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Mr. DENSMORE. I don't know, but the total is about 76 man-years of effort at headquarters and the regional offices.

The monitoring personnel usually are not auditors and do not receive training as auditors. Instead, they are specialists in cost reimbursement principles, who may or may not have an accounting background.

About 40 regional personnel presently devote more than half of their time to monitoring contractor administrative costs.

As a result of their work, periodic reports are written called contractor inspection and evaluation program reports. These reports can cover a contractor's operations for time periods from a month to a year depending on the degree of concern the Bureau has for the operations of the individual contractor.

The reports are kept at each regional office and are incorporated in annual contractor evaluation reports which contain evaluations of such things as bill processing, provider reimbursement, beneficiary activities, and administrative and fiscal management.

The annual reports are general and do not provide an indepth analysis of the contractor's operations. An evaluation of the effectiveness of the Bureau's system of monitoring administrative costs would require a detailed review at several contractors and regional offices.

Mr. STARK. Would you say that the rules and the method of reporting such matters as auto travel and new office space, entertainment, executive salary, and so forth, are so vague or general that it would be almost impossible to compare the effectiveness of the different BHI offices' monitoring, because there are no defined lines of what they are monitoring in that area?

Would that be a fair assumption?

Mr. DENSMORE. I wouldn't say that the rules and regulations are so general that we couldn't do that. I think the rules in the Federal procurement regulations, as well as Social Security's regulations, do specify the types of costs that are allowable and do specify the types of things that should be looked at.

The biggest problem that you run up against is that everything is defined with the use of the term “reasonable."

Mr. STARK. So, if one Blue Cross provider is paying $50,000 a year to its president and another is paying $200,000 a year, they could say that is reasonable, based on greater numbers of subscribers or amount of billing?

Mr. DENSMORE. Yes, sir. There are a lot of things that could come into play there.

There could be differences in the responsibilities, the qualifications of the individual, and there would be problems with the plan that they have had to get special expertise for.

It is conceivable that when you have a difference—the high one might be the reasonable one and the low one might be a bargain.

So, this is the type of thing that makes it difficult, without making a very detailed audit of all of the different factors to determine what is reasonable and what is nonreasonable.

The HEW Audit Agency's regional offices make their audits before the contractors' administrative costs are settled, and frequently recommend disallowance of some costs.

If the contractor does not agree, the questioned items must be resolved by negotiations between the Bureau and the contractor.

The Audit Agency follows up on the actions taken on its audit findings. Extensive fieldwork would be required to evaluate the adequacy and effectiveness of these audits.

The subcommittee expressed an interest in the Department's scrutiny of expenses for luxury cars, private aircraft, and executive compensation.

Most audit effort for such expenses is aimed at determining the acceptability of the contractors' cost allocation techniques.

For instances, if a Cadillac were purchased or leased by a contractor for one of its officers, the auditor would probably ascertain whether the cost of the vehicle was properly allocated to medicare without regard to whether it was considered a luxury vehicle.

Mr. STARK. Could I interrupt there again?

I am concerned, for instance, about getting into that dispute of how it may be followed up. For example, in a draft report on the intermediaries HEW Audit Agency looked into as a result of our recent inquiries, there was this statement:

We identified Medicare charges for business meetings at expensive, out-of-State motels/hotels. In our opinion, charging Medicare for the meetings was questionable practice since they were of a general nature, held in settings outside the contractor's service area, and families sometimes accompanied the attending officials.

Blue Cross, Des Moines, officials agreed that the extra cost for first-class air fares is unallowable and stated, “Otherwise, they are operating within Federal regulations."

That sounds to me as if there would still be a dispute.

Will you go back and clear up those points or, once having made an audit report, does it just get passed along and out of your hands?

Mr. DENSMORE. When we make an audit, sir?

Mr. Stark. When that kind of statement appears in a draft report on intermediaries, do you go back and settle?

It sounds from that statement like first-class air fare was disallowed but the rest of the meeting—which sounds more like a resort sort of operation or a paid vacation than a meeting—was paid for. The Blue Cross people say they need it, how does that get resolved?

Who wins?

Mr. DENSMORE. That particular incident is in an HEW audit report, not a GAO report, so we do not follow up on those particular things to see what action is taken.

We do, in the course of our work, review HEW audit reports that deal with the particular suggestion that we are looking at and we do make inquiries from time to time to see whether or not actions have been taken on HEW Auditing Agency recommendations.

Mr. STARK. Are your regulations clear on conventions and extensive travel and entertainment?

Mr. DENSMORE. Are the regulations clear?
Mr. STARK. Yes.

Mr. DENSMORE. Yes, sir. The medicare and Federal procurement regulations are clear.

Mr. STARK. Do you feel that if you saw an out-of-State meeting and a family attending on first-class air travel, and so forth, that your regulations would be pretty clear on whether that was an allowable cost or not?

Mr. DENSMORE. Yes, sir, we would question those costs, also.

Mr. STARK. Thank you.

HEW does not have a cost-per-mile limitation for travel costs incurred by intermediary staff, but the Bureau of Health Insurance is negotiating with its contractors to establish a 15 cent-per-mile limitation for automobile expenses.

For air travel, the Federal procurement regulations provide that:

One: Less than first-class air travel shall be used except where it is impractical to secure less than first-class.

Two: The cost of operating private aircraft is allowable when it can be shown that it is necessary for the conduct of business. Any increased cost over alternative transportation must be commensurate with the advantages gained.

