That one-eighth of administrative expenses is a sort of cushion in addition to the contingencies and profits. What it means is that the carrier must absorb all of the loss until the actual benefit payments have exceeded the sum of the anticipated payments, plus the amount to be set aside for contingencies and profits, plus one-eighth of the administrative expenses.

Now, the reason for the cushion in large part is the difficulty of determining the exact apportionment of the premium income. In other words, no matter how good the actuaries are, it is very difficult for them to ascertain this fine line at which the anticipated benefit payments will exceed the amount which would be set aside out of the total premium income, except for the administrative expenses.

The higher the cushion, the lower the actual reinsurance premiums could be. If we widen this cushion, to a greater sum, it means that the Federal reinsurance payment does not operate in as many cases; but it was concluded that a proper and reasonable cushion would be one-eighth of the administrative expenses.

Now, in the third bar, we have indicated the example of an abnormal year, where the actual benefit payments exceed this red line. They exceed the anticipated benefits, the contingencies and profits and oneeighth of administrative expenses; and in the case of this third bar, if the carrier's actual experience for the year were as indicated, the reinsurance fund would pay three-fourths of the amount by which the actual benefit payments exceeded the red line.

This is an explanation of the meaning of "abnormal loss," that is. this red line is the breaking point at which the Federal reinsurance fund would step in and pick up a portion of the losses. It would pay three-fourths of the amount in excess of that line.

Now, going back to our original chart, we observe that carriers are reinsured only for their abnormal losses. That is, the Federal Government would not be stepping in to help them out on each minor loss that exceeded what they anticipated. In other words, there is an element in the formula, by reason of this cushion, that is analagous to the $50 deductible provision in an automobile policy; the Federal Government would not be paying off in the small cases, but would be paying off in the cases of greater loss.

We have noted the fifth point, that the carrier shares in the losses because of two reasons: First of all, it has to absorb the loss with respect to its contingencies and profits, and the one-eighth of adminis trative expenses, and then, above and beyond that, there is this coinsurance factor. The carrier is paying one-fourth of the abnormal loss and the Federal reinsurance fund three-fourths. That is the accepted principle of coinsurance, which gives the insured party an interest in preventing the losses from getting too high.

Senator PURTELL, Mr. Perkins, may I interrupt?

Are these losses to be paid on a year-to-year basis, on an average basis or on a projected basis?

Secretary PERKINS. They would be in a year-to-year; the year would be the experience.

Senator PURTELL. Thank you.

Secretary PERKINS. The sixth point is that the Federal liability is limited to the fund. As the Secretary explained in her statement, the income for the fund would be the reinsurance premiums charged to the carriers. As a starter, however, there is provided a kind of

borrowing authority from the Treasury to the extent of $25 million authorization. That would be repaid as reinsurance premiums came in and as the fund got to be set up on its own feet.

Finally, as pointed out, it would be on a nonsubsidy basis, a selfsupporting basis, because the reinsurance premiums would be actuarilly determined so as to keep the fund on a self-sustaining basis. It would be exactly analogous to a company going into the reinsurance business on its own and deciding that it wanted to break even. Now, finally, the technical services and studies which are in title II of the bill-the Secretary has described their purpose and their scope. They would enable us, on a continuing basis, on a comprehensive basis, to get the kind of information that is necessary in order to determine where, in what areas, voluntary health insurance could be expanded or improved. Technical advice would be given to the carriers so as to enable them in their efforts, in expanding and improving their plans, to carry out the purposes of this bill.

Senator PURTELL. Thank you, Mr. Perkins.

Mrs. Secretary.

Secretary HOBBY. 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.

Before proceeding to tell you of the positive gains which this program can achieve for the American people, I want to mention three limitations. In doing so, I do not want to leave the impression that I view them as objections to the bill in any way; rather, my purpose is to make absolutely clear that we do not consider this proposal to be an all-embracing panacea for every aspect of our national health problem.

First, the program can help only those who can and are willing to include health-insurance 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, there is need to reduce the number of exclusions from coverage under certain forms of health policies, such as for heart dis

ease or cancer. This program will make it possible for carriers to experiment in removing these exclusions.

Experimentation is needed in making the benefits of many policies far more comprehensive as to total limits, thereby providing better protection against major medical expenses. I think this program will provide a stimulus for such experimentation.

As to other possible gains-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 do now; or perhaps terms may be found under which it is pos sible to provide insurance to individuals now considered uninsurable. Finally, perhaps more noncancellable policies can be written at prices people can afford to pay.

These possible improvements in health protection involve taking risks in areas where actuarial experience is limited. The availability of the reinsurance fund will make it possible for carriers to speed the progress of their experimentation. Furthermore, the availability of reinsurance should also make it feasible to conduct larger-scale experiments, thereby producing lower relative administrative expenses and permitting a lower margin for contingencies for unanticipated fluetuation in claims. This should be reflected in lower premiums charged to subscribers or policyholders during the early days of more compre hensive coverage.

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, Mr. Chairman, 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 popu lation.

We urge this committee and the Congress to give the bill favorable consideration.

