Mr. DOWNEY. I have to deal in our casework with many intermediaries. We have a fellow who has been particularly helpful to us in our office who complains incessantly to us about CHAMPUS. I will speak to him again to find out exactly what he is talking about.

He mentioned a number of instances where he thought the benefits were really out of line with other private programs. I did not necessarily agree with him, but I was not able to refute what he was telling me.

Everyone is concerned with the shortage of physicians. What concerns me is that the climate it would seem for attracting civilians into the military might be better now than in the past because of one related problem which would be the cost of malpractice insurance which I know in my State of New York is really horrendous. I think it is terribly unfair to physicians.

I would like to know, will we reach a point, without trying to sound provocative, where all the variable incentive pay, the Berry plan and the military hospitals, where we are going to still have a shortage of physicians and we might have to fill that out with some sort of involuntary servitude?

General TAYLOR. I will express my personal opinion on that.

The Department of the Army believes that the incentives necessary to support the All-Volunteer Force need to be given a chance to work. I think we are kind of between a rock and a hard place.

It is both because of what is happening on the active side and what is happening in the Reserves. Collectively we are going to have to find incentives for both that attract and more importantly retain because that is the least costly course rather than having to train people over and over-people who through patriotism, and through a sense of interest in the kind of life that the Army provides are willing to enter and remain in service.

I think we are going to have to have programs to do that because the other alternative is either lack of preparedness or some type of conscription, hopefully not for doctors alone but some type of national progress. I don't think I am prepared to talk about when that might be, but we are in trouble now.

Mr. DOWNEY. I would say to you, General, that I think the notion of somehow serving one's government is passé in our society. It is a shame, but the costs, I think, and those of us on this committee are particularly sensitive to them, of personnel in our services, not only military, is really astronomical. You reach a point of diminution of returns both with respect to variable incentive pay and with advertising where you are really paying so much more in than you are getting. So you have to think about another plan.

Mr. KAZEN. Mr. Bennett.

Mr. BENNETT. Without the drafting or the volunteer thing, of course, you could not in conscience draft doctors if you did not draft other people.

General TAYLOR. I could support that.

Mr. BENNETT. The next thing you come to is how do you draft such a small portion of the young people, male and female, in the United States for military service when your military service is such a small amount. Of course, you may have to compromise that. You have to face it. You are giving a certain percentage of your population an

involuntary situation and the vast majority escape it. It is not an easy thing to say I move to the draft.

You said a moment ago that they are dropping 350 doctors in the Army. Why is that?

General TAYLOR. That is the difference between our known losses and our known gains.

Mr. BENNETT. You are dropping that many, but you are not firing them?

General TAYLOR. We are not firing anybody except for cause. The net effect of our losses and gains is that we are going to have 350 less physicians beginning this summer.

Mr. BENNETT. Are there any restrictions on contracting, a budget figure or are there regulations about contracting things out?

General TAYLOR. Yes; there are two different kinds of problems. It is clear that for activities like radiology, which is a discreet service, contracting is a function of how much money you have and whether people are willing to bid.

There is another part of that problem that we have not really sorted out. That is when you switch over to the people who are in clinical patient care like internal medicine and pediatrics. There are Federal rules and statutes that you cannot mix people if there is a bossemployee relationship under contract and with Federal employees.

This is a personal services contract statute. That is being looked at now for us because to the extent there are Federal employees supervisors of contract employees that are doing professional work, those are not authorized under current law. That is going to have to be looked at.

Mr. BENNETT. You need a change in statute on that, don't you? General TAYLOR. We will have to come back when we get through all the legal discussion about what is authorized and what is not. But that will be a problem, a severe problem, because there is no legal way you can run a service where you are seeing patients day in and day out and having contract and Federal employees mixed, even professional supervisory layers.

Mr. BENNETT. Can't that be changed by statute or is there something deeper than that?

General TAYLOR. It is in statutes, but I don't know if there is something simple like changing a statute because I presume there are profound interests on both sides of that equation because there are a lot of laws on that area.

Mr. BENNETT. Can you contract out for part-time employees? General TAYLOR. Yes, sir.

Mr. BENNETT. You do that?

General TAYLOR. Yes, we do that.

Mr. BENNETT. You mean somebody who put in a $250,000 bid was expecting to be a part-time employee?

General TAYLOR. No, but if somebody came in and said I would like to work a half day each day, that kind of thing.

Mr. BENNETT. That seems to me to be a good thing to pursue. There was some criticism a couple of years ago about the military performing facelifts and things like that. A pretty good answer came back that the people wanted to have some experience in plastic surgery. But it is the sort of thing that does lend itself to doing in the military medicine. I presume you curtailed that very drastically?

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General TAYLOR. Yes, Mr. Bennett. I recall that experience. The three Surgeons General at that time, and I think that was about 2 or years ago, met to review both what our requirements for plastic surgeons were and also on how we can control the general area because of its sensitivity.

