A recent study done by Urban Systems Research & Engineering, Inc., under a SRS grant (contract No. 74-58) determined that in the three States surveyed (Massachusetts, North Carolina and Maryland) 50 percent of all medicaid recipients who were eligible as medically needy (AFDC related) had some kind of health insurance. The same survey indicated that approximately 80 percent of the aged medically needy recipients had other insurance (oftentimes they had medicare); 30 percent of the disabled medically needy had other insurance.

Mr. MICHEL. How widespread is the practice whereby people covered by both end up billing medicaid, thus resulting in the taxpayers footing the bill and the other insurance companies being left off the hook? Any dollar figures?

Dr. WEIKEL. Government Accounting Office audit reports and Department of Health, Education, and Welfare audit reports indicate that there are cases where medicaid is paying bills for medical services that should be paid by insurance companies. However, there is no compiled data as to how widespread this practice is or how much it is costing in Federal-State medicaid funds.

Mr. MICHEL. Are you making any effort to obtain this kind of information?

Dr. WEIKEL. There is ample data to indicate that medicaid funds are paying for medical bills that should be paid by insurance companies. We have not initiated further studies to determine how often this misallocation of funds occurs. However, we have studied the problem and determined that States are not collecting third party liabilities as they should primarily because they lack guidance on how to establish a system of recoupment. Accordingly, an operating manual for third party liability collections is being developed by Social and Rehabilitation Services for State use.

Mr. MICHEL. I understand a third party locator system would enable those people who have both medicaid cards and other insurance to be identified. How many States have adopted such a system, and are you doing anything to see to it that they do?

Dr. WEIKEL. States are required by Federal regulation to take reasonable measures to determine any legal liabilities of third parties for medical care and services included under the State's medicaid plan. Most States ask at the time of application whether a person has any kind of insurance which might help defray their medicaid costs. Persons who respond positively are in many cases queried further regarding the name of the insurance company, type of policy, services covered, et cetera. Many States have established a computer system which identifies those persons who have insurance so that when such claims are submitted they are "flagged" for billing to the appropriate liable parties. Other States require a manual review of claims to determine third party liabilities. We have no compiled data that shows how many States have automated third party locator systems or how many States have manual systems.

Social and rehabilitation services in an effort to assist States in their collection of third party liabilities is developing an operating manual for third party liability collection. When completed, this manual will guide States in the development and improvement of their own third party locator systems.

MEDICALLY NEEDY INELIGIBILITY

Mr. MICHEL. How many of the so-called "medically needy only" are receiving medicaid despite having incomes that would otherwise disqualify them? What is the dollar amount?

Dr. WEIKEL. Approximately 4.5 million persons received medicaid services as "medically needy only" in fiscal year 1975. Medicaid payments for this category of recipients amount to 39 percent of the total dollars spent for medicaid recipients. General Accounting Office studies and field tests indicate that the ineligibility rate in this group may run as high as 20 percent. If that rate is correct, ineligibility in this group is costing about $1,600 million a year in State and Federal funds.

The Social and Rehabilitation Service initiated a major quality control program on July 1, 1975. Under this program samples of paid claims are reviewed on a monthly basis in each State to determine whether or not the individual for whom the claim was paid was, in fact, eligible for medicaid. Some States have not submitted the results from the initial review to central office for analysis. Accordingly, the complete national results of this review are not yet available.

INCOME ELIGIBILITY

Mr. MICHEL. How many people receiving medicaid are above the poverty line? What is the total dollar amount going to such individuals?

Dr. WEIKEL. In fiscal year 1974-the latest year for which data is available-13 percent of the persons receiving medical assistance under the medicaid program had incomes above the Social Security Administration poverty level. It should be kept in mind, however, that the proportion of the poverty population who are medicaid recipients varies greatly from State to State. Medicaid recipients total less than 20 percent of the poverty population in eight States (Alabama, Arkansas, Mississippi, South Carolina, South Dakota, Tennessee, Texas, and Wyoming), and a number that is more than 100 percent of the poverty population in two States (California and New York). Of course, even in States with a number of medicaid recipients that exceeds the number of persons in poverty, a substantial number of the poor do not receive medicaid if they are not eligible under one of the Federal eligibility categories.

