I should like now to summarize the seven major characteristics of the reinsurance program as they are listed on the next chart (I).

PROPOSAL

I. REINSURANCE PLAN

/ VOLUNTARY FOR EACH CARRIER

2 REGULATION OF CARRIERS REMAINS WITH STATES

3 OPERATES ONLY WHERE COMPARABLE REINSURANCE
NOT AVAILABLE

4 REINSURE ABNORMAL LOSSES ONLY

5 CARRIER SHARES IN LOSSES (COINSURANCE)

6 FEDERAL LIABILITY LIMITED TO THE FUND ($25 MILLION
AUTHORIZATION, PLUS REINSURANCE PREMIUMS)
7 NON-SUBSIDY BASIS (SELF-SUPPORTING)

IL TECHNICAL SERVICES AND STUDIES

These are as follows:

(1) Voluntary for each carrier.

(2) Regulation of carriers remains with States.

(3) Operates only where comparable reinsurance not available. (4) Reinsure abnormal losses only.

(5) Carrier shares in losses (coinsurance).

(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.

Now let us see how this principle would be applied under the bill. Chart K illustrates it.

Let us assume that an insurance company wishes to sponsor a comprehensive health-insurance plan which we shall call plan X. It offers this plan to the public, and the individual persons who wish to become insured under this health plan pay premiums to the insurance company and the insurance company issues to the individuals the health policies under this particular comprehensive plan. These premiums have been calculated by the actuaries of the insurance company as scientifically as possible. However, because we will assume the plan is one which may reach into new fields and there may not be complete experience, there is always the possibility that benefit payments will exceed the actuarily determined risk. The company decides to spread the risk. It could do so by paying a premium to the Federal reinsurance fund. The Federal reinsurance fund under the bill would agree to make a reinsurance payment equal to three-quarters of the abnormal losses in any year; that is, the losses which exceed an amount determined under a formula which I shall explain in a moment.

One important thing to get out of this chart is the fact that the Federal reinsurance fund is not reinsuring any particular individual. The sole obligation of the Federal reinsurance fund is to the carrier itself. It is an insurance of the carrier's experience under a particular plan and not a direct obligation from the Federal Government to the individual policyholders.

It might be well to review how it would operate administratively. Our next chart (L) illustrates the flow of a reinsurance application and the issuance of a reinsurance contract. Here we have the insurance carrier. Let us assume it is the same carrier which is sponsoring

the plan X which we have been discussing. Most insurance carriers are regulated by State law and an insurance carrier has to file its plans and premium rates with the State insurance authorities.

Let us assume that has been done in the case of plan X and that the carrier has decided it wishes reinsurance. It would then file with the Department of Health, Education, and Welfare an application for reinsurance of plan X. This application would spell out the details of the plan, would have sample policy plans attached, specify the rates, and so forth. It would be the obligation of the Secretary, under the bill, to review the plan to ascertain whether the terms of it would promote the purposes of the act and whether they meet the standards established by the Secretary under the law for reinsurance.

Assuming that this review is made in the Department and the plan is determined to be one that would promote the purposes of the act, the Secretary must also find that the carrier itself is financially sound and that it is operating in accordance with State law. These determinations, as the Secretary has indicated in her testimony, would be made in the first instance by the State insurance authorities and the Secretary would in all probability rely on those determinations.

At this point we might go back and see which of the items we have covered on chart I.

We have illustrated point 1, that the reinsurance program would be voluntary for each carrier. A carrier would become reinsured only if it voluntarily applied for the reinsurance.

Point 2, we have seen that the regulation of the carriers remains with the States. The Federal Government would not establish any regulations other than the standards or specifications under which plans would be reinsured. It would not regulate the carriers as such. And we have illustrated point 3, as the Secretary has indicated in her testimony, that the Federal Government would have no authority

to reinsure a plan unless it had been found that comparable reinsurance was not available from private sources. In other words, in addition to approving the plan and approving the financial soundness of the carrier, the Secretary would have to find that comparable reinsurance was not available from private sources.

That covers these first three points. If these findings had been made, the Secretary would be authorized to write a reinsurance contract or issue a certificate of reinsurance relating to plan X. The reinsurance contract would specify the terms of the contract.

Now here I wish to reemphasize a point made by the Secretary in her testimony, that the reinsurance only applies to particular plans. This insurance carrier might have a number of other health plans outstanding but if it applies for reinsurance with respect to only one of them, then the obligations of the reinsurance fund would relate only to that particular plan which was reinsured and not to the other plans which the insurance carrier might sponsor.

That, then, is the principle of the reinsurance, and this is how it would operate administratively.

Now, what, precisely, is the obligation of the Federal Government? What is the amount of a reinsurance payment that is indicated on this chart? Well, Chart M illustrates the reinsurance payment formula. On the left-hand side, by the total height of this bar here, we have indicated the premium income of insurance company A in a given year. We have, also, indicated the anticipated distribution of that premium income between three items; first, the lower part of the bar indicates the anticipated benefit payments. The white in the middle indicates the amount which the carrier would anticipate setting aside for contingencies, and if it were a stock company, for profits. The upper portion of the bar indicates the amount which it would anticipate having to pay for administrative expenses.