At what level do occupancy rates get so low that hospitals should be forced to close?

A subcommittee is expected to draw up the new standards. Several persons familiar with the rate review process believe the subcommittee will become a major battleground for tussles between the state, pressing for cost control, and the hospitals, trying to defend, in some cases, their very existence.

SOME PESSIMISTIC

There are those who believe the strengthened rate review process won't be enough. "It's not going to work," one source predicted. "It's going to the Legislature eventually, but everyone's willing to give it a try to see if it's going to work." Lucey urged a state rate review committee two years ago, but his proposal died in the Legislature.

Blue Cross and the WHA contend that rate review has shaved more than $15 million from rate increase requests in its first 31⁄2 years. However, the governor estimates that Wisconsin hospitals are passing on to their customers more than five times that amount each year in unneeded costs because hospital rates are ́based partly on vacant beds that were part of unnecessary construction projects.

OFFICIALS WATCHING

State officials, finally, are looking closely at the performance of the Connecticut Commission on Hospitals and Health Care, which claims far greater savings than the Blue Cross-WHA rate review committee. In Connecticut, legislators ordered the state to combine into the commission several functions that still are divided or not performed at all in Wisconsin.

The commission is in charge of all regulations affecting planning, rate review and certification of need. This consolidation, supporters argue, has enabled the public to hold medical care organizations more accountable for their actions.

And that, critics of the Blues contend, is something that's been missing at the Blues and in the health care system in Wisconsin.

BLUE CROSS Loss QUESTIONED

(By David Beal)

Did Blue Cross of Wisconsin have a net operating loss of $10.4 million last year, or was the loss only $4.6 million?

Did the Blue Cross plan's reserve fund shrink from $37.7 million at the beginning of 1975 to $32.3 million at the end? Or did it grow, to $373. million from 136.4 million, during the year?

The answer depends on whom you ask.

If you ask Blue Cross and its accounting firm, Arthur Young & Co., you get the gloomier set of figures. Blue Cross lost $10.4 million. Its reserve fund fell about $5.1 million.

STATE'S VIEW

If you ask the Office of the State Insurance Commissioner's Office, you get a picture that is less bleak. Blue Cross lost $4.6 million. Its reserves increased by about $900,000.

The explanation for the variances rests in the use of different accounting systems.

Blue Cross says it uses "generally accepted accounting principles" to put together its financial statements. State insurance department regulators, on the other hand, require the plan to report its financial condition on a "statutory basis." Department auditors told Blue Cross, in a state examination last year, to begin reporting the statutory basis figures in the annual report Blue Cross distributes to the press and the public.

Thus, the Blue Cross annual report for 1975 does include a "statutory basis balance sheet." However, the report did not include the statutory basis income statement, as given to the state. And in a news release accompanying the annual report, Blue Cross emphasized the $10.4 million loss without mentioning the $4.6 million loss figure.

Joseph E. Voyer, senior vice president for finance at Blue Cross, and Robert H. Walker, director of the Insurance Department's Operational Review Bureau; explained the differences in separate interviews.

Voyer said the state's view is that Blue Cross should describe its operations for 1975 as the financial statements would appear if the plan had stopped doing

business Dec. 31, 1975. One effect of reporting that way is to include a financial statement item called "deferred premium credits," the excess of premium income over claims payments, in the income statement, instead of listing the credits as a liability in the balance sheet.

DIFFERING TREATMENT

Thus, he said, Blue Cross reported $6.9 million in deferred premium credits to the state as income, but the plan's accountants excluded this income in their report to the public. Most of the differences in the loss and reserve figures are due to the differing treatment of these credits, he said.

Voyer said the differences happened to be significant in 1975, but weren't likely to vary much for 1976.

Voyer was asked by a reporter whether Blue Cross emphasized the more gloomy figures in order to make a better case to the public for premium increases. Not so he replied.

