medical policy renewable to age 64. Of the 10 most substantial insurance companies in the country, not a single one is offering a major medical policy that goes beyond the age of 65.

Now, what I have to say can be brought to a very quick conclusion. If the insurance industry could offer an adequate policy, 56,000,001 policies would be more than enough, because we have only 56 million household units in this country. However, under the present circumstances the insurance industry knows that it cannot offer an adequate policy and the buyer knows that he cannot buy one.

The result is that both on the side of supply and on the side of demand, a proliferation of partial, inadequate enrollments is encouraged. We have arrived at the situation where no conceivable number of policies could be sold that would give a comprehensive, adequate coverage, because the gaps, the holes, that exist in the policies of one company are equally matched by gaps and holes in the policies of

others.

This problem is one that is too big for the insurance industry and it is too big for the nonprofit corporations.

The only possibility is that government might do something about it. I wish to list four advantages which the Federal Government would have over the insurance industry in dealing with this problem for the aged.

First, the Federal Government can obtain a group without adverse initial selection. Second, it can maintain the continuity of a group, once enrolled. Third, it can avoid the parasitic, competitive destruction in the quality of insurance that is inherent in the private insurance industry. Fourth, it has the financial power to supplement the contributions of needy groups to make this insurance policy possible. I do not wish to indicate that the insurance industry has been deficient in energy, determination or goodwill. But these are not the problem. It is my hope that if the Federal Government provides a suitable program for the aged, that the insurance industry will then be able to put its good intentions to work to provide adequate policies for those who are not above 65. Thank you.

Senator MCNAMARA. Thank you very much, sir. You have made some points that I am sure are very interesting to the committee. We will give them very careful attention.

PREPARED STATEMENT BY DR. PAUL E. HANCHETT, EDUCATIONAL DIRECTOR, THE CHICAGO MEMORIAL ASSOCIATION

SUMMARY

Medical care has become an unbudgetable commodity-especially for the aged. Being unbudgetable, it is not strictly insurable.

This predicament actually stimulates the sale of private insurance polices. Fixed-dollar insurance contracts, under the explosive conditions of the market for medical care, are automatically self-debasing. Any attained level of benefits melts away. The process of erosion has now become independent of general inflation.

Erosion is more disastrous for the old than the young: Medical payments accumulate toward the end of life after insurance contracts have had a longer time to depreciate.

In the strategy of the insurance market, poor insurance drives out good. So any attained level of coverage becomes further diluted.

Poorer insurance companies outsell better insurance companies. To survive, the better companies must contaminate themselves with the practices of thir competitors.

Coverage is something quite different from enrollment. The enrollment statistics produced by the insurance industry to prove that private health insurance coverage is steadily rising are self-discrediting.

After 20 years of sales effort, the average benefit gap remains at one-sixth nonenrollment and five-sixths noncoverage of the insured. The coverage afforded the elderly, of course, is far less than these averages.

Adequate health insurance will never be provided "cafeteria style." Only the Federal Government can contain the open-end cost averages and the openend insurance groupings which continue to bar effective benefit coverage for nearly all persons in the United States.

The insurance industry has not yet faced up to the fact that under prevailing conditions additional enrollment may actually mean diminished total protection.

WHY THE PRIVATE SECTOR CANNOT PROVIDE ADEQUATE HEALTH INSURANCE FOR THE AGED

In the United States medical care has now become an unbudgetable commodity. Under conditions prevailing in the American economy for nearly two decades, each of the four basic cost determinants (population, price, utilization, and product mix) has escalated upward to produce an explosive and unbounded situation. Since at least 1957, firm planning to meet medical costs in advance whether by individuals, families, nonprofit corporations, or insurance companies-has been generally impossible. And if medical care has become unbudgetable it has also become, in the usual understanding, uninsurable.

This predicament has not, however, hindered the sale of private insurance policies. Rather it has stimulated their sale. For while the market for an adequate policy would be distinctly limited by demand, there is no practical limit to the number of partial, inadequate, and unsatisfactory policies that might ultimately be sold.

This paper explores certain peculiar aspects of that field which is now called health insurance. It applies to medical indemnification plans for persons of all ages. But especially to the aged-who are at once our highest risk, highest cost, and least covered group.

