-term funds. people's deposit accounts, checking accounts, and they lend it for longer periods of time because if you're going to build a plant and equipment, it may be five years payback. the genius of the banking system is that maturity transformation. that means the bank is always going to be short if everybody runs to the window, we've seen this in 1930's movies and throughout the great depression, you never have enough in the till. it's a matter of confidence so capital is certainly important but all the capital in the world won't in and of itself stop banking runs. banking runs, it seems to me, get stopped by the public having enough confidence that the regulatorying meism in is going -- is doing its --

mechanism is doing its job, and the framework put in place by dodd-frank and the regulatory vigor. >> if you hear some say that higher capital requirements will dampen or reduce the amount of lending, why not, this is a bit rhetorical, but why not have no capital requirements? would that mean more lending? would that mean our my would get back on its feet and people could get capital? >> no, mr. chairman. the art of banking and the art of finance is a matter of balance after proportion. no capital would have some of the unfortunate externalities they've talked about, people would say, they've not no money in the till at all. but the practical problem for today is having raised capital so significantly, a 3.1%

increase in common equity that you get to a point at which, even if it's in -- if it's only a transition period, that at this point, i can just say practically, banks faced with additional capital requirements will start shrinking their balance sheet. lending takes up a lot of balance sheet and capital need. lending is a risky business. it's easier for institutions in terms of commercial loans to shrink their balance sheet and necessarily raise a lot more money and excess risk. >> i want to say several things. first, we don't really have much higher capital requirements now. these are all to come in the future. we have a lot of lobbying against them actually being installed. we have a capital short banking system today. >> the numbers he's talking about are the future, not today?

>> not today. >> that's right on paper but what happens is the market anticipating those requirements actually impose pressure on institutions to raise capital in the short-term. the institution having in fact raise -- have been raising capital in advance of the requirements and it's been stressed by the regulators, correctly, to push the standards up now. >> they're being pushed that way but they're trying to pay the dividends you talked about, senator, and had to be restrained. there is -- we're seeing a lot of pressure coming against the implementation of the dodd-frank reforms. i don't think we have to worry about the u.s. banking system being overregulated. i think that the lobbyists will see that it's underregulated at the margin and i would also say we have a crisis and never have enough capital. capital stops the runs. where did we have the runs in

this last crisis? in money market mutual funds and structured investment vehicles. they were put back on banks that were structured -- the structured investment vehicles were put back on bank balance sheets and that's when the banking system began to look terribly, terribly week. -- weak. the industry shows us you have to regulate maturity transformation. the s&l's making 30-year loans with passbook money became insolvent quickly when interest rates went up. interest rates will go up again and when they do, we have to be concerned about institutions that are boar reing -- borrowing overnight and lending for four or five months, never mind five years. >> thank you. when we conclude, i want to ask one more question, i'll give

you a moment to think about, what one or two improvements you'd suggest to dodd frank. i'll finish with that, one two thoughts of improving dodd franks in your mind. but i wanted to say the former attorney general of ohio came to see me this week. i've known him for many years. you recently wrote an article for american banker about competitive advantages in the shadow banking sector, system, you said, quote, if the newly minted consumer financial protection bureau doesn't have a senate-approved leader by july 21, the cfpb will be free to examine and take action against banks with more than $10 million of assets but not against their nonbank competitors. that was your quote. are you saying traditional

banks are hurt by efforts to block the appointment of the director? >> yes, they are, actually. i'm -- as you know, mr. chairman, i'm a huge supporter of consumer loan and moderate income issues. i think it's important to have a functioning agency and in that regard, the anomaly of not confirming mr. cordray, there will be an imposition on the banking sector of consumer rule, not a bad thing, but there won't be an imposition on those rules on the nonbank financial sector, the shadow banking system, not a good thing. i think we ought to get about moving forward here. >> in conclusion, i'll let each of you, what one or two improvements would you make to dodd-frank? >> it's hard to limit it to just two. >> and certainly you can commit in writing, you have seven days

after this. >> i think most of us are concerned about too big to fail banks. something should have been done about that. something like the brown kauffman -- coffman amendment should have been -- brown-coffman amendment should have been included. the second one is much higher capital requirements along the lines that most of us have been talking about. i don't think basel iii goes far enough. the third is c.d.s. as it's exemplifying the continuing risk taking. the point i made before, they continue to be engaged in by fdic ensured -- insured institutions makes no sense. the fact that they -- a large

fraction of them continue to be over the counter and nontransparent and increasingly concerned that the exchanges themselves, there were not adequate capital requirements imposed on exchanges so there's a risk -- if it goes down again there's systemic risk. there should have been something done about that so the taxpayers don't have to pick them up. i'll put forward recommendations on those lines. the final point is the anti-competitive practices of the banking sector that controls the means of payments, the credit cards and debit fees are an outrage. our major source of revenue which distorts our economy and hurts ordinary retail merchants throughout our country. small businesses. again. grocery stores that -- there

are some cases where 50% of their profits go on the sales of groceries are given to the banks. when they are paid for by credit card. i've seen disproportionate to the services provided. >> i can reduce mine to two themes. many of joe's points would go under my two themes. mr. ludwig made the point that research is one of the parts of dodd-frank. missing today is the director of the office of financial research and it's been placed under a very complicated 17-member committee. so i think that we really have to adress the need to measure and publicize the cost taxpayers incur in supporting national and international

safety nets. this will be the job of the office of financial research but it needs to be assigned to them in this way. i think also the authorities to do this conscientiously in the long run, governments need to train the -- change the way they're trained and incentivized. >> mr. ludwig. >> three things. one, i lament the fact that we don't have a single prudential supervisor. dr. stiglitz advocated for that early on in the clinton administration and it has not yet -- the countries that have done better, australia, canada, and japan had a single focused and professional prudential supervisor, i think that would advance the cause in this country markedly. i agree with dr. kane that

education for financial soup visors is critical and we don't have it adequately in this country. the third is not a new change to the law but i think it's porn to implement dodd-frank with prunes and care. it will -- there are only so many hours in a day and we want our financial institutions and regulators targeted on those things that matter most, not on those things that are extraneous. furthermore, excess here will put a drag on the economy which we can ill afford at this time. >> dr. fletcher. >> since i'm going last, i probably don't have much to add here. i'll just in some ways reinforce what's been said here. i made the analogy, it may not be the best analogy, is that we're trying to regulate cars

that are going down the road at 100 miles per hour that are only five feet apart so that requires careful regulation to make sure the cars don't hit each other. the answer is to have a bigger buffer between them. i think basel iii is not enough. it solves a lot by putting in much more privatization of losses rather than the socialization of losses we have now. i want to reinforce that idea that we need more capital. i haven't thought very much about having a single regulator, but having heard this idea, it makes a lot of sense to me. i think that that probably moves in the direction of taking care of a lot of the fragmentation that we have now. and i think that getting the research up and the problem is that the next crisis may not

happen in the way, almost certainly won't happen in the way the last one did and we need to constantly be vigilant and being ahead of the ball rather than behind it is going to be useful and i think it can help us that way -- the o.f.r. can help with that so it's important to get it up and running. >> thank you for your testimony, thanks for the majority and minority committee staff and to those in my office, i appreciate all of this. thank you. [captioning performed by national captioning institute] [captions copyright national cable satellite corp. 2011]

