The division of the total premium income would be determined in advance by the actuaries of the carrier, and it would be included in the application for reinsurance. It would be one of the items which would have to be approved by the Secretary in approving the plan.

We have a ratio, then, of the administrative expenses to the total premium income, and you will note in the bill that there is a definition of the administrative expense ratio. Let me repeat that this ratio is determined in advance by the actuaries of the company and approved by the Secretary.

Assuming that the anticipated distribution of the total premium income under the plan has been agreed upon, when does the reinsurance obligation come into play? Well, clearly, if the actual experience of the carrier is such that its benefit payments do not exceed the anticipated benefit payments-that is, if it has not suffered any financial discomfort-there would be no reinsurance payment. Secondly, under the formula in the bill, there would be no reinsurance payment unless the actual benefit payments exceeded the anticipated benefit payments plus the amount that would be set aside for contingencies and profits.

In other words, the carrier would have to absorb the loss of its anticipated contingency reserve, or rather the amount it would set aside for the reserve in a given year, and its profits before reinsurance payments would be made.

Now, finally, in developing the formula, it was concluded that the carrier should be required to absorb one-eighth of the amount that it would anticipate paying for administrative expenses before the Federal reinsurance fund would make any payments. This one-eighth is a kind of cushion which was designed largely for the purpose of removing the very sensitive nature of this point at which the calculations are made of anticipated benefit payments and contingencies and profits. In other words, this division, or this distribution of the total premium income is unquestionably a difficult one to make, and the actuaries may not hit it on the nose. Therefore, it was thought that there should be some cushion in there, and one-eighth of the administrative expenses is the amount that is written into the bill.

This means that the Federal reinsurance fund would not make any reinsurance payment for losses unless they exceeded anticipated benefit payments plus contingencies and profits, plus one-eighth of the estimated administrative expenses.

It should be noted that the greater the cushion, the lower the premium rates would be. In other words, if we were to raise this oneeighth to one-fourth, and make a cushion that high, the Federal reinsurance fund would not pay off as often. Therefore, premium rates could be lowered. But, on the other hand, it would not be as useful to the carriers since the Federal Government would not share in as many different losses.

This cushion could be analogized to the deductible item in an automobile policy. It is like the $50 deductible provision with which we are all familiar. Now, on the right-hand side of the chart, we have indicated the examples of actual benefit payments of the carrier. You will see that this bar goes no higher than the anticipated benefit payments, so that no reinsurance payment would be made in this case. Our second bar goes up only to the red line which is the critical point, and there would still be no reinsurance payment. The third bar of

actual benefit payments goes above that. This is what I have been referring to as an "abnormal year."

Now, to the extent the actual benefit payments in this abnormal year exceed this red line, the reinsurance fund would pay three-fourths of the excess. You will see it says here on the chart:

The reinsurance fund pays three-fourths of the amount by which the actual benefits exceed this level.

That is the reinsurance formula written into the bill. As the Secretary has testified, the essence of it is a spreading of the risk so as to enable carriers to go into new ventures where they have less experience. By the reinsurance payment formula, whereby the Federal Government would absorb three-fourths of abnormal losses, in a given year, the company would be enabled to spread its risk and to move into areas in which it would otherwise dare not venture.

Secretary HOBBY. Mr. Chairman and members of the committee: As the chart presentation has indicated, the program set forth in the bill before you is built upon well-established insurance principles. It embodies the safeguard that the reinsurance is only partial.

Furthermore, except as to administrative costs during the first 5 years, it is designed as a self-supporting program, financed from actuarially determined reinsurance premiums.

While we believe that this program holds great promise for the American people, I want to mention three limitations.

First, it can help only those who are willing to include healthinsurance premiums as a necessary part of the family budget and those who are covered by insurance plans maintained by their employers, in whole or in part.

Second, it may not immediately solve some of the problems of Coverage for those who are now aged or for those who already are chronically ill.

Third, it is apparent that the success of the plan depends on the willingness of the carriers actually to make use of it and to assume new and broader risks.

These reservations, however, do not detract from the positive gains which we think the bill can achieve. We are confident that the plan can bring significant benefits for the American people. We believe that use of the reinsurance fund by carriers would induce them to experiment more broadly and more rapidly and to accelerate new ventures in the voluntary health field. If carriers are protected through reinsurance which provides a sharing of unexpected losses, obviously they should be able to expand the scope of protection that they offer.