THE SELF-DEBASING INSURANCE POLICY

About 1940, when private insurance companies decided to embark seriously upon the health-care field, a number of ingenious safeguards and innovations had to be created. Obviously health per se could not be guaranteed to anyone— certainly not to the general public, millions of whom were already chronically afflicted and ill. Furthermore, there was no practical way to control the prices of medical vendors or the amounts and kinds of services that doctors might prescribe. The compromise arrived at was to tailor partial packages of specified medical service, placing a maximum fixed-dollar "cap" on each. To deter excessive use, the "caps" were set substantially below prevailing prices. Thus was born the "cafeteria approximation" to health insurance; and thus the service approach to health care (exemplified by the original Blue Cross), was replaced by indemnification.

The protection value of fixed-dollar benefits depends on the dynamics of medical care prices. If they rise relative to other prices, the insured will lose and the insurance company will gain; if they fall, the reverse is true; if both sets of prices keep in step, the initial positions of policyholders and insurance company under the contract will be maintained.

As it happened, medical prices soared. Apparently the rise was inherent in the structure of this particular market and not dependent upon general inflationary pressures. To consequence was that the fixed-dollar contract which has now become standard in health insurance is automatically self-debasing (fig. 7). The longer the policy is held, the further its real value shrinks.

This phenemenon of perpetual depreciation is of special consequence for the old. Since medical expenses are concentrated in the later years and since the old will have had a longer time to hold on to their policies than the young, a higher proportion of senior citizens benefits will derive from more fully discounted policies. This process, it should be noted, does not assume either the existence or continuance of general inflation.

TABLE I.-Percentage of inhospital expenditures reimbursable for selected years under North American Life and Casualty contract (Policy No. 92125; issued Oct. 1, 1939, and still in force)

The Automatic Erosion of Fixed-Dollar Hospital
Benefit Contracts, 1940-63

(Data taken from Table I).

10

90

100

1940

1945 19′50 1955

1960 1963

Consider a specific case. As early as 1939 North American Life & Casualty Co. was progressive enough to offer a combined hospital-surgical policy with a $150 maximum surgical schedule, that could be purchased during working years and continued on indefinitely into retirement. At time of issue, the fixed-dollar benefits sufficed to cover about 50 percent of a short-term inhospital charges.

As time went on and hospital charges rose, however, this percentage of protection steadily declined (table I). Finally during retirement in January 1963, when an insured really needed protection under this contract, he went to the hospital and ran up a medical bill of $822.20 of which the policy then covered only $62.20 or about 7.5 percent.

What had been purchased as an advanced and effective policy steadily depreciated into trivial protection-at the very time when it was needed most.

This example could be repeated ad infinitum for surgical schedules, drug allowances, or any other partial benefit that such policies provide. The medical content and the initial level of coverage might be different, but the fact of steady shrinkage of effective benefit protection would not.

GRESHAM'S LAW APPLIED TO HEALTH INSURANCE

A second dynamic factor also tends to produce systematic erosion in the field of health insurance.

At all levels in a competitive, pluralistic economy there exists constant pressure for additional "business." After an initial round of policywriting has settled down, the safest risks and those most interested in owning insurance will

be already enrolled on the books of some nonprofit corporation or insurance company; the poorer risks and those least interested in insurance will be dispersed as scattered individuals. Any insurance salesman can plainly see that his best underwriting target will be among the large groups already "sold." What will his sales strategy be?

He could stress lower price. He might stress higher quality. Or some combination of the two. In practice the best strategy is to claim both simultaneously. Since this will virtually always be impossible to deliver, it takes considerable care to district the prospective purchaser from making any shrewd evaluation of his claims. The final equilibrium position of nearly all such maneuvers is an objectively demonstrable lower price financed out of concealed dilution in quality. Thus poor insurance drives out good. What is worse, inferior companies gain business away from better companies. Even more tragic is the fact that the better companies are ultimately forced to imitate the tactics of their inferior competitiors in order to survive.

Nowhere is this rush by second-rate insurance companies to proliferate inferior policies more apparent than in the area of health insurance for the aged. Not a single one of the Nation's 10 largest insurance companies offers any guaranteed-renewable major medical or comprehensive policy to persons beyond the age of 65 (table II). Thus the aged are forced to seek out second-string companies like Continental Casualty Co. or even Mutual of Omaha.1

TABLE II.-Senior citizen lifetime guaranteed-renewable major medical plans; 10 largest life insurance companies in the United States

THE LOSING STATISTICAL BATTLE BETWEEN QUALITY AND ENROLLMENT Although the insurance industry has remained in doubt about the longrun feasibility of private health insurance, this has not prevented it from presenting the public with an optimistic picture of steady progress toward comprehensive coverage. Such semantic trick is accomplished by neglecting to define the goal of comprehensive coverage and by focusing attention upon enrollment rather than quality.