>> as you can see, if you missed any of this hearing, you can see it on our companion network c-span2 at 8:00 p.m. eastern. president obama turns 50 tomorrow. he's going to chicago for his birthday and tonight he'll hold a fundraiser there.

chicago natives jennifer hudson and herbie hancock are scheduled to perform. proceeds will go to his re-election campaign. live coverage starts tonight at 8:15 eastern you can see it here on c-span. following a series of tweets saying, the capitol looks beautiful tonight, and turn on c-span now. >> there isn't a name that stirs more love, more admiration, more of wishing for our daughters to be like her than the name of congresswoman gabby giffords. thank you, gabby. >> watch her return to the house online at the c-span video library. it's washington, your way. >> that figure that's removing the veil of ignorance from

human understanding, that's an american invention. that's not a classical statue but it's sort of class call theme. >> if you missed the latest documentry "the library of congress," there's a preview now on c-span's youtube channel . be a subscriber, it's free. receive notice of all the latest videos we're posting. that's youtube.com/cspan. every morning, "washington journal," our program about the news of the day. weekdays watch live coverage of the u.s. house and weeknights, congressional hearings and policy forums. also supreme court oral arguments. on the weekend see our signature interview programs, on saturday "the communicators," on sunday, "

newsmakers," "q and a" and the prime minister's questions. c-span, washington your way a public service created by america's cable companies. the senate health committee held a hearing yesterday looking at rising health care costs since the passage of the 2010 health care law. medicare and medicaid services insurance director steve larson testified about specific programs giving states help in monitoring rising costs. starting september 1, state insurance regulators will be able to review any insurance premium rising 10% or more. other senators include diane feinstein and the insurance administrator for the state of oregon. this is just over two hours.

>> in the decades before the health act was passed, rising premiums cost millions to families. small businesses couldn't afford it anymore and began dropping coverage. congress had to act and we did. in passing the affordable care act, we enacted reforms to contain this runaway growth. today's hearing will explore how those reforms are protecting consumers. it's basic economics that one of the surest way to bring down prices is through open competition. for the first time in our history, health reform applies this to the health insurance market. in 2014, americans in every state will be able to buy insurance in a one--stop shop called an insurance exchange. small businesses will be able to shop there also. just months ago, the

administration gave states great flexibility in designing the exchange to suit the needs of their citizens. it will bring competition to markets that have become stagnant and have high prices. just the consolidation of insurance markets alone accounted for overall premium increases of about $34 billion each year, equivalent to a $200 annual rate hike per person. that's due to a lack of competition. if insurers have to compete on price, rates will come down. indeed, the nonpartisan congressional budget office projects premiums in the small group market will be as much as 2% low for the 2016, about $350 less per family. in a market where premiums have increased 5% or more annually since 2005.

employers spending on premiums is estimated to decrease by almost 4%, about $20 billion in this year's dollars. by 2019, businesses will save about $2,000 per family they insure and by 2014, families buying in the individual market could save an estimated $2,300 a year if they buy health insurance in a new, affordable insurance exchange. health reform also gives state insurance regulators unprecedented new resources to fight for consumers. the law allocated $250 million in grants for this purpose, almost $50 million of which has been awarded to 49 states and the district of columbia. we are releasing a report today from the government accountability office that i requested along with senator feinstein which demonstrates the extraordinary work state regular lators have done using these grant funds. these improvements enabled by

federal grants will allow them to be able to rigorously health reform requirements. as of september 1 of this year, next month, regulators will review proposed increases of more than 10% in the individual and small group markets. the insurer must disclose and justify the increase and if the regulators find it's unreasonable, the finding will be posted. medical loss is a deterrent, requiring insurers to provide fair value in return for consumers' premiums. it requires consumers to return to insurers 80 cents of each dollar in the small group market and 85 cents on the dollar in the large group market. if they fail to return these amounts to consumers either in payment for services or quality of care, the company has to

make up the difference in cash. it's estimated that next year when rebates are due, five million americans will revive between $160 and $300 per person. even those who don't receive rebates will benefit since insurers will have controlled premiums to stay above the threshold. some argued that insurers can't meet these requirements and holing them accountable will cripple their businesses. insurers have been reporting their quarterly earnings over the last few days, let's take a look at that. united health group's net earnings before taxes were $1.9 billion. that's for the quarter. that's not a year, that's for one quarter. and its net profit for that quarter was more than $1.2 billion, just for that quarter. executives issued this announcement, i want to quote from it. in the first half of 2011, the number of people united health

group serves with medical benefits grew by 2.1 million, plus those added over 2010. this addition almost entirely -- through organ inmeans places this among the strongest growth periods for our country. i think that united health care can come -- can muddle through rate review. i have a letter from an iowa constituent who received notification of a 19% rate increase by united health care. she writes, quote, i am a self-employed professional with no pre-existing conditions. i now will pay $276 per month with a $5,000 deduckedable. i changed from a $2,500 deductible last year, the premiums were getting too costly. at least it hasn't been a repeat of 2008 when my premium was increased twice that year. that was a 48% premium increase in one year, end quote.

so i believe these reforms are long overdue and our witnesses have agreed to discuss them. i thank them for coming to washington today and i'm looking forward to their testimony. i yield to the senator. >> thank you. today's hearing is to discover how the government can better regulate the insurance premium. this is an unfortunate but predictable response to the new health lew. as we predicted, it's driving up health premiums so now the authors of the law are attempting to shift the blame they don't want to acknowledge that the reason premiums are going up is because of the law they enfacted. they would rather lay all the blame for increased premiums on insurance companies. unfortunately, this destroys -- ignores the base exfacts. insurance premiums are going up because health care costs are going up and they are going up at least in part because of the health care law. don't take my word for it.

