at the August 2 hearing that "under the selective testing techniques that we have been using, I would have to admit that apparently some (improper charges) have slipped through."

At a time when health insurance costs are skyrocketing to catastrophic heights, I find it shocking that these intermediaries-most of which are nonprofit, tax-exempt, Blue Cross plans-would have any luxury expenditures whatsoever. I do not understand how a Blue Cross plan can have a fleet of luxury cars or a private airplane and yet advise its subscribers that it will not pay "for personal comfort, such as * radio, television, and telephone" in a hospital.

We would like to hear from the representatives of the Blue Cross Association here today what they feel the national association can do to police these types of abuses and improve the efficiency of intermediary operations.

Specifically, I wrote to BCA on July 1 requesting information on: (1) The relationship between BCA and the Blue Cross plans, which serve as medicare intermediaries;

(2) The type of guidance which BCA provides the State plans in determining what is an acceptable administrative or overhead charge; (3) The type of assistance BCA provides the State plans for improving their efficiency; and,

(4) An analysis of the charges BCA makes to medicare for executive guidance and administrative costs.

In this series of hearings, we are interested in issues that reach far beyond the question of administrative costs.

We are interested in:

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 corporations?

How to require such tax-exempt organziations to provide for truly public representation in their management.

How to insure that these intermediary middlemen, who 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?

What the Blues are doing to improve their consumer complaint operations? One of the most common and difficult types of congressional casework is the flood of complaints we receive from medicare beneficiaries who are unable to obtain assistance-and in some cases, common courtesy-from their intermediaries and carriers in their area. What the Blues are doing to help hold the line on improper health expenditures-on the profiteering which occurs in many lab tests and on the gross overutilization which is occurring in many home health visits? The Blues provide a vital function through their audit process; it is imperative that their audit systems work and work well-otherwise we will have to redesign the format for administering this and any future health insurance program.

Finally-and this is an issue we would like to discuss today-after examining the Federal Government/BCA contracts, we are concerned that the Blue Cross Association is simply running interference as a

middleman to lobby for and protect the interests of local Blue Cross plans (and their clientele, such as hospitals and the medical profession). We have a series of letters between Social Security and Blue Cross in which the Bureau of Health Insurance Director strongly calls into question the worth of BCA's services.

Therefore, we are interested in knowing precisely what services the BCA provides in exchange for its $7 million-plus contract with Social Security.

I also have this vague feeling that I would like to get more into focus. The Blue Cross Association and its members may indeed be directly or indirectly a price-setting function for the medical care professionals. I find an absence in the whole medical delivery system of any bargaining to lower prices on behalf of the consumer but more or less a willingness to just pass on the increased costs that particularly the medical profession feels they must constantly pass on.

I find no countervailing force in the system and I would like any indication of where one bargains to get, say, a physician to hold down the cost of a hospital visit rather than just give in and pass it along to subscribers.

I hope these will be a productive series of hearings and not only provide some improvements to the present system, but provide some information that will help in making the decisions concerning the future direction that health legislation will take.

At our August 2 hearing, medicare Director Thomas Tierney said that at the beginning of the medicare program, HEW Secretary Gardner hailed the administrative structure of medicare as a use of 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.

Sometimes abrasive partnerships are the best way for providing balances and checks. I hope that these hearings, however, will not be viewed as wholly abrasive. I hope, rather, that they will be a productive series of hearings which will not only provide improvements in the present system, but which will help us in making decisions concerning future health legislation.

Mr. Tresnowski has an excellent statement and it provides more specifics than I have ever seen before in this type of testimony. To help sharpen the focus of certain issues, I would like to ask questions as we go through the statement.

I understand there were some differences of opinion on some questions as to whether the staff had made some errors in drawing up these charts which were used in a previous hearing. I would like very much if there are any errors to have your staff now or later correct these and make that correction a part of the record so that we are not offending anybody or blaspheming them here gratuitously and we will get that straightened out at the end of the hearing, if you would like to do that later and have it made a part of the record at the first hearing. We would like to do that and put a correction in if those are in order.

Why do you not proceed, however you would like.

STATEMENT OF BERNARD R. TRESNOWSKI, SENIOR VICE PRESIDENT, FEDERAL PROGRAMS AND HEALTH CARE SERVICES, BLUE CROSS ASSOCIATION

Mr. TRESNOWSKI. Thank you very much. Mr. Chairman. I am Bernard R. Tresnowski. I am senior vice president of Federal programs and health care services of the Blue Cross Association and I am here to represent that association.

We very much appreciate and welcome this opportunity to present our statement of what we consider to be an outstanding record of performance as you consider the matters identified in your opening remarks.