The enrollment figures presented by the insurance industry are certainly much overinflated. But evident inconsistencies and inadequacies within them make it clear that these figures are not worth deflating. When is it known as an upper limit that not more than 28 percent of private health expenditures are covered by prepayment, no self-respecting statistician could prepare data to prove that in 18 States "over 75 percent of the civilian population is covered by health insurance" and in the District of Columbia "166.4 percent of the civilian population is covered." The incontestable giveaway of the statistical fraud is not the 166 percent (which any grammar school student would immediately recognize as spurious) but the 0.4 percent-a fraction which no responsible statistician would publish when dealing with empirical aggregates of such latitude.

2

After a thorough investigation of these matters, Prof. Seymour E. Harris has concluded recently that the benefit gap can be resolved into "one-sixth nonenrollment and five-sixth noncoverage of the insured." The latter part of this statement is especially revealing.

1 I evaluate these companies as second rate on the basis of their percentage of premium income that is not paid out in benefits and by their reputation in the industry for the processing of claims.

2 "Source Book of Health Insurance Data," 1963, p. 25.

If nearly 900 insurance companies "working both sides of the street" and selling mainly the better risks have been unable to provide anything more than "five-sixths noncoverage" after 20 years, what hope is there that they will ever be able to provide anything approaching satisfactory coverage for our more disadvantaged groups?

Harris' conclusions also confirm my earlier contention that the escalation of medical prices and the selling tactics of the insurance market both tend to dilute the quality of any attained level of coverage. It is evident, for example, that back in 1945 Blue Cross provided far more than "five-sixths noncoverage of the insured" for hospital care although it probably no longer does so in all Blue Cross jurisdictions and for those insureds beyond the age of 65.

CONCLUSION

Sickness benefits in the United States began "as a frill on the accident form." They ripened and matured into a proliferation of fringes on employees' welfare contracts.

Thirty years of experience under Blue Cross-Blue Shield and 20 years of internecine warfare between and among the 879 private insurance companies and the "Blues" have made it demonstrably clear, however, that adequate prepayment planning for medical care, either for young or for old, can never be made available "cafeteria style."

What is required instead is some agency, larger than any nonprofit corporation or combination of insurance companies, which can act in the public interest and set guidelines so that the open-end cost averages and the open-end insurance groups which have produced the uncontrolled, escalating costs of medical care, can be contained. The only agency available to do this is the Federal Government.

It is therefore to be hoped that Congress will act with economy and with dispatch to author a hospital and health care bill that will truly conserve the 18 million senior citizens who already make up about 10 percent of our most precious natural resource. As a welcome side effect, we may also hope that this step will enable the private insurance industry to achieve a higher quality and more adequate health insurance protection for the remainder of our population. Senator MCNAMARA. Thank you for your comments. Thomas J. O'Leary here?

Mr. O'LEARY. Yes; sir.

Is Mr.

Senator MCNAMARA. We have run over the time we anticipated closing our hearings, but if you want to leave a copy of your testimony with the reporter we will see that it is included in the appropriate place in the record.

Mr. O'LEARY. There are also documents that I would like

Senator MCNAMARA. Fine, we will include those in the record if the documents1 the lengthy we will just refer to them in the record and they will be kept in the files of the subcommittee for further analysis. PREPARED STATEMENT BY THOMAS J. O'LEARY, REPRESENTING THE BOARD OF

FREEHOLDERS, HUDSON COUNTY, N.J.

Mr. Chairman and members of the subcommittee, my name is Thomas J. O'Leary. I represent the supervisor and Board of Freeholders of Hudson County, N.J. I am also the welfare officer and president of local No. 8-623 of the Oil Chemical & Atomic Workers International, and a former member of the Board of Managers of the Jersey City Medical Center.

Mr. Chairman, I've sat here now for 2 days and listened to health insurance tell you and this committee that they are offering real protection to older Americans. I find their arguments impossible for me to accept, and I base my rejection of their claims upon the experience I have had in this field within the last 12 years.

As a result of that experience, I have come here today to say that Americans especially older Americans-are paying a heavy price for discriminatory policies that force many patients to pay a needless premium for hospital care. In a few moments, I'd like to explain to you how at least $4 billion can be cut out of the overall medical cost in this country.

1 The documents referred to are on file with the Subcommittee on Health of the Special Committee on Aging.