simply reflect a plan that does nothing in terms of controlling the excesses of hospital costs and utilization.

The only way to know is to look at each individual plan. I believe all of this simply underscores the need for a publicly administered health program. The Civil Service, whatever its problems, at least provides uniform and publicly defined criteria for determining salaries and for controlling administrative expense.

The Blue Cross building program cries out for comprehensive and close scrutiny. I expect that such an examination will reveal, as one national BCA official said of the Richmond building program, “a can of worms.' ." The BHI's contract evaluation report, issued in the fall of 1974, notes that while the national BCA reviews the local plan's administrative cost budgets to make sure that they are asking for enough money from the Federal Government, there is no systematic review to make sure that plans are not asking for too much money. The BHI report deplores this situation, but to my knowledge nothing has been done to change it.

The testimony of the other witnesses raised, I thought, a lot of interesting points. I would like to make two general points and two suggestions in terms of general solutions.

One general point-and this point was made by other witnessesis that the cost allocation problems in medicare are not limited to medicare. The cost allocation problems are inherent in providing costbased reimbursement from public sources to an organization that does both public and private business.

I think that those problems are even more acute in the case of health insurance where, unlike defense, there is no cost-conscious purchaser on the private side. At least when the Government contracts with McDonnell Douglas they can look at the kind of prices Eastern is paying. When the Government contracts with Blue Cross, it cannot hope to get some reasonable guidance by looking at what private Blue Cross subscribers pay, because they are in no better position to get reasonable premiums than the medicare beneficiary is to get reasonable taxes.

That is inherent in the program and I think that, in and of itself, provides sufficient justification for moving toward a national health program that doesn't rely on these private organizations with inherent conflicts and that inherent necessity to deal with the allocation probIems.

The second general point is that, in determining whether buildings or salaries are reasonable, it is not enough to look comparatively. It is useful to look comparatively to see which ones are the worst. But I think that there is an overall problem in the area of executive compensation, that there is an overall problem in the area of Blue Cross building programs, and it is not enough to ask that plans be as good as the average because the average is lower than what we can legitimately expect.

The notion that these disputes are being resolved by the same body that resolves disputes within the defense contracting industry would, I think, be shocking to most taxpayers. The costs in the defense area have never been held up as a model to emulate.

Furthermore, there are some fundamental differences in dealing with the profitmaking industry that produces a definable product and

dealing with an industry that is by and large nonprofit and that doesn't produce a definable profit.

A third general point, responding to some of your questions about the function of tax exemption, Congressman Vanik. I think you have to seriously question whether in the area of health insurance you can rely on profit motivation and competition to give people reasonable costs and a fair deal. What competition means in the health insurance area is primarily competition for coverage of those people who are not going to have health problems. Therefore, any legitimate profitmaking organization is going to try to cover those people who are going to be most likely to not need the services that are being insured. Second, if they cover them, they are going to charge correspondingly more to those people who are likely to make greater use of the services. So old people will pay more and poor people will pay more and people with kids will pay more and black people will pay more.

And all of that is actuarially justified and makes perfect sense within the context of the competitive profit-motivated industry.

My question is, is that appropriate when you are talking about insurance to meet people's health needs? Blue Cross was originally founded on the notion that that is not appropriate, that there should be one rate for all the people in the community, that to the extent that we are fortunate enough to be healthy, we should be expected to pay a little more to help out people who are less fortunate in that respect. Finally, I would like to suggest two ways of dealing with this administrative cost situation. One way and the way that seems obvious to me is administration.

Whatever problems are involved in public administration, at least we have standards to go by and they are standards that are, I believe, fundamentally different from the standards applicable to the private profitmaking industry and I believe are more appropriate in dealing with people's health.

The other possible way to deal with the administrative cost situation is to contract with private plans on the basis of advanced budgets. Mr. Tierney's testimony seems to indicate that even though budgets are submitted by Blue Cross in advance, they are not sufficiently detailed to reveal situations like the people going off to the resorts in the Poconos. Those things are only discoverable after the fact in audits.

