a little too low, and that, naturally, is hard on the surgeons, because they have to charge extra fees, and that is difficult and unpleasant. Mr. THORNBERRY. That is right.

Mr. BEERS. That will cause a little trouble locally. But localities copy each other, you know. One fine thing about the arrangements now is that we have so very many different plans of this kind that the poorer ones see the better ones and tend to copy them. Then somebody invents something, and if it works well, it is copied. If it does not, people kind of snicker, but they do not copy it.

Mr. THORNBERRY. I believe you referred awhile ago to the fact that you are continually revising the plans, and I believe you referred to the fact that hospital costs have been increasing because of increased costs.

Mr. BEERS. Yes, sir.

Mr. THORNBERRY. And it was necessary to revise the amounts to cover the payment. How long does it take ordinarily to catch up with those increases in the policies and cover them?

Mr. BEERS. It depends, you know, on how wide awake the employer is. If a union represents the employees, it would depend on whether they want to concentrate on fringe benefits this year or on cost of living, and all that sort of thing. There is always quite a lag, although we are rewriting our business on the average, I would say, every 2 or 3 years. We rewrite all of our group policies, to change one little thing or another, if not everything, at about that time.

Mr. THORNBERRY. Your experience with that type of policy is with the employer-employee groups mainly?

Mr. BEERS. That is right.

Mr. THORNBERRY. The thing I was thinking about was where the individuals take care of the coverage and are faced with the fact that the coverage they have is about a year behind what has happened in the hospitals.

Mr. BEERS. Yes, sir.

Mr. THORNBERRY. Particularly the hospital rooms have increased a great deal over the last few years.

Mr. BEERS. Yes.

Mr. THORNBERRY. At one time a person would go to a hospital and would think about paying $5, $6, $7, or $8; and now they are talking about $20 or $21.

Mr. BEERS. Yes, sir.

Mr. THORNBERRY. That is the average person.

Mr. BEERS. Yes, sir.

Mr. THORNBERRY. I am not talking about the person who wants a special room in the hospital.

Mr. BEERS. That is right.

Mr. THORNBERRY. The hospitals generally are not based upon philanthropies or people who are civic minded, and they have to have their money. The patient will find the bill about the time he is located in the hospital room.

I believe that is all.

Mr. CARLYLE. Are all the more prominent diseases covered by some form of health insurance?

Mr. BEERS. The kind of insurance I have been talking about does not exclude any kind of disease I can think of. It does not exclude

any kind of disease at all. The only thing it excludes is the occupational accident covered by workmen's compensation. Our object is to issue a kind of insurance that covers nonoccupational accidents and diseases, so if it is not covered by workmen's compensation, it is covered by group insurance.

Mr. CARLYLE. I was under the impression that perhaps rheumatism and arthritis were not covered by this insurance.

Mr. BEERS. That is not so, sir.

Mr. CARLYLE. They are covered?

Mr. BEERS. There is no exclusion. I am talking about group insurance of this kind, and I have omitted major catastrophe medical insurance from my remarks.

Mr. CARLYLE. Well, how about mental disease?

Mr. BEERS. All covered.

Mr. CARLYLE. They do cover mental disease?
Mr. BEERS. Yes.

Mr. CARLYLE. With group policies only?

Mr. BEERS. I am not at all well versed in individual insurance, sir. My company issues it, but they specialize more in individual accident than they do in individual health. I, myself, have only a little more than a newspaper knowledge of individual insurance, so I will have to defer to others.

Mr. CARLYLE. That is all, Mr. Chairman.

Mr. HESELTON. Any other questions?

I would just like to ask 1 or 2 more questions. My attention has been called to what is known as the life insurance medical research fund. Does your company participate in that?

Mr. BEERS. Yes, we do.

Mr. HESELTON. Could you tell us a little about what it does and how it operates?

Mr. BEERS. I am awfully sorry to say no, I cannot. I know only that we contribute, and I am convinced it is good; but that is all I can tell you.

Mr. HESELTON. You do not know what type of research it supports? Mr. BEERS. Heart is very important; and how many other things I do not know.

Mr. HESELTON. All right. We will now hear from Mr. Edmund B. Whittaker.

(The biography of Mr. Whittaker is as follows:)

BIOGRAPHY OF EDMUND B. WHITTAKER

Edmund B. Whittaker is vice president of the Prudential Insurance Co. of America, in charge of that company's group insurance department.

