Cross but never has made application for association membership. The same thing is true in the other five States.

Mr. HESELTON. Do they operate on much the same basis?

Mr. SMITH. Very much so. I would say that with one exception, they are eligible for membership in our association, eligible for our approval. They just haven't seen fit to do so.

Mr. HESELTON. Further on you said that 67 of the 77 plans currently operating include medical care in the hospital based on 2 methods of coverage, and you describe those methods.

Is there any reason why the other 10 have not undertaken to do that? Mr. SMITH. No legitimate reason, no. I suspect that they will before too long.

Mr. HESELTON. In several instances you mentioned the range of rates charged. In referring to the special benefits you said the rates for typical coverage ranged from a low of $2 a month for a family to a high of $7.35 per month. Is there any explanation for the different rates?

Mr. SMITH. I don't know which plan that is which has the $2 a month rate. I forgot to ask the member of the staff who prepared this information for me. My guess, Mr. Heselton, would be that the $2 per month contract is probably surgical only coverage, and is not as extensive a contract, certainly, as the one which carries the price of $7.35. I do happen to know that the $7.35 per month family rate is the Montana contract where, in the first instance, the fee schedule paid to doctors is higher than the average for the United States. The prevailing charge of doctors in Montana is about average for the country as a whole. It is a quite extensive contract with all the special services for anesthesia, radiology, and so forth, in there. So by comparison, it would be a much more comprehensive contract at the one end than the $2 contract would be at the other end.

So the prices used in this testimony are not for identical or comparable coverages.

What we did in producing these figures for this testimony was simply to review the coverages offered by the 77 plans, and those certificates most widely held in each plan's area, and what their rates were, and established the fact that the lowest rate for the most widely held contract in any given plan was $2, and the highest rate was $7.35, with a median of $2.80, indicating that the typical average type of coverage costs on the average $2.80 across the country.

Mr. HESELTON. I regret that I was detained and could not hear the first part of your statement. I did attempt to glance through it. I did not notice any reference to any pending legislation or to any portion of the President's recommendations. Did you refer to them?

Mr. SMITH. I deliberately made no such reference, Mr. Heselton, because I am playing strictly second base on the Blue Shield team. Dr. Hayden and his opinion as expressed this morning would represent my thinking.

Thank you.

Mr. HESELTON. I see.
That is all, Mr. Chairman.

The CHAIRMAN. Mr. Smith, I want to compliment you upon the splendid statement that you have made. Your statement, together with that which has already been given today by Dr. Charles G. Hayden, set forth in a very clear and plain manner the purposes, objectives and organization of the Blue Shield groups.

I wonder if there is any way that you would suggest to this committee whereby the formation of organizations such as those you have described would be encouraged?

Mr. SMITH. Mr. Chairman, I would subscribe to the things that Dr. Hayden said this morning, particularly as he referred to the probable need for some assistance or some help in the encouragement of experimentation in both techniques of enrollment and in techniques of extended coverage to obviously the groups which are not now adequately protected or adequately covered by prepayment systems or programs. I would like to expand for just a half moment on a bit of discussion this morning which I am not too certain was clearly concluded. Various questions were being raised about the use of the instrument of reinsurance, as to whether or not the instrument of reinsurance could solve or was capable of solving the problem of extending coverage to the commonly referred to classes of the population who do not now have adequate coverage, namely, the indigents, unemployed, and so forth.

I do not know whether it was made clear that in our feeling, the instrument of reinsurance creates no new money. As Dr. Hayden pointed out this morning, the primary problem in connection with these 3 or 4 classes of the population about which this committee is concerned involve primarily the question of the ability to pay for services needed. At least in our understanding of the instrument of reinsurance, it is pretty clear to us that the reinsurance technique does not create new purchasing power or new money for the providing of services.

The reinsurance agency, if it conforms to what we commonly understand it to be in the insurance industry, has to be a self-sustaining, self-supporting enterprise. It is a transaction in which certain risks are underwritten. The income on premiums charged, as in our business, must be sufficient to cover all losses sustained, and at the end of a given year your books are supposed to balance. That means that the customer is still paying the bill. You are just spreading the risk. The reinsurance technique, as we understand it, is simply a sharing of the risk with some other owner of capital or furnisher of capital. If the risk occurs and the loss has to be sustained, the loss is then shared between the original insurer and the reinsurer, but in the long run both have to remain solvent, and in the long run the customer still has to pay the full rate.

