What we find in looking at some of the States which we know have advanced the most in the use of automated data is that they have as much as a 50-percent increase in a year in the administrative cost per recipient in the first year that they install this kind of equipment— which then levels off.

Mr. FLOOD. What we are concerned about is that you buy some of this equipment. You get it set up, and in comes the salesman and says, "That is obsolete, here is a new one." And that goes in the warehouse. We have been through that time and time again-not just in your shop, but in the Department of Defense as an example.

Mr. NORTON. I have seen it happen at the State level, also, Mr. Chairman, and I understand you would have heard about that often. I do think that is leveling out as the users of automated data become more sophisticated themselves.

In the welfare system 5 years ago there were a lot of people trying to administer welfare who were novices with respect to automated systems, and they may very well have been involved in the kind of thing you described. But I don't think that is so much the case now. We feel that the States which have used automated data have, one, improved their management and reduced their error rates, and two, over time their administrative costs levels out. As more States embark upon this improved management effort, both in adding staff, adding training, and adding equipment, there will be continued increases in administrative expense, but we expect them to level out. It is also important to take note of the fact that for 1977, one-half of the increase in administrative cost is due to the child support enforcement program, and the increased Federal matching which is available under the statute for that administrative cost.

I would also like to point out that inflation, although it would not be at 30 percent, is an important factor in the increased administrative cost for the States.

Mr. FLOOD. Thirty-seven percent.

Mr. NORTON. Inflation is only one part of that. The absolute increase in the numbers of people employed, plus the increase, the one-time or perhaps two-time increased expense for equipment, together with the rather substantial increases in salaries, and the inflation in goods and services, together with the increased usage of food stamps, which has an administrative cost in the maintenance assistance program, and the IV-D program, are the major causes of the increase. We do, however, as Mr. Wortman said, share your concern that this whole area needs to come under close surveillance and scrutiny. Dr. Smith, in our planning and research unit, is planning some major studies in this area, and in the Assistance Payments Administration we are also planning studies.

AVERAGE NUMBER OF RECIPIENTS

Mr. FLOOD. All right.

What is the current average number of recipients for Aid to Families with Dependent Children?

Mr. WORTMAN. The 1976 budget is built on 11,500,000.

Mr. FLOOD. 11,500,000, or 11,300,000?

Mr. WORTMAN. The 1976 is 11.5 million. The 1977 assumption is 11.3 million.

Mr. FLOOD. Do you think this 11.3 million estimate for 1977 is realistic?

Mr. WORTMAN. I do. In fact, right now estimates during this particular period of the year are not quite as high as those included in the 1976 budget.

Mr. FLOOD. Have you assumed some recovery in the economy as the basis here for your overall estimates?

Mr. WORTMAN. Yes.

Mr. FLOOD. What is the time lag between the fluctuations in the economy and changes in the welfare caseload?

Mr. WORTMAN. I am going to ask Dr. Smith to speak about this, too. But in general the big time lag is when people have used up their unemployment compensation and thus would be eligible for welfare, depending upon whether they meet the assets test.

Mr. FLOOD. I want to know the time lag between fluctuations in the economy and the change in the caseload.

Mr. WORTMAN. Dr. Smith, would you like to address that?

Dr. SMITH. It runs on the average about a 6-month lag. But there is a differential lag between the unemployed fathers program, as you know, and the women. The unemployed fathers program is much more sensitive to those changes in the economy.

Mr. FLOOD. That is the answer I want.

AFDC DEMOGRAPHY STUDIES

We understand your office undertook a pretty elaborate demographic study for the Aid to Families With Dependent Children population last spring. Does that study show a significant shift in the group's composition?

Dr. SMITH. I think we have been seeing a shift over the last 3 or 4 years. And the shift shows basically smaller family sizes, better educated people, less time on the rolls, in single spans of duration.

NEW YORK JOINT PAYEE PROBLEMS

Mr. FLOOD. According to a recent news account, New York City is threatened with the loss of $431 million which was illegally paid out to joint payees since 1968.

