vantage and whether or not the tax advantages is of any real benefit to the ultimate consumer of the services.

Mr. TIERNEY. Mr. Vanik, I am sure Blue Cross and Blue Shield have more eloquent spokesmen than I. Let me say a couple of things about it.

I don't know that the nonprofit status either enhances their performance under this program and under their own businesses or reduces it.

We have, as you know, 17 commercial insurance companies participating in this program. The giants-Prudential, Equitable, Metropolitan, Aetna and Travelers. All the rules I am talking about here apply equally to them. I must say that they have the same question that they continually raise. And it is not really because they are commercial or taxpayers or nonprofit.

They have this strong feeling and I guess an outfit as big as Prudential maybe has a bigger feeling that the Government has contracted with them. They have laid out what it is to be done. They have laid out how they are going to be paid.

Now, don't tell us how to run our business. Don't tell us what cars our executives drive and all the rest. I only use that as a recurring example.

We can get into much more difficult things, of what kind of data processing machines they use and that sort of thing. Is the Government's job to see to it that they do a good job and that they do it at reasonable cost? That, I guess, has been the most difficult thing in these 10 years of the program, Mr. Vanik, trying to maintain our responsibility and accountability to you and to the public and at the same time withstand this continuous charge that we are stifling free enterprise and we are stiffling the expertise which they could use.

:

I remember when this program started, John Gardner was then Secretary. He hailed this use of the public and private sectors. He called it a partnership. But he said it ought to be a very abrasive partnership. If we have accomplished anything, I think we have accomplished that. We have a very abrasive partnership.

But when you get all through the discussions, what it seems to me it gets down to, is that basic philosophy. That doesn't mean for a minute, as I said, that we sit around tolerating people taking the wife and kiddies to wherever they go to and driving Cadillacs. You have got to do something about that because the public wants something done about it. So we are going to do something about it.

Mr. DUNCAN. I noticed a book your Department put out, "An Analysis of Intermediaries and Carriers of Administrative Cost". Apparently it is an advantage with Blue Cross over the commerical insurance carriers because administrative cost, as I have related earlier, is much less than the commercial carriers. And it could be due to the fact that the commercial carriers are paying taxes.

I don't know, but there is a considerable saving, according to your own statistics.

Mr. TIERNEY. Mr. Duncan, I think those statistics need some explanation, too. As you know, the medicare law provided that hospitals and institutional providers could nominate an intermediary to stand between them and the Government or to purify Government funds on their way to them; 95 percent of the hospitals in the country nominated Blue Cross. Blue Cross plans therefore, are serving local

hospitals and are handling well-prepared, standardized bills which they are pretty much doing routinely in their own business, whereas the commercial insurance companies only have 5 percent of the hospitals, spread around the country among them with the rest of their providers made up with home health agencies, and skilled nursing facilities. They require a much different kind of service in many ways and their costs are higher.

I am not defending the costs of either one, but I think that is the real difference between them.

Mr. DUNCAN. The fact that they are is important though, isn't it? Mr. TIERNEY. Pardon me?

Mr. DUNCAN. The fact that they are, that they do have less administrative costs, is important in relation to benefits is important, I would think.

Mr. TIERNEY. Yes.

Mr. DUNCAN. It has happened that way?

Mr. TIERNEY. No matter why it happens, that is a good thing. Mr. DUNCAN. You can go out one door and in the other, but you are getting it. That is important.

A question: I don't know if you care to elaborate on it, but some of the hospitals, in particularly my State, indicate that the failure to pay the full costs of medicare and medicaid benefits is that it causes, a shift of the cost to nonbeneficiaries.

Mr. TIERNEY. On the medicare side of it, Mr. Duncan, the law again provides that medicare will pay the costs of providing services to its beneficiaries to the end that none of their costs will be borne by nonmedicare patients, nor will other patients' costs be borne by them.

The facts of the matter are that people over 65 do not receive, obviously, certain services or procedures. For example, they obviously don't have maternity procedures. They tend to have a longer length of stay with a chronic medical disease and, therefore, their actual per diem costs are lower than the overall population's per diem costs.

Recognizing that, we have worked out a formula which relates a hospital's medicare charges to its total patient charges. That ratio is applied to the hospital's costs to determine a medicare reimbursement. Some can claim that that is too low. We think it is fair to accomplish the job of paying for medicare beneficiaries.

Some say: Well, but you don't recognize bad debts. You don't recognize charity and these other things and those are costs to us, and you should.

Those, I guess, are philosophical arguments that we can engage in On the medicaid side, as you well know, that is a State-administered program with a lot of State determination and I can't tell you what the answer is to that.

Mr. DUNCAN. What are your views on the Talmadge bill in the Senate?

