We hope to convince the committee that national health insurance. should, to the extent possible, limit itself to areas not covered by other insurance systems. We think that it is of major importance to internalize the cost of insurance within definite economic units.

For example, we believe that the cost of automobile ownership and enjoyment needs to be internalized within the automobile system to include the owner's share of the economic losses suffered from auto accidents. Such internalization allows for the making of reasonably rational decisions, an important individual and public policy goal. Similarly, we believe medical benefits paid to someone injured as a result of a faulty product should ultimately be charged to the manufacturer of that product. It should be against public policy to transfer the medical cost of injury resulting from the use of a faulty product to the health insurance policyholders themselves. Charging the product manufacturers with the cost of their negligent acts creates strong incentives for greater sophistication and care in the manufacture and design of consumer products.

As the subcommittee knows, each year almost $1 billion is paid in medical care benefits for the industrially disabled. These benefits are paid in their entirety by employers. This creates a strong incentive for the business community to develop sophisticated safety programs.

To the extent that employers provide their employees with a healthful and safe environment, the insurance costs are reduced. If workmen's compensation benefits were to be paid by a national health insurance system, not only would this incentive disappear, but employers might be relieved of the cost burden and the employee would in effect be required to pay a portion of the cost of worker's compensa

tion benefits.

There is another important reason why national health insurance. benefits should not replace medical benefits provided by casualty insurance. Casualty insurers are specialists in disability control, and amazing strides have been accomplished in the area of such control as well as in rehabilitation. Our statement cites some specific examples. As related to worker's compensation, casualty companies have developed expertise which has resulted in their being able to manage spiraling health costs. Let me give you some proof.

The National Council on Compensation Insurance, which serves as a national statistical and rating organization for worker's compensation, reports that the average medical cost for occupational disability rose 94.8 percent from the late 1950's to 1970.

During the same period, general health care costs increased by 118 percent. This worker's compensation insurance delivered medical benefits at a cost of about 28 percent less than other health care financing systems during this period of time.

The committee should recognize hat these savings did not result from statutory percentile limitations on physicians' fees as provided in medicaid, nor did the companies have hospital cost advantages of Federal and State tax exemptions which some providers of health care benefits rely upon to compete with private insurers.

The data would indicate that casualty insurers have developed well articulated methods to control medical costs. They are designed to provide employees with the best medical care available, to minimize the cost of accidents to employers, and reduce the overall medical care loss

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while at the same time improving the nature of the medical care provided.

Having made the case for the need to coordinate medical benefit systems, how does one go about practically coordinating these systems? Medical benefits paid under casualty coverage fall into two broad categories. One, benefits paid under no-fault type insurance systems, such as worker's compensation, automobile no fault, et cetera. Two, medical benefits paid under the total liability system to reimburse medical losses incurred as a result of someone else's negligence.

As related to the tort liability system, it is suggested that national health insurance be given the right to subrogate against any available tort libility benefit sources.

The subrogation mechanism is not needed, however, to coordinate national health insurance and no-fault health insurance benefits. The most widespread no-fault system in existence today is, of course, our worker's compensation system.

When this committee structured title XVIII in 1965, it recognized the need for coordinating medicare and worker's compensation benefits. The committee incorporated a provision in the law barring payment of benefits to the extent that worker's compensation benefits are also payable to the same beneficiary. This provision has worked extremely well.

The very same approach is a logical one to adopt in coordinating national health insurance benefits with other Government-mandated first party insurance programs. Foremost among these are no-fault automobile insurance plans, which more and more State legislatures are enacting today.

There is no reason whatsoever to charge the cost of no-fault automobile losses to national health insurance, and there are many reasons as cited above why the costs of these benefits should be internalized within the automobile transportation system.

Automobile no-fault insurance coverage is but one example of this new breed of insurance protection. Within the reasonable future, it is likely that a good many injuries associated with airline crashes might be handled on a no-fault basis, and it is possible that a solution to the malpractice insurance problem may call for a substantial involvement of first-party benefits in malpractice claims.

All of these no-fault benefit programs should bear the cost of the losses which they generate. These programs should not be subsidized by national health, and in fact, the limited resources available for national health insurance should be carefully nurtured so that the largest amount of benefits will be available to national health insurance for the most people at the lowest cost.

There are some who have been urging that the coordination of national health and other medical distribution systems be resolved on the basis of cost effectiveness. We would not quarrel with those who would use cost effectiveness as one of the criteria to judge which program should carry the expense. We do dispute those who use the expense markup as the measurement of cost effectiveness, or who restrict themselves to a single index for measurement.

A systems approach is the only way to measure the cost effectiveness as between medical distribution method programs. This requires a care

ful analysis of subsystems, including among others, loss prevention, loss cost control, and the administrative cost of benefit delivery.