the administration's chief actuary at the center for medicare and medicaid services released a report that said that insurance premiums are estimated to increasely 9.4% in 2014. this increase was 4.4% higher than it would have been as a result of new health care law this result should come as no surprise to anyone. more than two years ago, the congressional budget office told us it would increase premiums for individuals and families by 10% to 13%. this equals a 10% increase for families. this was confirmed by studies that predicted even higher increases. we're also seeing validation in the insurance market. the "wall street journal" reported that insurers requested premium increases between 1% and 9% to pay for the benefits required urn the new law. rather than confronting the reality they created by enacting the health care law,

it appears they want to find a scapegoat to take then blame for increasing insurance premiums. unfortunately, blaming insurance companies will do nothing to address the problems driving up the cost of health insurance. giving states and the federal government the authority to deny premium increases will do nothing to address the expensive new benefit mandates, billions of dollars on medical devices and unsustainable cuts to medicare payments, all part of the new health care law and which drive up private sector health care cost. anyone who thinks insurers won't pass these costs along in the form of higher premiums is deluding themselves. as a former business owner, i can assure you no business can sell their product below cost for very long. to think they can because the government mandates it is a disaster. this shifts the blame for the entirely predictable result of

the new health care law. we should be focusing on how to address the causes of premium increases. we need to examine how the law is increasing premiums an replace those measures with ways to lower costs for individuals and small businesses. with eneed to enact provisions to lower health care costs help employers and allow american it is keep the plans they want rather than being forced to buy the plan a government bureaucrat thinks best meets their needs or apply for waivers. thank you, mr. chairman. >> thank you, senator enzi. we would like to welcome our colleague, senator feinstein from california, chair of the intelligence committee, who does such a superb job there keeping us advised as to terrorist threats and what's going on. we thank you very much for your service as chair of that committee. senator feinstein also was very

active in the passage of the affordable care act, done a lot of work on that. one area in which she had done a lot of work was in the area of rate reviews and making sure that consumers had information, good information. and so senator feinstein and i together asked the g.a.o. to release a report on state rate review activity, releasing that today, senator feinstein has long championed consumer protections and insurer accountability. i thank her for her work in this area. you have a prepared statement that will be made part of the record in its entirety. you can proceed as you so desire. >> thank you so much, chairman and senators. i've for a number of years now been concerned about the affordability of health insurance. of course, if you look at health insurance around the world, you see that no country

has the size of large for-profit medical insurance companies that the united states of america does. if you go further, you see that the premiums for family coverage has risen 131%. while medical inflation, which should guide this, rose just 31%. two years ago in 2009, 57% of people attempting to purchase insurance in the individual market found it difficult or impossible to afford coverage. that's before the health care plan. while the cost of health insurance continues to rise for individuals, insurance companies, particularly the 10 large for-profit companies, enjoy unprecedented profits. in the first quarter of this year, 2011, the five largest

for-profit health insurance companies recorded a net profit in a quarter of $3.9 billion. that's an average 16% increase from the same quarter the year before. c.e.o. pay for the 10 largest for-profit health insurance companies was $228.1 million in 2009. up from $85.5 million the year before, in 2008. this is a 167% raise in just one year. and this doesn't include the tens of millions of more dollars in exercised stock options and it means that these c.e.o.'s received nearly $1 billion in total compensation. dollars, and here's the key, that could have been used to provide health benefits. this raises the question to me, as to whether america's health

insurance should be controlled by for-profit companies rather than by nonprofit companies. and here's the rub. at the same time these insurance companies were reducing the am they spend on actual medical care, the g.a.o. report shows state insurance practices now varies widely even within different markets in the same state. to me, the g.a.o. report shows how fractured the health insurance market continues to be. and how consumers are not uniformly protected from egregious rate increases. i believe that what should be standardized is the authority to block or modify unjustified, unreasonable premium rate increases. i strongly believe that each state insurance commissioner or

regulator should not only be able to look at insurance rate filings an evaluate them thoroughly prior to implementation which this g.a.o. report dealt with, but that he or she should also possess the authority to block or modify those rates that are egregious. to evaluate the rates and have no authority to reduce or stop those found to be unjustified makes the state insurance commissioner simply a paper tiger. the department of health and human services reports that as of december, 2010, less than half of states and territories had the legal authority to reject excessive rates. the kaiser family foundation reports in at least 17 states, including my own, california, state regulators do not possess the authority to block or modify premium rates prior to implementation. the health reform law actually

takes critical first steps to help control premium increases and ensures that companies spend more on medical care, not profits. the grants provided to states to improve rate review processes have helped ensure more information is available about all rate increases. however, the law does not grant the health reform -- the health reform law does in the grant explicit authority to modify or block egregious rate increases. this is a loophole which is why during health reform, i introduced legislation to authorize the secretary of health and human services to block or modify unjustified premium increases. in states where the regulator does not have that authority. the health insurance rate review act of 2011 is pending in this house and a like bill

is also pending in the house of representatives. these bills create a federal fall back rate review process that grants the secretary of health and human services authority to block or modify rate increases that are excessive, you have justified or unfairly discriminatory in those states where there's not appropriate authority. this legislation is a simple, common sense solution and we almost got it included in the bill but we did not. since then, what's happening is these big, for-profit companies are raising rates wherever they can, sometimes once a year, sometimes twice a year, and sometimes three times a year. in 2010, i received over 1,700

letters from constituents pleading with me to help them with their skyrocketing insurance rates. now in california, the state insurance commissioner has reviewed some filings, they disapproved 14 -- well, they were withdrawn or negotiated to lower rates system of 6% were modified. i suspect that if california regulators had an appropriate legal authority, many more than 14 rate filings would have been modified or withdrawn in 2010. let me give you an example of why the review of rate filings is not sufficient and why i believe authority to block or modify is necessary. just about everyone i think is familiar with the increases that anthem-blue cross was set

to impose in february of 2010. as much as 39% for 800,000 policyholders in california. and in california, i should say, a couple of these companies essentially control the major medical insurance markets so that as you spoke, mr. chairman, there isn't the competitive competition there might be otherwise. and anthem was not an aberration. insurance companies in california have continued to propose 30%, 40%, and even 80% cumulative premium increases. we have a very strong insurance commissioner. we have a bill pending, his name is david jones, he's been successful in getting some of these big companies to reduce or cancel their premium increases. recently, a number of insurance companies were set to impose premium increases in my state,

some as much as 80% cumulatively. commissioner jones requested a delay of these increases until we had a chance to review them and the insurance companies complied. after review and pressure from him, anthem-blue cross agreed to scale back planned rate hikes from 16.4% to 9.1% for 600,000 individual policies in the department of insurance and to delay implementation of these hikes. but here's the catch. anthem-blue cross also serves individual policyholders through the department of managed health care in california. for other 120,000 californians that receive blue cross insurance through this department, rates rose an average of 16% on maye 1 of this year. the -- on may 1 of this year. the department of managed health care deemed the

increases unreasonable but they don't have the authority to block them. this means that the same company scaled back rates for some individual policyholders, but not others and i don't think that makes sense. now on page 43 of the g.a.o. report, in the appendix, are general comments of the department of health and human services on the government accountability office's draft report which is this report. what they say is for too long, insurance companies in many states have increased health insurance premiums with little oversight, transparency, or public accountability. health insurance premiums have doubled on average over the last 10 years. much faster than wages and inflation, putting coverage out of reach.

