can save the public much more than the cost of a single luxury automobile.

I fear, however, that the attitude of an intermediary which purchases luxury items may reflect much larger problems. I fear that the discovery of questionable luxury expenditures is merely the tiniest tip of an iceberg of problems.

I am interested in those matters and, as Chairman Vanik says, we are interested in them primarily because they reflect an attitude toward the public that raises most serious doubts in our minds.

They are a very graphic way of demonstrating our concerns about the service being provided to medicare enrollees and to all health insurance subscribers.

The luxury autos and private airplanes are not the issue. The issue is an attitude of an executive corps of intermediaries doing bill processing, really, for the Government, and perhaps in the one area in which we could hold down the cost that is provided by health professionals and by hospitals.

Therefore, while much of our discussion today may center on the highly visible questions of how HEW checks against abuses in luxury items, it is my hope that we can begin to define today some of the larger problems involved when multibillion dollar social programs are contracted out to a relatively few private contractors.

First, let me say that by all the standards of measurement we have available to us, most intermediaries do a very good job and their performance has been improving over the 10 years of the medicare program.

Having said that, the fact remains that some intermediaries do not perform well, that there is enormous public concern about intermediary health insurance premium increases; and that congressional offices receive a constant stream of constituent mail complaining about delays and unexplained actions by intermediaries in the processing of medicare bills.

Therefore, we would like to discuss today some of these larger issues: 1. What should be the role of a group of tax-exempt, nonprofit organizations when directly administering medicare and, in all probability, when they come to administer some future national health legislation?

Should they be treated as private corporations? As utilities? As public, TVA-type, Fannie Mae corporations?

2. Why don't we require such tax-exempt organizations-which, after all, do compete directly with tax-paying, profit-oriented insurance companies to provide for truly public representation in their management, not just a few citizens who perpetuate a board of their cronies or neighborhood representation or subscriber representation?

3. How can we insure that these intermediary middlemen, which historically have been so closely connected with hospital management and medical professionals, work for the public and for the protection of the taxpayer's dollar?

For example, we have an interesting memo, which I would like to discuss, in which a group of social security employees comment on the total failure of a Blue Cross unit to contest questionable bills being submitted by a home health care agency.

To help discuss these issues, we have as a witness, Ms. Sylvia Law, a professor at New York University Law School, and author of a strong critique entitled "Blue Cross: What Went Wrong?" I might also say that Blue Cross has written an even stronger critique of Professor Law's book entitled "What Went Wrong with 'Blue Cross: What Went Wrong?" Those who are interested in the subject may want to consult both sources.

4. We are also interested today in how Social Security evaluates the efficiency and quality of the various Blue Cross plans.

There is strong evidence that even after 10 years Social Security has no coordinated system for ranking plans, for determining which is efficient and which is not.

I find it hard to understand this 10-year failure to develop a yardstick by which the efficient may be rewarded and the inefficient removed from the system.

5. Finally, after examining the Federal Government/BCA contracts, we are concerned that Blue Cross Association is simply running interference as a middle man to lobby for an protect the interests of local Blue Cross plans, and their clientele, such as hospitals and the medical profession, and for the protection of the taxpayer's dollar.

We have a series of letters between Social Security and Blue Cross in which the Bureau of Health Insurance's Director, Mr. Tom Tierney, who is with us today, strongly calls into question the worth of BCA's services.

Therefore, we are interested in knowing what amendments in the Social Security-BCA contract have been negotiated so that the public does not pay for a series of duplicative administrative services.

This is a very large range of issues; we obviously will not receive answers to all these questions today.

I hope, however, that this will be just the beginning of a productive series of hearings which will not only provide improvements in the present system, but which will help us in making decisions concerning national health insurance.

Representatives of Blue Cross were invited to this hearing; they were unable to attend. They will be present to help us better understand these issues at our next hearing, now tentatively scheduled for late August.

