HEALTH REINSURANCE LEGISLATION

WEDNESDAY, MAY 5, 1954

HOUSE OF REPRESENTATIVES,

COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE,

Washington, D. C.

The committee met at 10 a. m., pursuant to call, in room 1334, New House Office Building, Hon. Charles A. Wolverton (chairman) presiding.

The CHAIRMAN. The committee will please come to order.

This morning the committee will continue its hearings on H. R. 8356, the so-called reinsurance bill.

These hearings were interrupted by the Easter recess of the House and other business that the committee has had before it in the interim. We have scheduled 3 days of hearings on this bill and this morning we shall hear from 2 witnesses.

The first witness is Mr. D. D. Murphy, commissioner of insurance for the State of South Carolina, who appears this morning as official spokesman for the National Association of Insurance Commissioners. Our second witness this morning will be Mr. Frank E. Smith, a director of the Blue Shield medical-care plan, Chicago, Ill. The committee had the privilege of hearing Mr. Smith last February in connection with the committee's general health inquiry. At that time Mr. Smith gave the committee detailed information with regard to the history of the development and operation of the Blue Shield medical-care plans.

Today, both of the witnesses will address themselves specifically to the bill the committee is now considering, namely, H. R. 8356, the reinsurance bill, which forms an integral part of President Eisenhower's health program.

Mr. Murphy, will you please come forward, take the witness seat and state for the record your name, the position you occupy, and the capacity in which you testify, so that this will all appear in its proper place in the hearings?

STATEMENT OF D. D. MURPHY, PRESIDENT, NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS, CHICAGO, ILL.

Mr. MURPHY. Mr. Chairman, my name is D. D. Murphy. I am the insurance commissioner of the State of South Carolina and president of the National Association of Insurance Commissioners. I represent the executive committee of the National Association of Insurance Commissioners.

We have a prepared statement which we have filed with your committee, and if it is the wish of the chairman, I will be glad to read that; or if you care for me to do so I will dispense with that.

The CHAIRMAN. I think it would be well for you to read it.
Mr. MURPHY. Thank you.

The CHAIRMAN. Then the questioning will take place after you have finished your statement.

I note in connection with your statement that there is a resolution of the National Association of Insurance Commissioners.

Mr. MURPHY. Yes, sir.

The CHAIRMAN. I assume you will make reference to that and have it incorporated as a part of your statement.

Mr. MURPHY. Yes, sir.

This resolution is by the executive committee of the National Association of Insurance Commissioners.

The CHAIRMAN. You may proceed with your statement.

Mr. MURPHY. The resolution reads:

Whereas the National Association of Insurance Commissioners is one of the oidest voluntary organizations of State regulatory officials in America; and Whereas this association has consistently since the year 1871 advocated insurance legislation in the public interest, and accordingly the executive committee of this association was called into session at the request of the President to consider H. R. 8356, 83d Congress, (2d sess.); and

Whereas said executive committee of the National Association of Insurance Commissioners, meeting in the city of Chicago, Ill., and considering the text of the bill has reached certin definite conclusions: Now, therefore, be it

Resolved by the executive committee of the National Association of Insurance Commissioners, That this committee does hereby approve as being meritorious and in the public interest the avowed and declared objective of improving public health in the Nation; be it further

Resolved, That such executive committee does hereby voice strenuous opposition to the enactment of H. R. 8356, 83d Congress (2d sess.) for a number of reasons, some of which are as follows:

1. It is the considered opinion of the committee that the said H. R. 8356 in the final analysis is in truth and in fact a bill authorizing and providing for regulation of this phase of the business of insurance by the Federal Government and should be considered as such.

2. That the said H. R. 8356 will not in our opinion achieve the objects and purposes set forth in the proposed measure.

3. That the said H. R. 8356 if enacted into law would inevitably result in the socialization of health services and undesirable subsidization of health insurance by the Federal Government.