Senator PURTELL. Thank you, Mrs. Secretary.

I have some questions I would like to ask, and I thought I would defer asking them until after you had concluded your testimony. Secretary HOBBY. Yes, sir.

Senator PURTELL. Many of these you have answered wholly or partly, but I would like to have them perhaps extended upon your remarks for the record.

Secretary HOBBY. Yes, sir.

Senator PURTELL. I understand this recommendation for the reinsurance program was developed by your Department, and obviously you consulted many groups in doing so. I wonder if you would want to talk a bit about that.

Secretary HOBBY. Well, perhaps the group, the committee would be most interested in would be the group of insurance consultants who came eight of them, I believe, Mr. Chairman-and sat with us in reviewing the draft of this bill and making very helpful suggestions in areas in which they certainly had a great deal more competence

than we.

Now, that is the professional group, and I should like, Mr. Chairman, if I may, to submit for the record the names of these gentlement who were kind enough to come.

Senator PURTELL. We would like to have them become a part of the record, and it is so ordered, Mrs. Secretary.

(The list of names to be supplied by Secretary Hobby is as follows:)

EXPERTS WHO SERVED AS CONSULTANTS IN DEVELOPING RECOMMENDATIONS WITH RESPECT TO S. 3114

C. Manton Eddy, Chairman of Committee of Consultants, Connecticut General Life Insurance Co., Hartford, Conn.

Henry S. Beers, Aetna Life Insurance Co., Hartford, Conn.

Jarvis Farley, Massachusetts Indemnity Insurance Co., Boston, Mass.

Dr. Charles G. Hayden, Massachusetts Medical Service (Blue Shield), Boston, Mass.

William S. McNary, Michigan Hospital Service (Blue Cross), Detroit, Mich.

H. Lewis Rietz, Lincoln National Life Insurance Co., Fort Wayne, Ind.

J. Henry Smith, Equitable Life Assurance Society of the United States, New York, N. Y.

James E. Stuart, Hospital Care Corp. (Blue Cross), Cincinnati, Ohio.

Secretary HOBBY. And also, sir, I should like to make it clear that the gentlemen who helped us came in their individual capacities and not as representatives of their companies.

Senator PURTELL. But their experience was in many various fields affected by this bill?

Secretary HOBBY. We couldn't have produced a bill that we believe is as sound as this one without their aid and counsel.

Senator PURTELL. Thank you, Mrs. Secretary. You have indicated here generally, and somewhat specifically at times, who will be helped by this program, but would you want to elaborate a bit about that?

What are the fields that you hope this program will open up that aren't presently available to people; that is, those fields in which this health program can benefit more people?

Secretary HOBBY. Mr. Chairman, if you remember earlier what we called a pie chart (chart E)——

Senator PURTELL. Yes.

Secretary HOBBY. Showing the people who are not now covered by insurance, 62 or 63 million, as I recall, in the blue part, the right side of it, were self-employed, rural, small firms and others, the others being casual labor; the upper left part of it, as you will see, were the aged and chronically ill and those in public assistance; and those in the lower left were those with no special coverage problems.

I am sorry my eye is not true to scale, but actually this health reinsurance fund could help all of those in blue-the farm families, those in small firms, self-employed or others--and I would think that is a little better than half of the 63,000,000, Mr. Chairman.

Senator PURTELL. Yes.

Secretary HOBBY. The lower left segment-of course, there is no special coverage problem. They could buy health insurance if they

wanted to now.

ease or cancer. This program will make it possible for carriers to experiment in removing these exclusions.

Experimentation is needed in making the benefits of many policies far more comprehensive as to total limits, thereby providing better protection against major medical expenses. I think this program will provide a stimulus for such experimentation.

As to other possible gains the number of days of hospital confite ment 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 do now; or perhaps terms may be found under which it is pos sible to provide insurance to individuals now considered uninsurable. Finally, perhaps more noncancellable policies can be written at prices people can afford to pay.

These possible improvements in health protection involve taking risks in areas where actuarial experience is limited. The availability of the reinsurance fund will make it possible for carriers to speed the progress of their experimentation. Furthermore, the availability of reinsurance should also make it feasible to conduct larger-scale experi ments, thereby producing lower relative administrative expenses ard permitting a lower margin for contingencies for unanticipated fluc tuation in claims. This should be reflected in lower premiums charged to subscribers or policyholders during the early days of more compre hensive coverage.

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, Mr. Chairman, 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 popu lation.

We urge this committee and the Congress to give the bill favorable

consideration.

Senator PURTELL. Thank you, Mrs. Secretary.

I have some questions I would like to ask, and I thought I would defer asking them until after you had concluded your testimony. Secretary HOBBY. Yes, sir.

Senator PURTELL. Many of these you have answered wholly or partly, but I would like to have them perhaps extended upon your remarks for the record.

Secretary HOBBY. Yes, sir.

Senator PURTELL. I understand this recommendation for the reinsurance program was developed by your Department, and obviously you consulted many groups in doing so. I wonder if you would want to talk a bit about that.