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This is their rationale.

Mr. RANGEL. Do you see any reason why these organizations should be tax exempt?

Mr. STEPNICK. I haven't really examined into that question, sir. It is a policy question.

Mr. RĂNGEL. We have commercial businesses that do basically the same service; don't we?

Mr. STEPNICK. Yes. There are several private insurance carriers who also participate in the program.

Mr. RANGEL. Do they do the same thing?
Mr. SIMMs. But these are subsidized by the citizens.

These Blue Cross plans are nonprofit. If you increase any of their expenses by adding taxes, the Blue Cross rates go up, Blue Shield rates go up, and the citizens pay it.

Mr. RANGEL. How do the insurance companies survive?

Mr. Simms. The actuarial basis for the private insurance carrier premium basis is designed to make a profit for them.

Mr. STARK. Will the gentleman yield at this point?

I question that last answer that they work on an actuarial basis. I don't believe in the administration of medicare there is any actuarial competition at all. We have examples of the private carriers as profitmaking, taxpaying institutions.

Mr. Simms. Not medicare. The Congressman asked me why they were taxable. I say their overall business, private business is based actuariarily to produce a profit, but not on the medicare program.

Mr. STARK. Aren't there private profitmaking, taxpaying institutions administering medicare contracts at a competitive price with the nonprofit tax-exempts?

Mr. Simms. Right, but they don't make a profit on medicare. It is actual cost reimbursement.

Mr. DUNCAN. I was noticing that administrative costs for the commercial carriers is quite a bit more than for Blue Cross. Isn't that true?

Mr. Simms. I don't have those figures with me.

Mr. DUNCAN. I notice on the administrative costs data for July to March of 1976, most of the Blue Cross cities it was less than 2 percent and for the same commercial service it was above 2 percent.

Mr. SIMMS. I don't remember it that way, Congressman. The Bureau of Health Insurance puts out these comparisons. As I remember, if you start with the lowest and go to the highest, they are intermixed.

The Blue Cross plans are right next to some of the commercials. Some of the commercials are a right high cost. There is a mixture right on through their list.

Mr. DUNCAN. I found that the percentage of Blue Cross administrative costs to the benefits is much less, though, than the commercials.

Mr. RANGEL. It has been brought to my attention that in the Bureau of Health Insurance study on "Health Insurance Administrative Costs,” published by the Social Security, and known as the VogelBlair study

Mr. SIMMS. I didn't hear that.
Mr. RANGEL It states:

Our findings of economies of scale for commercial insurers indicate that national health insurance ought to be centralized in the hands of large, competitive firms.

Thank you.

This is not to say that BC-BS has no role to ay in national health insurance. Our findings on the Blues, however, indicate that the Blues' artificial competitive advantages probably should be eliminated to remove one impediment to the achievement of economies of scale in the competitive process.

Are you familiar with this study at all?
Mr. SIMMs. Not with that statement.

Mr. STEPNICK. Congressman, the questions that you are raising now are really basically broad policy matters that I think are better addressed to the policymaking officials of the Department.

The Audit Agency hasn't done any specific work with respect to that report.

Mr. RANGEL. Have you made any specific recommendations to the Congress as to what legislative changes should be made in order to make your job easier in areas of audit? Have you recommended measures so that the carriers and the intermediaries would know in advance what is allowable?

I have a problem with reasonable costs, which was referred to throughout the testimony. Congresswoman Holtzman has brought to this committee's attention the number of people in the area of New York who are not paid what is normally expected under the legislation, because all of our doctors are charging unreasonable costs and our citizens, especially our elderly citizens, can only obtain reimbursement for reasonable costs.

Is that just a problem in my city or do you find this nationally?

Mr. STEPNICK. As the prior witness indicated, making judgments on reasonable costs frequently puts you in the position of being able to show that it is unreasonable under the general Federal procurement regulations and, while the Social Security Administration has selected certain areas and tried to make the criteria a little bit more specific, we still have the general problem.

I haven't regarded it as something that could be solved through legislation.

