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Approval of plans: The reinsurance program would be wholly voluntary, and plans could be reinsured only on application by the carrier.
Moreover, the bill is designed to assure that the Federal Government would not be competing with the insurance industry in the reinsurance field. No individual plan could be reinsured by the Federal Reinsurance Fund if it were already reinsured privately. Moreover, as a condition of reinsuring any type of plan, the Secretary of Health, Education, and Welfare would be required to conclude that for plans of that particular type or kind, reinsurance was not available from private sources at comparable terms and rates to an extent adequate to promote the purposes of the reinsurance program. Thus, the Federal program would not be competing with private enterprise.
The terms and conditions governing approval of the plans submitted for reinsurance, and the types and kinds of plans which will be reinsured, would, in general, be determined by regulation. The bill directs that we take into consideration, in determining the types and kinds of plans eligible for reinsurance, the general purposes of the program, and that we give special emphasis to certain objectives. Here I wish to quote the provisions of the bill itself, begining on line 24 of page 13 and ending on line 15 of page 14. The bill would direct the Secretary to place
* * special emphasis upon the objective of encouraging experimentation designed to extend or adapt the prepayment method to substantive problem areas or geographic areas for which that method is in any significant respect new, untried, or not yet fully effective or widely available on reasonable terms, such as
(a) Coverage of classes of individuals for which protection through such health service prepayment plans appears to be feasible but is not adequate; or
(0) The offering of protection in communities or areas in which such protection (in the respects in which it is offered) is not adequately available on a prepayment basis; or
(c) A coverage of benefits or services which, either as to type, range, amount, or duration of such benefits or services, is not otherwise (generally or in a given area) widely available through such plans on an adequate basis. * * * These words in the bill, perhaps better than the purpose clauses themselves, indicate the direction in which we think the program should move.
The specifications concerning the eligibility of plans for reinsurance might include requirements or limitations on such matters as the ranges of health conditions to be covered by the plan; the kind, quantity, and duration of health services to be provided under the plan; undue exclusions or limitations; deductible amounts and maximum liability amounts; waiting periods; and the duration, cancellability, and renewability of policies or subscriber contracts issued pursuant to the plan.
These requirements, we must remember, would apply only to a carrier which voluntarily agrees to them as a part of a reinsurance contract involving a particular plan or plans of that carrier. Futhermore, although a plan would be disapproved if its rates were arbitrary or unreasonable, or such as to cause the plan to be financially unsound, the Secretary would not otherwise have authority to exercise any control whatsoever over the carrier's premium or subscription charges under a health service prepayment plan. Finally, no substantive changes of regulations could, without the carrier's consent, apply during the current terms of a reinsurance contract.
Assuming that a particular plan meets the requirements prescribed in accordance with the foregoing provisions, and that it is determined that the plan is sound and would promote the purposes of the act, the Secretary would still be required to make certain findings with respect to the carrier itself. These are:
(a) That the carrier is operating according to State law. and (6) That the carrier is financially sound and entitled to public confidence.
In making these determinations the Secretary would, as I indicated in my testimony relating to title I, make optimum use of State insurance authorities.
Reinsurance premiums: Premium charges to be paid by carriers for reinsurance of their plans would be fixed with the dual objective of making the program selfsustaining, and stimulating and encouraging plans which would further the purposes of the program. The bill does not specify a statutory premium rate. Rather, reinsurance premiums would be fixed at different rates for the different health service prepayment plans to be reinsured, so as to reflect, in accordance with acturial principles, the respective hazards involved.
Scope and extent of reinsurance obligation: Upon approval of a plan, reinsurance certificate or contract would be issued to the carrier. The contract would cover only a particular plan. Losses under other plans sponsored by the same carrier would not obligate the Federal Government in any way, unless such other plans were also reinsured.
With respect to the actual liability of the Federal Government under a reinsurance contract, the bill establishes two principles:
(1) The reinsurance program would reinsure abnormal losses only; that is, the abnormal losses of a carrier, in the aggregate, under a particular reinsured plan.
(2) The carrier would share in these abnormal losses. The reinsurance fund would undertake to meet only 75 percent of the abnormal losses.
The abnormal losses would be those in excess of premium income, after making a reasonable allowance for the carrier's administrative costs. This administrative expense allowance would be agreed upon for each plan at the time of the carrier's application for initial reinsurance, or for renewal of reinsurance. Gentlemen, of course, the explanation of abnormal losses is such a complicated one, there will be a chart which will graphically illustrate that point.
I do want to emphasize that there would be, under the bill, no Federal liability to any individual policyholder. The only liability of the fund would be to carriers which have a reinsured plan or plans, and then only for those plans.
The reinsurance fund: The source from which reinsurance payments would be made is the reinsurance fund, which would be composed primarily of reinsurance premiums collected and of the earnings of the fund.
