Department of Justice costs of litigation and Federal funds for settlements and awards for claims over $2,500 which are not recoverable from third parties. (HEW will pay settlements of $2,500 or less from the $135 million appropriated.) The total dollar amount of claims and suits filed as of September 8, 1977, exceeded $1.5 billion.

The Center for Disease Control is estimating costs for which limited accounting data is available. Not all of the estimates are complete. These costs include:

Personnel costs of full-time HEW employees detailed from other programs. (Estimated at $0.5 million.)

State and local program costs in addition to those funded by the Federal grants. (Estimated at $24 million.)

Lost opportunity costs to other programs. (No estimate yet.)

Costs incurred for health care and lost earnings by individuals because of immunization reactions. (No estimate yet.)

Although precise costs cannot yet be determined, total costs of the program may far exceed the $135 million appropriated.

Mr. Chairman, this concluded our statement. We shall be happy to answer any questions that you or other Members of the Subcommittee might have.

Mr. ROGERS. Thank you very much, and the committee is grateful to the General Accounting Office for the report and the time spent on this problem in trying to help us.

Mr. Waxman.

Mr. WAXMAN. Thank you, Mr. Chairman.

I would like to go into the whole question of costs with you, if I might.

You say in some instances the accounting data is too limited to identity precise costs. Why is accounting data too limited at this point for you to identify precise costs?

Mr. AHART. I think, Mr. Waxman, that what we are talking about there is where the State and local levels put people that ordinarily would work on other programs, into this program. I don't think their accounting systems are such that they kept account of all the time everybody might have spent on the program. The same is true at the Federal level, although there has been an estimate of what time other HEW employees spent on the program. Their accounting system is not such that you could precisely keep the exact amount of time and related personnel costs associated with the program.

Mr. WAXMAN. You are able to determine the costs to the Government for the vaccine; is that correct?

Mr. AHART. That will be determined ultimately. Right now I understand the estimated cost of the vaccine is about $67 million. Contracts with three of the manufacturers have been signed. Those contracts do lay out the cost elements for which the firms will be reimbursed. They will be subject to audit by HEW audit agency and a final cost determination made.

Mr. WAXMAN. Will they be subject to audit by GAO?

Mr. AHART. Presumably, if we have any problem with what the HEW audit agency does and feel there is a need for us to audit they would be subject to our audit as well.

Mr. WAXMAN. I find that a peculiar response. Doesn't GAO work for the Congress and isn't GAO going to be independent of the administration? Are you going to rely on the administration for the figures to determine whether it was an appropriate cost or not? Mr. AHART. Obviously if you look at the Government as a whole we rely upon the executive branch agencies a great deal for the propriety and accuracy of costs. We are a relatively small organiza

tion. We feel that it is a responsibility of the management of HEW in this case to make a proper cost determination. We would not spend our resources until we had some question as to the adequacy of their determination. We would not redo their work on a routine basis.

Mr. WAXMAN. So HEW promotes a program for swine flu vaccine, pays for the program costs, and would obviously be embarrassed if they weren't doing their job. GAO, which is an arm of the Congress, is to be an independent arm of the Congress so that we can check on the administration, relies on the administration's figure for the administration's program for us to know whether the administration is doing its job. I find that a frustrating answer that you are giving me.

Mr. AHART. I don't think it is quite as simple as the way you have related it. If you take a look at the organization of HEW you will find that the audit agency is established under the Office of the Inspector General, which is a statutory job. It is fully independent of the operating bureaus of the agency-CDC, and the Food and Drug Administration, and others-which are directly involved in the program. It is independent of the contracting authority. It is responsible to the Secretary. So there is a high degree of independence between that arm of HEW and the people who were in support of the program.

I would suspect that the HEW audit agency didn't have a particular point of view on whether we should or should not go forward with the swine flu program.

Mr. WAXMAN. In your report you indicate that there were no signed contracts with HEW and the vaccine manufacturers in the beginning. I gather there were no signed contracts for a long period of time; is that correct?

Mr. AHART. That is correct.

Mr. WAXMAN. Now, isn't it fair to assume that the fact that the contracts remained unsigned for so long would allow the vaccine manufacturers to elude a timely audit by either you or HEW auditors.