Mr. TIERNEY. You got me now. If I may, Mr. Duncan

Mr. DUNCAN. The medicaid and medicare administrative reimbursement format.

Mr. TIERNEY. I think Senator Talmadge has addressed some real problems that have existed not only in medicare and medicaid, but in the whole health insurance system of the Nation for 25 years, and is proposing solutions to them.

I have been intrigued by his attitude that if you don't like this provision, tell me something better, but let's get the problem answered.

Mr. DUNCAN. I happened to be the cosponsor in the House. I wanted to find out your opinion about it before I submitted it. Mr. TIERNEY. It will undoubtedly, I assume, in the process, get some amendments, but I think it is a good one.

Mr. DUNCAN. You feel it is in the right direction?

Mr. TIERNEY. Yes, sir.

Mr. DUNCAN. Thank you.

Mr. STARK. Mr. Rangel?

Mr. RANGEL. No questions, Mr. Chairman.

Mr. STARK. Just one other question, Tom.

There was a question where you were disputing a BCA claim from 1971 of $49,000 for a first-class airfare over tourist fare and $322,000 for incorrect salary allocation and $3,400 for entertainment.

Mr. TIERNEY. I beg your pardon, what was the second one?

Mr. STARK. It is my understanding dating back to 1971 there was a disputed claim with the Blue Cross Association for $49,000 for firstclass airfare over tourist fare, $322,000 for incorrect salary allocation, and $3,400 for entertainment. I wondered if that claim was still in dispute with BCA.

Mr. TIERNEY. I would have to give you a definitive answer on that. It is a good example of the type of dispute that you get into on this allocation business. I don't know that it is criminal for an organization to say, "We are going to ask for every dime we can get, because if we don't, our own subscribers will carry that bill."

On our side we say, "We are going to cut down every dime we can.” I will have to find out if that has been settled.

Mr. STARK. The point is, here again we get to the final item, which it is criminal to ask for every dime you can get. I certainly don't feel this in the case of your agency. I want to make that very clear. But in my opinion, when we withhold medical care to the low-income or elderly, just in the interest of getting that extra dime, that may border on the criminal.

That is a point to be considered.

Mr. TIERNEY. I agree with that, Mt. Stark. I am not sure it is totally germane to what we are talking about, but that is a much bigger problem.

Mr. STARK. Thank you. I appreciate your taking the time to be with us.

Mr. TIERNEY. Thank you, sir.

Mr. STARK. I would like to enter in the record at this point a series of newspaper articles from the Milwaukee Journal by Neil D. Rosenberg and David L. Beal concerning many of the issues we have been discussing.

[The newspaper articles follow:]

[From the Milwaukee Journal, May 30, 1976]

INSURERS' PROBLEMS MOUNT

(By Neil D. Rosenberg and David L. Beal of The Journal Staff)

Fueled by a special legal status and left virtually unregulated by the state, Wisconsin Blue Cross aad Surgical Care-Blue Shield have become the state's two largest health insurance firms covering more than one of every three residents.

But a three month investigation of both organizations shows that its problems and shortcomings have escalated in kind, according to government officials, subscribers and observers of the health insurance industry.

Among the findings:

Hundreds of complaints and questions each month pour into both organizations, the state insurance commissioner's office, newspaper offices and government agencies. Subscribers complain of wrongly rejected claims, claims not completely paid, mistakenly canceled policies, long delays and just plain confusion about coverage.

Thousands of customers complain each year that Blue Shield does not pay their doctors' complete fees, leaving them the target of months of past due notices from doctors' offices and dunning notices from collection agencies.

Because Blue Shield failed to comply with eight recommendations made in a State Insurance Commissioner's Department audit in 1971 and has current financial problems, it is now under special monthly surveillance by the department. The Federal Trade Commission has subpenaed records of Blue Shield here as part of a nationwide investigation into Blue Shield's plans. The FTC suspects that physician control of Blue Shield-its board here is dominated by physicians and it is an arm of the Medical Society of Milwaukee County-has stifled competition, helped fuel higher health costs and may be in violation of federal antitrust laws.

Blue Cross, which does all the marketing and advertising for Blue Shield, has engaged in questionable advertising in recent years. It has brought a warning from the State Insurance Commissioner that, if such activities continue, civil fines will be sought against the company.

Gov. Lucey and other state officials charge that Blue Cross and its primary constituency-the hospitals-effectively scuttled legislation to set up a state commission to control hospital costs.

Instead, Blue Cross and the Wisconsin Hospital Association set up a voluntary Rate Review Committee in 1972 to act on hospital requests for rate increases. But the committee's attempt to control costs in any meaningful way in the last four years has come under serious question, and the committee is now undergoing dramatic changes, with the state entering as a partner for the first time. "I suppose it is a little like the fox watching the chicken coop," Lucey said in an interview about the committee.

