Mr. HALE. Mr. Chairman, you are talking about health legislation generally, or this particular reinsurance?

The CHAIRMAN. I am talking about both. Maybe my remarks do not stress the point you would like, in connection with this bill.

Mr. PRIEST. Mr. Chairman, may I ask a question there with reference to the mail situation?

The CHAIRMAN. Mr. Priest.

Mr. PRIEST. I have a feeling that perhaps a great many people generally believe that this reinsurance program, if enacted and put into effect, will provide some individual benefits that a private citizen may receive, some benefits directly through this program, which, of course, as I understand it, is not true.

The relationship is entirely between the insurance fund and the carrier of insurance. The individual as such does not come into the particular picture.

I think that phase of it should be cleared in the public mind, because I believe that some of the mail probably reflects the feeling that Jack Johnson at 1006 19th Street can directly receive some benefits through this particular fund, just as Jack Johnson of the same address would apply to the RFC for a loan for his business, and I believe we should, in the very beginning, clear that in the public mind, that that is not that sort of a proposition, if I am correct, and I believe I am.

Mr. PERKINS. Yes, sir; you are correct, and I think you are doing the Administration a favor to clarify that in the public mind.

The plan's success and its benefits to the individual depend upon what the carriers do under it.

The CHAIRMAN. Well, of course, I do not know what kind of communications are received by other members of the committee. I can say very definitely that I do not have in mind one single letter, of all the hundreds I guess thousands-that I have received and I take occasion to look at each of them every day as they come in, and there has not been one that I can recall that spoke of the bill in terms of individual benefits, except indirectly, to the end that the policies that they would have would be a better protection than the policies that they now have, and that would relate in most cases-or a great many-I will put it that way-relates to this cancelability that exists in most of the policies that are in operation at the present time; that is, as soon as there is some illness of a certain kind develops, then the first opportunity that the company has, or the group can have, the insurance is canceled, and that stands out prominently in all of the mail that I have received. I venture to say that anybody that looks at this mail will be impressed with that fact.

Here is one that covers a more general character, and а noncancelable policy.

That is the burden of all letters, or most of the letters that I have received.

Mr. ROGERS. Mr. Chairman.

The CHAIRMAN. Mr. Rogers.

Mr. ROGERS. Mr. Perkins, I would like to have you comment on why this reinsurance should be restricted to abnormal losses.

Mr. PERKINS. Well, perhaps the term "abnormal losses" is an unhappy choice of words. We could perhaps use, or call it "losses." Mr. ROGERS. What?

Mr. PERKINS. We could perhaps use the term or call it "losses." We used the term "abnormal losses" simply to indicate that there is a provision in the formula for the absorption by the carrier of oneeighth of what it has set aside for administrative expenses before there would be reimbursement under the reinsurance formula.

Mr. ROGERS. But it appears to me from the language used that you are not going to

Mr. PERKINS. I beg your pardon.

Mr. ROGERS. You are going to let the Government just participate in the losses. In other words, they can only insure against losses. Is that the purpose of it? Insure against losses, abnormal losses. Mr. PERKINS. You say, is that the purpose of it?

Mr. ROGERS. Yes, to insure against abnormal losses; get reinsurance against abnormal losses.

Mr. PERKINS. Well, I think that really all the carriers would want is reinsurance against losses. Of course, the Government would share in favorable experience as well.

Mr. ROGERS. Why do you not say that that is so? You do not say that.

Mr. PERKINS. Well, the reinsurance premium paid into the Federal reinsurance fund would accrue to the fund, and in the event that there should be no abnormal losses by the carriers under this plan, in that particular year, so that, just the way that we pay our insurance premium on a house that does not burn down, so also the Federal reinsurance fund would benefit from the reinsurance premiums paid in that particular year.

So that the Federal fund would be sharing in the favorable experience, as well as the unfavorable experience of the carriers.

Mr. ROGERS. It looks to me like the odds would be very much against the Federal reinsurance fund under the abnormal losses; reinsurance of abnormal losses.

Mr. PERKINS. No; on the contrary, the fact that we reinsure only abnormal losses and have this cushion of one-eighth in the formula means that the Federal Government is sharing in fewer losses. It is only when the losses exceed the amount that the carriers anticipated allocating to contingencies and profits, plus a little bit for administrative expenses, that the Federal Government steps in. Of course the Government stepping in where there are fewer losses is the same as under the $50 deductible provision in an automobile policy. It is going to result in a more favorable experience for the reinsurance fund and, the premium, the reinsurance premium, would be actuarially determined so as to take into account all of these factors. Mr. HESELTON. Will the gentleman yield?

