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Some carriers, notably the Aetna, tried a stricter control on doctor charges by developing computer profiles and using such techniques as notifying employees when the doctor's charge was above what they had determined was the usual and customary for the area. Under some plans we went so far as to advise the employee that if he was pressed by the doctor for payment of the portion of the charge which had not been recognized for payment, because it exceeded the prevailing charge in the area, the Aetna would defend and pay all court costs in addition to any judgment.

This, as you might imagine, produced a bitter reaction from the doctors and many large employers who were just not ready to go this far. Consequently, Aetna was not able to establish these controls on a widespread basis. The carriers have accomplished some control through active participation in planning agencies, support of medical foundations and the development and maintenance of surgical profiles, but accomplishment lags behind what is desired.

Now, insofar as individual insurance policies are concerned, individual policies are offered by a number of major insurance companies. The benefits offered vary from comprehensive plans similar to those offered to groups to very modest plans providing only hospital indemnity benefits or accident only coverage.

Except under conversion policies there is usually medical selection and poorer risks are simetimes denied



risks can usually obtain coverage from the Blues by applying during their open enrollment periods, but these are usually held only periodically. Because the agent selling the coverage needs to be compensated for his time, the distribution cost of individual insurance is quite high and expense rates of 45–50 percent are the rule. Premiums are accordingly substantial and policies actually bought tend to be less broad in coverage, in part because of budget considerations.

The more limited policies are, however, often supplemental to other coverage and the overall adequacy of coverage is somewhat better than the statistics would indicate. Profits are quite moderate and approximate 2 to 3 percent, including investment income and net of Federal income taxes.

There is not the same level of sophistication on the part of the purchaser of individual coverage that there is on the part of the purchaser of group insurance and there is some abuse in the mass-marketing of very limited policies which are not always as clearly described as might be desired. In these mass-marketed plans preexisting conditions limitations sometimes seem to be excessive and claim practices on occasion have also left something to be desired. State supervision has been something less than effective in this area since many States do not have the authority to enforce sound practices when the policy is issued outside of their borders.

The insurance industry is by and large a very responsible industry with a very high degree of social consciousness, but whereas much headway has been made in recent years, particularly in the extent and adequacy of coverage, the industry cannot do the whole job without help from the Government.

Although there are the forces of collective bargaining and competition in the labor market to assure adequate benefit amounts for em

ployee" groups, something more is needed to provide continuity of coverage for: (1) temporary layoff and leaves, (2) transfers of the plan from one underwriter to another, (3) transfer from one plan to another, and (4) dependents of deceased employees.

This might be accomplished by (a) tax incentives for "qualified" plans meeting a minimum standard 'in continuity, (b) it could be achieved by a mandate on insurers requiring all policies to conform to a minimum standard or (c) a mandate for all employers to provide a minimum standard. The mandate on employers would be the most immediately effective approach, but if the minimum standard were to include benefit amounts—as would be advocated by some it would have to be a less liberal level of benefit than will otherwise gradually emerge because of limitations of available facilities and general economic considerations.

Whereas these approaches would be effective in improving the adequacy of benefits for employer groups which can afford to pay, there remain the problems of the marginal group and the individual who does not belong to a group who is not poor or near-poor, but cannot nevertheless afford the higher cost of comprehensive individual insurance.

What is needed is a policy providing adequate coverage which is available at reasonable cost to the individual who wishes to purchase it, “reasonable” being. “without loadings for uninsurable risk and without loading for the high cost of individual solicitation.” If this coverage were available at the option of the individual, much could be accomplished and whereas the competitive impact on individual policy companies would be severe, the public interest would be served.

The extension of coverage would be greatly helped if tax incentives could also be made available. In any event, such coverage would have to be subsidized. I would say it would have to be subsidized by the insurance industry and it would have to be offered through a pool to equalize the cost impact on individual carriers.

Legislation would be required to specifically permit carriers to band together for this purpose. It would probably be necessary for the legislation to require insurance companies to participate in the pool as a condition of conducting a health insurance business. It would also be necessary for self-insurers to be required to participate. The pool should be administered by the carriers themselves under Government supervision.

