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Blue Cross of Milwaukee also participates in a full medical surgical benefit program, so they are, in effect, a Blue Cross and a Blue Shield program. Therefore, they do all the other things that a Blue Shield plan does in their professional relations programs.

Mr. STARK. You mean the doctors ride first class more often than hospital attendants?

Mr. TIERNEY. No. A Blue Shield plan spends a great deal of time not with doctors, but with doctors' business offices. The gal in the business office in the final analysis is the one who prepares the bill and sends it in and codes it and all. They seem to find a greater significance in dealing with them than they do in having a nice philosophical dissertation with doctors.

I just point some of these things out as possibilities which underlie the difference.

I am sure that the organization involved would have to give you



I looked at another one there-I quess it was on salary—that indicated that on an enrollee basis Indianapolis, Ind., was way ahead of others. I don't know all the details, but Indianapolis, Ind., is actually a mutual insurance company and they have a very large group life insurance company.

If you note their assets were double anybody else's. Those things you have to go into at least. You have to at least look at them.

Having said that, our rules of allocation are the same for every one of them. But they sure do vary. Why, I don't know.

Let me give you another one. The Chicago, Ill., plan is very high on the list. In earlier days we were having trouble with the provider auditing program. When we started out, for example, I think after the end of 2 years about 34 percent of the total administrative costs in part A-hospital insurance-was going into auditing. While it was very productive, it nevertheless was a tremendous expenditure. That was going largely to outside audit agencies.

So we made a big push for these people to develop their own internal capacities. In this respect, the Chicago plan was providing some auditing support to the Florida organization and Oregon and, perhaps some others, although it may not have occurred during these same periods.

Mr. STARK. What you are indicating is some of this may show on the other side of the balance sheet as outside income and we aren't seeing the offset to it.

Mr. TIERNEY. Right, sir.

Mr. STARK. That kind of information would be very helpful to us, if you would submit it. I think there may very well be some extenuating circumstances. Mr. TIERNEY. I want to look into it further at least. Mr. STARK. Thank you. Mr. TIERNEY. If I may skip to our budget process

Mr. STARK. Why isn't it that this is the place to use a little gentle persuasion, first of all, when you have people who have been questioned by audit for past unreasonableness, to call the auditors in? Wouldn't this be the time to look at somebody and say, “Look, we have three cases going back 5 years”?

Mr. TIERNEY. It is the time. That is exactly what we do. For example, Mr. Stepnick brought up the issue of the $7 million under dispute in premium taxes. We don't advance that. They still claim it because they feel very strongly that they have a right to it, that it is a cost of doing business, just the same as heat, light and power, and that they ought to get it. But until that question is decided, we don't advance any funds.

Mr. STARK. Would you hold up on the Lake of the Ozarks meeting until that one gets ironed out?

Mr. TIERNEY. Yes, sir. We would do that. If it were this general a question, should meeting and conference attendance at all be allowed, then we would simply say, “Well, until that is determined, there will be no funds advanced for those things."

As for these other things, you have to remember that is one of the purposes of audit, to find out if the folks took the wife and kiddies along. They do it, I guess, for the reasons Mr. Stepnick said, thinking, "Well, it is a good rationalization." Only upon audit do they become revealed, and only then is the issue joined.

The point I wanted to make was that you had seemed to feel where there was a question raised about an expenditure they just went right on submitting that cost each year. I think that implied that we went right on advancing funds for it. They go right on submitting it, but we don't advance any funds for it.


The principal mechanisms for enforcing adherence to the reimbursement regulations and for controlling costs are the budget process and the audit of final cost proposals. I would like to briefly describe these processes. Contractors are required to file budget requests with the Bureau of Health Insurance on April 15th each year for the forthcoming government fiscal year. These requests estimate the number of claims to be processed and the necessary manpower, facilities and services necessary to accomplish this task.

In addition, they identify the impact of any new legislative or regulatory requirements. These budget requests contain several schedules which identify costs within various functions to be performed and, in total, the contractors identify the various elements of costs that make up their budget requests, such as, salaries, fringe benefits, travel, space and equipment.

The BHI regional offices review the budget requests addressing such issues as changes in average salary on a corporatewise basis, changes in productivity, and the need for additional space or equipment. The budgets are reviewed against the background of historical experience for individual contractors, national and peer group averages of actual costs, and guidelines developed within BHI central office.

The regional office review and approval effort is controlled by the BHI central office by means of allotments relating to both workload and dollars. The regions cannot authorize budgets in excess of the amount provided by central office. Once the annual budget is approved, a quarterly distribution of cost and workload is prepared, and this distribution serves as a control factor in determining the amount of payment which can be made to the contractors during the fiscal year.

On an interim basis contractors file quarterly cost reports which are reviewed by the regional offices for conformity with the approved

quarterly distribution of funds as well as for making determinations that work performed is proceeding in accordance with budget projections. Where actual experience deviates from authorized limitations contractors are required to submit variance analyses explaining the causes for the variances. These variances may be resolved by: revising the quarterly distribution, amending the annual budget, directing the contractor to abate various activities, or taking other actions which will assure that the contractor does not exceed the annual budget amount.

At the end of the accounting year the contractors file final cost proposal with the full explanation of all costs incurred. This report is audited by the HEW Audit Agency in accordance with the FPR and contract reimbursement principles. BHI negotiates audit excep, tions with the contractor and closing agreements are then prepared. This has been a problem in the past, where maybe the Audit Agency picked out a relatively small amount of the total budget.