Born in Scotland, he comes from a mathematical family and received his early training in the Scottish Widows Fund and Life Assurance Society in Edinburgh, Scotland. He came to this country in 1926, joining the actuarial department of the New York Life where he stayed 3 years.

He joined the Prudential as mathematician in 1929 and has been advanced along the line to the position of vice president which he now holds. He is a fellow of the Faculty of Actuaries in Scotland and the Society of Actuaries. He is well-known in educational circles, having been chairman first of the educational committee of the Actuaries Club of New York and then of the joint educational committee of the Actuarial Society of America and American Institute of Actuaries, which have since been consolidated into the Society of Actuaries. He also served as a member of the advisory council of the mathematics department at Princeton University.

Mr. Whittaker is in charge of the group-insurance activities of the Prudential. He is a member of the Advisory Council on Disability Benefits for the State of New Jersey.

STATEMENT OF EDMUND B. WHITTAKER, VICE PRESIDENT, THE PRUDENTIAL INSURANCE CO. OF AMERICA

Mr. WHITTAKER. My name is Edmund Boyd Whittaker. I am vice president of the Prudential Insurance Co. of America in charge of our group-insurance department. This department handles all forms of mass coverage including group life insurance, weekly indemnity for sickness, group annuities, and various forms of hospital, surgical, and medical coverage.

Though my current responsibilities lie mainly in the sales field, I am an actuary by profession and have been very keenly interested in the development of new forms of group coverage to meet the everchanging demands of employers, unions, and the insuring public.

Mr. Beers has described to you the situation as it exists with respect to what we call in the trade "basic coverages." I shall confine my. remarks to the most recent and, I think, the most important development in group coverage of the last 20 years, namely, major medical insurance, which is sometimes referred to as medical catastrophe insurance. From Mr. Beers' figures you must have gathered that basic coverage is tremendously popular and is becoming increasingly so. One of the reasons for this is no doubt the fact that labor unions are demanding so-called fringe benefits in lieu of cash wage increases, and, since all the workers would participate in a cash wage increase, there is a natural tendency for their leaders to concentrate on providing benefits under which large numbers of the workers or their families would collect, rather than insuring against the tremendous medical bills which occasionally ruin even the most prosperous families.

Major medical insurance, to the best of my knowledge, first came into being 5 years ago when an association of General Electric employees took out a policy with the Liberty Mutual Insurance Co. of Boston. It provides insurance to cover practically every expense incurred in restoring a sick person to health. It embodies two factors not commonly found in basic coverage, namely, the "deductible" and "coinsurance factor." The deductible follows the same principle as in automobile collision insurance. I suppose that most of you have collision policies with a $50 or $100 deductible, and you have been educated to the fact that there is no sense in invoking the mechanism of insurance to pay small claims. There is no sense incurring a $5 claim expense to pay a $5 claim for a dent in a fender. The same principle applies to medical expenses; namely, that the only economical method of taking care of small medical bills is for the patient to pay for them himself without involving insurance records or claim investigations. By cutting out the expense of paying small claims, the deductible principle has permitted the use of much lower premium rates than would otherwise be necessary.

The principle of coinsurance means that the patient has to pay part of the bill, and we believe that coinsurance is necessary, because, unless the patient has some financial stake in the bill, the cost of medi-. cal care will skyrocket. Since the general principle of medical economics is for surgeons to charge fees according to the patient's income,

this is one of the hazards insured against, and it becomes perfectly obvious that the patient must have some stake in keeping the cost down or the calculation of scientific premium rates would be utterly impossible. While coinsurance is desirable even in basic coverage, it is much more important in the case of major medical insurance, which provides for claim payments in some cases up to $10,000.

Major medical insurance made very slow progress in the first 2 years and, in my opinion, was on a most unscientific basis because the rates charged for any given combination of deductible and coinsurance were uniform regardless of the composition of the group. A group of executives earning $10,000 a year and over obviously incurs much higher surgical fees than a group of clerks and a group of old people will incur higher medical expenses than a group of young people.

It seemed to us that we ought to make an effort to have premiums which would reflect the composition of the risk, because once an employer puts in a plan of this sort it is going to be very difficult, from the employee relations angle, to abandon it. Therefore, he should have some sound idea at the start of what it is likely to cost, and we felt there would be wide differences in cost depending on the composition of the group.