Why in the world didn't HEW discover that years and years ago, and stop it? How could you miss?

Mr. WORTMAN. Well, we have that particular problem in different areas of the country.

Mr. FLOOD. I'm talking about New York City; that always stands out like a sore thumb.

Mr. WORTMAN. My own experience, short as it is with this program. is that in some cases States feel strongly that they have interpreted the regulations and the law consistently and do not believe the Federal posture. In other words, there is the contest, like the contest that I indicated earlier, with regard to the social services claims. I am not sure this has any bearing on this particular case.

Mr. NORTON. There is a provision in the statute, I am sure you are aware, that says a State may make payments directly to landlords and other vendors in situations where they have discovered that the

AFDC recipient is not managing money properly. This is sometimes subject to some rather difficult nuances at the operating level, as to what constitutes a permissible payment to a vendor because of that statutory provision, and what is impermissible where there is not really mismanagement, but simply a convenience payment.

I don't believe that we could give you an adequate answer on the authenticity of the allegation that New York State was overpaid $431 million until we have the results of the full HEW audit. We first became aware of this in August of 1975, when the HEW Audit Agency revealed to us that they were beginning to question some of these payments over a very long period of time. They have done some preliminary sample studies. But I do not believe that we can be conclusive until we have the full findings of whether or not the workers at the operating level did in fact meet the statutory requirements, that this payment was made because the recipient was not able to manage money.

If that was an appropriate finding, the money was not misspent. Mr. FLOOD. We were just wondering why HEW did not discover this years ago.

Mr. NORTON. Because of the fact that the statute provides that a State may make up to 10 percent of its payments.

Mr. WORTMAN. Theoretically, all those payments could be concentrated in one county.

Mr. NORTON. Oh, yes. The State is right now, in cooperation with our regional office, undertaking an intensive review to make sure, one, that they have not exceeded the 10 percent; and two, that within the 10 percent they are legitimate. I think it is a creeping issue.

I don't think it is one that is easily detected at the outset. And I do think that the Audit Agency has done an effective job of uncovering the problem.

Mr. FLOOD. All right.

QUALITY CONTROL

Your budget shows a $200 million savings as a result of what you call quality control. Now, these savings have been quite elusive over the last couple of years. What makes you so optimistic about 1977?

Mr. WORTMAN. It is true the Federal Government has, since the inception of the program, postponed or suspended the imposition of the disallowance on two occasions. Secretary Weinberger did that. Mr. FLOOD. You have restated the question. What is the answer? Why are you so optimistic about 1977?

Mr. WORTMAN. Well, the time period on which we are basing the disallowance has not changed. It is still for the July through December 1975 period. When we were here before you last year, we were planning to take prospective disallowances as a fiscal year 1976 action. But our General Counsel has advised us that we should not do thatthat we should take it as a retrospective action. Thus, the way our grant quarterly funding cycles work, it will be effective October 1,

1976.

Mr. FLOOD. What error rates are you estimating for 1977?

Mr. WORTMAN. I would assume the States will be down to a combined error rate for ineligibility, overpayments, underpayments, of 25 percent or better by 1977.

Mr. FLOOD. Do you feel those error rates are realistic when compared to the 30 percent and 40 percent that you reported in the past?

Mr. WORTMAN. Our actual error rates for the period of January through June 1975 already reflect a considerable advance. Ineligibility was down from 10.2 percent to 6.5 percent in the Nation; overpayments were down from 22.8 percent to 13.3 percent. And this is a trend which I think will continue. At some point each percentage improvement will get more difficult, but I think this trend will continue.

AVERAGE MONTHLY PAYMENT

Mr. FLOOD. We note here also you are projecting an average monthly payment under AFDC, again, of $77. That is up 10 percent from the 1976 level.

Mr. WORTMAN. Yes, sir.

Mr. FLOOD. If inflation is slowing down, as everybody tells us it is, then why such a very large increase?

