lower of these overall costs or charges to the general public and we spread this among the total membership so that

Mr. WALDIE. But you don't spread it among me.

Mr. JONES. No.

Mr. WALDIE. Why should I pay more than your people? That is what I am trying to get at. Why should the hospital bill me more? Is it because I don't have the bargaining power with the hospital that you have?

Mr. JONES. Blue Cross certainly is a volume buyer.

Mr. WALDIE. Right.

Mr. JONES. And one might say it should have a discount because it is a volume buyer.

Mr. WALDIE. Well, one can say that, can one not?

Mr. JONES. It has been suggested that should be worth at least 5 percent, if you are a large volume buyer. And perhaps social advantages of Blue Cross and the social contributions to the community should be worth perhaps another 5 percent.

Mr. WALDIE. I don't know who suggested that. I suspect Blue Cross suggested it.

Mr. JONES. It is a fellow who used to be at Blue Cross who suggested it.

Mr. WALDIE. Right. But, literally, the discount comes because of your volume, does it not?

Mr. JONES. It comes because of that. It comes because of the particu-, lar statute under which we operate specifies that our rate of reimbursement be on the basis of the lower cost or reasonable charge to the general public.

Mr. WALDIE. I understand that you get discounts in other States that don't have such statutes. At least I have been told. I understand that in every State you get discounts. Am I mistaken on that?

Mr. JONES. I am not certain that that is true. There are some States where they get a small discount from charges. They pay on the basis of charges which are tightly controlled, regulated. And Blue Cross pays something less than charges to the general public. They don't have the same kind of statute that we operate under here.

Mr. WALDIE. But they get an advantage-in terms of cost?

Mr. JONES. Yes.

Mr. WALDIE. Whatever it comes about and I guess it comes about because of their ability to be a large consumer. I am not suggesting that is wrong. I just don't know at this time. I am just trying to figure out why you get it and

Mr. JONES. There is another reason why.

Mr. WALDIE. I want to make just one other comment that I don't ask you to respond to it. I listened to Washington representatives when we asked about what was once called "risk charge" and then was semantically changed to "public service charge." They always said, "Well, that is because we have a unique community service that we render to the community that no one else does." But I have never had that defined. What do you folks do for the community that no one else does? What do you do in Massachusetts for the State of Massachusetts that nobody else does in this field?

Mr. JONES. Well, we write all kinds of groups, regardless of risks; we provide for conversion privilege to all members, regardless of status of health; we offer coverage to all people on a nongroup category who can't belong through groups because they don't work for a group or they aren't in a group of sufficient size.

Mr. WALDIE. Is that by law that you are required to do that?
Mr. JONES. Yes.

Mr. WALDIE. Are those the unique community services that der?

Mr. JONES. These are some of the unique community services.
Mr. WALDIE. Are you paid for doing that?

Mr. JONES. Are we paid?

Mr. WALDIE. Yes.

you ren

Mr. JONES. The only source of income we have, of course, are the subscriber premiums.

Mr. WALDIE. And does not the subscribed premium reflect whatever economic disadvantage those practices result in to you?

Mr. JONES. Yes. We have to charge whatever this costs.

Mr. WALDIE. So you get that kind of money from your subscriber to take care of these requirements by statute?

Mr. JONES. Yes.

Mr. WALDIE. What then is the unique public service that you render for which you do not receive compensation from your subscribers and, therefore, are entitled to a discount?

Mr. JONES. There are no services that we provide for which we are not compensated. Unlike the private pay service individual, we do provide coverage, availability of coverage, to all segments of the population in Massachusetts.

Mr. WALDIE. I know. You, thereby, incur a greater risk that you, thereby, reflect in your premiums?

Mr. JONES. Yes, we do.

Mr. WALDIE. OK. Would you please continue?