as recently as september of 2010, fewer than half oh the states and territories had the legal authority to reject a proposed increase if the increase was excessive, lacked justification or failed to meet other state standards. additionally, many states that had authority lacked the resources needed to exercise it meaningfully. this lack of authority and resources for states have contributed to unjustified premium increases. then it announces starting in september of this year, 2011, h.h.s. is requiring that all nongrandfathered insurers seeking rate increases of 10% or more in the individual and small group markets publicly disclose the proposed increases and their justification for them. disclosing proposed increases along with the insurers'

justification sheds light on industry pricing practices that some experts have led -- have been led to believe -- have -- have been led to believe led to unnecessarily high rates. this transparency in the insurance market will help promote competition, encourage insurers to work toward controlling health care costs and discourage insurers from charging unjustified premiums. then it goes on to talk about the affordable care act. i think this is a major step forward, mr. chairman. we worked with the health department to try to get the rate review authority as part of the bill. we failed. the lobbying by the big insurance companies obviously was intense. but i think, sufiss -- suffice it to say we have a problem that's out of control. we have a lot of people suffering for it.

we have a reduction in the number of people covered by this insurance because people can no longer afford the premiums. whether they're doing this just because they know in 2014 the health insurance law goes into play and therefore they want to recover as much as they can before that, or simply because they're going to raise rates as best they can to flush up that bottom line, i think it's just as simple as that. let me conclude with this. a man by the name of t.s. reid wrote a book about health care all over the nation, probably members of this committee have read it, and he concludes that no nation on earth has really been able to reform health insurance with large for-profit insurance industry. that may continue to be a problem. but i just want to thank you for watching this carefully

because our people have to be able to afford to be covered. i wish we could get this rate review through. i thank you for your support of it and you know, i wish the other side of the aisle -- ranking member enzi has always been fair, we've worked together on other matters, but this one really cries out for watching and for taking action to see the premium rates are truly justified. i thank you for the opportunity to testify. >> senator feinstein, thank you for your very eloquent presentation. i'll just say that, i quoted a constituent of mine who had written about her increases, one of my staff said, why doesn't she just shop around and buy something else? two companies have over 80% of all the market in iowa and in some places in iowa, only one

company, united health care. there are no other options. it's called monopolyism. >> we have that too, one company dominates, it's a 16-person -- 15 million person market, it's huge. >> that's why i was pushing for the small business health plan so the associations could group together and possibly form their own insurance company to increase, but by having those groups we would have encouraged -- we would have had some people who would have been on a par with the insurance companies for doing any of the -- any of the negotiating and i think that would have brought down prices. yes, i read that book, i think the author missed switzerland. >> he mentions switzerland. i'll send you the chapter. he was in switzerland and he found the care pretty good there, he found >> in switzerland, they had a

battle there several years ago and to regulate the insurance companies and the conservatives fought it but now they are very happy with it. and they interviewed a conservative and said since this reform, has any swiss citizen gone bankrupt because of the health care issue? and as you know in this country, 50% of bankruptcy are caused by health care challenges and he said has anyone in switzerland since these reforms gone bankrupt? and he said no, that would be a shame. that would be a disgrace. and they have made these reforms in switzerland. >> senator, thank you very much.

i know you have other obligations. thank you very much for being here. i appreciate it. now we'll welcome our panel. >> mr. larson is director for the sent of consumer information and oversight within medicare and medicaid services and comes with a distinguished insurance background and held a number of senior positions with a managed health care company, spent six years as maryland's insurance commissioner. we last saw him here in march. mr. larson, we welcome you back to the committee. your statement will be made part of the record in its entirety and summit up in -- clock says five, if it goes to seven.

five to seven minutes. >> thank you very much. thank you for the opportunity today to discuss the positive impact of the affordable care act on the affordability of health insurance premiums for american families and businesses, including small businesses. the affordable care reforms the health insurance market for the benefit of health care consumers, both individuals and businesses. one important goal of the reforms in the affordable care act is to make sure people and businesses receive value for their health insurance premium dollars. the need for this focus is clear. over the last 10 years, health insurance premiums have risen dramatically and the increases in health care costs outpace the rise in medical costs and wages during the same period. we know this is not only a burden on individuals who have seen their rates increase 20% a year or more, but on small

businesses as well. the rate at which small businesses are offering coverage to their employees has dropped in the last decade. the affordable care act helps to make insurance coverage more affordable in three key ways. first, it provides states with unprecedented resources to strengthen the existing processes that they have in place today to review proposed rate increases by insurance companies. i know from my experience as an insurance commissioner for six years, how important the process of being an independent review of proposed rate increases can be for consumers. but although the rate review process is important, we also know that the resources and expertise for rate reviews varies across the states. the affordable care act provides $250 million in grants to assist the states and territories in enhancing their health insurance review processes. since enactment of the bill, $48

million has been awarded to 42 states, the district of colombia and the territories. the a-- district of columbia, additional financing was announced to support the continuation of these efforts. the grants are having a major impact. as of june 2011, 178 states have proposed legislation to review states, 37 were engaged in rate review contract activity. 33 states were enhancing their i.t. capabilities and 35 states working to increase consumer transparency and provide information to consumers on the rate review process. the secksd important tool to ensure that consumers receive value are the rate review provisions which we have heard about. as the senator indicated and you did, mr. chairman, beginning on september, insurers seeking rate

increases of 10% in the individual and small group market are required to disclose the proposed increases and provide basic information to consumers about the reasons for their increase. these increases will be reviewed by states that have an effective rate review process or c.m.s. as a backstop to determine if these rates are unreasonable. we concluded an he valuation of state review processes and found that almost all states will have an effective rate processes and will be reviewing rate increases beginning on november 1. many states enhanced their processes in order to meet the standards for an effective rate review and drew on grant funds. we know effective rate review works. rhode island's insurance commissioner reduced a proposed insurer in that state by 6% and today, there was a blush he

reduced a proposed increase by united healthcare. 30,000 consumers in north dakota faced a proposed increase of 23% on their premiums that were reduced to 14%. and i know we'll hear about some of the great review activity that the state of oregon has done. finally to ensure consumers receive value for their premium dollars, the a.c.a. established minimum standards for spending on clinical services, medical costs and quality improvement activities for their members known as the medical loss ratio. the new m.l.r. provisions require that insurers spend at least 80% or 85%, depending on the market of premium dollars on actual health care services and quality improvement efforts rather than on administrative expenses. insurance companies that don't meet the standards will be required to provide rebaits to their customers. recognizing state flexibility,

the law allies for a temporary adjustment in the individual market m.l.r. standard if the state requests it and demonstrates that the 80% m.l.r. standard may destabilize its individual health insurance market. we are seeing indications that these provisions are benefiting consumers. insurance companies are pricing to the 80% standard for the benefit of consumers and will moderate future increases in order to meet the 80% standard. states play a critical role in the implementation of the affordable care act and we have worked with governors, insurance commissioners, medicaid directors and stake holders to implement these programs. it has been our priority to work with our state partners as the provisions of the affordable care act go into effect. in conclusion, the act includes a variety of provisions designed to promote accountability, affordability, quality and