Mr. AHART. I don't think that would be the case. There were letter contracts, letters of intent, in effect, with the HEW. The final signing of the definitive contracts was held up, I understand, for two reasons. There was a question as to what the income tax treatment would be of the $2.5 million insurance fund which was provided each of the manufacturers under the contracts. That was finally resolved by Internal Revenue Service with a ruling last April which stated that it would not be taxable.

The other question was whether or not the standards of the Cost Accounting Standards Board would be applicable to the contracts as provided for in the letter contracts of September, or whether it would be waived by HEW in the circumstances.

They were finally waived last month at which time three of the contracts, final contracts, were signed.

Mr. WAXMAN. What was waived?

Mr. AHART. The cost accounting standards promulgated by the Cost Accounting Standards Board were waived in this case.

Mr. WAXMAN. What were those? What exactly did HEW decide to waive?

98-930 O-78-2

Mr. AHART. Basically the Cost Accounting Standards Board is to promulgate standards for allocation of cost to Federal contracts and these are applicable to certain contractors depending on their level of business, size of the contract and other matters.

Mr. WAXMAN. Is that the process by which the Government decides what actual costs were to determine whether profits were the amount to be provided for pursuant to the contract?

Mr. AHART. In case of most contracting situations that would be true.

Mr. WAXMAN. How do we know what the actual costs of the vaccine were to the manufacturers?

Mr. AHART. This will be done when they submit their cost reports and HEW goes back and audits against the records of the firms as they maintain them and then a judgment will be made as to the allowability of the costs which are claimed.

Mr. WAXMAN. Is HEW going to rely on the statement of what the manufacturers say were those costs in determining what those costs were?

Mr. AHART. I think in the first instance the manufacturers must come forward with their statement of what costs are chargeable to the contracts.

Mr. WAXMAN. What is going to be done to look behind that to be sure that the statement that they make as to what their costs were are in fact correct?

Mr. AHART. The HEW Audit Agency wil go into the manufacturers records and verify the information provided in the cost reports submitted by the manufacturers, verify it to the original records maintained by the four manufacturing firms.

Mr. WAXMAN. Do you know whether HEW had done this yet? Mr. AHART. I don't think they have gone into any of the firms yet. Let me ask my associates if they have knowledge where that stands?

Mr. WAXMAN. The contracts were only signed last month?

Mr. AHART. Three of the contracts were signed in August of 1977. We don't know if they are in there yet or not. Let me ask Mr. Burnett if he has current knowledge on that.

Mr. BURNETT. Yes sir; they have begun work in region 3 where two manufacturers are, I believe Wyeth and Merck. They have visited those manufacturing plants and they are in the process of putting together their report for those two.

They have not begun work, as I understand it, in region 5, which would include Parke-Davis and Merrill National.

Mr. WAXMAN. So we didn't have contracts until August of 1977 for any of the drug manufacturers; is that correct?

Mr. AHART. They did not have final signed contracts. They did have letter contracts, letters of intent which were issued sometime during 1976.

Mr. WAXMAN. Was there competitive bidding among the manufacturers of the flu vaccine before the contracts were let out? Mr. AHART. There was not competitive bidding. In this case the contracts were on a cost basis. Competitive bidding is not feasible in that short a time frame. Also, in this case you only have six licensed manufacturers in the country to produce vaccine. You only had four currently in a position to produce and it was felt that

the capability of all four would be necessary to produce the desired 200 million doses of vaccine within a time frame that would make it useful should a pandemic occur in the fall of 1976.

Mr. WAXMAN. One thing the Congress felt very strongly about when we authorized that liability legislation was that the drug manufacturers were not to make a profit. This was a national emergency and we weren't going to allow profiteering at the expense of the American people during such a situation.

Can you tell us for certain that no profit was made?

Mr. AHART. We have not audited the contracts, Mr. Waxman. The way the contracts are written it is my understanding there will be no profit allowance on the swine flu portion of it. There will be an allowance of profit on the Victoria-A component of the bivalent vaccine and obviously I am not in a position to attest to whether there is or is not any profit on the portion of the bivalent vaccine that there should be no profit on.

