decide whether the disability insurance exemption in section 4 really excludes health plans. But there is no good reason to exclude them. Of course, there would be certain powers in the State legislatures but it is the same type of power which the States have in the other fields listed in section 4. There is really no good reason to distinguish, especially as a State may establish a public fund for that purpose. In fact, the distinction might be violative of the equal protection clause of the Constitution.

Mr. ERLENBORN. Do you all subscribe to the theory that there is only a certain amount which can go into a wage package-part will be salary, part will be fringe benefits, such as health insurance, vacation plans, et cetera?

Mr. GILKEY. Yes, sir.

Mr. ERLENBORN. What leads you to the conclusion the employer and the employee, particularly in the collective bargaining situation, should not be able to decide themselves as to how to divide up the wage package?

Mr. GILKEY. Our law as originally enacted did not intrude upon the statutory provision. Our prepaid health law did not pertain to collective bargaining.

Mr. ERLENBORN. If there was a collectively bargained contract which did not include health benefits, the law would not require health benefits to be included in the contract?

Mr. GILKEY. That is correct.

Mr. ERLENBORN. So you have an exemption for the union situation where they can decide not to provide health benefits at all? Mr. GILKEY. Yes, there was some discussion as to this earlier. If the unions have the clout to go in and negotiate for their members, they should.

The concern of our legislature and our State, I think, was primarily for those who had no coverage at all, were not unionized, and had no one to speak for them.

Mr. ERLENBORN. What if an employer not in a collective bargaining situation had established prior to passage of this law a health benefit plan and includes visual benefits by examination, glasses, et cetera? Should the legislature change the package, take those benefits from the employee, and put those into other benefits mandated by the law?

Mr. GILKEY. No, of course, we have minimum standards. There are many plans that go beyond the minimum statutory provisions provided. This would be true in any type of social legislation of this type, that the legislature, as the Congress might, of course, if there was national health insurance, that would go a long way in solving our problem. But, in that kind of situation, a determination as to what seemed to be the greatest need was made. Then it would be up to the employer, of course, as to whether he felt he wanted to continue the additional benefits above and beyond what the law provided.

Mr. ERLENBORN. One last comment, and then I will yield the floor, but Mr. Chairman, it seems to me, if all 50 States had such laws, that then the national standards would be the highest minimum of each of the 50 States. If one were to maintain a national plan or a national employer and we were to have one health insurance plan covering all their employees, we would take the

highest minimum in each category covered in each State law. That would be a package each State would decide was proper for their particular circumstances. It would seem then we would be leading to a specific preemption of the State from passing such laws and would be passing national standards for the maintenance of such plans and require they be maintained by employers.

That is what my colleague, Mr. Dent, suggested as far as retirement benefits were concerned, mandatory pension benefits with the law setting the level of benefits. It is exactly what Congress rejected, and I think this would move us in the health-care field as to what Congress has already rejected in the retirement field. Thank you.

Mr. HEFTEL. I would like to make some observations concerning Hawaii, and both the question of health care and the question of pensions.

The Federal Government, the Congress, enacted ERISA in response to abuses of employees concerning pension programs. It is interesting that we have now heard testimony which has said, in effect, that legislation regarding pension plans was resisted by management until States decided they had to do something to protect their citizens, and only then did management decide to support Federal legislation. They knew they had to have some legislation, because the individual States would not sit by idly and watch employees abused, due to inadequacies and impropriety in the pension programs.

Concerning health care, I think everyone is in agreement that this Nation has a problem in health care. While the Congress talks about national health insurance, with all the problems which seem to be attendant to any attempt to discuss it, while the President talks about it, the State of Hawaii took action which did not encumber it with the problems of national health insurance or a miniature model thereof. Hawaii said, we respect private enterprise; we respect the continuation of health programs from the private sector; but because the nonunionized worker needs assistance in maintaining and having health coverage, we will pass-and they did pass-a law which simply states that an employer will provide insurance programs for health coverage, and that the employer will pay and the employee will pay, one half each or the employee will pay 1.5 percent of his or her monthly salary, depending on which is less.

