of those who are covered by group policies, as well as those who are covered by individual policies. There is a trend in the direction of extending beyond the retirement age provisions in group policies that cover major medical expenses. There is also a trend in the direction of making individual policies that cover major medical expenses available to persons 65 and over. These policies call for payment of premiums ranging from $60 to $130 a year per individual. They include deductible provisions ranging from $250 to $500. They ordinarily establish annual or lifetime dollar ceilings on benefits. Most contain coinsurance provisions of 20 percent to 25 percent.

It follows, therefore, that a large percentage of persons aged 65 and over do not have protection against long-term illnesses, and either cannot obtain protection at rates they can afford to pay, or cannot. obtain adequate protection.

PENDING LEGISLATIVE PROPOSALS

There are several bills before this committee (S. 881, S. 1151, S. 2915, and S. 3503) which would amend the Social Security Act to impose an additional payroll tax to finance hospitalization and other medical care benefits for persons eligible for old-age and survivors insurance benefits.

In addition, the administration has outlined a proposal for a program of Federal-State matching grants to provide approximately 12 million persons 65 and over who have limited resources with the opportunity of taking steps which, if taken, will enable them to cope with the heavy economic burden of long-term or other expensive ill

nesses.

As this committee undoubtedly knows, the executive branch has given careful consideration to proposals that have been made to deal with the health and medical expenses of the aged through the social security system. Our reasons for rejecting this approach include the following:

1. It is not pinpointed to the need. There are 4 million of the 16 million in our aged population who are not covered by social security. Approximately one-half of these persons have incomes of $1,000 or

less.

At the same time there are many persons who are covered by social security who have no interest in and no need for the type of protection that would be afforded.

2. We feel it would constitute a serious threat to the orderly development of present retirement, survivorship, and disability benefit features of the social security system.

The payroll tax which finances the OASDI program is already scheduled to rise in 1969 to 4.5 percent each on employees and employers (634 percent on self-employed)—a total of 9 percent of payrolls.

Further liberalization in retirement, survivorship, and disability benefits will call for additional revenues. These revenues can only come from increases in the payroll tax or increases in the earnings base, or both.

If health insurance is added to the social security system it will be even more difficult to predict where we will end up as far as the payroll tax is concerned.

Pending proposals would call for an addition of 1 percent to the tax. It is generally recognized that these proposals are inadequate when looked at from the point of view of taking care of the costs of long-term illnesses. Unquestionably, therefore, if health insurance becomes a part of the social security system, there will be insistent demands for improving the schedule of benefits.

In addition, there will be insistent pressures for reducing or eliminating the age requirement. A combination of increased benefits with the lowering or elimination of the age requirement could easily lead to an addition of 4 to 5 percent to the presently scheduled 9 percent

rate.

This increase plus the increase that will be required under the retirement, survivorship, and disability features of the program, could very well bring the payroll tax up to somewhere between 15 and 20 percent. We believe it is unsound to assume that revenue possibilities from a payroll tax are limitless.

We decided therefore that it was far better to reserve the payroll tax for the retirement, survivorship, and disability features of the social security system.

Whatever the Government needs to do in the area of health care for the aged should be done by the appropriation of general revenues. This will safeguard the orderly development of the retirement, survivorship, and disability features of the social security system.

Moreover, taking into consideration that in the medical benefits area we are dealing with benefits that are not related to wages, the appropriation of general revenues will provide for a more equitable distribution of the fiscal load. A system of raising the Federal share of revenues that relies primarily on the use of the progressive income tax is fairer for health benefits than one that places one-half the burden on earnings of $4,800 or less.

In other words, the use of the social security system for health insurance purposes would give rise to some very serious problems. Once the step is taken it is irreversible and we would have to continue to live with these problems.

As I have indicated, the administration has developed a proposal that would help approximately 12 million persons who are over 65 years of age and have limited resources to cope with the financial burdens of long-term or other expensive illness.

We have developed this proposal in the belief that any program undertaken by the Federal Government in this area should meet the following tests:

1. It should provide the individual with the opportunity of deciding for himself whether or not he desires to be a participant in the program.

2. It should make available a system of comprehensive health and medical benefits which provide adequate protection against the costs of long-term and other expensive illnesses.

3. It should make available all the benefits of the program to public assistance recipients at public expense.

4. It should provide for some financial contribution on the part of those participants who are not on public assistance.

5. It should provide private insurers with the opportunity of expanding their programs of extending health protection to the over-65 age group.

6. It should provide for a Federal-State partnership in dealing with the problem.

We have developed a program that is consistent with these guidelines. We believe that if it is put into operation it will provide the aged with the type of assistance they most need. We want to make it clear, however, that we will be glad to discuss any suggestions for improvements that are consistent with the basic guidelines that I have just outlined.

Specifically, we have recommended that the Federal Government assist the States in establishing a program of medical benefits for the aged in accordance with the following specifications:

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1. Eligibility for participation in program: The program would open to all persons aged 65 and over who did not pay an income tax in the preceding year and to taxpayers 65 and over whose adjusted gross income, plus social security benefits, railroad retirement benefits, and veterans pensions, in the preceding year did not exceed $2,500 ($3,800 for a couple).