We are suggesting, as my statement indicated, that there are some ways you can tighten up on some of these debatable items simply by agreeing, in effect putting them on a fixed price-basis, based on a study-in other words, paying for automobiles at the rate of $0.15.

In the very sensitive area of executive compensation, even though the Federal procurement regulations are pretty much silent in terms of general guidance, other than reasonableness, there is nothing to prevent the Social Security Administration from amending its contracts with the medicare carriers to put a limit on the amount of salaries or any other expense that should be charged against medicare.

It seems to me this would be a better way to go about doing it at this point, based on some broad legislation.

Mr. STÁRK. Would the gentleman yield?

Mr. Stepnick, you indicated earlier that often when you, the auditors, suggested unreasonableness in a cost, that it is contested by the contractor and comes back to you. I would assume, your management and you feel somewhat frustrated, your auditors do, that they generally are decided against.

Do you think that if you maintained the role of advocate in suggesting unreasonableness and the deliberations were public, that there were in fact some kind of a public meeting or a meeting open to the press and reporters, which would allow you to make your statement, the auditor to say, “This is unreasonable cost" and require the contractor to defend it, some of these things seem to get resolved by a few letters and just get swept under the rug, I pressume.

I It must make the auditors feel somewhat powerless in not being able to say why raise the question if you keep getting hammered down. Do you

think you might be more effective if you or the audit arm were directed to be an advocate and to say, “We are going to determine this cost is unreasonable based on the following empirical evidence," and then let the contractor come back and contest you in more of a hearing format.

Would something like that make you more effective in pushing for reasonableness, do you think?

Mr. STEPNICK. Yes. I think that would certainly elevate the forum in which the issues would be debated. Mr. STARK. Thank you. Mr. Duncan? Mr. DUNCAN. Thank you.

Mr. STARK. Thank you, gentlemen. I appreciate very much your being with us this morning and taking the time to give testimony.

There will be some questions that we would like to submit in writing, and I would like to invite any


who want to elaborate on answers as you look over our transcript, if you would like to submit additional written material for the record, we would be pleased to have you do so.

Mr. STEPNICK. Thank you.

Mr. STARK. I would like to call at this time Mr. Thomas M. Tierney, Director of the Bureau of Health Insurance of the Social Security Administration.

Tom, welcome. It is good to see you again. I would like to have you introduce your colleagues and proceed in whatever manner you are comfortable.



Mr. TIERNEY. Thank you, Mr. Chairman, Mr. Stark-whatever your title is when Mr. Vanik is in the room.

On my left is Mrs. Mildred Tyssowski, who is Deputy Director of the Bureau in charge of program operations. And on my right is Mr. Lamont Williamson, who is now Mrs. Tyssowski's deputy and has been in charge of contract operations.

Mr. Chairman, if I may, I would like to read some portions of the statement. I promise I will leave out all I can.

I, first, would like to put, the whole financial picture into some perspective so that you can understand the magnitude of the various elements of cost within the program. During fiscal year 1975 we paid out about $14.1 billion in benefit payments, and administrative costs totaled $699 million or 5 percent of benefit payments. The ratio of administrative costs to benefits for the hospital insurance program was 2.5 percent and for the medical insurance program, 11.6 percent. The ratio for the medical insurance-or physician services partprogram is significantly higher than the ratio for the hospital insurance program because of the large volume of claims of relatively small amounts. That ratio doesn't mean that the intermediaries under part A are doing much better than the carriers under part B. In fiscal year 1975, we handled about 10.7 million claims in the hospital insurance program with an average payment of about $945 per paid claim and about 95.6 million claims in the medical insurance program with an average payment of about $48 per paid claim.

About 40 percent of the $699 million in administrative costs was for expenses incurred directly by Federal agencies involved in administration of the medicare program and some reimbursement to State agencies for surveying hospitals and other institutions to determine whether they meet the medicare conditions of participation. One of the things, I think, that is sometimes not fully understood in the administration of medicare, is that about 40 percent of the administrative costs are costs incurred directly by the Federal Government and agencies that are involved in the administration of the program, plus some reimbursement to the Senate agencies which do the job of surveying institutions and recommending their participation.