Certainly there are models of the Government contracting with local organizations to do a job under a budget that is sufficiently detailed to reveal that sort of thing. The model with which I am most familiar is the Legal Services Organizations. Certainly Legal Services Organizations can't pay people salaries like that because they contract with the corporation and there are standards as to what you can pay people and you determine in advance what you are going to pay people. You don't fight about it after the fact.

If Legal Services is going to move into a new building, that will have to be a line item in their budget before the Federal Government pays out any money. If they are going to have conferences, somebody puts in an application to a national fund and says, "We want to have a conference. We want to pay people's expenses.

Somebody looks at it and says, "That is legitimate" or "It is not" and approves it or disapproves it. That is very different from saying

"have conferences" and then we will come along 2 years later and decide whether it was a legitimate expense or not.

I think that that is kind of line-by-line budget submission; and examination before the fact is the only way possible, really, to deal with these very difficult problems. I appreciate the opportunity to be able to come here today.

Mr. STARK. Can you give us 10 minutes to answer a quorum call and come back?

Professor LAW. Ten minutes now?

Mr. STARK. We will recess for 10 minutes and come right back. [Whereupon, a brief recess was taken.]

Mr. STARK. The hearing will come together.

Thank you for your testimony, Professor Law.

In your book you say that "perhaps the strongest argument for preserving the role for private insurance in the administration of national health insurance is that the system operated by the Federal Government could be simply inaccessible."

I am assuming you mean as Blue Cross is or was unresponsive to consumer public interest.

In your testimony you say the facts that are available "indicate a need for increased congressional surveillance, perhaps amendments in the law, and I believe ultimately a national health program that does not provide insurers with a tap of the Federal Treasury.'

What went wrong or have you changed?

Professor LAW. I don't know if I have changed or not. In the book I say that I don't think it matters that much if you have a national health insurance program that is publicly administered or whether you contract with Blue Cross, provided you do a half dozen things that would fundamentally change the nature of Blue Cross like, say, no private business; like requiring that they be bound by basic principles of due process, as is the Federal Government.

I think that, once you do those things, the difference is largely a matter of form rather than substance.

If it makes people more comfortable to say, "We are contracting with this organization in much the same way we contract with local legal services offices," which are private local corporations, then I don't see any difference in substance there.

The second problem, the fact that the Government could be as bad as Blue Cross, is more a problem that relates to questions of utilization review and control, access to services, and quality of services rather than specifically to fiscal controls. I think that the Government has a better record in fiscal controls than does the private sector.

In order to make a health insurance program responsive to people's needs in those other areas, you have to structure in some things like local boards that are selected in some democratic means and required to report to the public in some regular way, so that there is some opportunity for oversight that goes beyond the periodic investigation of a congressional committee, because we can't expect Congress to keep tabs on a whole system as vast as Medicare.

Mr. STARK. Before we go on, there are some questions I have based on your testimony. Perhaps we have some semantic differences.

I like to define or make a distinction between "health" and "medical." To me, health has a lot to do with a whole lot of things-how you feel when you get up in the morning, whether the sun is shining and where your head is. It is probably more a result of environment, your nutritional training, your education, how you feel about your own femininity or masculinity. It seems to me to have a whole hell of a lot more to do with health than Blue Cross or Blue Shield or the AMA.

Medical, to me, defines the "I hurt," "My arm is broken," “I have the flu," "I am pregnant," on down the line. That is really what we are discussing.

I think health is really just a function of environment, and if we leave it there, we would be a lot better off.

Professor LAW. I agree with you.

Mr. STARK. I want to keep saying "medical" and not "health." Professor Law. Absolutely, yes.

Mr. STARK. Second, I don't think there is any "insurance" outside of perhaps catastrophes where you get some actuarial experience. An insurable event is something different from a prepayment of medical services, although, as you point out, there is some kind of medical progressiveness in saying that those more healthy, they are needing less medical care, pay for those less healthy.