accessibility in the health care system for all americans and to make sure that the health insurance market is more consumer friendly, transparent and responsive. thank you for the opportunity to testify today and i look forward to answering questions you might have. >> mr. larsen, thank you very much. and your statement will be made part of the record in its entirety. let's start a round of five-minute questions. mr. larsen, as i mentioned in my opening statement, insurance companies have reported their second quarter earnings and indicating that the industry is doing well. after the first quarter earnings report this spring, when the medical loss ratio requirement was first in effect, united health groups shares shot up 10%. humana jumped up 7%. the chart is the growth trend

across the industry. how mana's profits up. so from 1.1 to $1.8 billion. aetna grew steadily up to $8 billion in profits. as i mentioned, united healthcare is growing and net profits last year were lrs 4.6 billion. and just last week, united healthcare announced profits up 13% from the same period last year. shares have risen 44% this year. 44%. and the standard & poors index for large health insurance overall has climbed at a 40% rate, one year. so it's no mystery. i think what's feeding this, if you look at the growth in the profits and that's on the left side and right side is the

family preliminary yulls. those two lines just about parallel each other. as the premiums go up, profits go up. so given these numbers, mr. larsen, what is your perspective on the ability of insurance companies to remain viable in the the health reform area? we have heard a lot of these numbers have gone up. certainly premiums have gone up. some people may say, well, if we hadn't passed the affordable health care act, that wouldn't have gone. i don't know, because the senator alluded to, are they trying to get in before the exchanges before 2014 and get their prices up as high as possible or is this simply market forces saying, if we can make more profit, make more profit without anybody regulating or guiding it. how is the affordable care act like provisions of the medical

loss ratio again to change the insurance market so more premium dollars are returned to consumers and not just to company profits? >> both provisions i think will help between now and 2014. i know with respect to some of the major companies that have reported in some cases record profits and some cases their stock is trading as an all-time high, and the wall street analysts have indicated medical trends have moderated somewhat but the premiums haven't lowered. so some of the companies are benefiting between the spread of their premiums and moderating medical trends. and the m.l.r. standard helps that because it forces the companies to look down the road and if they don't want to pay rebates to consumers, they have to moderate their rate increases and we have seen and heard both from the states and from public

reports that companies are now going to be pricing to 80% and that means they have to moderate which their premiums are increasing and track more closely to what medical trends are. >> i think, if i'm not mistaken is your office preparing for a second round of grant review? and tell us what are some of the criteria. >> there was a first round of grants that we issued, $1 million per state that laid the foundation for the states. i think it was mentioned earlier in the testimony. i think it's in the g.a.o. report. huge variation among the states and particularly in the resources that the states have to perform this review. second round of grants will enhance the work that's been done so far. the first round are the building

blocks that help states get to a basic level but the next round is going to improve the capability of the states between now and 2014. >> i have one more question would like to ask but my time is basically up, so i'll ask in the next round. senator enzi. >> thank you, mr. chairman. some folks in the administration are having a problem understanding the c.b.o. scoring that the new health care law would increase insurance premiums. c.b.o. said the average premium would be 27% to 30% because americans would be forced to obtain greater amount of coverage. but they also said that the average premiums would be 7% to 10% lower because of greater administrative efficiencies and the average premiums would be 7% to 10% lower because of health care people getting coverage. if i subtract 27 minus 7 minus

7, i come up with 13% increase. so would you agree that c.b.o. said the new health care law will increase health care premiums by 13%? >> there were a number of moving parts in the c.b.o. analysis and they did analysis for individual, small group and large group markets. with respect to the small group market, there were factors that could lead to increases and factors they thought would lead to decreases. in the small group market, i think it was a wash or to the good for the small group market, particularly because of the efficiencies that small businesses are going to get. again, i think it was similar for the large group market as well. i think with respect to the individual market, i don't recall exactly -- again, there were moving parts and certain aspects of it by improving the risk pool and getting more

healthy people into the risk pool that was going to improve the overall experience of the individual market and then there were some additional benefits that would move in the other direction. so i don't recall the exact pluses and minuses that were in the c.b.o. report, but i think we certainly took the view when we put out our regulations that the impact was going to be potentially small numbers, but when you add the preventative care and other benefits that you get, that it was going to be a benefit for health care consumers. >> the congressional budget office confirms that number and all new plans being forced to have essential health care benefit packages that are dictated by the secretary. interesting to me that secretary sebelius used to be an insurance commissioner and didn't use her authority to change the rates. she kept a merger from happening

but never changed the rates. now, on a different question, apparently h.h.s. prohibited the institute of medicine considering cost implications when they drafted the recommendations that will mandate womens's clinical services that the government must be providing free. if these mandates increase costs, won't that increase the federal deficit and why did h.h.s. prohibit institute of medicine from considering the cost of these new mandates? >> well, the i.o.m. recommendations with respect to women's preventative services, those apply only in the private insurance market, so i'm not sure what you mean by the federal government subsidizing. but with respect to your second question, the statute with respect to all of the preventative services, nongrandfather plans are required to provide are not

applied with respect to cost benefit analysis. so i don't think we prohibit and it wasn't part of the legislative charge. they had a panel of medical experts that looked at the various preventative services and found they were effective and that's o.i.m. recommended those to the secretary. >> i have several questions, too, about the way that children-only policies. but i have someone who has worked on this. senator murkowski has done a lot of work on that and will let her handle those questions. the department of health and human services will write a $250 million for the grants for these rate reviews thaw are mentioning. 46 states have gotten funding. how many of these states claim more stringent policies would lead to decrease overall health care spending in their state? does merely reviewing a rate

increase result in lower health care costs? >> we absolutely think there is huge value in reviewing rates and bringing transparency and sunshine to the rate review process and i think some of these examples that we cited earlier, not every state as we have pointed out has prior approval authority. but reviewing and bringing to light the underlying issues associated with a rate increase can have the effect of having insurance companies go back and sharpen their pencil and review the proposed rate increases. review alone is a very powerful tool. many states have prior approval authority, which provides even more protection to consumers but the baseline review is a good place to start. >> thank you. my time has expired. >> senator frank and you are

next. >> thank you, mr. larsen for your testimony. experts agree that rising health care costs in our country are unsustainable for the federal government for states and for consumers. during the health reform debate i looked to minnesota for ideas to bend the implement cost care curve and making sure our insurers are offering high products in minnesota where the dollars they took in premiums were going directly to health care services. but it wasn't that way everywhere. the so-called medical loss ratio for individual and small group policies was as low as 60%, 50% and even 40%. and insurers were spending 40% of their dollars from premiums on health care services.