Now I am sure you know that during World War II and the many combat wounds and burns and so forth, that the whole area of plastic surgery developed, urban and the efforts to rehabilitate the wounded. We do need to maintain a modest, capable, active group in this area. But we have made every effort to have them working on things that are not publicly called cosmetic.

Mr. BENNETT. Thank you very much.

Mr. KAZEN. The subcommittee will recess until 5 minutes after the quorum call is finished.

[A brief recess was taken.]

Mr. WHITE. The subcommittee will again come to order.

I would like to ask whichever gentleman made the statement that there is a declination of scholarships; I think that was the general. General Taylor, you said there was a declination of scholarships that is apparently an increasing experience. Can you give us some basis of why you feel that this is happening?

General TAYLOR. It was this chart which is attached to my statement. During the past 4 years, the percentage of primary zone selectives who declined Army scholarships has increased. It is declining. It has increased from 5.8 percent to 43.4 percent.

I think there are two reasons for that. The first is related to a different kind of perception about the value of the scholarship because of the IRS ruling concerning the taxability. It was widely publicized during that period of time.

On the 1st of January, 1977, the previous tax exemption expired and the medical students are now fully taxed, not only on their scholarship but on their stipend and associate costs. (See appendix.)

I think the other reason for that, however, has to do with many students applying to more than one department, like all three military departments, or applying to all three plus HEW. Their perception of benefits from the HEW program that we discussed will cause a lot of competition.

Admiral ARENTZEN. I would like to add that the Navy last year had to go to the third alternate list to fill out the program. As a result, we had to lower our quality criteria to bring them aboard.

Mr. WHITE. Counsel is wondering if you could give us a statement of your quotas for each of your programs. I believe some of you already touched on that.

Mr. HOGAN. Just how many billets you have each year out of the total. What is the split up among the services?

General TAYLOR. The Army has approximately 1,850, I believe, of which 1,037 are physicians.

Admiral ARENTZEN. 1,575 for the Navy. These are total program. Mr. HOGAN. I understand, total program, and then break out the physicians.

Admiral ARENTZEN. 1,050.

General SCHAFER. That is the same for us, 1,050.

Mr. WHITE. Insofar as the IRS is a part of the executive branch and so are you, what effort is being made, if any, to try to reverse this

ruling? If you are having this problem, it would appear that the ruling as a regulation or a finding I presume within the department could be changed. Is there an effort being made at the present time?

General SCHAFER. Yes, sir. May I first make one statement that will clarify my other comments, the submitted statement as well as my

summary.

I am led to believe that neither cleared the higher circles so, therefore, it represents my total personal opinion, not the administration opinion. I would just like that to be a matter of record.

We have been working with the Office of the Secretary of Defense for Health Affairs, in this regard. There is a little difference of opinion between several circles as to whether we should try to get a reversal of the IRS ruling or whether we should increase the stipend and if it would not be better that way.

I think this is only a determination of somebody's best judgment as to which is the best way to go.

Mr. WHITE. What effort has been made in approaching the Ways and Means Committee toward some alteration of the law?

General SCHAFER. I believe we can increase the stipend without an alteration in the law.

Mr. WHITE. No, I am talking about making the pure exemption. General SCHAFER. No, I know of no effort at the present time.

Mr. WHITE. What would it take to get the wheels in position to do this? I know you all can't initiate this on your own, but is there any point that someone from the Pentagon can fly in our window and give us some language or to say that this is what they want to do? This is a very frustrating thing for the Congress, you know, because there is always a lack of communication or a hiatus there between the branches.

I know you all have a labyrinth of channels that you have to go through. We are more inclined to go to two points. We are inviting this travel between two points if it could be done.

Admiral ARENTZEN. Could I ask Dr. Cox to say a few words?

Admiral Cox. I am Rear Adm. J. William Cox, MC, USN, Assistant Chief of the Bureau for Professional Operations and Human Re

sources.

The issue on that tax question goes very, very deep in that the law is very clear that if there is a quid pro quo, it cannot be considered a scholarship grant and therefore is appropriately classified by IRS as taxable benefits.

We have discussed this with concerned officials of the Office of Management and Budget. They are looking to the whole spectrum of quid pro quo benefits, not only within the health services sector but in such things as athletic scholarships. They see a very large loophole in the taxable base.

This is the reason why the debate is continuing. I think that is the reason why no proposed legislation has gotten through to the Congress. Mr. WHITE. When is it anticipated that the debate will resolve itself? Admiral Cox. I think when there is a position on the part of the Office of Management and Budget as to what is appropriate to recommend to the higher authorities of the executive branch in cooperation with the Congress.

Mr. WHITE. I think it would behoove this committee to contact the Ways and Means Committee and make available excerpts of your testimony to apprise them of the problem so that they can take what