2. Eligibility for benefits: Persons eligible for participation in the program would be entitled to the benefits of the program if they had paid an enrollment fee each year of $24 and after they had incurred health and medical expenses of $250 ($400 for a couple).

Public assistance recipients would be entitled to the benefits of the program without paying the enrollment fee and with the States paying the initial $250 of expenses under the regular public assistance pro

gram.

3. Benefits: The program would pay 80 percent (100 percent for public assistance recipients) of the costs of the following comprehensive health and medical services for all participants who had established their eligibility and if such services had been determined to be medically necessary.

(a) Inpatient hospital services for not to exceed 180 days in any enrollment year;

(b) Skilled nursing-home services, all of these others are unlimited, I might say.

(c) Physicians' services;

(d) Outpatient hospital services;

(e) Organized home health care services;

(f) Private duty nursing services;

(g) Physical restorative services;

(h) Dental treatment;

(i) Laboratory and X-ray services not in excess of $200 in any enrollment year; and

(j) Prescribed drugs not in excess of $350 in any enrollment year. 4. Optional benefits: Each State would provide that an aged person eligible for participation in the program could elect to purchase from a private group a major medical expense insurance policy with the understanding that 50 percent of the cost would be paid for him from Federal-State matching funds up to a maximum of $60.

The States would be responsible for establishing the minimum specifications for such policies in accordance with broad standards established by the Federal Government.

5. Continuation of eligibility: Once a person had qualified for participation in the program, he could maintain his eligibility by the pay

ment of the annual fee. If his income rose above the figure specified for eligibility, his fee would be raised on a graduated basis for each $500 of increase in income until the fee covered the full per capita cost of the benefits made available to him.

6. Administration: The program would be administered by the States, under State plans approved by the Secretary of Health, Education, and Welfare. The State would be authorized to use appropriate private organizations as agents.

7. Financing: The governmental cost of the program would be financed by the Federal Government and the States on a matching basis. Federal matching would be 50 percent on the average with an equalization formula ranging from 331% to 662% percent for the Federal share.

8. Cost: Assuming that all States participate and that 80 percent of those who are eligible enroll for the program, it is estimated that the annual Federal-State cost of this plan would be $1.2 billion with the Federal share estimated at $600 million. There would be some reduction to the extent that persons eligible for participation in the plan elected to purchase insurance policies providing for the optional benefits. It is impossible to estimate the number of persons who would elect the optional benefits.

On the other hand, however, it should be noted that increases in costs and increased utilization of facilities over and above that included in the cost estimates could lead to an increase in these estimates. Also, there would be some increase in Federal payments for public assistance. This increase might reach $100 million per year.

The makeready cost during fiscal year 1960-61-including grants to States to help them develop their programs-would be about $5 million. The fiscal year 1961-62 cost would depend on many factors. We estimate that this would run in the neighborhood of $400 millionof which $200 million would be the Federal share.

We believe that the plan which I have just described would achieve the following results:

1. It would permit the individual to decide for himself whether or not he will participate in the program.

2. It would preserve the opportunity for private insurers to continue to demonstrate their ability to develop major medical expense programs for the aged.

3. It would divide the cost equitably among the entire propulation by providing for financing the Federal share out of general revenues, contrasted with a payroll tax that places half the burden on earnings of less than $4,800.

4. It would provide a wide range of benefits without placing a premium on institutional care as opposed to alternative lower-cost services. Thus, it would facilitate the most effective and economical use of available medical facilities and services.

5. It would provide a built-in incentive for judicious use of health facilities and services by requiring the individual (other than public assistance recipients) to share in the cost above the deductible of $250. Most important, however, the program is designed to pin-point the area of greatest need, namely, the large number of persons over 65 who do not have the resources or the opportunity to obtain adequate protection against the staggering financial burdens of long-term ill

ness. This is the most serious problem in financing health care for the aged.

The administration's proposal would guarantee comprehensive health and medical services to all aged public assistance recipients in States that avail themselves of the program.

Benefits would be available to all persons in the lower income brackets, regardless of whether they happen to be covered by social security. Individual eligibility to participate in the program would be determined by a simple income test, without subjecting the individual to a detailed and involved means test.

In summary, we believe that our program for helping the aged obtain protection against the costs of long-term or other expensive illness will concentrate governmental assistance in such a manner as to provide the most effective and most responsible use of Federal and State funds. We believe this program represents a practical solution to a pressing human problem.

(The following tables were submitted by Secretary Flemming for the record.)

ESTIMATED FEDERAL AND STATE-LOCAL EXPENDITURES AS A RESULT OF MEDICARE PROGRAM FOR THE AGED, BY STATE, IF ALL STATES PARTICIPATE, AS OF JANUARY 1960

TABLE 1.-Population aged 65 and over: Estimated total and number eligible and participating under medicare program for the aged, as of Jan. 1, 1960