CHAPTER III

COST OF HOSPITAL INSURANCE TO THE ELDERLY

No end is in sight to the spiralling premium cost of hospital insurance for older people. In fact, based upon information developed at our hearings, not only are these periodic increases expected to continue, but, in the case of Blue Cross they may well be substantially greater than past increases.

The effect of these sharp increases in the premium cost of hospital insurance is to further seriously impair the capacity of older Americans to secure and retain adequate policies. Good coverage is expensive, and more and more is being pushed beyond the limited means of the aged.

COST OF COMMERCIAL HEALTH INSURANCE POLICIES

Perhaps the most dramatic recent increase in the cost of commercial health insurance was that effected by the Continental Casualty Co. in its "Golden 65" program. Premium charges were raised from 23 to 36 percent on three of the four components of the Golden 65 package. The only segment which was not increased-the $5,000 medical plandoes not provide a hospital benefit.

It would appear that the increases were necessary in terms of the claims experience ofthe "Golden 65" program (see app. A-2). Nonetheless, the very substantial cost rise coming only 6 short months after the company had mounted a multimillion-dollar national advertising campaign which resulted in the enrollment of 105,000 people age 65 and over-came as an acute shock to the 250,000 older people insured under the program.

This subcommittee received a substantial number of bitter protests from older people relative to the action of the Continental Casualty Co. Many advised that they would no longer be able to retain their policies. Indeed, the company estimates that approximately 17,000 Golden 65 policies, held by some 11,000 different people, were dropped as a direct result of the rate rise (see app. A-2). It is possible that many more Golden 65 policyholders will find the program too heavy a financial burden over the months to come and be forced to terminate their policies.

The two other mass enrollment programs sponsored by individual health insurance companies are the "Fund 65 Plan-Plus $10,000 Plan" of the Fireman's Fund Insurance Co. and the "Senior Security" plan of Mutual of Omaha.

The "Plus $10,000" segment of the "Fund 65" program was sharply increased in premium cost in August 1963-from $11 monthly to $15.75, a rise of 43 percent.

Mutual of Omaha, despite steadily increasing claims, in response to a question by Senator McNamara advised that "We are not considering rate increase ***"' on the "Senior Security" plan. The premium costs of the several mass enrollment plans are substantial. Monthly charges for the "Golden 65" plan range from $8 for the "65-plus" hospital plan to a total of $25.50 for the full package. An older couple purchasing the complete "Golden 65" program pays $612 per year for insurance which provides only partial protection against their total medical costs. Mutual of Omaha's "Senior Security" plan costs an older couple a total of $204 annually (with less benefits of course, that the "Golden 65" package). The "Fund 65Plus $10,000" program requires the older couple to pay a total of $534 a year-again, for partial protection only.

These premium costs for incomplete coverage must be weighed against the hard fact that older people have limited incomes. Half of the aged couples have annual incomes of $2,875 or less. Half of the nonmarried elderly (widowed, divorced, separated, never married) have annual income of $1,130 or less. This certainly doesn't indicate a vast reservoir of purchasing power for health insurance.

The premium cost situation under the several State "65" programs is not appreciably better than that just described for the Continental Casualty, Mutual of Omaha, and Firemen's Fund plans-in fact, it may be worse over the long run.

STATE "65" HEALTH INSURANCE PLANS

Over the past several years, groups of insurance companies have banded together to offer statewide mass enrollment programs. The principal programs for which meaningful data are now available are Connecticut "65," Massachusetts "65," and New York "65."

Each of the programs varies in the benefits provided and premiums charged. Their common elements include (1) establishment of a separate insurance organization representing all of the various participating insurance companies; (2) offering of policies periodically on a mass-enrollment basis without requirement of physical examination; and (3) unusually low commissions to agents selling and servicing the policies.

Despite the most stringent economies and costcutting, premium charges for the three State "65" programs are high relative to the ability of the aged to pay for health insurance. Costs are kept down to a limited extent, by means of use of the donated services of executives of participating member insurance companies as well as by the fact that agents are paid nominal commissions only. Despite these unique economies, the annual premium charges to an older couple for the privilege of securing limited basic and major medical protection are $420 in Massachusetts, and $456 in Connecticut and New York. Again, these heavy premium charges must be evaluated in terms of the median annual incomes of the elderly-$2,875 for couples and $1,130 for the nonmarried aged.

Data supplied to the subcommittee by the three "65" plans (see app. B), make it quite likely that each of the three programs will require premium increases sometime within the next 12 months.

While the Texas "65" plan's claims experience was not significant due to the newness of the program, the actuarial subcommittee for

"Texas 65" had this to say about future premium charges (app. B-4): "The actuarial subcommittee does not feel that the proposed rates are inadequate but it does feel they are close enough that we will have to anticipate a rate increase at least by the end of the second year of plan operation and, presumably, about every second or third year thereafter. [Emphasis supplied.]

The Connecticut "65" plan was permitted to raise its premium charges (as well as to reduce certain benefits) effective January 1, 1964. The plan received a smaller increase than that requested of the State insurance department and indicated that it would have to ask for an additional increase sometime within the near future.

The Massachusetts "65" plan advised the subcommittee that its premium rates were developed on the basis of a 2-year estimate. The estimate was founded upon anticipated claims expenses of 85 percent over the 2-year period. However, the plan's claims experience was at the 85-percent level after only 1 year of operation. Obviously, an upward adjustment will be required before too long in order to bring the program into reasonable balance.

The New York "65" plan testified that its claims experience was greater than initially anticipated. According to officials administering the program, barring an extremely unusual change in the usage of the plan by its policyholders, premiums will have to be raised.

Thus, we have a pattern of initial high cost coupled with the prospect of further premium increases. But this is by no means the only problem confronting the State "65" plans.