For example, perhaps the number of exclusions from coverage under certain forms of health insurance can be reduced, perhaps the benefits can be made far more comprehensive as to total limits, thereby providing better protection against major medical expenses. Perhaps the number of days of hospital confinement for which reimbursement is provided might be greatly increased. Perhaps policies need not terminate upon the attainment of age 65 or some other stated age, or upon termination of employment, as many policies now do, or perhaps terms may be found under which it is possible to provide insurance to individuals now considered uninsurable. Finally, perhaps more noncancelable policies can be written at prices people can afford to pay.

In brief, the stimulus of reinsurance protection and the help of advisory services, when added to the incentives of free competition, should result in enlarging the scope of health-insurance coverage and improving the benefits it provides.

The greater the success of our efforts, the more we will narrow the problem areas and the better we will be able to determine the extent of the need for other methods of making good medical care available to all Americans. Meanwhile, through public assistance and other public and private efforts, we will continue to help many of those for whom voluntary insurance is not feasible.

To conclude, we are persuaded that the bill before you can, in the traditional American way of individual responsibility and private endeavor, do much in providing the means by which better health protection may be attained by a large segment of our population. We urge this committee and the Congress to give the bill favorable

consideration.

The CHAIRMAN. Mrs. Hobby, we appreciate your presence this morning and this statement that you and your associates have made with respect to the proposed legislation. We compliment you upon the manner in which you have presented it. We recognize that it is a very complex and difficult subject that presents many features undoubtedly that it will be necessary to examine very carefully, because we are pioneering in a new field of activity. Therefore, care will be observed as it has already been by yourself and your associates who have drawn this legislation.

The opportunity is now afforded to the members of the committee to submit such questions as may be desired, either to Mrs. Hobby, Dr. Keefer, or Mr. Perkins or any other member of their force that is present and who has information which might be utilized in giving the committee any additional information which might be desired. Secretary HOBBY. At this time, may I say that Mr. James Stuart of the Blue Cross plan, director of the Cincinnati plan, and chairman of the Blue Cross Commission, has served as a consultant to the Department in the group of eight insurance people who helped us work out the details of the bill, and is with us today. If there are particular insurance questions which we cannot answer, sir, we think Mr. Stuart

can.

The CHAIRMAN. We thank you for the suggestion you have made and we appreciate the presence of those to whom you have referred. It has been very encouraging to this committee as it has given consideration to these matters of health to have found the willingness on the part of individuals who have special information and knowledge on the subject, to make the same available to our committee. It has created a sense of indebtedness on our part. We are glad to welcome these additional persons whom you have just mentioned.

Mr. DOLLIVER. Mrs. Hobby, you have just alluded to the fact that you had some assistance, some technical assistance, from individuals representing organizations or companies in this field.

Would it be proper, Mr. Chairman, to have the list of those individuals and companies in the record?

Secretary HOBBY. We will be delighted to furnish it to you.
The CHAIRMAN. It will be entered at this point in the record.

(The list is as follows:)

The following served as consultants to the Secretary of Health, Education, and Welfare in working on the Department's recommendations on H. R. 8356. They served as individuals and not as representatives of their organizations.

C. Manton Eddy, chairman of conference, vice president and secretary, Connecticut General Life Insurance Co., Hartford, Conn.

Henry Beers, vice president, Aetna Insurance Co., Hartford, Conn.

Jarvis Farley, secretary-treasurer and actuary, Massachusetts Indemnity Insurance Co., Boston, Mass.

Dr. Charles Hayden, executive director, Massachusetts Medical Service, Boston, Mass.

William S. McNary, executive vice president, Michigan Hospital Service, Detroit, Mich.

Louis Rietz, vice president, Lincoln National Life Insurance Co., Fort Wayne, Ind.

Henry Smith, vice president and associate actuary, Equitable Life Assurance Society, New York City

James E. Stuart, chairman of Blue Cross Commission, and executive vice president, Hospital Care Corp., Cincinnati, Ohio

Mr. DOLLIVER. I assume that this program has been developed with the help of those various associates to whom you have referred at this time.