I would like to present a very brief oral statement, and with your permission, submit for the record the more detailed statement that we gave to the committee, if that is acceptable.

Mr. STARK. That would be fine, thank you.

[The prepared statement follows:]

STATEMENT OF THE BLUE CROSS ASSOCIATION, BERNARD R. TRESNOWSKI, SENIOR VICE PRESIDENT, FEDERAL PROGRAMS AND HEALTH CARE SERVICES

PERFORMANCE OF THE ASSOCIATION AND THE BLUE CROSS PLANS IN THE MEDICARE PROGRAM

Mr. Chairman and members of the Oversight Subcommittee. My name is Bernard R. Tresnowski. I am senior vice president of federal programs and health care services of the Blue Cross Association and am here to represent the Association.

BCA is prime contractor to SSA for Part A of Medicare, which includes hospital services, skilled nursing care and home health services. BCA subcontracts with eligible Blue Cross Plans which principally handle claims payment and provider audits, The total organization now serves a majority of providers participating in Part A of Medicare.

During the first year of the program, we handled $2.3 billion in benefits. In fiscal 1971, the fifth year, benefits had risen to $5 billion. For fiscal 1974, benefit payments totaled $8.5 billion; and for fiscal 1975, $9.6 billion.

BCA's most important function as prime contractor is to serve as the single point of accountability for the performance of contractual responsibilities by all Plans. In its role as performance manager, BCA has expanded the scope and frequency of management reports covering all aspects of Medicare performance, productivity and quality. BCA has also developed statistical standards of Medicare performance ranges for use as a key management tool.

On such basis of such reports, BCA staff highlights Plan performance discrepancies and, when necessary, asks for Plan programs of action to correct them. BCA also conducts on-site reviews to assure that Plans are performing in the most efficient manner and are applying all policy and program instructions correctly. With that much background, I would now like to present an overview of the Medicare program itself, and of the role of BCA in administering it-including some specific challenges our organization has faced and successfully met.

Medicare was the first instance in which the federal government had contracted, on such a vast scale, for management services in the social services area. And it was the first involvement of the private sector with the government at the level of developing major program policy. Even the major participants did not fully appreciate the uniqueness and intricacies of this relationship as the program began. We assumed our responsibilities as Part A intermediary in an active partnership with SSA, working closely with its Bureau of Health Insurance to initiate and operate this pioneering program.

As Part A intermediary, our responsibilities are principally twofold:

To assure that the program is run accurately; to see that Medicare funds are spent only for services covered by the program; to see that services billed to the

1 Please see Appendix B (last page of the statement) for an explanation of initials used most commonly throughout this presentation.

program were actually furnished to the Medicare patient; and to see that all furnished and covered services were necessary and appropriate for the diagnosis and course of treatment.

To assure that the program is run efficiently; to see that authorized payment is made to providers or reimbursed to beneficiaries without undue delay; to see that administrative costs are kept as low as possible; and to see that total costs are kept as low as possible while fulfilling the program's mission.

Throughout the growth and evolution of the program, we have been oriented to results and the systems and processes necessary to gain those results. Our approach has been pragmatic; the most pressing needs and main leverage points were targeted and available skills and resources were focused on them.

Today, having processed more than 139 million Medicare bills and having paid out more than $48 billion, we have established an outstanding record of effectiveness and efficiency in carrying out our intermediary responsibilities.

Using our basic performance as the measure of results-as shown by cost and productivity, claims processing, provider audit and provider settlement-we have consistently been the best of any intermediary serving the program. For example, provider audit cost per bill for commercial insurance intermediaries is 53 percent higher than ours; net administrative cost per bill for the commercials is 18 percent higher.

While expenditures involved in fulfilling our intermediary role appear to have risen since the program began, in fact our provider audit and administrative costs-when adjusted for inflation-are lower than they were when the program began. Productivity in all areas has increased year by year. For instance, from 1970 to 1975 our overall productivity increased by 32 percent; claims department productivity increased 44 percent.

Some highlights of our record include:

Provider audit.-audit programs have a high (313 percent) return on dollars spent on audits; it is estimated that proper allocation of provider costs to the provider achieved through audit has saved Medicare $50 million per year.

Claims processing.- a tape-to-tape system developed by us and used for transmitting claims from 57 Plans representing over 90 percent of claims volume for the Blue Cross Plans to the SSA has reduced bill errors (a 99.9 percent accuracy rate has been established), speeded claims processing and saved the government an average of $4 million per year since 1968; a Model A claim processing system developed by the BCA also helps assure consistently accurate and timely handling of claims and is used by 24 Plans processing over 50 percent of Blue Cross organization claims volume; the BCA telecommunications system transmits a 100-word message coast to coast for 22 cents compared with a Western Union charge of more than $16.51 for almost the same service; and 98.1 percent of all claims are processed without error.

