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 cases 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:]

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

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.

Also, since medicare may be only a small portion of the plans' business, the ability of the Government to impose limitations on executive salaries, which are indirect costs, is questionable.

Mr. Chairman, that concludes our statement. We will be happy to answer your questions.

Mr. STARK. Thank you very much.

Before we go on, I would like to introduce a gentleman who by his tardiness has elevated me to this lofty position of chairman this morning, the chairman of the Oversight Subcommittee, Mr. Vanik, and my distinguished colleague from New York, Congressman Rangel, who have joined us during your testimony.

Mr. VANIK. Mr. Stark, I want to point out that this is the first in a series of hearings that we plan on the administration of medicare. I have asked our colleague, Mr. Stark, to chair this particular section dealing with the medicare administrative problems.

I want to commend our colleague, Mr. Stark, because he has already turned over things to the audit agency that have saved considerable sums of money for the medicare trust fund.

His special interest in these problems can be an instrument by which we can make medicare more effective and reduce some of the excessive costs.

I would say that our interests probably extend beyond certain luxury items, but these items are things that illustrate certain issues of public accountability and responsiveness which have been a longrange concern of the subcommittee.

I certainly want to support Mr. Stark in continuing in this matter of great interest, a matter which can be a great saving to the medicare trust fund and make the system more effective.

I will have some questions further on as the testimony develops. Thank you.

Mr. STARK. Mr. Rangel?

Mr. RANGEL. Both my chairman and acting chairman, I would like to prepare some written questions concerning this most important matter and thank Mr. Stark for initiating this type of investigation which is of concern to most of the poor people in this country. Mr. STARK. Certainly.

Without objection, some of the members may want to submit some written questions to you or all of the witnesses for inclusion in the record later.

We would appreciate your response to those.

Thank you, Mr. Rangel.

Thank you, gentlemen.

Our next witness will be Mr. Edward Stepnick who is Director of the HEW Audit Agency, accompaned by his staff.

Please identify your colleagues, Mr. Stepnick, and read your statement or summarize it and submit it for the record, whichever you prefer.

STATEMENT OF EDWARD W. STEPNICK, DIRECTOR, HEW AUDIT AGENCY, ACCOMPANIED BY LAWRENCE SIMMS, CHIEF, MEDICARE AUDIT BRANCH, AND LAWRENCE SIMMONS, ASSISTANT CHIEF, MEDICARE AUDIT BRANCH

Mr. STEPNICK. Thank you, Mr. Chairman.

To my left is Mr. Larry Simms, who is the chief of our medicare audit branch, and to my right, with a name that is almost the same, Larry Simmons, his assistant.

Mr. STARK. To Mr. Simms and Mr. Simmons, welcome. You may proceed.

Mr. STEPNICK. Having two with similar names is not designed to confuse anyone. It is just the way it happened to come out.

I am pleased to have the opportunity to appear before the subcomImittee to discuss our audits of administrative costs of medicare contractors.

From the inception of the medicare program, the HEW Audit Agency has audited the contractors, called intermediaries for hospital and other institutional reimbursement, and carrier for physician and other reimbursement, that participate as claims processing and paying agents under agreement with the Secretary, HEW.

Currently, there are 130 medicare contractors subject to our audits, including 74 Blue Cross organizations, 32 Blue Shield plans, 23 commercial insurance companies, and one State agency.

In fiscal year 1976 these organizations are estimated to have made payments of $16.8 billion for medical services provided beneficiaries and incur reimbursable costs of administration totaling $461 million. Our audits of medicare contractors are generally performed on a 2- or 3-year cycle. Our audits include reviews of claims processing/ program activities and administrative costs.

For fiscal year 1976 our program reviews are focusing on selected functional operations. For example, with respect to the intermediaries we are reviewing the process by which provider costs reports are audited and settled and the effectiveness of procedures for recovering overpayments from both terminated and actively participating providers.

As to carriers, we are focusing on the adequacy of processing controls to prevent duplicate payment of claims; the propriety of reasonable charge payments to physicians and medical service suppliers; and the enforcement of certain special reimbursement/coverage limits.

Following the close of each contractor's fiscal year, an administrative cost report is submitted containing the claimed costs of administration. This cost report and supporting data, after audit by the HEW Audit Agency, serve as the basis for final settlement by SSA of the contractor's allowable administrative costs.