Mr. WAXMAN. I find it very frustrating. You represent the Government Accounting Office, an arm of the U.S. Congress. We asked you to look into the question of how this program was being handled economically, what costs were going into it, whether the program was being carried out pursuant to the intent of Congress, and as I understand your testimony, you are going to rely on HEW to report on their own program, when they get around to it, and we don't even know to this point in September of 1977 whether profits were made or not.

I assume we don't even know the cost per vaccine for each individual patient; is that correct?

Mr. AHART. The estimated cost of the vaccine is somewhat less than HEW's original estimate of about 50 cents per dose. I think they are down in the range of about 30 cents per dose for the monovalent vaccine and in the range of 40 to 49 cents on the bivalent vaccine. The estimates are somewhat lower than the original estimate. I don't think it is unusual or unexpected that we would wait until the agency with the prime management responsibility made its determination before we decide whether or not there is a need for further effort. This is basically the agreement which we reached with this subcommittee quite a number of months ago, that we would rely basically on the HEW aduit agency and when they got through to make a judgment on whether there was a further need for audit and for the General Accounting Office to become involved in the audit portion of it.

Mr. WAXMAN. Can you tell us how much money the insurance companies will make as a result of the swine flu program?

Mr. AHART. The total premiums paid to insurance companies by the four manufacturers, and that they will be reimbursed under the contract for, was $8.65 million. It is our judgment, based on the liability protection provided by the Congress last year, that virtually all of that could be profit to the insurance companies.

Mr. WAXMAN. All of it could be profit for the insurance companies?

Mr. AHART. Yes; as stated in my statement.

Mr. WAXMAN. In other words, they were not giving anything in return for that money?

Mr. AHART. Well, it is hard to see where they are going to be reached under the liability provisions, because of the way Congress has set up the liability protection. The sole recourse is to the Government, then the Government must reach manufacturers and whatnot. If we reach manufacturers and recover more than the $2.5 million each-is that correct, Mr. Burnett? It is possible some of the $8.6 million may have to be paid back to the Government. Mr. WAXMAN. How would that take place?

Mr. AHART. Well, basically it would occur when someone sues the Government or submits a claim to the Government, it is settled or the judgment is rendered in court that the Government has the liability under the statute, and then the Government in turn feels that the real culprit in the case was negligence on the part of the manufacturer and would go against the manufacturer for recovery and the manufacturer is found to be liable.

Mr. WAXMAN. I understand what you are saying. You are saying if under the remote possibility that we go back against the drug manufacturer and he is held liable, in spite of the liability section passed by the Congress, then that insurance, $8 million plus, will cover that possibility?

Mr. AHART. Yes, sir.

Mr. BURNETT. Only in excess of the $2.5 million which is selfinsured by the manufacturers. That is the first layer that we get

to.

Mr. WAXMAN. So I think it is fair to assume the drug manufacturers and insurance companies have ongoing relationships with each other of all of the products that they produce, isn't that correct?

Mr. AHART. I assume all drug manufacturing firms would have liability insurance on a continuing basis. I don't know in this case whether it was the same firms and same companies involved as in the ongoing thing. I would suspect they would turn to the regular insurance, yes.

Mr. WAXMAN. I am not saying this is the case. If a drug manufacturer in exchange for the $8 million which the taxpayers are paying for liability, which is very unlikely, in exchange for that $8 million gets a break on some other insurance coverage somewhere else, would HEW's accounting office or GAO's accounting office ever be able to tell us that information?

Mr. AHART. I suspect not. Under the hypothetical case that you are mentioning.

Mr. WAXMAN. Well, they came in together, the drug manufacturers and the insurance industry, and they cried to us that they would not go forward with the program to protect the American people from an epidemic, a pandemic, they said they couldn't do it, they wouldn't do it, unless we absolved them of liability. I am a bit frustrated because now we can never really seem to get somebody in Government who can dig into those records to find out once we gave them the money how much the program is going to cost for the vaccine and for the insurance coverage, not the liability that the Government is going to assume but for the program itself for the purpose of the vaccine.

Mr. AHART. What has been spent just for the vaccine?
Mr. WAXMAN. Yes.