Therefore, the indigent, overage, or chronically ill, or those unable to pay for services or even unable to pay premiums for protection, would not be aided or assisted in the least by a reinsurance technique, as we understand reinsurance.

It would permit, however, an individual plan that wished to venture into some unknown area of risk, to guarantee its own solvency by reinsuring that risk with either a Federal fund or with Lloyd's of London or with any of the already established private institutions that are in the reinsurance business. Probably because their own capital structure and their own reserves were not quite sufficient to warrant their entering upon that new risk, it might encourage them to undertake these new risks quicker and to a larger degree.

The end result would merely be an expansion on the scope of benefits made available to the public. The public still would have to pay

the price or would have to pay the premium. I don't think it would solve the problem of those groups in the population about which this committee is normally and quite obviously concerned.

The CHAIRMAN. It would seem to me from the testimony that has been given by those who have already testified, representing different organizations which provide health insurance, that it is their desire, as nonprofit groups, to supply as much help and assistance as they can safely give.

Mr. SMITH. That is right, sir.

The CHAIRMAN. Certainly it is true that the fees that they charge are based upon the extensiveness of the benefits. It is observable that over a period of years these organizations have expanded their coverage as experience has come to them in the operation of these plans.

I take it that they would be very willing, if they had the information available to enable them to do so safely, to increase their coverage, but until they have had more experience it is impossible for them to do so without to some extent, at least, risking their financial stability. Therefore, it has seemed to me that there might be a place for reinsurance, to the end that groups that do desire to expand their coverage can do so without the risk of destroying all the good that they are doing for the benefit of others.

Mr. SMITH. Mr. Chairman, I think you are quite correct. As you spoke another thought occurred to me ranging over perhaps 2 or 3 points.

First of all, the executives who are responsible for these Blue Shield plans are a pretty average cross section of human individuals. You have your liberals and your venturesome people among them, and you have your very cautious and conservative individuals. By and large, the experimentation or the advances to which I have referred in this presentation have been under the guidance of those executives who had a little more imagination and a little more nerve, shall we say, than some of the rest. Those plans which lagged, those to which Mr. Heselton addressed the question about the 10 who do not yet have inhospital medical care in their contracts, are probably those plans which are managed and directed by the less imaginative and the more conservative and cautious individuals, who are less prone to move ahead.

The second point leading to your observation and in support of your observation, it is only the larger plans among the Blue Shield plans that have either employed on a full-time basis or have retained as consultants, professional actuarial services. Mr. Sorg yesterday represented two large plans in New Jersey who have a full-time certified actuary on their staff. Obviously they are in a better position to move ahead with experimental types of coverage, having this fulltime actuary on their staff, than would a small plan which feels it. could not afford the luxury of bringing an actuary from New York to work with them.

It would be my understanding that a reinsurance proposal such as you are interested in would have certainly as one of its basic staff requirements, consulting actuarial service available which would scrutinize any application for reinsurance and would probably be of some considerable service to plans which might like to move ahead into new fields of coverage but have never had actuarial consultation available

to them. This might be a means of compelling them to live with good actuarial consultation, which they have neither been able to afford nor have they availed themselves of it before, but in seeking an application for reinsurance would have to live with.

Mr. HESELTON. Would the chairman yield to me for a question? The CHAIRMAN. Surely.

Mr. HESELTON. I wonder if any of the plans, to your knowledge, have undertaken to do this experimentation which was referred to this morning in the sense of setting up an arbitrary fee with a very definitely limited contract in one particular field, say heart disease, and offer it-I assume you would have to have a minimum number or you could not operate-to those who chose to have a rider for another $5, or any additional amount, for a limited period, thereby cutting back on the possibility of cutting into the actual main capital of the plan, building up a fairly substantial amount of money and experimenting as to how that would work in that field.

Mr. SMITH. Experimental types of coverage, Mr. Heselton, do have to be controlled in some way simply to assure yourself that, if you were wrong, you do not go broke doing it.