Professor Law. That is not an insurance concept. That is a tax concept.

Mr. STARK. That's right. That is what I am getting at. It is like the progressive income tax, although it does relate to income actually going back. I would like to call these plans bill-payers, because a billpayer director or a bookkeeper, with all the really nice bookkeepers and bill-payers in this world, sounds less impressive than "executive." Or you can make it four syllables, if you want to really savor the position. That is what I see these intermediaries as being, an extension of the hospitals' or the doctors' accounting offices.

What also is missing here is the passthrough of costs or that absent from the whole system is any kind of alternative which allows the consumer a choice to do anything but accept and pay for or not have the service. In other words, when you are sick, you don't question the doctor or the practitioner or the chiropractor or the hospital or the blood test person when you're told how much it costs. You pay, even if you are not covered by one of the plans.

You just don't, as a practical matter, have a choice unless you are extremely wealthy, or are a member of the fraternity of professionals where you have the luxury of having several medical professionals to discuss things with.

I keep hearing from my constituents, "The price went up $4 or $5 a hospital visit. Why?" Because it was the practice in your area. My next question is, whether you have seen a practice within the Blue Shield or Blue Cross system of spreading around rates or comparing rates among physicians?

I wouldn't go so far at this point to say that it is prophetic. But it seems to me if you are a physician and you see what all the other physicians are charging to set a right arm, for instance, and yours

are below that rate, you don't have to be a whole hell of a lot smarter than Mr. Stark's son to say, "I had to raise my rate because that is what the insurance companies are paying an employee."

Maybe that is OK, but where is the bill-payer who says these rates are too high, and we are going to go out and create an HMO or hire some physicians and set up a public interest medical practice to cut the rates down to bring the business in? Absolutely nowhere in this whole process do I find any incentive to either reduce the amount of services so you will lower the costs.

The rule seems to be, Let's increase them and pass them through. When in doubt, stick him in the hospital over the weekend so we can go play golf on Sunday and come back and operate on Monday.' Would you comment on where cost-cutting enters into the system? Professor LAW. I think I agree with everything you said except the characterization of Blue Cross as the bill-payer. I think that is true today, but I also think that there is a need for some agency that looks at the budgets of hospitals, just as there is a need for some agency that looks at the budget of Blue Cross. That agency, whether it is called "fiscal intermediary" or the "health services organization" under the Health Security bill, or Blue Cross or whatever, that agency has a very important job to do that is not just paying bills. It is a job that is essentially a job of making social judgments as to how much money you want to spend, and how you want to spend it.

At some level those judgments are made here in the Congress, but at another level those judgments have to be made in a more detailed way and you need an agency to do that.

You are absolutely correct, that you can't expect consumers at the point of illness to make those judgments. But I think you can expect consumers and people in a more general way to be involved in the process that determines whether we are going to get a CAT scanner for this community or whether we are going to spend our money expanding outpatient services.

Mr. STARK. Can those decisions be made on the basis of economicjudgment or are they really judgmental? It isn't something that a free marketplace is going to decide, is it?

Professor LAW. There is no marketplace. Even if there was a marketplace, I am not sure we would want to allow those decisions to be made by the marketplace because I think, unlike other things that we need as human beings, there is a growing sense in this country that your accessibility of health services shouldn't depend on whether you have the money to pay for it.

It is one thing to say if you want a Cadillac, you go out and get a job so you can buy it. But it is quite another thing to say if your kid is sick and needs medical care, you just earn enough money to buy it or else don't buy it.

Mr. STARK. When you wrote your book, did you receive public assistance in financing?

Professor LAW. Yes. At the time that I wrote the book I was staff director of the health law project at the University of Pennsylvania and received funds from OEO, Health Services Administration and the Ford Foundation. I received no profit from the book. The royalties. from the book go to maintain the Health Law Project Library, which I think is a very good collection of materials in this area and is what is left of the health law project.