vestigation of the commercial liability insurance marketplace during the last seven years.

AIA believes that the issues that the FTC would address are not new and indeed have already been considered by, among others, state insurance regulators throughout the country over the last few years. Some of them have been explored at the federal level as well. The Administration's Tort Policy Working Group concluded in 1987, as it did in 1986, that the insurance industry is indeed competitive with few, if any barriers, to market entry.

We therefore do not believe that an FTC investigation will shed any new light on the problems confronting consumers of insurance in those lines of business which have characterized by increased rates or reduced availability in recent years. We are also concerned that the costs of complying with Section 19 will be great as insurers will be required to submit detailed information to the Commission at significant expense.

Nonetheless, if the House of Representatives feels the need for an FTC investigation, the limited approach embodied in S. 677 is preferable to providing the Commission with a broad and unrestrained, overreaching mandate. By requiring the Commission to narrowly focus any investigation, Congress will have effectively prevented a repeat of the same mistakes which occured in the late 1970s.

Should Section 19 of S. 677 be ultimately enacted, we will cooperate fully with FTC to ensure that they have the best information available for their investigation. We do have concerns with some of the language relating to the scope of the study called for in Section 19. But, once again, should the Congress wish to pursue the same, we will be happy to work with you to put all the issues into a proper, broad perspective. We are confident that the ultimate conclusion of any fair examination will demonstrate that the insurance industry is fully competitive and that recent rate increases in selective lines are a logical and rational response by individual insurers to the rapidly increasing costs associated with the risks being insured.

Mr. LUKEN. Thank you, Mr. Suttle.
Mr. Sick.

STATEMENT OF THOMAS O. SICK

Mr. SICK. Thank you, Mr. Chairman.

Mr. LUKEN. You are here on behalf of the Health Insurance Association of America?

Mr. SICK. I am. My name is Tom Sick. I am here today to present the views of the industry regarding the proposals to study the marketing and sale of health insurance to the elderly.

Mr. Chairman, we in the industry share the concerns regarding practices in this area. However, any proposals should not cast a wide net over matters which have already been studied repeatedly. Medicare supplement insurance serves as an important link in the health care delivery system for the Nation's elderly. Secretary Bowen stated in his November 1986 report that it "acts as a simplifying mechanism for dealing with the complexities of the Medicare program."

Medicare supplement insurance is not medigap. Since the 1984 Baucus amendments, medigap has ceased to exist as a product, and all accident and health policies which wrap around or supplement Medicare must conform to State laws, which in turn must conform to the Baucus provisions both with respect to coverages and advertising.

These study proposals appear to be directed at two principal concerns, advertising practices and loss ratios. The subject of advertising practices has been studied and restudied. It has been studied by the FTC, HCFA, the GAO, and the NAIC. The HIAA conducted a recent consumer survey, which indicated a high level of satisfaction. The recent GAO report concludes that while some abuses still occur, States are doing a reasonable and effective job of limiting

abuses through monitoring sales, advertising, revoking agent licenses, issuing Cease and Desist Orders, and punishing perpetrators, all in keeping with the States' traditional role in regulating the insurance industry. These State laws, of course, were enacted pursuant to the Federal advertising requirements of the Baucus amendments.

The subject of loss ratios must be kept in perspective. Loss ratios are only one element in measuring the value of a health insurance product. The Baucus amendments set target, not actual, loss ratios of 60 percent for individual policies and 75 percent for group policies. The recent GAO study concluded that loss ratios must be interpreted with care and that early policy experience may result in low loss ratios due to waiting periods or where policyholders are healthy and file few claims.

Various other factors, in addition to the health of the policyholder, can affect loss ratios. One is the number of policyholders under a group plan. Another might be whether premiums may be adjusted annually.

In view of these points, I suggest that this subcommittee focus its valuable time and attention and that of the FTC on a recent phenomenon in this area and one where this committee may do a real service to the elderly. Many transient, noninsurance operations, usually appearing as senior citizens groups, are marketing packages of various benefits to elderly citizens, which are composed of insurance and noninsurance products. These entities appear to be operating in a regulatory void, not regulated by the State Insurance Commissions, and are thus a proper subject of FTC study.

I compliment this committee for taking the time to request the health insurance industry's views on this subject prior to taking action, and I'll be pleased to answer any questions that you might have.

Additionally, I have examples of the National Association of Insurance Commissioners' current advertising guidelines. I currently sit on the NAIC advertising committee and we are meeting tomorrow morning contemplating an extension of these guidelines addressing some of the specific problems regarding Medicare supplement insurance.

Additionally, I have a copy of the NAIC minimum standard act and regulation for health insurance. That defines each category of health insurance policies.

Thank you.