We will first receive a brief summary from the General Accounting Office of how HEW audits intermediaries and what type standards exist to regulate the expensing to medicare for luxury items.

I would like to welcome Mr. Ed Densmore, the Associate Director of the Human Resources Division, General Accounting Office—if I have your title right, Ed.

Thank you. You can proceed as formally or informally as you like. I want to say informally, because I may want to interrupt you as we go along. Thank you for being with us.

STATEMENT OF EDWARD A. DENSMORE, ASSOCIATE DIRECTOR, DIVISION OF HUMAN RESOURCES, U.S. GENERAL ACCOUNTING OFFICE, ACCOMPANIED BY ROBERT HUGHES, ASSISTANT DIRECTOR, SOCIAL SECURITY ADMINISTRATION, AND ROLAND MILLER, SUPERVISORY AUDITOR, SOCIAL SECURITY ADMINISTRATION

Mr. DENSMORE. Thank you, Mr. Chairman.

I would like to introduce the two people that I have with me.
Mr. STARK. Let me interrupt.

In the absence of the subcommittee chairman, Mr. Vanik, I appreciate that.

Go ahead.

Mr. DENSMORE. On my left is Mr. Bob Hughes, who is the Assistant Director in charge of our medicare work at the Social Security Administration.

On my right is Mr. Rod Miller, who is the supervisory auditor at the Social Security Administration.

We are pleased to appear here today to discuss the Department of Health, Education, and Welfare's auditing and monitoring of contractor administrative costs charged to medicare.

Medicare contracts with intermediaries and carriers are administered by the Bureau of Health Insurance of the Social Security Administration.

Intermediaries are responsible for the payment of medicare part A benefits and related functions, while carriers are responsible for the payment of part B benefits

Most of the intermediaries are local Blue Cross plans which are subcontractors of the Blue Cross Association, and most of the carriers are Blue Shield plans.

The contracts provide for reimbursement of the carriers' and intermediaries' costs of administering medicare, which totaled about $335 million for the first 9 months of fiscal year 1976.

The contracts incorporate the cost reimbursement principles of the Federal Procurement Regulations and other SSA provisions that deal with the allowability of costs.

The primary methods for monitoring and controlling the contractors' costs are budget and on-site reviews by the Bureau of Health Insurance and audits by the department's audit agency.

The Bureau's Division of Contractor Operations provides policy guidance to regional office personnel for on-site reviews and negotiates with the contractors for reimbursement adjustments resulting from audit findings.

The regional offices make the on-site reviews of each contractor's financial records and monitor their adherence to Bureau policy and procedures.

According to Bureau personnel, headquarters expends about 33 staff-years of effort and the regional offices about 43 staff-years of effort and the regional offices about 43 staff-years of effort monitoring contractors' costs.

Mr. STARK. Would those monitoring efforts show that you get about one monitor for about every $200 million in medicare funds administered?

Mr. DENSMORE. I don't know, but the total is about 76 man-years of effort at headquarters and the regional offices.

The monitoring personnel usually are not auditors and do not receive training as auditors. Instead, they are specialists in cost reimbursement principles, who may or may not have an accounting background.

About 40 regional personnel presently devote more than half of their time to monitoring contractor administrative costs.

As a result of their work, periodic reports are written called contractor inspection and evaluation program reports. These reports can cover a contractor's operations for time periods from a month to a year depending on the degree of concern the Bureau has for the operations of the individual contractor.

The reports are kept at each regional office and are incorporated in annual contractor evaluation reports which contain evaluations of such things as bill processing, provider reimbursement, beneficiary activities, and administrative and fiscal management.

The annual reports are general and do not provide an indepth analysis of the contractor's operations. An evaluation of the effectiveness of the Bureau's system of monitoring administrative costs would require a detailed review at several contractors and regional offices.

