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Washington, D.C. The subcommittee met at 10:05 a.m., pursuant to notice, in the committee hearing room, Longworth House Office Building, Hon. Fortney H. Stark presiding.

Mr. STARK. I think if the clerk is ready, we will bring this meeting together. Chairman Vanik may come along in a while, but we will proceed, if the witnesses are ready.

The subject of today's hearing is medicare administrative costs, and in particular, the role of private, generally tax-exempt intermediaries in managing the $15.5 billion medicare program.

The issue is of double interest to the committee, since we are concerned with the efficient administration of medicare and with the laws governing the tax-exempt organizations.

Earlier this year and at my request, the Ways and Means Oversight Subcommittee staff collected information about certain medicare administrative expenses.

With almost no searching at all, we have found medicare intermediaries running up huge bills for executive luxuries such as limousines and private aircraft and billing portions of those costs to medicare.

At my request, the HEW audit agency-sort of an inspectorgeneral group separate from social security-has reviewed information we provided and as a result, it is recouping $23,786 from five different intermediaries—not a tremendous amount of money, but maybe just the harbinger of more to come.

We will hear today from the audit agency on these findings and the process by which they help audit intermediary claims.

At a time when health insurance costs are skyrocketing to catastrophic heights, I find it shocking that these intermediaries--most of which are nonprofit, tax-exempt, Blue Cross plans—would have any luxury expenditures whatsoever.

I do not understand how a Blue Cross plan can have a fleet of luxury cars or a private airplane and yet advise its subscribers that it will not pay "for personal comfort, such as radio, television, and telephone" in a hospital.

I recognize that in the $120 billion health sector of our economy the cost of a Cadillac or a private plane is barely noticeable.

Indeed, an intermediary who prevents three or four unnecessary surgery procedures or the unnecessary expansion of a hospital bed


can save the public much more than the cost of a single luxury automobile.

I fear, however, that the attitude of an intermediary which purchases luxury items may reflect much larger problems. I fear that the discovery of questionable luxury expenditures is merely the tiniest tip of an iceberg of problems.

I am interested in those matters and, as Chairman Vanik says, we are interested in them primarily because they reflect an attitude toward the public that raises most serious doubts in our minds.

They are a very graphic way of demonstrating our concerns about the service being provided to medicare enrollees and to all health insurance subscribers.

The luxury autos and private airplanes are not the issue. The issue is an attitude of an executive corps of intermediaries doing bill processing, really, for the Government, and perhaps in the one area in which we could hold down the cost that is provided by health professionals and by hospitals.

Therefore, while much of our discussion today may center on the highly visible questions of how HEW checks against abuses in luxury items, it is my hope that we can begin to define today some of the larger problems involved when multibillion dollar social programs are contracted out to a relatively few private contractors.

First, let me say that by all the standards of measurement we have available to us, most intermediaries do a very good job and their performance has been improving over the 10 years of the medicare program.

Having said that, the fact remains that some intermediaries do not perform well, that there is enormous public concern about intermediary health insurance premium increases; and that congressional offices receive a constant stream of constituent mail complaining about delays and unexplained actions by intermediaries in the processing of medicare bills.

Therefore, we would like to discuss today some of these larger issues:

1. What should be the role of a group of tax-exempt, nonprofit organizations when directly administering medicare and, in all probability, when they come to administer some future national health, legislation?

Should they be treated as private corporations? As utilities? As public, TVA-type, Fannie Mae corporations?

2. Why don't we require such tax-exempt organizations—which, after all, do compete directly with tax-paying, profit-oriented insurance companies—to provide for truly public representation in their management, not just a few citizens who perpetuate a board of their cronies or neighborhood representation subscriber representation?

3. How can we insure that these intermediary middlemen, which historically have been so closely connected with hospital management and medical professionals, work for the public and for the protection of the taxpayer's dollar?


For example, we have an interesting memo, which I would like to discuss, in which a group of social security employees comment on the total failure of a Blue Cross unit to contest questionable bills being submitted by a home health care agency.