Mr. STARK. Just one more question.

Why do you think that these violations continue when the regulations are clear?

You can read from the audit agency's summary of claims against BCA dating from 1971, "$49,000 for first-class air fare over tourist; $322,000 for incorrect salary allocation."

Did they just feel that they might as well try it and if you didn't catch it, it would go through?

Is that the kind of attitude you think you face, or is it just oversight in the allocation process of the contract?

Mr. DENSMORE. We have not made a review into this type of expense on our own, at least in recent years, so that would be purely conjecture.

The contracts do imply that the contractors will be reimbursed for their costs that can be allocated to the medicare program.

As a result, they probably are submitting these as costs that they have incurred and HEW then makes the audits and determines that some of them are allowable and others are not allowable.

Mr. STARK. That is just direct allocation on a dollar billing basis or on a unit billing basis?

How do you allocate the overhead among those?

Mr. DENSMORE. It would be allocated on the basis of the percentage of the business.

Mr. STARK. It is on the dollar billing?
Mr. DENSMORE. Yes, sir.

Mr. STARK. And with no marginal indications, just strictly a straight-line division between what is billed to the Government on what is billed to the private sector?

Mr. Hughes. Mr. Chairman, I believe that they use a different method of allocating costs.

In some eases it is dollars and in others it is the estimate of time devoted to medicare versus other lines of business,

Mr. Stark. So, it could differ from plan to plan, then? In some cases it would be actual executive time allocated and in others it would be a percentage of total dollar billings to the private sector and to the Government?

Mr. Hughes. That is correct, Mr. Chairman. Mr. STARK. Thank you. Mr. DENSMORE. Numerous HEW audit reports contain findings of improper auto expenses and commercial and private aircraft expense.

These findings generally do not deal with luxury items. Audit Agency officials advised us that, due to a lack of staff, audits are made under tight manpower constraints.

They do not believe that additional effort to look specifically for luxury items would result in findings sufficient to justify the additional .audit effort.

As a result of recent allegations regarding contractors charging medicare for luxury vehicles, excessive numbers of vehicles and private airplanes, the Audit Agency is making a special audit of such costs at a number of intermediaries.

The results of this audit should provide additional insight into the desirability of expanded audit work in these areas.

Regarding executive compensation, intermediary and carrier contracts state that salaries, executive or otherwise, must be reasonable for the services rendered and commensurate with compensation paid under the contractor's established policy.

In addition, salaries should conform generally to those paid by other firms of the same size, in the same industry, or in the same geographic area for similar services.

Mr. STARK. Let's look at the large charts over there. [The charts referred to follow:]

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Mr. STARK. Given what you have just said about the salaries, how would you explain between Rockford and Canton, Ohio, for instance, about 100 percent difference in salaries?

They have the same size assets and Canton has a much larger membership. The Canton president gets half the salary of the man at Rockford, yet both are similar and are middle-sized towns in middle America.

You have mentioned some possible factors before, such as one of the plans may have been in trouble when the man went in, but would that difference in salaries be likely to flag your attention?

Mr. DENSMORE. Yes, sir. We have not, as I said, made this type of review, but if we were looking into the administrative costs in these

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areas, difference such as you have illustrated here definitely would be the type of thing that we would inquire into and try to ascertain the reasons for those differences.

Mr. STARK. Because, as you go down the list there, you can see other similar situations, North Carolina and Indiana, for example, where the person with the smaller program in terms of membership is getting twice as much in salary.

Admittedly, these examples were picked to illustrate the case. It would seem to me that that is the wrong order, at least in terms of the ratio. It ought to be going the other way, I would think, that that would be the kind of thing you would look into in your audits.

Mr. DENSMORE. Yes, sir.

The Audit Agency generally does not compare contractors' salaries with those of other firms, but we understand that the Bureau and the Audit Agency look at annual increases in each contractor's salaries as part of their monitoring and audit activities.

Two of our audit reports have dealt to some extent with amounts paid by contractors to employees working directly on medicare.

In September 30, 1975, report comparing the Government with four private intermediaries who handle part A bills, we noted that Government salaries for similar functions were substantially higher.

Mr. STARK. I would like to ask if this is the study which is now being redone which originally showed BHI at a higher cost per claim than two of the Blues? When redone, this actually will show that they are pretty similar in cost and that when you factor in that civil service salaries may be higher, that they are going to come in pretty close to the Blue Cross intermediaries in cost per claim.

Mr. DENSMORE. Yes, sir.
That is true. This is where we are doing a followup review.

Mr. STARK. I wanted to put in a plug for the underpaid bureaucrats here.

Please continue. Mr. DENSMORE. We have pretty much completed our work on the followup. We are in the process now of analyzing the data and drafting the report.

Although we are not in a position to say exactly what the final outcome will be, indications are that the cost differential is significantly less and that improvements have been made in the recent review from the 1973 fiscal year that we looked at before.

In a March 19, 1976, report dealing with delays in procesing parts B claims in Florida, we noted that one apparent cause of a high turn over of medicare claims examiners was that they were paid less than claims examiners in other parts of the carrier's organization.

The test of reasonableness would be difficult to apply to the executive salaries which concern the subcommittee.

Blue Cross/Blue Shield plans are usually not located close to each other, and size and executive responsibilities may vary greatly.

Even if significant differences were observed among executive salaries paid by plans of similar size and in similar geographic areas, it would be difficult to conclude that some of the salaries were unreasonable.

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