I think this is probably an outstanding example of efficient government action utilizing existing private-sector expertise and knowledge without interfering with the private sector in the conduct of its business.

It is also interesting to note that in Hawaii-HMSA, is what we call in mainland U.S.A. Blue Shield and Blue Cross-there is a difference between HMSA or Blue Cross-Blue Shield in Hawaii and the rest of the Nation. The difference is that HSMA by its own corporate statutes, elected to preclude physicians or those in the hospital-medical field from controlling the boards that would administer the health programs under Blue Cross-Blue Shield.

Conversely, there are States which by law have stated that 85 to 90 percent of the board of an HMSA, called Blue Cross-Blue Shield program on the mainland, must consist of doctors.

We are just now finding out that the FTC has awakened to a critical conflict of interest which certainly touches on antitrust violations, in which you have the medical profession controlling the boards of the Blue Cross and Blue Shield programs which, in turn, determine what will be paid to the profession for their services, then determine the fee to be charged to the public under the insurance programs. A classic example of conflict of interest.

Hawaii, therefore, distinguishes itself in two ways. First, it does not allow the medical profession to control Blue Cross and Blue Shield, and over 50 percent of the people in Hawaii are covered by Blue Cross-Blue Shield; and, second, Hawaii has a program which says all employers shall provide health insurance to employees in a way which does not affect collective bargaining; it does not affect the ability of business to stay in business; it has not resulted in bankruptcies, unemployment or any other consequences. It has only resulted in the fact that people have medical health insurance coverage.

It is a very viable alternative to the complex problems we know exist when we try to talk about national health insurance.

I would hope this committee would focus on the distinction between pension plans and States that want to have mandatory health programs enacted by employers, which was not the case when ERISA was passed in the first place. There was no reason then to say we will have in addition to unemployment compensation and disability insurance exemptions from ERISA, disability or

health insurance laws.

The reason the exemption was not in ERISA originally is that there was nothing in existence to give reason for the exemption. We now have a State which has taken the initiative to logically and sensibly provide for the needs of its people in its State without interfering with the cost of health care, without interfering with the private sector in terms of providing that kind of insurance, and I cannot think of a better example why H.R. 6944 should not correct what was an oversight in ERISA, because ERISA did not think about that at the time, from anything I can discover.

I would hope Mr. Miller, who preceded me in the Congress by about one term, would know more about it, but we were not here when it was enacted. But we can look back and see that it was simply an oversight, in the sense that the Congress did not think about excluding States which would require health care insurance from employers because nobody did, at that time.

I think that is where we are at this moment. I do appreciate the fact that you gentlemen have come from Hawaii to testify, and I hope this committee, and I appreciate them allowing me to participate, although I did not intend to chair-but it is important that Hawaii is an example for 49 States, all of which could come up with reasonable standards, and I do not think we can allow those major corporations such as Standard Oil, to determine our legislation for their convenience, because that is what they are asking for.

I do not think it is germane to the question of all of the people who are not unionized and all the people who do not work for Standard Oil, for an example, and it was Standard Oil who brought the suit.

I would hope the Congress would recognize an oversight, remedy that oversight, and then let Hawaii be an example for the Nation as to how to approach the problem of national health care.

Mr. Miller, may we have your observations or questions, please? Mr. MILLER. I have none.

Mr. HEFTEL. My esteemed colleague from Pennsylvania. I am delighted we have another member with us. Are you on this subcommittee, Austin?

Mr. MURPHY. Yes.

Mr. HEFTEL. I would like to hear your observations, because I have not, and I would like to catch up. Any questions?

Mr. MURPHY. Not at the present time.

Mr. HEFTEL. Thank you very much.

We next have, from the State of California, Willie R. Barnes, Commissioner of Corporations, who will then be followed by the National Association of Insurance Commissioners, Herbert Anderson, Commissioner of Insurance, State of Iowa.

Mr. Barnes.

STATEMENT OF WILLIE R. BARNES, COMMISSIONER OF

CORPORATIONS, STATE OF CALIFORNIA

Mr. BARNES. I welcome the opportunity to appear before this committee and share with you some of the concerns of the Department of Corporations over the preemption effects of ERISA and the resulting catastrophic effects it has had and continues to have on the implementation of California's Knox-Keene Health Care Service Plan Act of 1975.