Administrative expenses are not an adequate basis for judging cost effectiveness of a benefit distribution system. The objective of a system should be to minimize the loss. To the extent that an insurer can save $1 in losses by expending 50 cents in expenses, society has benefited.

Finally, we urge that to the extent it is felt necessary to impose Federal regulation on health insurance carriers, that these regulations be carefully constructed so as to neither overlap nor replace existing State property and casualty insurance regulatory programs.

In conclusion, we urge that national health insurance benefits be coordinated with casualty insurance medical benefit systems, so as to eliminate duplication of benefit payments by charging the costs on those causing the losses, thus creating a major incentive for loss control, while at the same time nurturing the limited financial resources of national health to achieve maximum coverage.

Thank you, Mr. Chairman.

Mr. ROSTENKOWSKI. Thank you.

Are there any questions?

Thank you very much.

Mr. MAISON PIERRE. Thank you very much.

[The prepared statement and attachments follow:]

STATEMENT OF THE AMERICAN MUTUAL INSURANCE ALLIANCE, ANDRE MAISON PIERRE,

VICE PRESIDENT

The Alliance is a trade association representing over 100 mutual property and casualty insurance companies doing business in all 50 states and the District of Columbia. A complete list of the companies is available upon request.

SUMMARY STATEMENT

General Principles.-The Alliance believes the national plan should be based on the broadest possible access to the health care system as can reasonably be supported by the medical care delivery system. The plan should be compulsory, comprehensive to include catastrophic coverages, and operated in the main, by the private insurance sector. We urge that to the extent that it is felt necessary to impose federal regulations on the health insurers, that such regulation be carefully structured so as to neither overlap nor replace existing state property and casualty insurance programs.

The Dilemma.-Although we see a need for a national plan, we are concerned over the impact of the plan on health care costs. The solution lies in a “phase-in" of benefits as the health care delivery system improves.

The Catastrophic Health Insurance and Medical Assistance Reform Act

We are concerned that a compulsory catastrophic program would lead to the channeling of already scarce medical manpower into more costly and sophisticated facilities, and thus bring about additional inflationary cost pressures on the health care delivery system. We recognize, however, that the failure to enact a comprehensive national health insurance plan creates pressures for the enactment of categorical programs which are costly, and tend to produce similar effects on the health care economy. We have reviewed H.R. 10028, and find that it is more than a catastrophic program, for it provides basic benefits for the low-income population to include the temporarily unemployed, and would encourage upgrading of health insurance generally. We feel that there is an urgent need for cost controls in the legislation, however.

We hope that the economy will soon be able to absorb comprehensive national health insurance legislation. We recognize that any further undue delay will necessarily lead to more thoughtful consideration of legislation along the lines of H.R. 10028.

Loss Should Be Charged to Source of Loss.-The Alliance believes that the economic unit in which the loss occurs, e.g. automobile ownership and operation, should be charged with cost of medical care resulting from the accidental injuries occurring within that system.

Casualty Insurance Benefits Should not be Replaced.-Casualty insurers have developed efficient procedures for controlling the costs of medical care, and at the same time assuring that the injured receives the best medical care, available. These methods have resulted from the insurers dual responsibility-the reimbursement of the medical loss, and the reimbursement of the wage loss-which creates major incentives for overall control. These incentives would no longer exist if national health insurance were to replace medical benefits provided by the casualty system.

Coordination of Benefits. We are convinced that the casualty insurance system needs to be maintained as the primary provider of benefits for trauma care. To accomplish this purpose, it is necessary to coordinate benefits between the national health insurance system, and casualty insurance benefits. It is recommended that the subrogation procedure be utilized in the tort case, and for the first party nofault situation that the procedures adopted by the Congress for coordinating Medicare benefits with workers' compensation be followed.

The Medicare law bars payment of Medicare benefits to the extent that workers' compensation benefits are payable.

Cost Effectiveness of Benefit Distribution Systems.-A systems approach is the only way to measure comparative cost effectiveness of benefit distribution systems. This requires more than a consideration of expense markup for other sub-systems such as loss prevention, loss cost control, and administrative costs need to be taken into account. Although casualty insurance administrative expense may be higher than health insurance, in the final analysis cost savings which tend to exceed those expenses are produced.

Conclusion. The Committee needs to carefully weigh the impact of national health insurance on existing benefit distribution systems. National health insurance should be structured so as to coordinate benefits available under that system with existing health benefit distribution systems.

STATEMENT

On April 15, 1975, at the request of the Subcommittee on Health of the House Committee on Ways and Means, the American Mutual Insurance Alliance filed a statement setting forth its position relative to national health insurance. That statement continues to represent the Alliance basic posture on the subject.