[From the Milwaukee Journal, June 11, 1976]

PHARMACISTS DEALT BLOW BY BLUE CROSS

(By Neil D. Rosenberg)

Dozens of Milwaukee area pharmacies that have been battling delays and rejections of claims for prescriptions they have given Medicaid recipients now have a further problem.

The delays are due in part to delays in transferring eligibility notices between the state Welfare Department and Blue Cross and Surgical Care Blue Shield, which handle the fiscal arrangements for the program.

To circumvent this problem, pharmacists have invested hundreds of dollars in photocopying machines so they can copy their customers' Medicaid cards. They have sent the copies with the claims to prove their customers' eligibility. But Blue Shield has sent a letter to all pharmacists saying this practice conflicts with state and federal regulations.

PROCEDURE ALTERED

"Previously, Medicaid claims that were rejected were normally processed the following month if a copy of the patient's Medicaid indentification card was attached to the claim form," the letter said.

"It has become necessary to alter this procedure to more closely align Milwaukee County procedures with the rest of the state and to provide stricter compliance with state and federal regulations governing the Medicaid program. "It will no longer be of any particular benefit, or necessary, to attach copies of the Medicaid recipient's eligibility cards to our office.

"It should be noted that rejections frequently occur because of the time lapse between the date the Welfare Department issues Medicaid cards and the date that notification is received by Surgical Care to update the computer eligiblity file."

MORE BACKLOGS

An official of a chain of six pharmacies said the new policy would cause even longer delays. He said he had been told unofficially that pharmacists could call Blue Shield if a customer wanted to check on his eligibility. If Blue Shield does not list the person as eligible, the pharmacist will be told not to fill the prescription because it won't be allowed.

"What am I supposed to tell the customer who has the Medicaid card right in front of me?" he asked.

He said he had waited five or six months for some customers to be certified. And he said that he feared the situation would become worse under the new system.

He said Blue Cross had advanced him $25,000 to cover delays in payments. "They act like they are doing you a favor in giving you the money, but it is my money, not theirs," he said.

BLUE CROSS PROBE SOUGHT

(By Neil D. Rosenberg and David Beal)

A California congressman says he plans to seek a congressional investigation into Blue Cross of Wisconsin, particularly into the organization's use of a $200,000

private plane and a fleet of 118 cars, including a 1976 Mercedes-Benz and other luxury cars.

Rep. Fortney H. (Pete) Stark (D-Danville) said in a telephone interview that he would ask the oversight subcommittee of the House Ways and Means Committee to investigate. A spokesman for the committee said the investigation might begin in less than a month.

Stark's call for an investigation came after he learned of the plane and luxury cars in a federal audit, a summary of which was obtained by The Milwaukee Journal. It was unclear whether the investigation would include Surgical CareBlue Shield.

The audit showed, among other things:

In 1974 Blue Cross sold a Piper Aztec twin engine plane, which it purchased in 1970 for $88,840, and bought a twin engine Cessna 414 with a pressurized cabin for $201,642.

Maintenance and operating costs jumped from $33,138 in 1973, when the Aztec was used, to $52,869 in 1975.

Blue Cross overcharged the federal government $726 in 1975 because it used luxury cars instead of nonluxury cars to transact some Medicare business. There were also overcharges of $61 in 1973 and $61 again in 1974. The audit concluded that the 1973 and 1974 overcharges were not significant, but it recommended that Blue Cross repay the $726.

Twenty-two of the 118 cars in the fleet are classified as luxury cars. (A Blue Cross spokesman said the government defined a car costing more than $5,262 as a luxury car, for purposes of the audit.)

Most of the cars in the fleet are given to employes for personal use as well as business use. In return, the operators have to pay for all gas, for business and personal use, except for certain business mileage. They get 4 cents a mile for business mileage of more than 500 miles a month in the Milwaukee area and 5 cents a mile for business mileage of more than 600 miles a month outside the Milwaukee area. They are reimbursed for all maintenance, repairs and parking.