based on minnesota's experience, i introduced a bill that was included in the health reform requiring insurers to spend at least 80 in small group and individual markets and 85% of insurance premiums on actual health care services. in the large group market. during a hearing before this committee in march, you testified that you had already seen premiums go down due to m.l.r. can you walk us through the examples of you have seen the m.l.r. provision has helped to moderate premium increases. >> the couple of once i cite off the top of my head, in reviewing requests from the states to adjust the m.l.r. standard between now and 2014, there is a process -- some states are

starting at 50% and heavy lift to get to 80% in a year. states can submit a request to adjust those and we have quite a bit of back and forth with the states in that process. many states who were at much lower than 80% are now pricing to 80%. what i mean when i say pricing to 80% is that they have to make sure they are not charging so much to their consumers that they are continuing to generate that lower loss ratio. what that results is a moderation of the rate increases that they otherwise would have gotten. that's one thing we have seen. and a number of the publicly traded companies have announced rather than paying rebates, they will moderate their pricing. and we heard wellpoint was going to be shaving some of their administrative expenses in trying to be more efficient. across the markets, we are

seeing that. >> aetna in connecticut, lowering their premium, on average, 10%. >> right. >> mr. larsen, c.i.o. has granted m.l.r. waivers to five states and i'm extremely concerned that these waivers are being granted without sufficient evidence that these states wore truly see a disruption of their insurance market without such a waiver. in a recent waiver that was granted in nevada, it was clear that the state did not make its case. in fact, it appeared that they relied on information that wasn't even included in the application to make its decision and out of the six waiver applications that have been cited, only one has been

rejected. i wrote a letter to secretary sebelius two months ago expressing my concern about the number of waivers. i have not received a response and two more waivers have been approved. first of all, can i expect a response to that letter and when? and can you address the concern that ccio is willing to give a waiver to any state that applies even though they don't data? how much money will consumers lose in states where there aren't waivers? >> let me apologize to you for not getting a prompt response back. i will make sure you get that response when i get back to the office. with respect to the six adjustments that we have gotten, we have taken that review

process very seriously. if your staff has had the opportunity to look at the letters we send back and forth. it's a record that is developed, it's an expensive record. we have denied one and of the others we have approved, i can tell you we modified every request that has come in and have not granted the request as it came in the door. ultimately it is a balancing act. we want consumers to get the benefit of the 80% provision. some states have a number of smaller companies that in some cases that are on the edge of making money or not making money. and we are the ones most concerned about leaving the market. if there aren't any available, if the company were to leave, and some have said they would leave, sometimes they tell the commissioner, look if we have to hit that 80% in one year, we may

have to leave the market. we try to reach a balance and the decisions where we have rendered and not granted what the commissioner has requested, try to get as close to 80% as quickly as we can, that is reflected in our decisions and we support the m.l.r. provision and it's incredibly important and we will look at these very closely. >> i look forward to a response to my letter. thank you, mr. chairman. >> senator enzi, you mentioned the child-only policies and that is an issue. i thank you for your leadership on this aspect of health care and the study that you have conducted along with your staff. i'll ask as one of these 17 states now that has been impacted in really a very, very harsh way. we currently have no child-only

policies since the affordable care act went into effect. it's not only been harmful to my state, but as i look around here, minnesota does not have one, connecticut does not have one and wyoming does not have -- these no-child policies and it's fair to say, this is harmful to these states where we don't have any coverage. we have got to deal with this. i have been working on legislation that would allow parents and grandparents in my state and any other state to purchase child-only policies across state lines to ensure we aren't leaving any of these children behind. the legislation would require the department of health and human services to issue an annual enrollment period of at least 45 days. i appreciate your testimony here today. couple of questions for you and these relate to the news stories

that describe the burden that this provision has on these 17 states. the main concerns that the child-only policies do not have uniform open enrollment policies so parents can sign their kids up on the way to the emergency room and then this adverse selection to exit the child-only market. it goes without saying that as a direct result of this policy, what we're seeing is our nation's children that are put in a very difficult position. we can talk about who's at fault here, whether or not it's the insurers or what not. i'm not here to defend the insure hers, but the questionr what other options are out there to these children in the 17

states currently, maybe there will be more, what other options exist when there is only one insurer that is writing child-only policies left in the market? and what's the administration doing to help get children access to insurance? >> thank you, and we certainly share your concern about what has happened and it's been disappointing frankly to see the reaction of the insurers who we have given them a number of tools they can use to manage the risk. they can charge higher rates, have their own open enrollment periods. we have given them every option to ensure healthy kids and not insure a sick kid. so they decided not to participate in some of the markets. this doesn't affect kids that are currently covered. they stopped issuing new

policies. we have provided a number of -- and i think there are a number of options available in the states. first of all, as you point out, states have employed different tools. some have passed legislation requiring if you are in the individual market, you also have to cover child-only policies. we know under the a.c.a. that kids have coverage from their parents' policies up to age 26. to the extent there is parental coverage you have access to that under the new provisions in the a.c.a. we have made provisions to the piece of program that pre--existing insurance program that operate across the states to one, lower premiums and two, make it easier for kids to get into the program. we have allowed insurers to screen kids for available in other programs like the chip program. so when you put all of these provisions together, we think there are many avenues for

access for kids and there are tools available for the states and the issuers like open enrollment periods. >> is the administration defining what is an open enrollment period? >> we haven't yet in part. >> you think it makes sense to do so? >> we can. our preference is for the states to design a state-based solution. >> but in a state like alaska where we don't have anybody there. 16 others don't have anybody there. we are really caught in a bind and alaska's population is low enough that we aren't attractive to too many insurers coming into the marketplace. when we lose those with child-only policies and allowing for purchasing across state

lines is one avenue, but i think we recognize even with the expansion of medicaid and s-chip the fact of the matter is you are going to have a lot of parents who won't qualify for either of those programs. so we have a real gap here. and i appreciate the fact that the administration recognizes that, but you have to work with us so we can find solutions so we don't leave kids hanging as i believe we are. >> we can look at that as an option. states were taking action not to override what the states are doing. but if we have done what we can do, we will look at a backstop. >> my time has expired, i do have another question on the flexibility that is granted to states. but maybe we'll do that in the

second round. >> i want to thank the chairman for having this hearing on a very important topic and thank you, mr. larsen, for your continuing work on this very complex and profoundly important issue. i know a little bit about it from the standpoint of a official, state attorney general in connecticut and participating in a number of hearings on rate review issues, hearings that were not required under connecticut law. one of the walknesses of connecticut law, hearings are not required and rates can go into effect without prior approval and despite your citing an example in connecticut and i agree a very encouraging example of one insurance proposal being cut as a result of, in effect,

public notice and attention being focused on that proposed increase of 20%, there are still more examples of rates going up than rate proposals being cut. and i venture to say that's true across the country. let me begin with a question based on my experience, would you agree that prior approval or disapproval is a very important feature of effective rate review? >> well, if i could answer it this year, we define effective rate review in the context of the provisions that were in the a.c.a., which is truly a review process. if the question is in the spectrum of activities that fully protect consumers, you know, at one end you have states that had user file where the rates could go into effect without review and then you have public disclosure and other end,