Lucey considers the committee not effective enough and thinks it is unwilling to get tough on hospital costs. That's why the state is moving in as a third partner to strengthen the program, he said.

ARROGANCE NOTED

But more than one state official and several members of the committee and others have said privately that perhaps the biggest problem with the "Blues”—as they are widely known in the trade-may simply be their arrogance.

"Their attitude in the past, because of their special status position, was they didn't always have to care about the rules and regulations," one top state official said.

Specifically, critics charge, the Blues have been operating relatively free of regulation, particularly in setting rates. In some other states, the Blues must appear before a commission similar to the Public Service Commission to justify and get approval for rate increases.

But in Wisconsin the insurance commissioner has authority to block rate increases only if the increases are discriminatory. While questioning some requests, department officials candidly admit that they cannot recall ever disapproving a Blue Cross or Blue Shield policy.

"It just doesn't happen," one department rate examiner said.

Such ease in setting its own rates unencumbered by any watchdog caught Blue Cross in an embarrassing situation last year.

It had developed its first major medical policy for nongroup subscribers and proudly announced the new service in a press release.

However, after a reporter's inquiry, Blue Cross learned that the insurance commissioner's office still had the policy under study, and it had not yet been approved. A mere administrative mixup, Blue Cross said.

In recent years premiums have risen rapidly. They have nearly tripled in the last five years for nongroup subscribers.

An average increase of 35 percent-in some cases exceeding 50 percent was announced for most Blues groups last October, provoking Lucey to call it an

outrage and calling for an investigation. But both state officials and Blue Cross have remained relatively silent on the subject since then.

In addition to minimal rate scrutiny, Blue Cross enjoys other advantages. Unlike most other insurance companies, it does not have to pay premium taxes. It also does not have to pay property taxes, having won a court suit in 1957 that said because it officially is a "charitable and benevolent" corporation, according to state law, it is exempt from taxes.

That exemption was challenged in court against Blues in four other states, and the Blues lost in each case. In the Georgia case the court found that Blue Cross was "pure and simple insurance in direct competition with private concerns which are engaged in the same business."

Edward L. Moerke Jr., at the time an assistant city attorney who represented Milwaukee in the 1957 suit said:

"In all ways this corporation is similar to other insurance companies providing hospital insurance payments, except that other insurers make their payments directly to subscribers rather than to a hospital.

"No purpose is set forth in their articles of incorporation indicating any educational functions. Obviously it is not a religious organization. Nothing is given away."

As a result of its status, Blue Cross and Blue Shield have no shareholders to badger its executives into paying more dividends and in keeping costs down. Blue Cross recently reported its biggest net loss ($10.4 million), measured as a portion of claims, since at least the mid-1950s.

Flush from its more successful years, it has built up a huge reserve fund to cover losses.

Able to raise rates without any meaningful challenge from the state, it expects income and expenses to be back in balance this year.

"Historically, the Blues have enjoyed a very special status," said Harold Wilde, insurance commissioner. "They have been insulated a lot from regulations. By virtue of their position, they must have a high standard of responsibility."

ANOTHER ADVANTAGE

Yet still another relatively unknown advantage that Blue Cross has over its competitors is that it receives a discount on hospital bills.

The contracts that Blue Cross has with hospitals indeed, it is a hospital service corporation that guarantees bills will be paid at the hospitals-allow Blue Cross a 2 percent discount. That is, for every $1 billed the patient, Blue Cross has to pay only 98 cents.

Maryland state health officials are fighting that system, arguing, among other things, that the discount hurts competition among health insurers by giving Blue Cross an unfair advantage.

SEEN AS NORMAL

Blue Cross officials argue, however, that it should be viewed as a normal business discount given to firms that pay their bills on time and engage in a huge volume.

Critics also allege that the payment system, which pays the hospitals directly rather than the patient's paying first and then getting reimbursed, may contribute to rising health care costs.

The U.S. Council on Wage and Price Stability says the Blues' "third party payment" system goes to the heart of rising medical care costs.

In a special report in April, the Council said: "When a customer pays out of pocket either nothing or a small fraction of the total cost of providing health services, economic theory and common sense suggest that he will tend to demand more service than if his out of pocket cost reflected the full cost of providing that

care.

"The consensus is that the prevalence of third party payments is a significant factor affecting decision making by consumers and providers.'

Robert Durkin, assistant administrator of the State Division of Health Policy and Planning, puts it more bluntly: "The service (Blue Cross-hospital) contract is an invitation to financial disaster."

In an effort to determine whether charges of price fixing, conflict of interest or antitrust violations have any basis, both organizations were asked to produce copies of the minutes of their board meetings. Both refused to release them.