Secretary HOBBY. That is true, and perhaps I can simplify it by telling you what the procedures were, Mr. Dolliver, so the entire committee might know. We did a draft bill in the Department, after which these gentlemen, whose names have been put in the record, very kindly and generously came in as consultants. Mr. Stuart can tell you the exact number of days; I understand it was 6. The eight of them sat there, and I must tell you that I had a very amusing experience because they worked this thing out with blackboards in a true actuarial experience. These 8 gentlemen met for 6 days trying to perfect this bill so that we could have something that we could bring to you and say to you that we believed it was sound.

Mr. DOLLIVER. Is it fair to say that so far as these gentlemen to whom you referred are concerned, perhaps representing a substantial segment of the health-insurance field, they are in accord with the provisions of this bill?

Secretary HOBBY. Mr. Dolliver, I have to answer that question, and I do not want you to think that I am evading it, but I am answering it literally as the eight agreed that the question could be answered. There was unanimous agreement that the gentlemen thought that this was the best way to implement the President's reinsurance proposal. Mr. Stuart, am I representing the position of the consultants correctly?

Mr. STUART. That is correct.

Mr. DOLLIVER. I assume that in this group there were representatives not only of the nonprofit insurance group which might be generally referred to as the cooperative groups, and others who are in the business to make money.

Secretary HOBBY. Yes, sir.

Mr. DOLLIVER. Do these consultants represent, among others, some of the largest companies in the field?

Secretary HOBBY. Oh, yes, indeed.

Mr. DOLLIVER. As well as some of the less important companies? Secretary HOBBY. Yes. Mr. Stuart, I think, can give you the names of the companies, 1 by 1.

Mr. STUART. The chairman of the group was Mr. C. Manton Eddy, vice president and secretary of the Connecticut General of Hartford, Conn. The rest are Mr. Henry Beers, vice president of Aetna; Mr. Henry Smith, vice president of Equitable; Mr. Jarvis Farley, vice president of Massachusetts Indemnity; Mr. Louis Rietz, vice president of Lincoln National Life; Dr. Charles Hayden, Massachusetts Blue Shield; and Mr. William S. McNary, Michigan Blue Cross and myself, Cincinnati Blue Cross.

Mr. DOLLIVER. Thank you.

Mr. Perkins referred in his statement and you gave an illustration of reinsurance in the life-insurance field, and that principle applies not only to life insurance but to fire insurance and many other fields of insurance, of course. We are all familiar with that. Is there any private reinsurance company in the field of health insurance?

Secretary HOBBY. Mr. Stuart, would you answer that question? Mr. STUART. It is available to a limited extent. I believe one healthinsurance plan was reinsured for a time through Lloyds of London, and so far as I know in the nonprofit field, that is the only instance of reinsurance.

I think reinsurance is available to some extent to other types of plans.

Mr. DOLLIVER. I recall in our hearings some weeks ago allusion was made to the fact that there was one of the cooperative plans which reinsured some of its risk with Lloyds for the purpose of getting started. They have now abandoned that, as I understood it. Is it fair to say that at the present time there is no private reinsurance concern actively engaged in this field?

Mr. STUART. I think that is a fair statement, Mr. Dolliver.

Mr. DOLLIVER. Mrs. Hobby, are not some of these cooperative plans actually self-insured? For example, we had before us a representative of Blue Shield some weeks ago, and this very question came before us. As I recall his testimony, the medical profession is the organizing body behind Blue Shield. The testimony was to the effect that in every one of the Blue Shield organizations, the medical profession themselves carry the entire risk. If their premium payments are not sufficient to pay the losses, they do the work anyway. Is that your understanding of the situation, sir?

Mr. STUART. For those Blue Shield plans which are on a service basis, in which they have a contract relationship with the medical profession, individually, to provide the services for the people in the income groups below certain limits, that is true. There are some Blue Shield plans that are on an indemnity basis, in which the guaranty is to reimburse the person so many dollars for the type of operation performed or the type of medical services given. In all cases, the medical profession sponsors Blue Shield, but in those indemnity-type cases there may be additional charges, as I understand it, for services performed even on the lower-income group.

Mr. DOLLIVER. Would it be contemplated under this legislation that both of those types of Blue Shield plans be reinsured, or would it be only the one type, the indemnity plan?

Mr. STUART. I think probably the Department should answer; I would think so.

Mr. PERKINS. The proposed bill would definitely cover a direct service carrier, as well as the indemnity type. I think the statement