prior approval. certainly the prior approval provisions and protections that the senator indicated provide the maximum level of consumers that the commissioner can modify or deny a rate increase. >> in my personal view, i believe that our rate review system should absolutely be strengthened by providing more transparency and accountability, including the opportunity for citizens to participate and for prior approval by the insurance commissioner after that kind of process and a right of appeal, which many states lack as well. would you agree that that right is an important feature of accountability? >> i think those are all important features of a full and fair rate process, public input and the right to appeal. >> aside from the grants that

you can provide and thank you for benefiting connecticut with a grant, among the other states that you have done, what more can the administration do do you think to encourage more accountable and effective review systems across the country, given its present authority? >> well, we're certainly in the process of granting, making and administering the grants. we have a lot of back and forth with the staffs of the insurance departments and hopefully we can play a role and cross ideas from different states. we get asked that question a lot. so we can certainly provide more technical expertise, letting states know what other states are doing. and we are working in that regard as well. in terms as we evaluate the progress that states are doing,

we want to hold them to standards and make sure they are doing. i think that's an important part of maintaining an effective rate review process. would you say that the industry could do more in perhaps encouraging that kind of review, especially companies in the industry and unquestionably there are some, who want a responsible and accounting? >> it's my experience that the industry is usually wary of the bank review process. but they can be encouraged to play a more -- >> if they felt it was a fair process, which i think it should be, can be and is, but i think they have to feel it is a fair process to engage in it as well. >> do you feel that a fairer

process would be one administered at the federal level that might be applied more uniformly nationwide? >> you know, i don't know how to answer that. i think my experience was most companies want and we want for the reviews to be conducted at the local level by the local state insurance commissioner who is more familiar with the market and where people are situated where covered by the policies. so it's not our objective to have a large federal involvement in the rate review process. it's our objective to have that performed at the state level and we are only performing fee backstop position. where states can't get to an effective point where we be doing the reviews. >> my time has expired but i would welcome a continuing dialogue on this issue. >> senator hatch. >> thank you, mr. chairman.

i thank you for having this hearing to discuss the rising costs of health care in this country and the health law has failed to reduce costs. c.m.s. published their national health expenditures report that shows as a result of the health law, premiums will increase by 9.4% in 2014. and i would like to ask for unanimous consent that my opening statement be included in the hearing record along with the health affairs article. welcome, mr. larsen. appreciate the work you are doing and trying to do there at c.m.s. c.m.s. published its national health expenditures report for 2010 and found that the health insurance premiums will increase by 9.4% in 2014 as a result of the president's health law. your testimony, you discussed two tools as i view it, that the

administration is using to decrease the rate of premium increases. however, the central promise of the law was that it would reduce premiums, not reduce the rate of growth in premiums. now, in light of the new report issued by your agency, how can the law keep its central promise of reducing premiums by $2,500? >> well, my understanding of the report was that it showed the rate of health care spending for last year was at the lowest it had been for many, many years. the rate was moderating. and that's a significant plan. i apologize and i'm not able to speak to the estimates by the c.m.s. person. it's the difference between what rates would have been with or without the a.c.a. but we believe the affordable care act is going to moderate significant

preliminary numbers. how it does it in different markets it depends. for the small businesses, they are going to have opportunities that they don't have today and going to get efficiencies through exchanges that they don't have today. so, we continue to believe that the tools that are available in the ample c.a. are going to help moderate. >> the national health expenditures report found that prescription drug spending will increase by 10.7% in 2014 which is 1% higher. physician and clinical services will increase by 7.8%, which is 3.1% higher than without the health law. this report shows that the president's health law did not reduce the costs of health care in the long run and instead will bend the cost curve in the wrong

direction. do you agree that the cost of health care continues to rise and that the tools under the president's health law will not bend the cost curve downward in the long run? >> well, i don't agree but i have to admit that i haven't reviewed the c.m.s. estimates. >> you said, quote, states are the principal regulators of the private insurance market, unquote. how does the rate review program established under the president's health law respect the states if the law requires the federal government to conduct rate review in states without a federally approved process for reviewing rates? >> that's an important question and i think we touched on it in the prior exchange. our objective, and i think we have largely reached that, is for the states to be the primary

reviewer. so we just completed an evaluation of all the states and the level effectiveness that they have and we found that only seven states so far were not effective, meaning that the vast majority of states are effective and even those that aren't, they could come back to us and say we have some kind of authority to review rates, but that is the biggest barrier. some states don't have an existing state law and some states passed legislation this year. vast majority are effective reviewers and we will do everything we can to support the small number of states left to get them there. >> you have testimony focusing on transparency and accountability, however there are a number of areas in my opinion, the administration has fallen short ol both. i sent a letter asking that she

fully consider the effect of benefit mandates and urged her to provide a comment period, however none was provided. can you tell me why the administration is seemingly transparent in their implementation process for some programs, but not all. >> when we issued the initial interim final rule on preventive services last year, we did get comments on various aspects of preventative services and what should be included in the costs and things like that. we took those comments into account when we just issued the latest decision with regard toll women's preventative services. we do feel like we took comment and responded to the comment. nonetheless i think in the amended interim final rule we just put out, we have an initial comment period and if we get comments that we should revisit

the policies we just announced, we will do that. >> mr. chairman, i have to leave, but could i ask one other question. do you believe that a majority of the employers will be incentivize to stop providing health insurance as a result of the employer mandate and penalties under the law? >> we think that employers will continue to offer and in fact the rate of offers by particularly small businesses will increase between now and certainly when the exchange are on-line. >> you believe that? >> yes and there are a number of studies from rand that make that projection. >> if you could submit those. i would like to read those. >> senator. >> thank you, mr. chairman. and mr. larsen, thank you for your testimony. i appreciate the work that your office is doing. and i do hear from my constituents on a regular basis about how frustrated and

concerned they are that their insurance premiums continue to rise. in your experience, can you tell me what are the top three reasons that health insurers continue to have such large increases in rates. >> there are a number of different reasons. insurance companies would indicate that they are simply passing along health care costs. and health care costs are driven by a unit cost how much they are paying for hospital visit or doctor stay and how many services they are delivering. there are a number of different reasons why cost increases and one of the things that this provision, rate review provision is going to get at is bringing transparency to exactly why rates are going up. i think -- there is not always a good answer to your question and i think there is a lot of confusion and i may not be answering your question but that's the real benefit of this provision for the first time, a

uniform disclosure form about what it is driving these rate increases. >> as a follow-up, 10% threshold that you mentioned in your testimony is that a good benchmark for the percentage increases we should expect to see in the future or see further reductions in premium costs. starting in 2012, do you expect that the threshold will be greater or less than 10%? >> that's going to vary by state. and that raises a good point. the 10% was a starting point. we looked at a number of medical trends and thought that was the best one to start with and it is a national number but insurance markets are very local and the rate increase in one state could be different in another, cost factors are different. so the 10% may turn into a 12% in another state and 9% in