Mr. WORTMAN. I am going to ask Mr. Norton to speak to that. But I assume some of it is the delayed reaction of the AFDC program.

Mr. NORTON. That is correct. There is pent-up demand, Mr. Chairman. The States, as you know, have been under severe fiscal stress. They have not been able to enact this past year some of the increases that they would like to have. Many are planning increases for this coming year. The State of Maryland, for example, in an action which we think is very wise and very helpful to the system, has taken the position that every dollar saved through improvement in management and reduction of errors, will be spent on increased awards to their recipients. Again, this $77 estimate is based on the States' estimates of what they, themselves, anticipate through their own future planning they are going to do in the area of increasing their grants.

PARENT LOCATOR SERVICE

Mr. FLOOD. What progress have you made recently in putting the parent locator service into operation as required by the child support enforcement program?

Mr. WORTMAN. I'm going to ask Louis Hays, the Deputy Director of the Office of Child Support, to give us a progress report on that, sir.

Mr. HAYS. Mr. Chairman, the parent locator service, under title IV-D of the Social Security Act, went into operation today. Under the statute which went into effect on August 1, 1975, all the States have submitted their state plan under title IV-D, and all but three of the State plans have been approved as of this date.

The parent locator service aspect of the program, which obtains address information from Federal records, became operational as of this date. The reason for the delay in implementation was due to the fact that prior to the enactment of the Department's fiscal year 1976 appropriation, we lacked the legal authority to operate that service.

MEDICAID: HEALTH APPLICATION SYSTEMS CONTRACT

Mr. FLOOD. Turning to the medicaid program-there has been a great deal of publicity surrounding the North Carolina prepayment con

tract with health application systems. We are told a dozen or more States are very much interested in this arrangement. Suppose you tell us briefly how that contract works, and what was the role of HEW in the negotiations?

Dr. WEIKEL. Basically, the contract which the State of North Carolina has negotiated with health application systems allows for the State to pay that organization a single premium per month. That premium is based on the number of enrollees in the medicaid programthe number of eligibles, up to a maximum. If there are more than 312,000 eligible enrollees in the medicaid program in the State, there is no increase per capita premium. The total premium is capped on the basis of the premium for 312,000 recipients.

If the recipient rolls drop below that 312,000, there is a deduction made from the total premium that is paid to the firm.

It is interesting to note that while the cap was at 312,000, during the first month of that contract, July 1975, approximaely 312,000 medicaid recipients were enrolled. But during December of 1975, 340,000 recipients were enrolled, indicating some savings to the State by having the premium capped. The contractor has responsibility for providing the payment on an insured risk basis for all services delivered to the recipients. The contract is between the State and the firm. They did work with HEW regional office and central office in the review of that contract-although at that time there was no requirement for HEW to approve any contracts of that nature. Our regulations have since been changed, so now any contract of a prepaid nature of $100,000 or more must be approved by HEW prior to the signing of the contract.

Mr. FLOOD. What measure do you have about the success of the program? How much are you going to save?

Dr. WEIKEL. The State of North Carolina has articulated that just by signing the contract, they are saving $13 million over what they estimate their medicaid expenditures would have been if they had not signed the contract.

Now that figure is one that the State uses. We cannot document it at this point. But there are some interesting facts out of that contract.

During the first 6 months of the operation, through December, they processed 1.3 million claims under that program. During that time period they rejected 35,000 claims for either ineligible recipients, or for duplicate claims that had been submitted by providers. Just that saving alone was $4 million, because that is the total amount of those claims.

MEDICAID REIMBURSEMENT RATES

Mr. FLOOD. All right. We have heard reports that many physicians are limiting their participation in medicaid because of the low reimbursement rates. Is that a significant problem? They also tell us that the rates do not cover the increased cost of the malpractice insurance. We heard this particularly about the State of California.

Dr. WEIKEL. I believe that the problem varies from State to State. Our rate of participation of physicians in some areas is inadequate.