Mr. STARK. Would you say that the rules and the method of reporting such matters as auto travel and new office space, entertainment, executive salary, and so forth, are so vague or general that it would be almost impossible to compare the effectiveness of the different BHI offices' monitoring, because there are no defined lines of what they are monitoring in that area?

Would that be a fair assumption?

Mr. DENSMORE. I wouldn't say that the rules and regulations are so general that we couldn't do that. I think the rules in the Federal procurement regulations, as well as Social Security's regulations, do specify the types of costs that are allowable and do specify the types of things that should be looked at.

The biggest problem that you run up against is that everything is defined with the use of the term "reasonable."

Mr. STARK. So, if one Blue Cross provider is paying $50,000 a year to its president and another is paying $200,000 a year, they could say that is reasonable, based on greater numbers of subscribers or amount of billing?

Mr. DENSMORE. Yes, sir. There are a lot of things that could come into play there.

There could be differences in the responsibilities, the qualifications of the individual, and there would be problems with the plan that they have had to get special expertise for.

It is conceivable that when you have a difference-the high one might be the reasonable one and the low one might be a bargain.

So, this is the type of thing that makes it difficult, without making a very detailed audit of all of the different factors to determine what is reasonable and what is nonreasonable.

The HEW Audit Agency's regional offices make their audits before the contractors' administrative costs are settled, and frequently recommend disallowance of some costs.

If the contractor does not agree, the questioned items must be resolved by negotiations between the Bureau and the contractor.

The Audit Agency follows up on the actions taken on its audit findings. Extensive fieldwork would be required to evaluate the adequacy and effectiveness of these audits.

The subcommittee expressed an interest in the Department's scrutiny of expenses for luxury cars, private aircraft, and executive compensation.

Most audit effort for such expenses is aimed at determining the acceptability of the contractors' cost allocation techniques.

For instances, if a Cadillac were purchased or leased by a contractor for one of its officers, the auditor would probably ascertain whether the cost of the vehicle was properly allocated to medicare without regard to whether it was considered a luxury vehicle.

Mr. STARK. Could I interrupt there again?

I am concerned, for instance, about getting into that dispute of how it may be followed up. For example, in a draft report on the intermediaries HEW Audit Agency looked into as a result of our recent inquiries, there was this statement:

We identified Medicare charges for business meetings at expensive, out-of-State motels/hotels. In our opinion, charging Medicare for the meetings was questionable practice since they were of a general nature, held in settings outside the contractor's service area, and families sometimes accompanied the attending officials.

Blue Cross, Des Moines, officials agreed that the extra cost for first-class air fares is unallowable and stated, "Otherwise, they are operating within Federal regulations."

That sounds to me as if there would still be a dispute.

Will you go back and clear up those points or, once having made an audit report, does it just get passed along and out of your hands? Mr. DENSMORE. When we make an audit, sir?

Mr. STARK. When that kind of statement appears in a draft report on intermediaries, do you go back and settle?

It sounds from that statement like first-class air fare was disallowed but the rest of the meeting-which sounds more like a resort sort of operation or a paid vacation than a meeting-was paid for. The Blue Cross people say they need it, how does that get resolved?

Who wins?

Mr. DENSMORE. That particular incident is in an HEW audit report, not a GAO report, so we do not follow up on those particular things to see what action is taken.

We do, in the course of our work, review HEW audit reports that deal with the particular suggestion that we are looking at and we do make inquiries from time to time to see whether or not actions have been taken on HEW Auditing Agency recommendations.

Mr. STARK. Are your regulations clear on conventions and extensive travel and entertainment?

Mr. DENSMORE. Are the regulations clear?

Mr. STARK. Yes.

Mr. DENSMORE. Yes, sir. The medicare and Federal procurement regulations are clear.

Mr. STARK. Do you feel that if you saw an out-of-State meeting and a family attending on first-class air travel, and so forth, that your regulations would be pretty clear on whether that was an allowable cost or not?

Mr. DENSMORE. Yes, sir, we would question those costs, also.