The Federal Government costs are incurred for such functions as determining eligibility for medicare benefits, issuing health insurance cards, collecting premiums and maintaining national records on beneficiary utilization of covered services. These are functions performed by the Social Security field organization and the Central Data Processing Center in Baltimore.

We have better than 1,200-or 1,300, I guess-district offices around the country, which provide services to medicare beneficiaries as they do other social security beneficiaries. The Federal Government costs also cover the costs of directing and managing the program incurred by the Bureau of Health Insurance and other SSA components and certain DHEW offices. The Public Health Service, for example, has a large role to play in establishing standards for the participation of providers, costs of the Treasury Department in collecting the taxes and of the Postal Service are additional examples.

About 60 percent of the administrative costs, or $410 million in fiscal year 1975, was paid to the medicare contractors for their primary role in making payments to institutions, physicians, and beneficiaries for covered medical services and related activities. The functions involved in carrying out this mission are classified in our budget processes under five major categories.

The first, which accounts for 48 percent of contractor costs in fiscal year 1975, is called "clerical claims review." This includes preliminary screening of claims and submitting inquiries to determine beneficiary eligibility, reviews to determine whether the services are covered under the medicare program, and the appropriateness of the level of utilization of these services and work related to beneficiary inquiries and hearings, which is another facet that I would like to talk about, Mr. Stark, with regard to some of these travel expenses.

The second functional grouping, which accounted for 23 percent of contractor costs in fiscal year 1975, includes the activities involved in electronic data processing of claims; principally data entry, computer processing and programing.

The third major grouping, which accounted for 16 percent of contractor costs in fiscal year 1975, includes those activities which cut across most of the contractors' lines of business, including medicare. These include professional relations, general corporate services, payroll, accounting and other financial services. Almost 9 percent of total contractor costs in fiscal year 1975 were for the auditing of cost reports submitted by institutions under the hospital insurance program. You may be interested in knowing that for every dollar spent on audit we recover about $3.60. So audit, obviously, is a worthwhile activity.

The last functional grouping which accounted for 4 percent of contractor costs in fiscal year 1975 was for those "general and administration" (G. & A.) costs of the contractors allocated to the medicare program, generally on the basis of the proportion of payroll expense or man-hours for medicare to total corporate payroll dollars or labor-hours. G. & A. costs generally include the salaries of all corporate officers, their immediate staff and the legal department also the space, furniture and other facilities and equipment necessary to support their day-to-day activities.

Because of the committee's particular interest in travel costs, I would like to point out that these costs are distributed among the five functional groupings and, in total amount to $9.4 million or 1.8 percent of total contractor costs. The bulk of travel costs are expended on direct medicare activities including provider auditing, provider consultation and attending meetings and conferences. For example, the amount of travel costs expended on provider auditing alone is $2.7 million.

If you think back to my prior statement, for every one of those we recover $3, that is not so bad.

Mr. STARK. Tom, do you provide any guidance on the amount of travel permitted or such things as can the employee have an auto; should he take the auto home? If you look at the chart, you see that in travel expenses by local plan there is a significant difference between Texas and Massachusetts. Probably understandable—but in the Newark case there is about 700 percent difference between that and Chicago. Why should there be? Each covers the same general number of enrollees and has assets that cover a dense metropolitan area. I don't know whether the business situation is any better in Newark than it is in Chicago. Is there a reason that comes to mind?

What I am concerned about is that $1.2 million a year again is a flyspeck in the medical costs. But if there are other vast differences when you are comparing comparable plans, that could result from the way that the burden is allocated. Maybe one has more employees stationed around, as your agency does. What does that say to you?

Mr. TIERNEY. It certainly says, Mr. Stark, there is disparity. I think you really have to go beyond those figures and look into the basic facts. For example, taking the enrollees of these organizationsand this is their own private business—I doubt that comparing things on an enrollee basis is very significant. Let me just give you a couple examples.

I know that Blue Cross of Maryland's total travel expenses for their total business is about $134,000 and Blue Cross of Milwaukee is about $814,000. I don't know the answers, but let me tell you a few factors that might go into it.

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