Coverage for the poor and near-poor should be subsidized by the Government, although administered by the private sector on a fiscal intermediary basis. It is important, however, that incentives be built in for the carriers so that they feel justified in allocating the resources necessary for the proper administrative effort. If these pools were to be Government-administered, there would be no economies and the danger of perpetuating second-class care for the poor would be greatly increased.

The third problem, lack of adequate cost and quality control of providers, is not an easy one. As far as hospitals and other institutions are concerned, probably the most effective controls are planning, certificate of need, and prospective rate review.

The new planning legislation recently passed by Congress would seem to take care of part of the problem. We will know more specifi


cally when regulations are finally issued, but there is no federally mandated prospective rate review.

We have had 2 years' experience in Connecticut with prospective rate review and I understand that Maryland has also had some experience. In Connecticut, budgets for October 1, 1974, to October 1, 1975, were approved at an average increase of 8.3 percent. This compares with 16.2-percent increase in charges nationally, and the 6 percent permitted under wage price control. Budget increases submitted for 1975-76 average 10.7 percent on a weighted basis-beds for hospitals. Again, this is well below the average increases being experienced nationally. The discipline has been responsible for increased efficiencies and restraint which otherwise might well not have been there.

Yet the hospitals seem to be relatively comfortable with the existence of the cost commission after 2 years, and where they have opposed its operation in the past, they have been working with it comfortably

Now, the problem of controlling physician's charges is a much more complicated problem and unless an answer can be found to the malpractice problem, it will be difficult to get the full cooperation of the medical profession. Without their full cooperation there can be little hope that any approach to cost control will work.

Any number of schemes have been tried to control doctors' charges fee schedule in Canada, per-capita tried in the United Kingdom and profiles tried in medicare—none has been really successful. Currently profiles are almost universally used by insurance companies and by Blue Cross/Blue Shield to monitor and control physicians' fees.

Increasingly there are effective peer review mechanisms run by the doctors themselves to review cases involving substantial amounts in excess of carrier profiles. The problem lies in strengthening these mechanisms and providing an objective and acceptable means for physician-carrier determination of the magnitude of increases in physicians' fees and profiles which should be permitted from year to year.

The carriers can develop and apply fee profiles, evaluate the effectiveness of physicians' review of disputed cases, and, with the indirect backing of appropriate Federal legislation, negotiate with physicians concerning the average increase in fees acceptable for the year at hand. Carriers would be supported by both employers and employees in their efforts and have the medical, actuarial, and data processing capacity and they do have the incentive to do a good job in this most difficult


There are many advantages to having health care financed by the private sector.

If administered by Government, new bureaucracy would be built and it is just not easy to control or limit its growth. There are strong competitive pressures in the private sector which bear an actual survival for an individual company. This pressure insures quality, fair and prompt payment of claims, and efficient administrative systems.

The private sector is more responsive to change. There is constant innovation and change in medical treatment and the needs of employers and employees change. The bargaining position of the employer is such that he can force carriers to meet his needs. Government is traditionally slower to respond.

The present system is pluralistic. There are many approaches to providing the financing needed. No one would satisfy all needs. The private system breeds innovation and pluralistic response. Government through its regulation tends to stifle initiative and to develop monolithic response.

I think the most compelling reason is that the private insurance industry has proven it can efficiently administer many different health plans covering almost 200 million individuals. The organization is in place and has a record of efficiency surpassing that of Government.

The challenge to you will be to design legislation which will fully utilize the strengths of the private sector and also stimulate it to cope with the remaining problem areas by providing the Government assistance which is needed.

Thank you.
Mr. CORMAN (presiding]. Mr. Thompson, please.


Mr. THOMPSON. Mr. Chairman, and members of the Subcommittee on Health, my name is John Larkin Thompson, and I am president of Blue Shield of Massachusetts. Blue Shield is a nonprofit medical service corporation which provides private insurance coverage for physician-related costs as well as serving as the part B carrier for medicare in Massachusetts. Working in tandem with Blue Cross of Massachusetts, Inc., which covers hospital and other institutionalrelated expenses we endeavor to make available to our subscriber population the most comprehensive protection possible.