Mr. JONES. Yes. (c) An improvement in predicting what the costs to Blue Cross are going to be under its contractual obligations; (d) a means of improving the manner in which expensive health care resources are being utilized in caring for Blue Cross member patients through a cooperative effort on the part of hospital administrations, Blue Cross and physicians; and (e) a means for closing, in major part, the open-ended nature of cost reimbursement which has existed in prior contracts.

Mr. WALDIE. What is that?

Mr. JONES. Incidentally, we of course, operate under phase two of the wage price freeze.

Mr. WALDIE. Right.

Mr. JONES. And we know that that could be phased out. The new contract provides for a substitution for the Federal stablization guidelines in providing for that, which we term a threshold, rather than a ceiling, but it may be equivalent to a ceiling, in the cost that might be allowed. We feel that this is a step toward closing the open-ended nature so that we can predict what our liability will be.

Mr. WALDIE. That is the first time that has been put into the contract?

Mr. JONES. Yes, it is.

Mr. WALDIE. That seems to be to be a significant change.
Mr. JONES. Yes.

Mr. WALDIE. Why, given all these controls, would you not just simply adopt prospective rate setting?

Mr. JONES. We like the idea of prospective reimbursement. We call it prospective reimbursement. The hospital association calls it prospective rate determination.

Mr. WALDIE. Whatever the semantics.

Mr. JONES. We like the idea of being able to sit down and negotiate a budget with the hospital. We have one hospital we are experimenting with. We are gaining a little experience. We feel because of the unique nature of Blue Cross that we should not agree to a contract, a prospective rate determination contract, which provides that all parties pay on the same basis.

Mr. WALDIE. Why not?

Mr. JONES. Because we couldn't do that which we now do for the public. We have estimated

Mr. WALDIE. What is that? That is again-we come back to the same question. What do you do for the public?

Mr. JONES. We provide coverage for all segments of the population. Mr. WALDIE. You are paid for it, aren't you?

Mr. JONES. Yes, we are paid for it.

Mr. WALDIE. Well, then what are you doing for the public for which you are not getting paid which you couldn't do?

Mr. JONES. We are not doing anything.

Mr. WALDIE. Then why would prospective rate setting interfere with your ability to do that which you are now doing?

Mr. JONES. It depends on the definition and the manner in which prospective rate determination is administered. Let us assume we were paying on the same basis as the insurance industry. I think that helps to get at it more.

Mr. WALDIE. Yes.

Mr. JONES. And let us assume that the insurance industry would not write any individual contracts, but would only write groups that are preferred risks. We could write those groups on the same basis. I think we could compete very well with the insurance industry doing business on the basis on which they do business.

We have estimated out of the over 3 million people, which we now cover in Massachusetts, that there would be 800,000 of these priced out of the market-of course, if we could write only the better groups it would be done on a very competitive basis. We would have no contribution from these groups to subsidize the higher risk groups.

Mr. WALDIE. Well, then I guess what it boils down to is prospective rate setting, if it has as its conclusion the fact that everybody pays the same price for a similar service, would remove a present competitive advantage that you have over the other commercials?

Mr. JONES. Yes. Yes, it would. And it would deny us the ability to provide coverage for the people in whom the insurance industry doesn't have an interest in providing coverage.

Mr. WALDIE. Well, should we remove the commercials then from the field entirely. Are they not, by their very presence in the field,

operating against your ability to insure those who can't afford the full cost of what their medical needs are?

Mr. JONES. I don't think I understand that question.

Mr. WALDIE. Should we leave the field open to you entirely? If you think that placing them on a competitive advantage with you that is equal in terms of charges would be detrimental to you because they would take away part of your business and that would not be in the public interest-that is essentially your argument?

Mr. JONES. Yes.

Mr. WALDIE. Is it then in the public interest to eliminate the commercials entirely and leave the entire field to the Blue Cross people? Mr. JONES. I think we could do the job, but I am not suggestingMr. WALDIE. Would the public be well served?

Mr. JONES. I think there is a value in competition. It keeps our pencil sharp. It keeps us doing a better job.

Mr. WALDIE. But you are not interested in making that competition any more fierce than it is?