Nevertheless until the final cost settlement was executed, we carried that as an open item. In the contract negotiations which we are now conducting for the new contract, to be effective October 1, there is a provision for settlement of everything in which there is no dispute and leaving only disputed amounts, open pending decision on appeal.

Where the contractor and BHI are unable to reach agreement on an issue of cost a final determination is issued which may then be appealed to the Armed Services Board of Contractor Appeals as the agency to make the final decision. That is where the matter goes from there.

Mr. VANIK. May I inquire, how do we get to the Armed Services Board of Appeals? Is that a convenient tribunal or is it all agreed upon?

Mr. TIERNEY. No. Back in 1965 when the legislation was going through, I don't know whether the word "convenient” is particularly applicable, Mr. Vanik, but there obviously was a recognized need for some official board to have the responsibility of making final decisions on these disputes.

So the Secretary was given authority under the law to select an appropriate review board and he selected the Armed Services Board of Contractor Appeals which had experience in this field.

Mr. VANIK. That has never been challenged by any of the parties involved?

Mr. TIERNEY. No, sir.
Mr. VANIK. They accepted that decision?

Mr. TIERNEY. It seemed clear under the law it was left to the Secretary's discretion to appoint or select whatever appropriate board ho thought could best do the job.

Mr. VANIK. Thank you.

Mr. TIERNEY. I would like to describe briefly the significant impact in cost which is exerted by BHI in its budget and cost review program. During the 1976 annual budget review the contractors requested a total of $469.8 million. BHI approved $454.6 million.

Well, that is not a great reduction, but it does reduce $15.2 million from proposals which the contractors already believed were reasonable.

Through negotiated final cost settlement during fiscal year 1975, we disallowed $1.8 million.


The system we have in operation is generally effective, we believe, in controlling costs. Perhaps the best evidence of this fact is that the unit costs for handling claims has been relatively constant or lower in the last 5 years despite the impact of inflation on salaries and other costs of the contractors. In the hospital program (part A] the unit cost per bill in fiscal year 1972 was $6.33. For the first 9 months of fiscal year 1976 the unit cost was $5.76. In the physicians' part of the program (part B] the unit cost per claim in fiscal year 1972 was $3.18. For the first 9 months of fiscal year 1976 the unit cost was $3.12.

If I might just say one more thing, Mr. Stark: I feel I owe it to your committee's fuller understanding of these costs, to point out that our budgetary analysis and final settlements go far beyond such questions as the type of automobile a given contractor's executive may drive.

I am certainly not here to support their use of Cadillacs, and I would parenthetically seriously question the judgment of their public relations advisers in view of the headlines such items generate, but I think I owe it to your full understanding to point out that even if all of them used Fords, and you said this yourself, the actual dollar difference to the Government would be minuscule.

The real question, which I think such issues raise, is to what extent should the Government interpose itself into the private business operations of its contractors and how much should they rely on the overall reasonableness of the costs of their contractor services? That is a question which I am sure your committee will be considering.

[The tables to the prepared statement follow:]

Table I shows the various functions performed by the contractors, the cost of each of those functions and their relationship to the total administrative costs for the July-March period:

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Table II indicates the impact of the budget review process on administrative costs:


Total cost (thousands)

Unit cost






Pt. A.
Pt. B.

$43, 051
133, 838
292, 881

$41, 774 128, 665 284, 164 454, 603


4. 85
3. 34


3. 23



469, 770


Pt. A contractors Pt. B contractors

Fiscal year 1972 Fiscal year 1973. Fiscal year 1974. Fiscal year 1975. July to March 1976.

$6. 33

$3.18 3. 23 3.23 3.21 3.12

Mr. STARK. Tom, if I can interrupt there, that is the real question. When you have organizations—and I am going to take the whole Blue Cross as an organization, although we recognize they are separate-which are tax-exempt, when they are given really noncompetitive contracts, when they make all their information available to the public as part of their contract, when they are competing with the free enterprise system, when they do make headlines because the public is so darned upset about the high cost of their medical care, there are questions to be asked.

But the question isn't really whether it is $3.76 for a hospital bill or $3.12 for a doctor's bill. These programs do nothing but pay bills. They are an intermediary for some reason between the Government and the hospital where the Government is paying or the individual is paying or the corporation is paying or the labor union is paying. The chance that the average citizen has to negotiate with the doctors is through the Blue Cross plans, but they are really not very cautious about their private planes or their vacations for employees. How can we have any feeling that they are going to make any attempt to hold that office visit cost down from $23 to $21 or $20 or $19?

What ought our rule to be then? Are they really quasi-government? Ought they to be combined with HEW perhaps? Should

your institution do it all so we don't have to get a layer like the Blue Cross Association on top of the other plans?

You hit it right there. That is the real question. I think it is the question we are going to have to decide as we get into the question of national medical costs, assistance programs or call it whatever you will. Further, I like to stay away from calling this health insurance". I am sorry, but that it is not. We just keep passing the costs through. They go higher, the monthly billings go higher, the doctors get paid a little more, the hospitals a little more, the public pays a little more.

If we added income tax on there, it still raises the costs. We all understand that.

The question is where is the cat that we bell to hold these costs down? We hear about it here in Congress. You hear about it. The Blue Cross providers hear about it. The physicians hear about it.

At some point where do we start reversing the trend? I wish you and I could write those answers today, but we both know we can't.

Mr. VANIK. My question and the Ways and Means question is the whole question of tax-exempt status. Does tax-exempt status make it harder to compare these costs with the commercial companies? Is nonprofit status necessarily good? Is there any advantage that falls to the general public, the consumer, for this service because of the taxexempt status?

I think that brings us home to our jurisdictional considerations as to whether or not the commercials can compete without that tax ad

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