Stark, with Rep. Charles A. Vanik (D-Ohio), chairman of the oversight subcommittee, has informally investigated other Blue Cross plans and their use of cars and planes. He said Blue Cross here had one of the largest transportation fleets of any such plan in the country.

"This is so flagrant that it offends public sensibility," Stark said. "There is no question this is one of the biggest plane and car fleets of any plan.

"Why should we pay Medicare money to keep that group in abject luxury? It is absolutely ridiculous."

PLANE RAISES QUERY

Stark questioned the need for any plane, though the audit found the costs charged were reasonable for a private plane and comparable to costs of commercial airlines or privately owned autos. The audit was done by the U.S. Department of Health, Education and Welfare.

Stark, himself a pilot and familiar with both types of planes, said there was no way a plane could be cheaper to operate on a trip to say, Madison or Green Bay, than a car. Stark, who was born and grew up in Milwaukee, said he was familiar with the state.

Leo Suycott, president of Blue Cross, emphatically rejected Stark's charges. "It's easy for him to sit in Washington and make these wild statements," Suycott said. "It makes good news to seize upon us and make noise about an emotional issue such as health care. Medicare is getting a pretty good buy. We're doing a good job for them."

FIGURES RELEASED

Separately, a Blue Cross official released figures from Blue Cross that said the insurer's cost of handling Medicare claims had dropped from an average $6.07 a claim in 1972 to $4.83 last year. The 1975 figure is lower than average handling costs for other, similar sized Blue Cross plans, commerical insurers and the government, he said.

Suycott said he drives the Mercedes. He said the car has a diesel engine, making it efficient and economical. The car is a model 300D with five cylinders, he said. Suycott would not give the price of the car, but such models currently sell for $14,000 to $18,000 new, depending on optional equipment.

Suycott also said he saw no impropriety in the use of Blue Cross cars for personal

purposes.

"A CORPORATE ASSET"

As for the plane, he said: "It's a corporate asset." The Cessna can land at all the significant airports that the smaller plane could, and depreciating the plane at $12,000 a year over a period of years keeps annual costs reasonable, he said. Because of its pressurized cabin, the plane can climb as high as 25,000 feet, above bad weather, Suycott added. He said the Cessna was more efficient and more comfortable than the previous plane. And he said it saved time for company employes.

Another Blue Cross official said the $726 overcharge was minimal when compared to the $2.77 million that Blue Cross was paid last year by the government to administer the Medicare program.

PAID $37,466

Blue Cross was paid a total of $37,466 in transportation expenses for Medicare by the government for 1975, including the $726, the audit showed.

Suycott is a licensed pilot who sometimes flies the plane, but with another pilot. Blue Cross has a full time pilot for the plane, which is based at Timmerman Field. The audit showed that while the car fleet had steadily expanded in recent years, the number of luxury cars had declined. The fleet grew to 118 cars in 1975 from 107 in 1973, but the luxury cars declined to 22 in 1975 from 39 in 1973.

"This is the kind of excess by a few that gives the whole industry a bad name,' Stark said. "Today it is a Cessna 414. What will it be tomorrow, a jet? There is no question that operating a private plane is abjectly wasteful. There are all types of charter services and commuter airlines in Wisconsin.

"If there are times you can't drive, then you rent or charter a plane, and it would be far less expensive than owning your own."

Suycott said the plane was never flown for personal use by Blue Cross employes. But Stark said the investigation would look into that angle.

It is expected that the Blue Cross investigation will be expanded to include other Blue Cross plans that do government business, a staff member for the Ways and Means Committee said.

UNITED STATES TAPS BLUES FOR REFUND

(By David L. Beal and Neil D. Rosenberg)

Federal auditors want Blue Cross of Wisconsin to return $112,000 it collected from the US government to process Medicare claims.