Mr. HESELTON. I have that in mind.

Mr. SMITH. The Blue Shield plan of California, to which I referred in my testimony, which was the first of the plans to offer to the public a rider or endorsement on its basic certificates for these catastrophic type illnesses, and which is still the most comprehensive of any that have yet been offered, other than the one that Massachusetts is now ready to offer, pretty well typifies the type of thing that has to be done. In the first place, they used the statistical data they had available, which was rather fragmentary, and beyond that they just had, shall I say, to grab a premium rate out of the air, with some small bases of fact but largely by guess.

Then to assure themselves that they did not take on more risk than they could afford to lose on, they offered that contract only to certain well-established, what we call in our trade, so to speak, seasoned groups that they had had already enrolled for 8 or 10 years. They have sold that contract with that endorsement I think now to a total of only 25,000 or 30,000 people. Then they quit selling it. They estimated that that exposure of 25,000 or 35,000 lives on that risk would be sufficient for statistical purposes; that they would then watch it for 2 or 3 years to see what happened.

They are going to test this rate to see whether it is adequate. It might be too high.

Interestingly enough, in the field of polio coverage, which the private insurance companies went into several years ago, and which many of our plans are now going into, they did very much the same thing. They limited the sale of that type of contract. They picked an arbitrary rate, as you suggest. In the case of polio coverage, they found that their guess was away high, and they have been able to reduce materially, almost by 50 percent, the premium rate for polio coverage as against the rate which they charged 3 or 4 years ago when it was first introduced. Now they have enough experience to warrant a reduction of rate. They say, "We were wrong. We were overly pessimistic or cautious. Now we can be more realistic." Mr. HESELTON. That is encouraging.

Mr. SMITH. One additional word is important, and I think, Mr. Chairman, this will have some bearing upon your interest. The California Physicians' Service, the Blue Shield in California, 4 years ago, just prior to its offering of this experimental type coverage to the public, sought the assistance of half a dozen foundations, asking them, in effect, "Would you like to join with us in this experiment to the extent of guaranteeing us against loss, on the assumption that we will sell this or offer it to no more than 25,000 people, to help us find out what it costs to provide this kind of service to the general public?" They found no foundation at the time willing or in a position to make that kind of grant or to establish that kind of guaranty financially; so, being in a fairly good financial position anyhow, they went ahead and did it on their own. They have had a very satisfactory experience, luckily. They guessed very conservatively on the rate to be charged, and they have come out very nicely on it and are going to be able to reduce the rate. That is the $2.20 rate that I referred to here.

That is an area in which I think reinsurance has a legitimate function. In the same manner they went to the foundations, they could apply to the Federal Government for reinsurance.

The CHAIRMAN. Mr. Smith, we thank you very much for your appearance here today, and yesterday for that matter, and the patience you have shown, and your desire to remain until the committee could have an opportunity to hear you. The views that you have expressed, both in your statement and in answer to questions that have been put to you, have been very worthwhile, and I have no doubt will prove very helpful to the committee as it gives its further study to this subject, particularly the legislation which it hopes to be able to report to make effective some of these things that seem to be so desirable. If there are no further questions

Mr. SMITH. Mr. Chairman, with your indulgence, Dr. Hayden this morning, in a very brief way in his presentation, made reference to his feelings with regard to the problem of Federal payroll deduction for health-insurance premiums.

At lunch today he gave me this memorandum, which he had brought from his office, which he would like to introduce for the record. It is a report from the enrollment director in Boston describing the 3 methods that are now used in Massachusetts for handling Blue Cross and Blue Shield payments for Government groups, indicating both the problems involved and the shortcomings of these methods.

The CHAIRMAN. It will be made a part of Dr. Hayden's statement. (The memorandum referred to will be found at the conclusion of Dr. Hayden's testimony.)

The CHAIRMAN. If there is any additional information that you would like to make a part of your statement and have entered in the record, you may leave it with the clerk and I will look it over and, if possible, and if space permits, it will be placed in the record.

Mr. SMITH. Thank you very much, Mr. Chairman.

The CHAIRMAN. We will recess at this time until 10 o'clock tomorrow morning.

(The following statement was submitted for the record:)