To help discuss these issues, we have as a witness, Ms. Sylvia Law, a professor at New York University Law School, and author of a strong critique entitled “Blue Cross: What Went Wrong?” I might also say that Blue Cross has written an even stronger critique of Professor Law's book entitled "What Went Wrong with 'Blue Cross: What Went Wrong?' " Those who are interested in the subject may want to consult both sources.

4. We are also interested today in how Social Security evaluates the efficiency and quality of the various Blue Cross plans.

There is strong evidence that even after 10 years Social Security has no coordinated system for ranking plans, for determining which is efficient and which is not.

I find it hard to understand this 10-year failure to develop a yardstick by which the efficient may be rewarded and the inefficient removed from the system.

5. Finally, after examining the Federal Government/BCA contracts, we are concerned that Blue Cross Association is simply running interference as a middle man to lobby for an protect the interests of local Blue Cross plans, and their clientele, such as hospitals and the medical profession, and for the protection of the taxpayer's dollar.

We have a series of letters between Social Security and Blue Cross in which the Bureau of Health Insurance's Director, Mr. Tom Tierney, who is with us today, strongly calls into question the worth of BCA'S services.

Therefore, we are interested in knowing what amendments in the Social Security-BCA contract have been negotiated so that the public does not pay for a series of duplicative administrative services.

This is a very large range of issues; we obviously will not receive answers to all these questions today.

I hope, however, that this will be just the beginning of a productive series of hearings which will not only provide improvements in the present system, but which will help us in making decisions concerning national health insurance.

Representatives of Blue Cross were invited to this hearing; they were unable to attend. They will be present to help us better understand these issues at our next hearing, now tentatively scheduled for late August.

We will first receive a brief summary from the General Accounting Office of how HEW audits intermediaries and what type standards exist to regulate the expensing to medicare for luxury items.

I would like to welcome Mr. Ed Densmore, the Associate Director of the Human Resources Division, General Accounting Office-if I have your title right, Ed.

Thank you. You can proceed as formally or informally as you like.

I want to say informally, because I may want to interrupt you as we go along. Thank you for being with us.



Mr. DENSMORE. Thank you, Mr. Chairman.
I would like to introduce the two people that I have with me.
Mr. STARK. Let me interrupt.

In the absence of the subcommittee chairman, Mr. Vanik, I appreciate that.

Go ahead.

Mr. DENSMORE. On my left is Mr. Bob Hughes, who is the Assistant Director in charge of our medicare work at the Social Security Administration.

On my right is Mr. Rod Miller, who is the supervisory auditor at the Social Security Administration.

We are pleased to appear here today to discuss the Department of Health, Education, and Welfare's auditing and monitoring of contractor administrative costs charged to medicare.

Medicare contracts with intermediaries and carriers are administered by the Bureau of Health Insurance of the Social Security Administration.

Intermediaries are responsible for the payment of medicare part A benefits and related functions, while carriers are responsible for the payment of part B benefits

Most of the intermediaries are local Blue Cross plans which are subcontractors of the Blue Cross Association, and most of the carriers are Blue Shield plans.

The contracts provide for reimbursement of the carriers' and intermediaries' costs of administering medicare, which totaled about $335 million for the first 9 months of fiscal year 1976.

The contracts incorporate the cost reimbursement principles of the Federal Procurement Regulations and other SSA provisions that deal with the allowability of costs.

The primary methods for monitoring and controlling the contractors' costs are budget and on-site reviews by the Bureau of Health Insurance and audits by the department's audit agency.

The Bureau's Division of Contractor Operations provides policy guidance to regional office personnel for on-site reviews and negotiates with the contractors for reimbursement adjustments resulting from audit findings.

The regional offices make the on-site reviews of each contractor's financial records and monitor their adherence to Bureau policy and procedures.

According to Bureau personnel, headquarters expends about 33 staff-years of effort and the regional offices about 43 staff-years of effort and the regional offices about 43 staff-years of effort monitoring contractors' costs.

Mr. STARK. Would those monitoring efforts show that you get about one monitor for about every $200 million in medicare funds administered?

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