PERCENT OF INSTITUTIONAL COSTS

Mr. MICHEL. I understand that 60 percent of medicaid costs are institutional, is that correct?

Dr. WEIKEL. A report issued in November 1975 by the National Center for Social Statistics indicates that 70 percent of medicaid expenditures for fiscal year 1974 are for institutional services. Approximately 32 percent of the 70 percent is for inpatient hospital care; 18 percent is for intermediate care facility care and 20 percent is for skilled nursing facility care.

CHOICE AMONG INSTITUTIONS

Mr. MICHEL. Are there any limits on the price range of institutions that are reimbursed? In other words, there are expensive nursing homes, hospitals, et cetera and then there are lower priced ones. Is there any regulation that restricts a beneficiary from going to the most expensive one and having the cost fully paid by medicaid?

Dr. WEIKEL. No. As long as the institution meets certification requirements, it is eligible to participate in the medicaid program. The price or charge ranges vary from institution to institution as do the costs of providing services. Irrespective of the price ranges, reimbursement is based on actual costs for inpatient hospital services and limited to actual costs for other institutional services.

There is no regulation that restricts a recipient from going to any participating institution. In any case, the provider must accept the State's payment as payment in full for services rendered to medicaid recipients.

Mr. MICHEL. Do you have any method of policing what hospitals, for instance, may incorporate as part of their "reasonable cost" expenditures to insure against the inclusion of frills, inflated salaries, and so forth?

Dr. WEIKEL. Yes. The Social Security Act, under section 1902 (a) (13) (D) requires that reasonable costs must be reimbursed, and that such reasonable costs may not exceed that which would be determined under section 1861 (v) for purposes of title XVIII. Section 1861 (v) generally defines reasonable costs as those actually incurred and necessary to the efficient delivery of needed health services. Medicare regulations under 20 CFR 405.401-405.461 implement section 1861 (v) of the act through specific provisions regarding the treatment of individual cost items.

In addition, CFR 250.30 (a) (4) under title XIX, requires that a State plan for medical assistance under title XIX must "Provide that the single State agency will take whatever measures are necessary to assure appropriate audit of records wherever reimbursement is based on cost of providing care or service, or fee plus costs of materials."

NEW REIMBURSEMENT REGULATIONS

Mr. MICHEL. Dr. Weikel, you provided a very interesting answer to my question last month on the medical lab kickback scandal in Chicago. You said, and I quote, "The Federal regulations allow a situation where inflated rates and kickbacks are possible." You described a situation where the medical labs are paid at the "prevailing rate" but that actual costs have dropped by 60-80 percent due to laboratory technological advances. The prevailing rate has not dropped, however, and thus you indicate that large profits result which serve as an incentive to kickback schemes as well as increased us of lab services. My question naturally is why aren't regulations being written at the Federal level to tighten up on this prevailing rate payment practice? Dr. WEIKEL. Regulations are being written, and the first draft is near completion.

Mr. MICHEL. You said in that previous testimony that the States have the option of writing tighter regulations, but many have chosen not to do so. I assume Illinois is one of those which has not done so?

Dr. WEIKEL. That is correct. Illinois regulations are within the limits premitted by Federal regulations, however. California and New Jersey are two examples of States which have much tighter regulations in this area.

Mr. MICHEL. The "inflated charges" problem is not just limited to medical labs, is it?

Dr. WEIKEL. No; it is a problem in every area-inpatient hospital services, skilled nursing home services, physicians' services, and so forth.

LEGITIMACY OF PRICE INCREASES

Mr. MICHEL. Most of your medicaid cost increases are due to price increases, mostly institutional in nature. Do you have any opinion as to how legitimate these price increases are? I wonder how much of this results from higher fees, salaries, profits, and so forth?