[The prepared statement of Mr. Sick follows:]

STATEMENT OF HEALTH INSURANCE ASSOCIATION OF AMERICA, BY THOMAS A. SICK

My name is Thomas A. Sick. I am the Vice President of Government and Industry for Physicians Mutual Insurance Company of Omaha, Nebraska. I am a member and serve on:

The Mass Marketing Subcommittee of The American Council of Life Insurance. The Mass Marketing Subcommittee of The Health Insurance Association of America.

The Board of Directors of the Nebraska Life and Health Insurance Guarantee Association.

The Advertising and Marketing Guideline and Practices Advisory Committee to the Medicare Supplement Task Force of the National Association of Insurance Commissioners.

I am here today at the invitation of the Health Insurance Association of America to offer you any information that may help you decide whether or not to request that the Federal Trade Commission investigate and report on the sale of all health insurance to the elderly, as well as on loss ratios for such insurance. With me is Linda Jenckes, Vice President of Federal Affairs for the Health Insurance Association of America. The HIAA is a trade association with a membership of about 335 insurance companies. HIAA members write over 85 percent of the private health insurance available from insurance companies in this country.

BAUCUS MINIMUM STANDARDS: DEFINITION

The HIAA is proud of its record in providing supplemental coverage to the Medicare program. Currently, about 70 percent of all Medicare beneficiaries have this private coverage. This good track record is in part a product of our efforts since the late 1970's to work with the states and consumer organizations to control agent sales abuses. These efforts culminated in 1980 with the passage of the Baucus amendment to the Social Security Act (P.L. 96–265). This law sets minimum standards that must be met before companies can market Medicare supplemental insurance. Forty-six states, D.C., and Puerto Rico have met or exceeded all of the minimum standards. Four states, New York, Massachusetts, Rhode Island, and Wyoming, have not met all of the Baucus minimums, but do have substantial law regulating Medicare supplement insurance.

Following are key Baucus minimum standards:

Coverage of all Medicare hospital coinsurance through lifetime reserve days, plus 90% of an additional 365 hospital days;

Coverage of all Part B physician coinsurance (20%) up to $5000, after a $200 deductible;

Provision of a "free look" period (usually from 10 to 30 days), during which time a policy may be returned for a full refund;

Coverage of pre-existing conditions after a 6 month waiting period;

Fair trade practices such as simplified policy language and truth-in-advertising; Minimum loss ratios of 60% for individual policies and 75% for group; Provision of a buyer's guide upon sale of a policy, explaining benefits and limitations of Medicare and Medicare supplement insurance.

HOW WELL IS BAUCUS WORKING? WELL, ACCORDING TO RECENT STUDIES Every major government study of the Medicare supplement business since 1980 (1983 HCFA/SRI, October 1986 GAO, and the recent March 9, 1987, HHS reports), have concluded that the Baucus standards are being met or exceeded in nearly every state. The HCFA and GAO reports further indicated that Baucus has worked well in improving product quality and consumer education, and in curbing sales abuses (the 1983 HCFA report also noted that duplicative coverage, a frequent sales abuse charge, was rare) and in the product generally meeting the loss ratio standards.

The HIAA feels that when considering the value of an insurance product, it is best to evaluate the benefits covered in relation to the price of the policy. The Medicare supplement business is very competitive, with Blue Cross/Blue Shield and Prudential AARP coverage making up over 50% of the market. Also, it is important to bear in mind that over one-third of all Medicare supplement insurance is purchased on a group basis, much of which is funded by employers.

Finally, recent HIAA surveys on Medicare supplement insurance show high benefit levels and substantial consumer satisfaction. Our survey of 12 top commercial Medicare supplement carriers (representing about 66% of the total individual Medicare supplement business written by commercial insurers) shows that 86% of their insureds are covered for unlimited hospital days, paying 100 percent of all Medicare allowable hospital expenses. Ninety-two percent have coverage for 100% of the Part A hospital deductible. Also, 93% of those companies' policies had unlimited coverage for Medicare allowable Part B expenses.

Another HIAA survey assessing Medicare supplement consumer experience found that 8 in 10 persons surveyed say they were not pressured into purchasing a Medigap policy, that their policy was fairly priced, and that their insurer paid as much of their medical costs as they expected. The survey also revealed that 9 in 10 of the people who filed claims were satisfied with their policies. The HIAA feels that this data offers a clearer picture on commercial Medicare supplement insurance than loss ratio data for a select number of years.

INDUSTRY ADVERTISING STANDARDS

The current framework for state regulation of insurance advertising is found in the NAIC Model Rules Governing Advertisements of Accident and Sickness Insurance (including interpretive guidelines). These rules have been in place since as early as 1956; in 1974, and again in 1977, these rules were updated to fit more modern advertising techniques. They are again going through review within the NAIC for Medicare supplement coverage and all other health insurance. A recent review by that organization included a study of the appropriateness of advertising for today's interest sensitive life insurance products.