Mr. JONES. We would be perfectly willing for the insurance industry to have the same privileges we have if they are willing to accept the same kind of obligations and come under the same regulatory control.

Mr. WALDIE. That is what I am suggesting. Should we make all the carriers in this business Blue Cross carriers? You don't have to name them Blue Cross. Let them be Aetna, but let them be required to do exactly what you do. Is that in the best interest of the public?

Mr. JONES. I don't want to suggest that I am anticapitalistic structure here, but I don't like to see profit made on health care and we don't

Mr. WALDIE. Don't you think that profit ought to be made on health care?

Mr. JONES. We don't do anything to encourage expansion of proprietary hospitals in Massachusetts. We don't recognize return on invested capital for proprietary hospitals because we don't think in Massachusetts they are needed.

Mr. WALDIE. Why are you folks out soliciting business?

Mr. JONES. It enables us to spread the risk and to do a better job for the total community.

Mr. WALDIE. You are not interested in making a profit?

Mr. JONES. NO; we are not for profit.

Mr. WALDIE. What?

Mr. JONES. We are not for profit. We don't try to make a profit. We try to break even every year.

Mr. WALDIE. Really?

Mr. JONES. Certainly. We are nonprofit.

Mr. WALDIE. What do you do with your risk charge sent back to you from Washington? Is that a profit?

Mr. JONES. That goes into our general reserve.

Mr. WALDIE. It is a profit, isn't it?

Mr. JONES. NO. What do you mean by profit? Profit doesn't

Mr. WALDIE. I mean money over and above your expenses of doing business and the claims you pay out and that doesn't go into your

reserves.

Mr. JONES. It goes back to the members.

Mr. WALDIE. When it goes back to the members it is distributed to them as profit, isn't it?

Mr. JONES. No.

Mr. WALDIE. At least that is what the testimony in Washington was. Mr. JONES. You could return premiums and you could expand the benefits if you had a gain year. We have had gain years. We have had loss years.

Mr. WALDIE. We may be quibbling and I don't mean to do that. I don't mean to suggest that I have answers or that I have predisposed feelings on it. But I am interested in your comment that you don't believe profit has any place in the delivery of medical care in America. And, I presume, to the extent it does because, for example, you say you discourage proprietary hospitals coming into existence is that because you believe medical care delivered where there is a profit motive is inferior?

Mr. JONES. I think that in Massachusetts we don't need proprietary institutions.

Mr. WALDIE. Why?

Mr. JONES. I think that propriety institutions, like insurance companies, tend to be selective in their risks. I think they tend to select the kind of patients on which they can make money and I think they tend to let the community hospitals, the voluntary hospitals, take those that are going to be high costs.

Mr. WALDIE. Suppose we eliminate all the voluntary and community hospitals and went to a sole profit system, would that be destructive of medical care?

Mr. JONES. I am not certain that I would take the position that we have taken in Massachusetts, if I lived in some other State, where 50 percent of the hospitals are proprietary and the community needed these hospitals to meet the medical care and the health care needs of that community. I don't think we could take the position we have taken here. In Massachusetts we are a little different.

Mr. WALDIE. But you think that now that you have the chance to prevent the spreading of that practice it ought to be prevented in Massachusetts?

Mr. JONES. Well, we are trying to prevent it. We aren't encouraging expansion because we don't provide for return on invested capital. Now, we provide for the recognition of every element of cost for proprietary institutions that we recognize for the voluntary hospital system, so they aren't operating at a loss doing business with Blue Cross. They just don't operate at a profit.

Mr. WALDIE. OK. I don't want to, again, dwell on that, although that is an essential problem in the national issue of health care. I presume your position is that where proprietary hospitals have never begun to practice they ought to be discouraged because they are not positive contributions to the solution of the problem.

Mr. JONES. You see, when I suggest that I don't believe in people. making a profit in the delivery of health care

Mr. WALDIE. Does that include doctors?

Mr. JONES. I think doctors are entitled to a reasonable income, but