Dr. WEIKEL. Current law requires that inpatient hospital services be based on reasonable costs. Reimbursement for other institutional services cannot exceed that which would be produced through the application of the medicare principles of cost reimbursement. Since actual costs to the provider are either the basis for payment (in the case of hospitals), or the ceiling for payment (in the case of nursing homes), the payment rate is directly related to actual expenditures rather than price or charge increases.

The legitimacy of specific cost increases are ultimately ascertained through the audit process. Salary costs are generally the major component of institutional costs. An allowance of a reasonable return on equity capital invested and used in the provision of patient care is allowable as an element of cost for proprietary providers. The amount allowable is based on a specific formula related to the provider's equity capital and the average rates of interest on special issues of public debt obligations issued to the Federal Hospital Insurance Trust Fund during the provider's reporting period.

UNNECESSARY SURGERY

Mr. MICHEL. How about unnecessary surgery, an issue which was raised recently in a House Government Operations Committee report. Is medicaid paying for a substantial amount of unnecessary surgery? Dr. WELKEL. Unfortunately, the Medical Services Administration does not know if medicaid is financing a substantial amount of unnecessary surgery. It is difficult to determine what surgery is, in fact, unnecessary. This is as true for the population in general as it is for medicaid recipients-as the House Government Operations Committee hearings revealed, we do not know overall how much unnecessary surgery is performed throughout the United States today. In addition, to even begin to determine how much medicaid surgery is unnecessary, we would have to know how many surgical procedures title XIX pays for. We can only estimate this, since surgical services are not paid for as such, but under various categories including physicians' fees and inpatient hospital services.

In summary, we do not know if the Medical Services Administration is paying for a substantial amount of unnecessary surgery. However, to the extent that this is happening, we expect that increased PSRO and utilization review activities will make it increasingly less likely to occur.

EFFECTIVENESS OF MMIS

Mr. MICHEL. How effective is the medicaid management information system automated claims processing and information retrieval system which you are promoting?

Mr. WORTMAN. The medicaid management information system has already proven itself to be a very effective automated claims processing and information retrieval system, not only in maintaining payment of claims on a current and accurate basis, but, also, by providing to State agency management information necessary to effectively plan and control the medicaid program. Evidence of this can be found in those States certified for increased Federal matching.

Mr. MICHEL. You indicate that 32 States are moving in this direction, taking advantage of the 90-percent Federal matching for development and 75-percent matching for operation. Do you have a set of basic standards which you require them to follow to insure that they will set up sound and effective systems?

Mr. WORTMAN. Yes. The criteria for determining Federal financial participation certification are cited in the Code of Federal Regulations, 45: 250.90, and further described in Program Regulation Guide, MSA-PRG-31, dated June 10, 1974.

Mr. MICHEL. Is Illinois one of the 32 States?

Mr. WORTMAN. Yes. Illinois' Advance Planning Document and Detailed Implementation Plan have received the Department of Health, Education, and Welfare's approval and the State is presently in the development and installation phase of conversion to the medicaid management information system. I would like to point out that, at this time, the number of States working toward improved medicaid systems has increased to 38.

Mr. MICHEL. I understand that Illinois had the opportunity to contract with a private foundation to operate such a system that was already in operation and ready to go. The State could have avoided paying development costs. The State, however, turned it down, and is now apparently seeking a 90-percent Federal match to develop its own system from scratch. Do you have any familiarity with these developments?

Mr. WORTMAN. First of all, there are six major subsystems within the medicaid management information system. They are: recipient, claims processing, provider, reference file, surveillance and utilization review (S/UR), and management and administrative reporting subsystem (MARS). Of these six subsystems, two (S/UR and MARS) are now under contract. Although the State did elect to implement the other four subsystems, it was not a matter of starting from scratch. but, rather, choosing to modify the existing subsystem to conform to Federal requirements. The decision was based on the State having the staff and computer capability to complete this operation.

Mr. MICHEL. How tightly are you going to run things to insure that the States don't abuse this 90 percent Federal match?