Mr. ROGERS. Yes; I will yield.

Mr. HESELTON. You use the expression where comparable reinsurance is not available. What is the element that enters into that? Mr. PERKINS. For reinsurance?

Mr. HESELTON. Yes.

Mr. PERKINS. Well, testimony was received yesterday to the effect that the availability of reinsurance in the health area is extremely limited today.

Now, under those circumstances there would probably be a relatively few cases in which the Federal reinsurance fund would say

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to a carrier, "Reinsurance is available, is being written, by the XYZ company, and therefore, under our statute, we are not authorized to write your reinsurance." But if reinsurance should spring up, and it may well do so under the stimulation of this bill, the Federal fund might not be authorized to reinsure. In fact, one of the things we visualize as a possibility is that insurance companies will say to themselves, "Well, let us get together and make our own reinsurance pool rather than using this Government service."

We have actually heard talk to that effect, and if they do so and operated a reinsurance fund of their own

Mr. HESELTON. Does that mean at the same cost?

Mr. PERKINS. Well, we do not know what-you mean the word "comparable"?

Mr. HESELTON. Yes.

Mr. PERKINS. Yes. As to the element of comparability, that is right; it would be roughly the same cost.

Mr. HESELTON. If they could get insurance of that sort with an individual company and it was not necessary to have insurance, but the rates would be just a little bit higher, what are you going to do in a case like that?

Mr. PERKINS. Well, there is some leeway in the word "comparable." I would suppose that if rates were just a minuscule amount higher from the other sources, that we would certainly regard that as "comparable." However, if the reinsurance premium which would be charge by other carriers perhaps was 12 or 2 times as much as the Federal reinsurance fund, after consideration by the actuaries, would charge, perhaps that would not be comparable. There is some leeway there. And it is a matter of interpretation.

Mr. HESELTON. Yes, it is a matter of interpretation.

Mr. HARRIS. Will the gentleman yield there?

Mr. HESELTON. Yes.

Mr. HARRIS. As a matter of fact, it was testified yesterday that there was very little reinsurance available at the present time.

Mr. PERKINS. Do you mean it is a nonoperative part of the bill at the moment?

Mr. HARRIS. I understood yesterday-I belive one of the members of your staff made the statement, maybe the Secretary, said at the present time there was very little reinsurance available.

Mr. PERKINS. That is right.

Mr. HARRIS. So, consequently, this part of the program has very little meaning.

Mr. PERKINS. No; we think that it has a very real meaning. At the moment it does not, but we do feel that as a matter of principle it would be wise for the Federal Government to limit its reinsurance operations to those cases where it is not available from private sources. The Secretary's views are that the Federal reinsurance fund should not be in direct competition with reinsurance carriers, if there are any. Mr. HARRIS. Well, I understood her to say yesterday there was very little available.

Mr. PERKINS. That is right. I am perhaps not making myself clear. I mean, looking to the future, if reinsurance should begin to be written by others.

Mr. HARRIS. Is it not true that when the Federal Government undertakes a program private enterprise refrains from competing for obvious reasons?

Mr. PERKINS. I would not be surprised if the contrary were true. I think it is conceivable that when the RFC's operations turned out to be successful, perhaps that stimulated banks to undertake similar loans which they might not have undertaken prior to having the experience of the RFC in the same field. That is purely hypothetical. I have nothing to base it on.

Mr. HARRIS. I think that is a very good comparison.

Mr. PRIEST. Mr. Chairman, will the gentleman yield for one question?

Mr. HARRIS. I will yield.

Mr. PRIEST. Mr. Perkins, is the language beginning on page 18, line 9 of the bill, the language that sets up the statutory formula for determining abnormal losses?

Mr. PERKINS. That is it, sir.

Mr. PRIEST. I shall not ask you to go over that.

The CHAIRMAN. I believe you discussed that somewhat briefly yesterday.

Mr. PRIEST. But, I wanted to be sure that was the particular language that provides language for the formula for determining what abnormal losses is.

Mr. PERKINS. Yes.

Mr. PRIEST. It is rather complicated.