another state, depending on local factors. >> i hear from constituents all the time, particularly small businesses in north carolina. and they, too, are frustrated because of their premiums continuing to increase. and under these new regulations, will there be an opportunity for consumers to file requests for review of premium increases either for review and your office or with their state's insurance commissioner. >> the way it's structured now, the consumers don't have the ability to ask for a review formally. we added in an explicit provision that required states to have public input in some way because many states had no public input into the process. the reviews are triggered by a rate that's being filed that's over the 10%. so the reviews don't depend on

whether someone asks for them but automatic base odd that trigger. but we added that provision for specific public input into the process. >> thank you, mr. chairman. >> i thought about your question about why these increases and let me talk about letters that i have received from my own constituents on this. in iowa when you have two carriers that have 80% of the market and in some areas of my state, one carrier. why are the rates going up? because they can. you have charts that showed the increase in the profits that these companies are making and then you look at the increase in the premiums, they just about match. so that's why rate review is so important and both rate review and medical loss ratio is so

important to try and get on top of this and the transparency and getting the information out there of what's happening because a lot of times we don't know -- it's like a cloud out there. we don't know what's driving those costs. we do know from 1999 to about the middle of this last decade, insurance costs went up about 131% you but the middle inflation was 31%. 100% more than the medical rate of inflation. so some of these companies are doing quite well. mr. murphy, did you have any questions? >> i'm going to pass. >> mr. larsen. thank you very much for being here -- i'm sorry. >> could i ask a quick question about the flexibility to the states. 10 states we are told at the end of june that they have

insufficient rate review authority. you mentioned that as well. and that they might be taking them over -- h.h.s. is taking them over in september if they don't get it fixed. you mentioned the fact that several of these states lack that authority to fix it and unfortunately, as my understanding, many of these states don't have legislators that are currently in session. in alaska, we passed a law this year to address this -- the rate review structure. it goes into effect january of 2012, but what is going to happen is my understanding is that h.h.s. is still going to step in for this period between september and the date that it goes into enactment. and i really have to question

how this promotes states' flexibility. you have states that lack the authority and passed the law to gain it and doesn't quite mesh with the requirements under the law and so we have a three-month period where you all step in. does this promote the flexibility we are hoping for? it seems it doesn't work for me? >> we are kind of caught in the switches between the september 1 date in the regulation and the date that your law takes effect. i can certainly go back and talk to our staff. the one thing we wanted to make sure, somehow or another consumers in the state of alaska were going to get the benefit of the law. and my understanding was that until the law took effect for the markets that are involved in alaska that the insurance department there didn't have the authority to get all the information to do the reviews. the challenge for us, we would prefer for the states to do it.

>> and we would like to work with you on this to see if there is some way. it goes against the goals here for you to have a three-month -- >> our challenge would be, if you couldn't do it and didn't step in and then you are going to have companies who are going to be raising rates for january, so this is the period of the year when they are looking for increases and the rates aren't getting reviewed and probably you and h.h.s. are going to be asked, how come these rates aren't getting reviewed. we have the same goal and if there's a way to get there. >> alaska's situation is probably unique but does bring up the issue for these other states that again, lack the authority, their legislatures aren't in session to do anything about it and you are hanging in there. i would like to know that we could be working with you so we can provide the information

without some really serious inefficiencies within the system. >> thank you, mr. larsen. we'll call our next panel. our next panel will be coming up. >> we have three witnesses, mr. john dicken, director for health care issues at the u.s. government accountability office where he directs g.a.o.'s evaluations of private health insurance, long-term health insurance and prescription drug pricing issues. we have daniel withrow. he is the president of c.s.s. distribution group, an international packaging company head quartered in kentucky and his testimony -- covers the u.s. chamber of commerce. at least that's what i read any

way. and our -- i will yield to senator murphy. >> it's my pleasure to interviews teresa miller, oregon's insurance administrator and i commend her for her work for leading oregon's insurance division. she joined the division in 2008, bringing a background in legislative and policy issues previously having worked as legislative director for oregon's former governor. she oversees staff of 100 and budget of $10 million. the division protects consumers by licensing insurance companies and agents making sure insurers are financially sound, reviewing policies and investigating violations of insurance law. she has done a great job of bringing diverse parties to the table and of taking oregon forward based on a strong rate review statute which preceded

congress' passage of the affordable care act. delighted that you are here to share your insights. welcome. >> we'll start with mr. dicken and then go across. your statements will be made a part of the record in their enentirety and sum up in five to seven minutes we would appreciate that. >> i'm pleased to be here today to discuss the oversight of health insurance premiums. as the cost of health insurance coverage continues to rise, poll sill makers have raised questions about the stebt to which these increases in health insurance premiums are justified and could adversely affect consumers. while oversight of private health insurance, including premium rates is primarily a state responsibility, the 2010 patient protection and affordable care act established a role for h.h.s.

the act requires the secretary of h.h.s. to work with states to establish a process for the annual review of unreasonable premium increases. in addition, the act requires the state to award grants to assist states in their review practices. my statement highlights key findings from a report requested by chairman harkin and senator feinstein that the g.a.o. is releasing today. it requires state oversight of health insurance premium rates in 2010 and changes that states that received h.h.s. review grants have begun making to enhance their oversight. for this report, we surveyed officials from the insurance departments of all 50 states and the district of columbia. we also conducted interviews with insurance department officials and other experts and reviewed the grant review applications submitted to h.h.s. we found that oversight of health insurance premium rates

varied among states in 2010. while 48 of the 50 state officials responded to our survey reported that they reviewed rate filings in 2010, the practices reported by state insurance officials varied in three key areas. first, there was variation in terms of the timing of rate filing reviews. specifically, respondents from 38 states reported that all reviewed rate filings were reviewed before the rates took effect while other respondents reported reviewing summary filings after they went into effect. second, there is variation in the types of information respondents reported reviewing. while nearly all survey respondents reported reviewing information such as trends in medical costs and services, fewer than half respondents reported reviewing capital levels. some survey respondents reported conducting reviews of rate

filings while reported reviewing little information or conducting for three reviews. a third area of variation was opportunity for consumer involvement in rate reviews. 14 respondents reported providing consumers with opportunities to be involved in premium rate oversight, such as participation in rate review hearings or public comment periods. however, most respondents reported their state did not provide opportunities for consumer involvement. the practices and outcomes of the rate filings varied among states in 2010. specifically survey respondents from five states reported that over half of the rate filings they reviewed in 2010 were disapproved, withdrawn or resulted in rates lower than originally proposed. in contrast, state survey respond especially from 19 states reported these outcomes

occurred from their rate reviews in less than 10% of the time. let me close by discussing how states have begun using rate review grants provided by h.h.s. 41 respondents reported their states have begun making changes to enhance their states' abilities to enhance health insurance premium rates. for example, half of these respondents reported taking steps to review their rate review processes or develop new processes. some states reported they were changing information that carriers are required to submit with rate filings, incorporating additional data or taking steps to involve consumers in the rate review process. in addition, over 2/3 reported they have begun to increase their capacity to oversee premium rates. these capacity enhancements included hiring staff and improving the information improving the information technology systems use