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accordance with one of the President's recommendations, this title authorizes the Secretary to
conduct studies and collect information concerning the organizational, actuarial, operational, and other problems of health service prepayment plans and their carriers.
These studies would include the collection of much needed data on the incidence of sickness and its effects on the use of medical care facilities and services.
The information collected would be made available to the public and to sponsors of health service prepayment plans. Upon request, health insurance carriers would be given specific technical advice on organizational methods and other matters.
The purpose of these provisions of title II is to achieve a better understanding of the Nation's medical care problem, of the techniques for meeting it through voluntary means, and of the actuarial risks involved.
In support of these provisions, let me say that we are frequently reminded that the great gaps in our basic data are among the major obstacles to improvement and expansion of prepayment coverage.
Reliable and reasonably current information is needed on the incidence of disease, on utilization rates for the various health services and on prepayment plan enrollment and organizational methods and problems.
It is especially important to gather information which will provide a firmer basis for the determination of premium rates in the areas in which carriers have had little or no experience.
We believe that the service authorized under title II can help to fulfill these vital needs.
In summary, the provisions of titles I and II relating to the Advisory Council, the use of State agencies, and the conduct of technical studies are essential in developing a coordinated attack on the problems inherent in extending or improving voluntary health insurance. They will provide the tools for cooperative effort by Federal. State, and local agencies, public and private, and will assure that the broadest possible approach will be made to the problem.
Title III-Reinsurance of health service prepayment plans: I now turn to title III, the major part of the bill. In its simplest terms, Mr. Chairman, this title would establish a reinsurance fund designed to encourage and stimulate insurance carriers to broaden benefits and areas of service.
Types of carriers eligible: Under the bill, a carrier may be an insurance company, a voluntary nonprofit association, such as Blue Cross or Blue Shield, or a cooperative or a partnership engaged in providing protection under a health service prepayment plan.
I want to make clear our belief that all groups in the voluntary health insurance field can contribute to the development of broader and better benefits for more people.
It should be noted that direct-service carriers would be eligible for reinsurance; that is, reinsurance would be available to prepayment plans which furnish medical or dental care or treatment through a salaried staff of physicians, surgeons, or dentists. However, in these cases we would first have to be satisfied that the carrier has an organizational structure which vests control over the manner in which medi
cine and dentistry are practiced solely in duly licensed members of these professions.
Approval of plans: The reinsurance program would be wholly voluntary, and plans could be reinsured only on application by the carrier. Moreover, the bill is designed to assure that the Federal Government would not be competing with the insurance industry in the reinsurance field. No individual plan could be reinsured by the Federal reinsurance fund if it were already reinsured privately. Moreover, as a condition of reinsuring any type of plan, the Secretary of Health, Education, and Welfare would be required to conclude that for plans of that particular type or kind, reinsurance was not available from private sources at comparable terms and rates to an extent adequate to promote the purposes of the reinsurance program. Thus, the Federal program would not be competing with private enterprise.
The terms and conditions governing approval of the plans submitted for reinsurance, and the types and kinds of plans which will be reinsured, would, in general, be determined by regulation.
The bill directs that we take into consideration, in determining the types and kinds of plans eligible for reinsurance, the general purposes of the program, and that we give special emphasis to certain objectives. Here I wish to quote the provisions of the bill itself, beginning on line 24 of page 13 and ending on line 15 of page 14. The bill would direct the Secretary to place
special emphasis upon the objective of encouraging experimentation designed to extend to or adapt the prepayment method to substantive problem areas or geographic areas for which that method is in any significant respect new, untried, or not yet fully effective or widely available on reasonable terms, such as
(A) covering of classes of individuals for which protection through such health service prepayment plans appears to be feasible but is not adequate; or
(B) the offering of protection in communities or areas in which such protection (in the respects in which it is offered) is not adequately available on a prepayment basis; or
(C) a coverage of benefits or services which, either as to type, range, amount, or duration of such benefits or services, is not otherwise (generally or in a given area) widely available through such plans on an adequate basis * * *
These words in the bill, perhaps better than the purpose clauses, themselves, indicate the direction in which we think the program should move.
The specifications concerning the eligibility of plans for reinsurance might include requirements or limitations on such matters as: The ranges of health conditions to be covered by the plan;
The kind, quantity, and duration of health services to be provided under the plan;
Undue exclusions or limitations;
Deductible amounts and maximum liability amounts;
Waiting periods; and
The duration, cancellability, and renewability of policies or subscriber contracts issued pursuant to the plan.
These requirements, we must remember, would apply only to a carrier which voluntarily agrees to them as a part of the reinsurance contract involving a particular plan or plans of that carrier. Furthermore, although a plan would not be accepted for reinsurance if its rates were arbitrary or unreasonable, or such as to cause the plan to be financially unsound, the Secretary would not otherwise have
authority to exercise any control whatsoever over the carrier's premium or subscription charges under a health service prepayment plan. Finally, no substantive changes of regulations could, without the carrier's consent, apply during the current term of a reinsurance contract.
There are very sound and important reasons for leaving to regulations, rather than setting forth in the statute itself, the standards of eligibility for health plans.
The reinsurance program must be flexible if it is to serve as an instrument for continuing improvement of health protection for our people.
As more experience is obtained, as new groups are covered, and new types of benefit protection becomes feasible, standards will require adjustment.
The authority delegated to the Secretary of Health, Education, and Felfare to establish regulations would be exercised within the framework of the program itself, as fixed by the statute; the policy guid ance afforded by the provisions of the bill I have quoted and described; and the recommendations of the Advisory Council and consultants. Indeed, by leaving the detailed standards to regulation, the Congress would be enabling the best thinking of insurance and health experts to be brought to bear at all times upon the problem of proper standards of eligibility.