The bill would authorize an appropriation of $25 million to a capitaladvance account in the Treasury. The appropriation would be available, without fiscal year limitation, as a line of credit for advances of working capital to the reinsurance fund. When the fiscal condition of the fund permits, such advances would be repayable to the capitaladvance account in Treasury. The amount so repaid would again be available to the fund if future advances should be needed. Pending repayment of advance, the fund would pay interest thereon to the Treasury
All reinsurance premiums would be paid into the reinsurance fund. As I have indicated, these would be calculated with a view toward keeping the fund self-sustaining.
One of the most important features of the bill to understand is that the Government's reinsurance obligations would be limited to the moneys in the fund. It is not a subsidy-type plan with respect to reinsurance obligations, and there is no kind of open-ended authorization for this purpose.
The bill also provides that the Secretary of Health, Education, and Welfare would have discretionary authority to establish within the fund special reinsurance accounts. Such accounts might be created for classes of plans, classes of carriers, or groups of associated carriers, If this authority were exercised, premium payments would be credited to, and the Government's liability under a given contract of reinsurance would be limited to, the appropriate account.
Other provisions: The bill would authorize appropriations from general revenues for administrative expenses for a transitional period of 5 fiscal years beginning July 1, 1954. After that, such expenses
. would have to be borne by the fund.
One final very important provision should be mentioned-section 404, relating to advertising. We regard it as vital that every precaution be taken to prevent any reference to the reinsurance program which could result in misleading the public as to the scope, purposes, or financial undertakings of the program.
Two dangers exist:
(1) Individuals who buy policies may think that reinsurance means a guarantee of benefit payments under any reinsured plan; and
(2) Carriers which do not apply for reinsurance may be subjected to unfair competition by other carriers attempting to capitalize on the name of the United States Government in promoting their reinsured plans.
In actuality, reinsurance would not give an individual policyholder any positive assurance of receiving his benefit payments. Moreover, approval for reinsurance purposes would in no way signify that a reinsured plan is superior to plans not reinsured.
For these reasons, the advertising in connection with reinsured plans must be carefully circumscribed. The bill, therefore, provides that the fact of reinsurance cannot be used in advertising except in the manner specifically authorized by regulation. Criminal penalties are provided for unauthorized advertising which refers to the reinsurance program, as well as for wholly false advertising. Injunctive remedies are also provided.
I should like now to summarize the seven major characteristics of the reinsurance program as they are listed on the next chart (I).
I. REINSURANCE PLAN
AUTHORIZATION, PWS REINSURANCE PREMIUMS)
IL TECHNICAL SERVICES, AND STUDIES
These are as follows:
(1) Voluntary for each carrier.
(6) Federal liability limited to the fund ($25 million authorization, plus reinsurance premiums),
(7) Nonsubsidy basis (self-supporting):
And II, the technical services and studies: At this time I should like to ask Mr. Perkins to review with you, with the charts, the manner in which the reinsurance program will operate.
The CHAIRMAN. Before Mr. Perkins proceeds with his explanation, I should like to take this opportunity to acknowledge the presence of a considerable number of young students from the Jackson School of Arlington, Va., here in the company of their teacher, Miss McCune, to see Congress in action. I would like these young people to know that their presence this morning is very pleasing to this committee. We recognize you have an interest in Government that brings you here and we should like you to know that you are now in a committee that has been in existence since 1795. Of course, the membership has not been here that long. The committee is one of the important committees of Congress. It has a very wide jurisdiction over many matters that pertain to our welfare as a nation.
Today we are hearing an explanation of the bill that has been proposed by the administration, through Mrs. Hobby, the Secretary of Health, Education, and Welfare, that deals with the problems of
health, namely, the insurance program that will protect families in the payment of medical and hospital expenses. You are very privileged this morning to be present while Mrs. Hobby is testifying because, as you know, she is the only woman member of the President's Cabinet, and a very outstanding member, and it is giving you a great privilege to be present and to hear her give her testimony this morning.
We hope you will profit by your attendance this morning and that you will carry away a favorable feeling toward this committee. I want to emphasize again we are pleased that you have come and we hope that you may come again whenever you have the desire to do so.
Mr. PERKINS. Mr. Chairman and members of the committee:
Our first chart (J) is one designed to help us understand the princiciple of reinsurance. Before seeing it as applied under the proposed bill
, it might be well to see how the principle of reinsurance applies in a simple case of a life insurance policy.
On this chart we have taken the example of an individual who wishes to purchase a life-insurance policy of $100,000 face value. He pays his premiums to insurance company A, which issues the policy. But let us assume that insurance company A does not like to write policies in that large amount and it wishes to spread the risk. It has arrangements with insurance company B for reinsurance. It decides that it is willing to pay a reinsurance premium to insurance company B in return for B’s promise to assume part of the risk. Let us assume in this particular case B agrees to assume half of the initial risk. So in return for a portion of the premium, B agrees to pay $50,000 or onehalf of the face amount in the event this individual should die. That, in simple terms, is the principle of reinsurance. It is the principle of spreading the risk.