When the Employee Retirement Income Act of 1974 (ERISA) was signed by President Ford on September 2, 1974, it was proclaimed as a landmark piece of legislation which represented the greatest development in the life of the American worker since social security. Whether you agree with this characterization or not, there is little question that ERISA is the most comprehensive overhaul of the private employer benefit system to date.

In building a new and detailed legal framework for employee benefit plans, Congress decided that Federal law should supersede State laws which regulate such plans. Thus, section 514 provides, in pertinent parts, that ERISA "shall supersede any and all State laws insofar as they relate to any employee benefit plan." ERISA, with its broad, expansive preemption language is, to some extent, endemic of a much broader issue which strikes at the heart of the delicate balance in our Federal system of government, and that is: what are the relative roles to be played by the States and Federal Government in regulating various business and commercial facets of our society? In lieu of cooperation or coordination, ERISA has mandated preemption.

Mr. HEFTEL. Unfortunately, I will have to leave. Mr. Miller will chair the proceedings. It is not a lack of interest or importance in the subject, but just the three-places-at-one-time problem. I have your testimony. I will read it, and it will be a part of the testimony, and thank you very much.

Mr. MILLER [presiding]. Thank you very much.

Mr. BARNES. Please do not misconstrue the tenor of these remarks. My purpose is not to debate the preemption question from a

philosophical standpoint, but merely to point out that ERISA's preemption clause, in achieving a necessary and desired objective in the private pension area, has created a substantial and unnecessary void in the equally important area of health plans.

It is this combination of exclusivity or Federal preemption plus the absence of any meaningful regulatory standards which apply to health plans, which makes ERISA especially unacceptable for those States, like California, seeking to provide for their citizens a reasonable level of protection in the health care area.

The Department of Corporations' interest relates to its administration of the Knox-Keene Health Care Service Plan Act of 1975. The Knox-Keene Act is a comprehensive, insurance-type regulatory scheme which regulates with respect to funding or financial standards, marketing activities, the content of health care contracts, the operations of providers of health care services, the delivery of services, and utilization of services and quality of care. I shall elaborate briefly on the requirements of the Knox-Keene Act in each of these areas.

First, the California Legislature made every effort to insure the financial stability of health care service plans subject to regulation under the Knox-Keene Act. Every plan is required to demonstrate that it has a fiscally sound operation and adequate provisions against the risk of insolvency, and that it has assumed full financial risk on a prospective basis for the provision of covered health care services, except for permissible stop-loss insurance and reinsurance. (Section 1375.1.) And the commissioner is required to consider the financial soundness of the plan's arrangements for health care services, the adequacy of working capital, and agreements with providers of health care services (section 1375.1). Further, plans are required to comply with rules of the commissioner which require a minimum capital or net worth, limitations on indebtedness, the maintenance of appropriate insurance and a fidelity bond and a surety bond (section 1376). Additional substantive requirements include the maintenance of reserves for reimbursement liability (section 1377), and a prohibition on excessive administrative costs (section 1378).

The Knox-Keene Act authorizes the commissioner to inspect all books and records of a plan (section 1381), provides for periodical onsite fiscal and administrative examinations (section 1382), annual financial reports (sections 1383 and 1384(c)), authorizes special and periodic financial reports (section 1384), and provides for periodic onsite medical surveys of the health delivery system of each plan (section 1380).

Second, the Knox-Keene Act regulates the selling and marketing activities of plans. In order to solicit enrollees, one must be trained (section 1359) and licensed as a solicitor or a solicitor firm (section 1357). Disclosures, including advertising, are regulated with a view to providing reliable, relevant information and protecting potential subscribers and enrollees from misrepresentations (sections 1360 through 1364).

Third, the Knox-Keene Act regulates plans by requiring that their contracts comply with certain requirements. Plan contracts are required to be "fair, reasonable, and consistent with the objectives" of the Act (section 1367(h)). Each plan is required to provide