Provider payment.-because of the speed and accuracy of processing claims, as outlined above, and the fact that less than 1 percent of the more than 10,000 provider cost reports we submit to the government each year are being questioned, provider payment is both timely and appropriate under the regulations of the Medicare program.

Utilization review.—a broad range of support programs and systems has been developed to enable PSROS to establish and operate effective review processes; BCA has developed computer software programs that enable Plans to furnish PSROS with extensive health data profiles; BCA has developed guidelines for three levels of review, enabling use of medical information forms for prospective reviews, and helping avoid retroactive denial of claims. Ongoing cooperation with PSROs has allowed for the transition of intermediary UR responsibilities to these new agencies.

Financial management.-effective cash management has resulted in average daily Medicare bank balances of less than 1 percent of funds expended per month; and checks outstanding at 14 to 16 percent of funds expended per month; the gain over conventional banking practices for corporate funds has risen to a rate where yearly savings to the government are $14.5 million; BCA has improved Plan cost accounting and budgeting capabilities, developing the Standard National Accounting Program; the percentage of allowed administrative cost for the Blue Cross organization, following HEW audit, is now 99.1 percent and averages 99.0 percent for all years of the program.

While our performance record stands on its own merits, this record of accomplishment becomes even more apparent when contrasted with the performance of other intermediaries.

In essence, the Blue Cross organization's record of overall productivity demonstrates better performance than other intermediaries or the SSA's Division of Direct Reimbursement; its costs of administering the program are lower than those incurred by other intermediaries or SSA.

This performance record was achieved during a period when several major new developments were affecting the basic operation of the program. These included the several phases of the economic stabilization program, and adjustment in nursing cost differential, cost reporting form changes, major amendments to the program by Congress; and inclusion of coverage for chronic renal disease (kidney dialysis) for all ages.

Our results were based on the effectiveness of the prime/sub-contract format with the Blue Cross Association as prime contractor and the Plans operating under a sub-contract.

The leadership of the BCA, coupled with the operational skills of 69 Blue Cross Plans, has strengthened our ability to function effectively, helping assure national regional and local performance integrity for the Medicare program.

One indication of the impact of BCA leadership and services to the Plans has been a steady decrease in the variances between Plans for audit costs: variance dropped 50 percent from 1972 through the second quarter of 1976.

Other accomplishments which highlight the role of BCA include provision to Plans of the Model Part A claim processing system, the tape-to-tape claims transmitting system, BCA telecommunications system, performance standards for use in a management information system, a wide range of training programs such as those that have helped increase in-house audit capabilities to more than 83 percent, and the preparation and distribution-through administrative bulletins-of guidelines, procedures, manuals and forms to clarify and help implement Medicare policies and instructions.

In this latter area, we have helped sharpen and refine regulations and instructions to make them more effective in carrying out the aims of the Medicare program.

As this leadership has grown, it has come to stand as a key element in accountability, in performance, and in the establishment and maintenance of effective relations with providers, SSA and Medicare beneficiaries. This role is not unique to the Medicare program since the BCA also administers prime contracts for the Federal Employee Program and the Civilian Health and Medicare Program of the Uniformed Services (CHAMPUS). Many of our Plans also serve in administrative capacity in the Medicaid program and provide coverage for state and local governmental employees.

Our record of performance and accomplishment demonstrates the wisdom of those who formulated the Medicare experiment in public administration.

However, the public/private sector mix and the role of the Blue Cross organization itself have been targets for change by government seeking a lesser private sector role through contract renegotiation. The wisdom of this direction was seriously challenged by two independent panels organized by HEW to study the contract relationship.

These major Medicare studies by the National Adacemy of Public Administration and the Advisory Committee on Medicare Administration (Perkins Committee) underscored the merit of utilizing a contract through which the assets of the public and private sectors can be joined.

Importantly, both studies call for the government to place increasing reliance on standards and results when working with the private sector in health care financing programs.

The NAPA panel called for giving carriers "an earlier and more significant role in establishing policy and in formulating administrative procedures.'

The Perkins Committee stated that with the development of better evaluation criteria and performance incentives, "SSA should reduce its role in carrier decision-making and rely on its capacity to test carrier performance by results." In turn, carriers should (and they will) accept increased accountability.

By following the recommendations of these reports, the private sector's accountability can be ensured while its special capabilities and effectiveness are sustained.

Another key to the future success of the Medicare program and a basic ingredient in an effective public/private sector mix, is a focus on management effectiveness.

BCA has developed performance ranges and weighted statistical performance indicators to be used as guides or standards of performance evaluation. These