Mr. PERKINS. It is, sir. In an effort to try to supplement the chart, we have prepared an example of application of the reinsurance-disbursement formula, using some hypothetical figures, which I will give to the clerk and suggest that he might want to distribute them to the members of the committee. If they want any further discussion on them either now or later, we can go through and actually discuss the examples.

Mr. PRIEST. Thank you, sir.

Thank you, Mr. Rogers.

Mr. ROGERS. It states that a private company would have to lose all of its anticipated profits and an amount equal to one-eighth of its expenses before it begins collecting for reinsurance. That is the statement that you referred to.

Mr. PERKINS. Yes, sir.

Mr. HESELTON. If the Government pays 75 percent of each dollar, the company would pay out the rest.

Mr. PERKINS. That is correct.

Mr. HESELTON. The public statement has been made by certain people that that $25 million reinsurance fund would go broke and that an additional amount would have to be appropriated by Congress. Do you care to comment on that for the record?

Mr. PERKINS. Yes; I would like to. It can go broke only if our actuarial determinations are way off base.

Mr. HESELTON. May I ask you a question there?

Mr. PERKINS. Yes, sir.

Mr. HESELTON. Have those actuarial determinations been placed in the record?

Mr. PERKINS. No, sir. Actually, the determinations to which I referred would be those which would be made upon the application by each individual carrier for reinsurance of a particular plan.

At that point the actuaries of the company will have submitted all of their data as to their anticipated operations under the plan. They

would submit their data and then the actuaries of the fund would go over all their calculations and review them, ascertain their validity to the best of their ability, and would fix the reinsurance premium.

Now, the reinsurance premium would be actuarially calculated so that over the long term the reinsurance premiums would be adequate to handle this 75 percent on the dollar for that particular plan.

Mr. HESELTON. In other words, the allegation that the fund would go broke is not correct because of the fact that the plan contemplates an actuarial determination of a certain amount paid in premiums to offset any anticipated losses.

Mr. PERKINS. Yes, sir; at least, the statement, if made that boldly, implies that our actuaries are no good at all, but if they are any good at all that statement would not be true.

Mr. HESELTON. Do I understand you correctly that the Department has had the benefit of actuarial studies of this proposal to the extent that they could set up those studies as a guide?

Mr. PERKINS. Yes, sir. Among the consultants there were, I think, a majority, or at least five were actuaries themselves. Of course, they did not go in and work out specific examples because they were not presented with any specific prepayment plan, but they believe that the structure of the bill is such that it would permit the application of valid actuarial principles.

Mr. HESELTON. It occurs to me that that may become a matter of considerable interest; perhaps considerable controversy, and consequently it might be very helpful if the people who served as actuarial consultants would get together a short statement as to the studies they made and conclusions they arrived at in support of this principle that the plan is based on sound actuarial approaches to this particular problem.

Mr. PERKINS. I think that is a good suggestion, sir. We might not get it from the consultants, but we certainly can get it from our own chief actuary, who sat in the meetings and knows their thinking. (The information referred to follows:)

Memorandum from Robert J. Myers.

MARCH 19, 1954.

Subject: Possible reinsurance premium rates under H. R. 8356.

This memorandum will present the results of a brief preliminary and tentative analysis which I have made in regard to the possible size of reinsurance premium rates under the reinsurance plan proposed for voluntary health service prepayment plans under the provisions of H. R. 8356. There will also be pointed out certain actuarial difficulties and problems that might arise in the classification of risks and determination of premiums.

Specifically, under the formula in the bill, the carrier must bear all the benefit cost if its benefit loss ratio is equal to or less than the sum of (a) the portion of the premium estimated to provide for benefits, contingencies, and profit and (b) one-eighth of the remaining portion of the premium (which remaining portion is the amount estimated for administrative expenses). All benefit losses above this are 75 percent reimbursable by the reinsurance fund. In other words, the carrier must bear the entire benefit cost up to this point and 25 percent of the cost thereafter.

Several assumed cases have been taken, dealing with carriers having low administrative costs and carriers having high administrative costs. Also differentiation has been made as between carriers which allow a certain margin for contingencies and carriers which "cut thin" in their calculations and allow little or no margin. The latter type of carrier would, of course, be a greater reinsurance risk, all other things being identical, but this might be very difficult to determine when reinsurance premiums are being developed.