4. That the bill as drawn clearly places the Federal Government in the accident and health insurance business.

5. That the said H. R. 8356 is contrary to the public interest; be it further Resolved, That the president of the National Association of Insurance Commissioners be and he is hereby authorized and directed to designate one or more members of said association to transmit copies of this resolution to the Committee on Interstate and Foreign Commerce of the United States House of Representatives and to the Senate Committee on Labor and Public Welfare and to any subcommittee of either of the said committees or to any other appropriate committee or subcommittee of the Congress, and to give before any such committee or subcommittee such testimony bearing upon the said H. R. 8356 as may be deemed appropriate and compatible with this resolution.

The National Association of Insurance Commissioners has always encouraged and fostered legislation, resolutions, and any other measures to encourage the broadening of health insurance in order that the public health of the country may be put on as high a plane as possible.

We wholeheartedly agree with the purposes expressed by the President of the United States in his health message to Congress on January 18 and heartily endorse the purpose as outlined by the President; however, we do not feel that these purposes can be accomplished by

the proposed legislation known as the Health Service Prepayment Reinsurance Act.

We are opposed to the administration health reinsurance bill because: The bill contains provisions which will subject the field of health insurance to Federal regulation; the purposes of the bill will not be served by the methods provided; the bill contains provisions which involve subsidization and tend to point toward the complete socialization of health services; the bill as drawn clearly places the Federal Government in the accident and health insurance business; the bill contains provisions which are contrary to the public interest. First: The bill contains provisions which will subject the field of health insurance to Federal regulation.

This regulation will be contrary to the spirit and purpose of Public Law 15, 79th Congress, which reads in part as follows:

The Congress hereby declares that the continued regulation and taxation by the several States of the business of insurance is in the public interest, and that silence on the part of the Congress shall not be construed to impose any barrier to the regulation or taxation of such business by the several States.

Section 107 (a) and (b) (p. 10, lines 5-13) provides for general regulation by the Secretary. The broad power given to the Secretary to make regulations having the effect of law will subject the carriers to Federal regulation.

Section 303 (a) (p. 13, lines 11-20) gives the Secretary the power to regulate plans and carriers.

Section 303 (b) (p. 14 line 25; p. 16, line 6) gives the Secretary the power to regulate rates.

Sections 304 and 401 (p. 17, lines 4-8, and p. 36, line 18, to p. 37, line 10) give the Secretary power to determine that the companies are operating according to law, are financially sound, and entitled to public confidence. This carries with it the power to do all things which the Secretary may believe necessary to satisfy him in these respects, including the power of invesigation, examination, and subpena.

Any recourse from the findings of the Secretary would be subject to review of the United States courts only, thereby bypassing the State courts.

Section 404 gives the Secretary the power to regulate advertising. We regard these provisions as particularly objectionable because they subject the health-insurance field to Federal regulation. The carriers which participate would be subjected to this regulation directly.

We take pardonable pride in the fact that so many of the witnesses appearing before the congressional committees considering this bill have spoken in terms of high praise of the job of regulation of insurance as it is being done on the State level. History shows that it was Elizur Wright, the Armstrong investigation, and other State regulatory officials and activities which have brought propriety and effectiveness to the field of insurance regulation.

The principle of State regulation of insurance rests on the solid ground of precedent and law. We feel that a better job can be expected of the States because we are closer to the people than the Federal Government and more familiar with the problems.

Our departments are experienced and well organized to handle the many problems of the complex insurance industry. Many long hours and large sums of money have been spent in revising the insurance laws of the several States. These laws have been painstak

ingly drawn to reduce abuses and confusion and to encourage the expansion of insurance to meet the needs of the public.

We feel that there would be a tremendous loss in setting aside the deliberations of our legislatures and by superseding these written statutes with a system of regulations depenuding in large measure on the discretionary power of one person.

We regard this bill as not only containing the objections set forth but also as a significant step toward the complete Federal regulation of this phase of insurance. We, therefore, strenuously object to those provisions of this bill which express or imply Federal regulation.

Second: (a) The purposes of the bill will not be served by providing technical advice. The furnishing of this advice will, in our opinion, cause great confusion and possible inefficiency in the insurance business as we know it today because it will be necessary for the Department of Health, Education, and Welfare to encroach on the personnel of the commercial carriers, State insurance departments, and advisory organizations to obtain this type personnel.