The health care system is now and must be, under any form of national health insurance, the most effective coordination of a variety of necessary ingredients; providers of care, beneficiaries, administrative capacity, financial resources and others. It is not my intention to praise the private involvement generally or dwell on Blue Cross-Blue Shield system specifically. It is important, however, to identify what is actually "out there” operating the system today in order that legislation utilizing the necessary talents existing in the country can be developed for benefit of those to be served under national health insurance. In this, I will draw on the experience of the national system of Blue Cross-Blue Shield organizations as well. Secondly, I will make some observations as to problems in the health care delivery system as a whole. Lastly, I will tie in a list of considerations for national health insurance; items which should be addressed prior to making any kind of commitment to a specific piece of health legislation. Almost everyone

has heard, at one time or another, the story of prepaid health insurance concepts. In 1929, the outset of the Depression, a group of Texas schoolteachers banded together and agreed to pay a small sum of money annually to the hospital at Baylor University. In return for this, they received a guarantee of hospital care without charge should the need arise. Sometime later—1939 to be precise—a prepayment mechanism for physician's services was established in California. The history of this phenomenon as it grew in Massachusetts is typical to that of many other plans across the country,

Mr. CORMAN. Excuse me, Mr. Thompson, I hate to interrupt you. We will have to suspend—oh, excuse me, the chairman is back.

Mr. ROSTENKOWSKI. Go ahead, Mr. Thompson.

Mr. THOMPSON. It is interesting to look at the level of benefits available in those early years. Briefly, on an inpatient basis, general nursing care for 21 days per annum, $5 per day toward the cost of a private room, operating or delivery room, ordinary medications and dressings, routine laboratory and pathology service, anesthesia up to $10 per admission and maternity benefits after 11 consecutive months of membership was available for a mere $1.25 per individual per month. In comparison with today's costs it is hard to believe that these benefits were adequate. It does serve to point out, however, the tremendous changes that have occurred in all aspects of medical carefrom technology to economics.

In my own State, Blue Shield was organized in 1941 to provide a nonprofit medical surgical plan designed to meet the physician component of medical bills. The corporation was then and still is committed to certain basic principles. These include free choice of physician by the patient, freedom of action within ethical restrictions for the physician, full and open opportunity to participate for all physicians duly licensed in Massachusetts, subscriber representation in the corporation and supervision by the Commissioner of Insurance.

Enough history—let's take a look at what we are doing today.

Blue Cross and Blue Shield of Massachusetts are two plans within a national network of 94 nonprofit organizations which in 1973 insured one out of every three Americans and paid some $11.2 billion in claims. The figures for 1974 show substantiaÌ growth on that point.

In 1974—total Massachusetts Blue Cross and Blue Shield membership was 3.4 million people—providing services of one type or another to 63 percent of the Commonwealth of Massachusetts. Some 3 million claims were processed for both group and nongroup enrollees and an average of 93.2 cents per premium dollar was returned to our subscribers through benefits. This segment of the corporations' business resulted in total payments to providers and beneficiaries of $581 million.

The same two institutions, as the medicare intermediary and carrier within Massachusetts processed some $416 million in claims payment during 1974. In addition, we provided supplementary coverage for the over 65 to a total of 354,000 people which generated claim payments of $33 million.

In 1974 as well, three other programs, CHAMPUS (Civilian Health and Medical Program of the Uniformed Services), the over 65 portion of the Medicaid program in Massachusetts, and the Massachusetts Commission of the Blind recipients accounted for $21.2 million in paid claims.

In total, Blue Cross and Blue Shield in Massachusetts in 1974, received, investigated, processed and paid claims amounting to more than $1 billion. This represents the activity of only two of many organizations within one State of this country and should serve to establish a dimension of the enormity of the administrative task that is currently being accomplished and that will be dramatically expanded under any national health insurance program.

Let us shift slightly to the roles of the public and private sectors and how they interface.

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