There has been virtually no growth in the number of aged people covered by the "65" plans since their inception. The Massachusetts "65" plan has actually suffered a net loss of 5,000 people since it commenced operations 11⁄2 years ago.

The average age of the "65" plan participant remains much too high to insure any degree of premium stability. The average age today, 74 years, of the "65" participant is approximately the same as the average of the initial enrollees in the programs. In other words, the plans have been unable to secure sufficient numbers of new subscribers from among the younger segment of the older population to reduce the average age of their policyholders. The plans are desperately treading water, for without the compensating effect of younger policyholders they are faced with the prospect of insuring a group of increasingly older people. And, simply stated, the greater the average age of the "65" plan group, the greater the requirement for and use of medical care.

Faced with these facts, it is extremely difficult to place much faith in the long-term stability of the State "65" approach to providing health insurance. Even the insurers have their doubts. Mr. A. M. Wilson, chairman of the executive committee of the Massachusetts "65" was quoted as follows:

The early enthusiasm for a 65 plan as a means to combat Federal intervention is very rapidly subsiding as companies begin to realize the extent of their financial involvement. We are still a business which cannot function as a private social relief association.1

"Interinsurer Arrangements To Provide Over-65 Medical Care Coverage," by Robert D. Eilers, Journal of Insurance, December 1963, p. 485.

GUARANTEED RENEWABLE COVERAGE

The health insurance industry has devoted a great deal of time and money to promoting the guaranteed renewable feature of the mass enrollment programs of the State "65" plans and those of Continental Casualty, Mutual of Omaha, and Fireman's Fund as well as individual policies of other insurers. Guaranteed renewable means that the insurer cannot cancel or terminate a policy unless all such policies are canceled or terminated. Guaranteed renewability is important in an insurance policy, but it is only one part of the picture. The policy is guaranteed renewable all right, but the premium cost is not guaranteed. It is extremely difficult to persuade an older policyholder that he possesses a great buy when he is periodically asked to pay higher premiums for the same benefits. And he may even be asked to pay higher premiums for less protection. Where he has previously used some benefits and the guaranteed renewable policy has a lifetime maximum amount payable (such as $5,000 or $10,000 as is true of some of the programs we have mentioned), the maximum for which he is eligible is, of course, reduced by the payments made to him during a prior policy year or years.

The fact that premium charges are not guaranteed to continue unchanged is the hook concealed in the bait of guaranteed renewable health insurance.

BENEFITS IN RELATION TO PREMIUMS

Another important element in considering the costs of health insurance to the elderly is the extent to which premiums paid are returned to the aged in the form of benefits. In other words, "How good a value is commercial health insurance?"

In responding to questions during our hearings, concerning the percentage of premiums returned in the form of benefits, insurance industry spokesmen repeatedly cited the mass enrollment or group health insurance plans as illustrative of high benefits return-with payout of anywhere from 80 percent of premiums upward.

A good example of how the health insurance industry sought to portray the unusual situation as being the usual is contained in the response of the research director of the HIAA, Mr. Joseph F. Follmann, Jr., to a question by Senator McNamara:

Senator MCNAMARA. Doesn't insurance company overhead account for almost half of the premiums paid on individual policies and would this not be an important factor in the cost of providing insurance?

Mr. FOLLMANN. No, Senator. In the data which we have with respect to coverages for people over 65, for example, in the statewide programs, the expense of operation runs from 5 or 7 percent to 10 to 15 percent. This is made up of essentially three components, two of which are about equalone being operating costs, and the other being what we call acquisition costs-the cost of putting the business into effect. The third factor is taxation.

Senator MCNAMARA. So you think that it is closer to, shall we say 10 percent? This is slightly exaggerating the figures you gave us, the overhead involved in insurance premiums.

Mr. FOLLMANN. That is right, the cost of operation and taxes.

Senator MCNAMARA. Well, this sounds astonishingly low to me, but this is your evaluation of the situation.

The three "State 65" plans which Mr. Follmann used as illustrative of typical insurance company overhead have only 175,000 people enrolled. Mr. Follmann's reply begged the question for very good

reason.

At least one-half of the commercial health insurance policies held by older people are not of the mass enrollment or group type. They are the policies issued on an individual basis and subject to individual acceptance or rejection by the company. The payout picture here is considerably different than that for the group or mass enrollment plans. According to data provided by the Health Insurance of America, itself, only 51 percent of all premiums received for individual health insurance policies (for people of all ages) was returned in benefits in 1962. In 1961 the benefits payout was only 53 percent of premiums. During the course of our hearings (Apr. 28, 1964) Senator Hiram L. Fong, had an illuminating colloquy on the question of benefits paid in relation to premiums charged, with Mr. A. M. Hansen, Vice President of Mutual of Omaha:

Senator FONG. ** * Now, as a mutual company, do I understand that you do not make any profit? That is, you charge the policyholder what it costs you to really give him the benefit. Is that correct?

Mr. HANSEN. That is correct.

Senator FONG. So, from that standpoint, if the cost is low, your premium will be low, and if the cost is high, your premium will mount accordingly?

Mr. HANSEN. That is correct. There is no money paid out of our organization to stockholders who may buy stock for the purpose of seeking a profit.

Senator FONG. But does the premium you charge reflect what it really costs you?

Mr. HANSEN. It does. [Emphasis supplied.]

Mutual of Omaha, subsequent to our hearings, provided the subcommittee with data on premiums received and benefits paid for each of the different types of policies in which people 65 and over are insured (see app. A4). The following table indicates the percentage of payout on several of the individual health insurance policies issued by Mutual of Omaha to the elderly. Apparently it costs Mutual of Omaha a great deal to provide these policies for the benefits payout ranged from only 31 percent to 43 percent in 1963.