Assuming that a particular plan meets the requirements prescribed in the regulations, and that it is determined that the plan is sound and would promote the purposes of the act, the Secretary would still be required to make certain findings with respect to the carrier itself.
(a) That the carrier is operating according to State law; and (b) That the carrier is financially sound and entitled to public confidence.
In making these determinations the Secretary would, as I indicated in my testimony relating to title I, make optimum use of State insurance authorities.
Reinsurance premiums: Premium charges to be paid by carriers for reinsurance of their plans would be fixed with the dual objective of making the program self-sustaining, and stimulating and encouraging plans which would further the purposes of the program.
The bill does not specify a statutory reinsurance premium rate: rather, reinsurance premiums would be fixed at different rates for the different health service prepayment plans to be reinsured, so as to reflect, in accordance with actuarial principles, the respective hazards involved. It is only in this way, we believe, that the program can be run on a business-like and self-sustaining basis.
Scope and extent of reinsurance obligation: Upon approval of a plan, a reinsurance certificate or contract would be issued to the carrier. The contract would cover only a particular plan. Losses under other plans sponsored by the same carrier would not obligate the Federal Government in any way, unless such other plans were also reinsured.
With respect to the actual liability of the Federal Government under a reinsurance contract, the bill establishes two principles:
(1) The reinsurance program would reinsure abnormal losses only; that is, the abnormal losses of a carrier, in the aggregate, under a particular reinsured plan.
(2) The carrier would share in these abnormal losses. The reinsurance fund would undertake to meet only 75 percent of these losses. The abnormal losses would be those in excess of premium income, after making a reasonable allowance for the carrier's administrative costs. This administrative expense allowance would be agreed upon for each plan at the time of the carrier's application for initial reinsurance, or for renewal of reinsurance.
Mr. Chairman, this is such a complicated point that I would like to indicate that charts will illustrate this point later.
I want to emphasize that there would be, under the bill, no Federal liability to any individual policyholder. The only liability of the fund would be to carriers which have a reinsurance plan or plans, and then only for those plans.
The reinsurance fund: The source from which reinsurance payments would be made is the reinsurance fund, which would be composed primarily of reinsurance premiums collected and of the earnings of the fund.
The bill would authorize an appropriation of $25 million to a capital-advance account in the Treasury. The appropriation would be available, without fiscal year limitation, as a line of credit for advances of working capital to the reinsurance fund. When the fiscal condition of the fund permits, such advances would be repayable to the capitaladvance account in the Treasury. The amount so repaid would again be available to the fund if future advances should be needed. Pending repayment of advances, the fund would pay interest thereon to the Treasury.
All reinsurance premiums would be paid into the reinsurance fund. As I have indicated, these would be calculated with a view toward keeping the fund self-sustaining.
One of the most important features of the bill to understand is that the Government's reinsurance obligations would be limited to the moneys in the fund. It is not a subsidy-type plan with respect to reinsurance obligations, and there is no kind of open-ended authorization for this purpose.
The bill also provides that the Secretary of Health, Education, and Welfare would have discretionary authority to establish within the fund special reinsurance accounts. For example, such accounts might be created for classes of plans, classes of carriers, or groups of associated carriers. If this authority were exercised, premium payments would be credited to, and the Government's liability under a given contract of reinsurance would be limited to, the appropriate account.
Other provisions: The bill would authorize appropriations from general revenues for administrative expenses for a transitional period of 5 fiscal years beginning July 1, 1954. This would permit the intensive preparation which must precede the acceptance of reinsurance applications. It would also give the fund several years of operation without being charged with administrative expenses, which may be disproportionate in the early years. After the 5-year period, such expenses would have to be borne by the fund.
One final very important provision should be mentioned-section 404, relating to advertising. We regard it as vital that every precau
tion be taken to prevent any reference to the reinsurance program which could result in misleading the public as to the scope, purposes, or financial undertakings of the program.
Two dangers exist:
(1) Individuals who buy policies may think that reinsurance means a guarantee of benefit payments under any reinsured plan; and
(2) Carriers which do not apply for reinsurance may be subjected to unfair competition by other carriers attempting to capitalize on the name of the United States Government in promoting their reinsured plans.
In actuality, reinsurance would not give an individual policyholder any guarantee from the Federal Government of receiving his benefit payments. Moreover, approval for reinsurance purposes would not signify that a reinsured plan is superior to plans as to which no application for reinsurance had ever been made.
For these reasons, the advertising in connection with reinsured plans must be carefully circumscribed. The bill, therefore, provides that the fact of reinsurance cannot be used in advertising except in the manner specifically authorized by regulation. Criminal penalties are provided for unauthorized advertising which refers to the reinsur ance program, as well as for wholly false advertising. Injunctive remedies are also provided.
I should like now to summarize the seven major characteristics of the reinsurance program as they are listed on Chart I. These are as follows:
/ VOLUNTARY FOR EACH CARRIER
2 REGULATION OF CARRIERS REMAINS WITH STATES
3 OPERATES ONLY WHERE COMPARABLE REINSURANCE
4 REINSURE ABNORMAL LOSSES ONLY
5 CARRIER SHARES IN LOSSES (COINSURANCE
6 FEDERAL LIABILITY LIMITED TO THE FUND ($25 MILLION
TECHNICAL SERVICES AND STUDIES
(1) Voluntary for each carrier.
(2) The regulation of the carriers remains with the States. (3) It operates only where comparable reinsurance is not available. (4) It would reinsure abnormal losses only.
(5) The carrier shares in the loss or a co-insurance feature.