Since there were no statistics available, we decided to get some from the experience of our own Prudential employees. We sent out elaborate questionnaires, some 5,600 of them, to all our employees throughout the country with the title of assistant manager or up, which corresponds roughly to those making over $5,000 a year, asking them to cooperate with the company by listing their own ages and the ages of their wives and dependent children under 19. Then, if they had any single illness in the family during the calendar years 1949 or 1950 which cost more than $100, we asked for full particulars as to which member of the family was sick and how the expense was divided between (a) hospital charges, (b) hospital nursing, (c) drugs, (d) surgeon's fees, and (e) home nursing. By diligently following up these questionnaires we got replies from 98 percent of the people, and we also analyzed, from the material in our claim department, the expenses in connection with employees of that group who had retired or died during the 2-year period. These statistics were written up in detail in a paper which was presented to the Society of Actuaries by my associate, Alan Thaler.

The first study was made by income brackets and revealed the fact that, with a flat deductible such as $300 and any reasonable coinsurance factor, the actual cost to persons in the $10,000 to $15,000 income bracket was exactly twice as great as in the $5,000 to $7,500 income bracket. So medical care costs go up exactly with relation to income. There was not too great a difference in the hospital cost or hospital nursing, but there was a whale of a difference in the cost of special nursing and surgeon's fees.

The second study was made geographically, dividing the country into four large areas. This showed that if, for a given combination of deductible and coinsurance, the monthly net claim cost was $3 for the country as a whole; it was $3 for the East, $2.50 for the Midwest, $2 for the South, and $4 for the West.

The third study reflected incidence by age, and the results of this study are, I think, more important and more astounding than we had

anticipated. If the net claim cost for a plan with a $500 deductible be represented, for employees under 35, by 1, the net claim cost from 35 to 50 is 2, from 50 to 65 is 5, and at age 65 itself it is 10. We had no experience over 65, because our survey was limited to active employees and we have a compulsory retirement age of 65. This shows that age is actually more important in this type of insurance than it is in life insurance. Under the latest mortality table the mortality rate at 65 is only 9 times the rate at 35, whereas in major medical it is 10 times.

The last study showed the cost as between various members of the family. This showed that the additional cost for an employee's wife under most family budget deductibles was 50 percent greater than for the employee and, taking all ages combined, the cost for the children as a unit (not each child) was only half as much as the cost for the employee. The average number of children came out at 12 per employee, or 2 per employee with dependent children.

The survey covered 35,000 life years and, therefore, should have considerable statistical significance. It points very clearly that, in spite of all the dramatizations of poliomyelitis, spinal meningitis, and so forth, the major medical expense hazard is at the older ages and not on children. From the point of view of an insurance company we would expect the claims on an old industry such as the railroads, with an average age of 50, to be at least twice as great as they would in the case of an airline, where the average age is probably under 35.

Our study showed that out of every 1,000 families consisting of a husband, wife, and at least 1 child, 1 out of 10 would have an illness costing at least $300 each year, 1 out of 20 would have an illness costing $500 or more, and 11 out of 1,000 would have an illness costing $1,000 or more. Since the cost of medical care has gone up considerably since 1949, the percentages applicable to 1953 would be quite a bit higher.

As a result of our study, we have come up with group insurance policies embodying various deductibles, with maximum amounts for any one individual going up to $10,000. The deductible is generally based on the illness for which payment is to be made, but we also have what we call a family budget deductible under which the deductible amount for any subsequent illness on the same member of the family or any illness on another member of the family within the same benefit year is a nominal amount, say, $25, which is imposed only to cut out the expense of investigating small claims.

The rates are based primarily on the age distribution and family status, but the number of high-earning employees and the geographical locating must be taken into account.

Many other companies have come out with group policies, some of which have deductibles varying with income; some only cover illnesses where the patient is hospitalized; some have uniform premium rates regardless of distribution by age, income, or residence; some limit payments for any one illness to a specified time, such as a 2-year maximum. Most of them have a coinsurance factor, the most common being 25 percent, but some companies issue policies with no coinsurance factor at all which, in my opinion, is thoroughly unsound.

I have available for each member of the committee a copy of the enrollment booklet which we used when we enrolled employees of