Forty-eight states and Puerto Rico have adopted regulations the same as or substantially the same as the NAIC Model. Only Hawaii and Montana have not adopted the Model through legislation or regulation. We should point out, however, that Montana at least applies the advertising interpretive guidelines to products sold in its state.

All state advertising regulation based on the NAIC Model requires insurers to maintain copies of all advertising materials. Records of the time and place of their publication, broadcast, or dissemination must be maintained. These records are subject to detailed insurance department review during a company market conduct examination or financial exam. Many state life and health regulations also require a company officer to submit a "certificate of compliance" with the insurer's annual statement.

The state advertising rules are just one set of the many complex laws governing the marketing practices of health insurance. In particular the minimum benefit standards for Medicare Supplemental coverage (Baucus), adopted by virtually very state, require that only policies meeting certain benefit standards can be marketed or sold as Medicare Supplemental. The buyer is provided a simplified outline of coverage which relates the benefits of the policy to the gaps in Medicare. Also part of the marketing requirements is that any policy sold to someone over age sixty-five must be accompanied by a booklet developed by the insurance industry, state regulators and federal officials explaining private insurance and the federal Medicare program.

The final protection is that should a buyer be dissatisfied with the policy for any reason, the buyer is entitled to a full refund without question. This is known as the "free look" period.

SUGGESTIONS FOR CONSIDERATION

In view of these points, I suggest that this Subcommittee focus its valuable time and that of the Federal Trade Commission on a recent phenomenon which does impact on the marketing of insurance and non-insurance products to the elderly. There are many legitimate consumer organizations which represent senior citizens effectively; however, many new ones have been established for the primary purpose of only marketing. These entities appear to be operating in a regulatory void and certainly warrant the attention of the FTC in terms of consumer proteciton. We appreciate the opportunity to appear before the Subcommittee and would be happy to respond to any quesitons that you may have.

Mr. LUKEN. Thank you, Mr. Sick. Mr. Wenning.

STATEMENT OF THOMAS F. WENNING

Mr. WENNING. Thank you, Mr. Chairman. I want to thank you for the opportunity to appear before the Subcommittee regarding the FTC funding and reauthorization. I am appearing today on behalf of the Small Business Legislative Council as its antitrust committee chairman. SBLC is a coalition of approximately 90 trade and professional associations that represents approximately 4 million small business organizations.

The SBLC has had a tradition of over 10 years of supporting strong and consistent antitrust enforcement and supporting the reauthorization of the FTC. Our interest is not only free and open competition but also fair competition. As such, we have a vital stake in the future and operations of the Federal Trade Commission.

Last year, as you know, over 1,800 representatives of the small business community gathered in Washington for the White House Conference on Small Business to determine what objectives are most desired by those business concerns. Antitrust enforcement, I'm happy to report, was one of the priority items that was recommended in the final report. Likewise, at our recent 1987 SBLC annual meeting, antitrust enforcement and our policy position which is attached was rated as our number eight issue.

Mr. Chairman, as you recall, last year and in 1985 and 1986, during the 99th Congress, this committee approved a reporting requirement imposed upon the Commission to detail its FTC enforcement activities regarding predatory pricing. That was ultimately, even though you didn't make it through Conference, that provision was ultimately included in House Joint Resolution 738 for fiscal year 1987. Just recently, the Commission has submitted to this committee and to the Senate committee its report.

While those procedures do not guarantee adequate final enforcement, we believe they do greatly assist in an ongoing evaluation of the Commission's efforts in this area.

SBLC still believes, however, that this action is still required and we would endorse enactment by this committee of reauthorization legislation that would continue such reports for 1988, 1989 and 1990. This provision was included in the Senate passed bill and we feel it should be included in the House version as well.

In the area of insurance, this has been a very strong issue of debate within the SBLC and also within the small business community as far as the concern over the rising rates in product insurance and casualty insurance. Within that regard, SBLC has endorsed and will endorse the Senate provision that calls for a study of the property and casualty insurance.

Small business feels strongly that they need answers and have not been able to get the answers to questions they have been asking about rate availability, product coverage and so forth and they feel that the Federal Trade Commission would be a proper Commission to conduct a study in this area. I would emphasize that the SBLC has not gone to the step of endorsing repeal of McCarran-Ferguson but has taken the approach that a study by the FTC in this area would be appropriate.

As far as FTC enforcement, Mr. Chairman, we feel strongly that the activities of this committee go a long way in providing oversight and requiring oversight to assure the FTC maintain a strong and vigilant antitrust enforcement activity. We would encourage you to continue your efforts in assuring that the Commission maintain its level of enforcement and use your powers of oversight to review their activities and to listen to the small business community as we address the issues of concern.

In conclusion, I want to thank you once again for the opportunity to testify on behalf of the Small Business Legislative Council. If there are any questions I can respond to, I'd be glad to do so. Thank you.

[The prepared statement of Mr. Wenning follows:]