This supplementary statement shall discuss and review important health insurance legislation recently introduced in Congress and a special study relative to the cost effectiveness of benefits distribution systems.

I. Newly introduced legislation—H.R. 10028—The Catastrophic Health Insurance and Medical Assistance Reform Act

In prior appearances before the House Committee on Ways and Means, the Alliance has stressed its support for the adoption of comprehensive health insurance as against catastrophic health benefit programs. This position has been predicated on the belief that the enactment of catastrophic health legislation would seriously fragment the health care financing system by over emphasizing the high cost end of the health care spectrum. We have been concerned that compulsory catastrophic insurance programs would lead to the channeling of already scarce medical manpower into more costly and sophisticated facilities, thus bringing about an additional inflationary cost pressure on the total health care delivery system.

Yet, we must recognize that the failure to enact any national health insurance program is beginning to have similar effects. We are witnessing more and more pressures on Congress to develop categorical health programs, such as the kidney dialysis program. These programs are not only very costly, but they also have the effect of diverting from the main stream of health care, considerable manpower and facility resources. This, in turn, has had serious effect on the total health care cost. In fact, we feel these specialized programs which respond to a particular medical condition, seriously disrupts the health care system and should, in fact, be handled within a broad national health insurance framework. It would seem that if a catastrophic health insurance plan would be enacted, the categorical health programs would no longer be needed and could be absorbed within a broader health insurance framework.

It would be wrong to consider H.R, 10028 as limiting itself to catastrophic health insurance. While this seems to be the bills' emphasis, its reach is considerably broader. Title II provides basic coverage for the low-income population and would also provide health care coverage to the unemployed, a subject which has been particularly thorny during this period of high unemployment. Additionally, we believe that Title III would encourage the upgrading of basic health insurance coverage generally.

While we feel that the enactment of national health insurance must be given primary priority, we also feel its passage without adequate health care cost controls would be totally inadmissible. Since H.R. 10028 fails to contain any cost controls mechanism, we would be much concerned that its enactment would have serious adverse effect on the total cost of health care delivery.

While we continue to support the concept of comprehensive national health insurance and would hope that the economy would soon be able to absorb such legislation, we recognize that any further undue delay in its enactment will necessarily lead to more thoughtful consideration of legislation along the lines of H.R. 10028.

II. Cost effectiveness of benefit distribution systems

In our statement of April 15th to the Subcommittee, we urged the coordination of national health insurance benefits with benefits available from other medical benefit distribution systems. Relative to the decision as to which benefit system should bear the losses, we indicated a dispute with those who use expense mark-up for the measurement of cost effectiveness or who restrict themselves to a single index for such measurement.

We have noted in the preliminary report of the HEW study, Health Care Administrative Costs, that its authors agree. "For purposes of discussing which form a National Health Insurance System should assure," the authors state, "it is tempting to compare the administrative cost experience of the three different entities and to make statements about their respective efficiencies and inefficiencies. We have found, however, that the commonly used measures for comparison are inappropriate and misleading if not used with extreme caution. The most common practice is to use some ratio such, as administrative expenses as a percent of premium written or earned, or administrative expense as a percent of benefits paid. In using such a ratio, the individual making the comparison implicitly assumes that the health insurance service (or the "product or output") being provided by the three major entities is homogenous. While such an assumption may be close to the truth when comparing the output of, say, differing steel companies, it is generally invalid for the service sector of the economy and for the health insurance industry in particular."

"In an actuarially "fair" world, i.e., where there were no selling costs, no administrative costs and no other services provided, on average for each individual over time," the report continues, "health premiums paid would exactly equal benefits received because the individual would be buying pure protection against the incidence of morbidity and its treatment. In a world where the individual is buying other services along with pure health insurance protection, premiums paid must be greater than benefits received on average over time. This follows because a portion of the premium must be used to pay for the other services that the individual is purchasing along with this pure health insurance protection. When statements about the efficiency of differing insuring entities are made and based on ratio comparisons, the fact that the insuring entities may be offering a variety of different services is totally ignored. Such comparisons are conceptually invalid for the purpose of comparing efficiency in delivering health insurance."

The authors see a further difficulty in the use of the above ratios, since the ratio lends itself to a type of manipulation. "In order to appreciate this fact," the report states, consider the following equation:

B=P-(A+C),

where B may represent a break-even point or a targeted level of profit, P denotes premium, A is administrative costs, and C is claims cost. Clearly, the firm can obtain a constant value for B by lowering A and increasing C by equal amounts. There are any number of reasons why an insuring organization might allow such offsetting changes. For example, the firm may find that a reduction in the claims review process, which lowers A will be accompanied by an increase in claims costs just offsetting the savings in administrative costs. Since profitability is un