The amount is part of a much larger sum-an estimated $7 million—that the auditors are seeking in similar disputes with about 29 other "Blues" plans and their trade group, the Blue Cross Association (BCA).

Blue Cross officials here argued that Blue Cross of Wisconsin should keep the $112,000 because it was a cost allocated to Medicare as part of Blue Cross' cost of doing business. They said the money represented state franchise taxes paid by Blue Cross on its income from premiums and that Blue Cross should be reimbursed for the tax payments.

But auditors for the US Department of Health, Education and Welfare disagree. "The franchise tax is determined on the basis of operating income," they said in a recent audit of Blue Cross. "No operating income is generated by the plan under the Medicare program because the plan is reimbursed only for costs incurred under the program.

"We are of the opinion, therefore, that none of the franchise tax should be allocated to the Medicare program.'

The auditors examined costs incurred by the Wisconsin plan in 1972 and 1973. They also disallowed these costs, which Blue Cross did not contest:

Franchise taxes on income from investments, $97,000.

Advertising costs mistakenly charged to Medicare, $2,308. The money was part of a BCA national advertising assessment, the costs of which are not allowable under Medicare.

Donations to charitable and community organizations and entertainment expenses, $3,192. The audit gave no details on how the entertainment money was spent.

The BCA dispute with the auditors about reimbursement for the franchise tax came up earlier this week in Washington, at a hearing conducted by the oversight subcommittee of the House Ways and Means Committee.

On Thursday, Rep. Fortney Stark (D-Calif.), a member of the committee, pointed to the association's claim for the franchise tax money as one of many reasons the committee is investigating Blues plans around the country.

Stark said he agreed with the auditors that Blue Cross should not be reimbursed for the franchise tax expenses.

Mr. STARK. Prof. Sylvia Law of New York University Law School has written "Blue Cross, What Went Wrong?"

We are privileged to have Professor Law with us this morning. I will let you proceed in your own way and at your own pace. Welcome.

STATEMENT OF PROF. SYLVIA LAW, NEW YORK UNIVERSITY LAW SCHOOL, NEW YORK, N.Y.

Professor Law. Thank you very much, Mr. Chairman and Congressman Rangel. I appreciate the opportunity to be here today.

I would first like to focus on some facts in three areas: one, executive compensation; two, buildings; and three, public relations. I will then discuss briefly the legal controls which now exist-or, more precisely, don't exist to deal with these problems. Finally, I will offer some principles and suggestions for approaching these problems.

Limited data on executive compensation, which I am submitting for the record, suggests that there is enormous variation in the amounts that local Blue Cross plans pay their executives. For example, the chief executive in the New Jersey plan receives more than the president of the New York plan even though the New Jersey plan serves about half as many people, and is not known for its high-quality administration. As another example, even though the Cleveland plan serves more people than the Cincinnati plan, Cincinnati pays its chief executive about half again as much as does Cleveland. Most of these plan chiefs, and indeed many of the plan vice presidents, were earning in 1973 more than Members of the U.S. House of Representatives or Federal court judges.

There is also evidence that since the enactment of medicare there has been a proliferation of Blue Cross plan executives, and a dramatic increase in their compensation. Data on the New Jersey plan through 1974, which I have submitted for the record, shows that since 1966 the number of plan executives increased from 7 in 1966 to 10 in 1973. From 1966 to 1974 the salary of the president of the New Jersey plan increased over 100 percent and the salaries of other plan executives increased almost 100 percent.

In 1974 the president gave himself an 8.4 percent increase, and other executives increases of 8, 10, 12 and 16 percent. During the same period the unionized employees of Blue Cross were granted a 5.5 percent raise.

These figures on executive compensation do not take into account. all of the indirect forms of compensation which are from time to time exposed in the press: private airplanes, generous life insurance and retirement programs, private limousines, and so forth. I believe this sort of indirect compensation may represent a more significant cost to Blue Cross subscribers and to the Federal treasury than the direct salaries.