There is no other source. If this program is to involve training of technicians, it will be years before the program can be put on an efficient basis. The studies and findings of this informational service would necessarily cover many subjects and it is probable that an individual carrier would find relatively few of the reports to be of use in the solution of his particular problems.

In an effort to promote the purposes of this bill there will be a tendency for the studies and advice to be slanted to show that certain underwriting principles, plans, and areas of insurance, and organizational procedures are feasible when these principles and procedures may be actually unsouund. Technical advice alone does not seem likely to offer much encouragement and stimulation to the making of comprehensive plans available on reasonable rates to the maximum number of people.

(b) The purposes of the bill will not be served by making that form of reinsurance available that is prescribed in the bill. The number of Americans covered by hospital insurance increased from 6 million in 1939 to more than 90 million in 1952.

Policy provisions such as grace-period provisions, limiting time-ofaction clauses, exceptions and exclusions have been made more liberal. Group-insurance coverage has been extended to smaller units. More people are being reached through farm cooperatives.

Weekly premium hospital and sick benefit plans are increasing the availability of coverage to people otherwise unreachable. Carriers have shown an increasing willingness to experiment with more comprehensive plans such as coverage for impaired lives and major medical expense insurance. The number of Americans who are insurable and can pay their share of the cost of voluntary prepayment plans and who actually have not had the opportunity to purchase health insurance under present conditions is very small.

For example, in one medium-sized State 9,954 licenses were issued during the year 1953 to agents to sell hospitalization and accident and health insurance. The population of this State as shown by the last census was approximately 2,100,000. This gives a ratio of 1 such agent to every 215 persons.

Since the earnings of these agents are primarily derived from commissions from the sale of such insurance, it would appear to us

that the public has had ample opportunity to secure such coverage. This extension of health insurance has taken place with little use of the already extension reinsurance facilities available. There seems to be little evidence that this development would have been encouraged or stimulated more by increased reinsurance facilities, particularly if the increased facilities had carried the possibility of a form of Federal regulation.

Third: The bill contains provisions which involve subsidization, which tend to point toward the complete socialization of health services, and which clearly place the Federal Governmcent in the accident and health insurance business.

Section 301 (p. 11, lines 6-16) provides that if reinsurance at premium rates comparable with those offered pursuant to this title is not available the Secretary is authorized to reinsure plans on behalf of the United States. Private reinsurers who have had to furnish their own capital, who did not have the benefit of a subsidy for the first 5 years of their existence, and who are paying taxes to support such nontaxed programs as this one will probably be compelled to retire from this field, and this field may pass completely into Government operation.

Section 306 (p. 26, line 16; p. 27, line 6) provides a reinsurance premium which is to promote the objectives of the act and is also to conform to actuarial principles. Real encouragement and stimulation of private health service plans almost has to take the form of benefits which are more valuable than the costs.

This type of encouragement and stimulation is the exact opposite of the fundamental principle of actuarial science.

We regard these provisions as particularly objectionable because they place the Federal Government in the accident and health insurance business and constitute or could constitute a significant step toward the subsidization and complete socialization of health services in the United States.

Fourth: The bill contains provisions which are contrary to the public interest. Section 305 (p. 18, lines 9-20) (a) provides reinsurance coverage for 75 percent of the normal losses. If a nonprofit carrier is induced to reinsure existing hazardous plans and underwrite hazardous plans because of reinsurance under the terms of this bill and excessive losses result, then the subscribers (including the regular, nonhazardous, and nonreinsured subscribers) will eventually pay 25 percent of the excess losses.

Section 305 (g) (p. 24, lines 17-23) provides the limitation of liability of the United States to the amount which may stand to the credit of separate funds. A commercial insurer or reinsurer cannot limit its liability to the amount in a separate fund.

All of its assets must be available for claims payments. This provision of the bill seems to indicate that the liability under unprofitable accounts may be written off and that the profits accounts that is, accounts for which reinsurance was not needed in the first placewill continue.

Section 101 (f) (p. 4, lines 4-19) defines personal health services as those services rendered to individuals by licensed health personnel. Further references concern institutions licensed by a State. There is a reference which includes eyeglasses.