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Mr. ROSTENKOWSKI. Thank you, Doctor.

Mr. Ryan, good morning. If you will identify yourself and proceed with your testimony.

STATEMENT OF WILLIAM E. RYAN, PRESIDENT DESIGNATE OF THE NATIONAL ASSOCIATION OF BLUE SHIELD PLANS; JAMES D. KNEBEL, EXECUTIVE VICE PRESIDENT

Mr. RYAN. Mr. Chairman, I am William E. Ryan, president designate of the National Association of Blue Shield Plans. With me is James D. Knebel, executive vice president.

The association consists of 71 locally based, not-for-profit, medical care prepayment plans, employing 55,000 people and covering 73 million private subscribers.

Thirty-two Blue Shield Plans act as carriers for 12 million people under the medicare program. Two of every five Americans look to Blue Shield for financial protection against health care expense.

We appreciate the opportunity to appear before this subcommittee and comment on some of the current issues in the medicare program.

FEP/MEDICARE COORDINATION

Section 210 of Public Law 92-603, the Social Security Amendments Act of 1972, mandates that where an individual is eligible for benefits under both the Federal employees health benefits program (FEP) and medicare, the two programs must be coordinated to provide a program supplemental to medicare through FEP.

The act further specified that if such coordination did not occur by January 1, 1975, the medicare program would no longer pay benefits to those covered under both programs. This would in effect reverse the existing situation and make FEP primary for persons having coverage under both FEP and title XVIII.

Public Law 93-480, passed last October, extended this date to January 1, 1976. It also required the Civil Service Commission and the Secretary of Health, Education, and Welfare to report to Congress describing the progress and proposals they had made toward coordinating the two programs.

This report was prepared and we have read it. It cites administrative, actuarial, and rating problems and points out difficulties in allocating the Government's contribution when a dependent or spouse is not eligible for medicare.

It concludes that "on balance the modification described in that section of the law would be disadvantageous not only to the Federal employees and annuitants but also to the Government." NABSP agrees with these conclusions.

It would be extremely difficult to implement section 210 without inequity. Compliance would likely result in FEB's becoming primary. The purpose of this section was not to make FEP primary, but to effectuate some coordination with title XVIII.

The Blue Cross/Blue Shield contract with the Civil Service Commission already includes a coordination of benefits provision. This makes medicare benefits primary and guarantees that enrollees 65

or older get the full benefits of the Federal employee program, except for those services covered by medicare.

In order to provide equity to those with medicare coverage, the Blue Cross/Blue Shield program has been broadened for those enrolled in both programs. For example, FEP provides such individuals with complementary coverage which covers the medicare deductible and coinsurance.

In addition, FEB offers coverage for prescription drugs, medically necessary private duty nursing, and other benefits not provided by

medicare.

Another fault with section 210 is that compliance would require that the Government contribution be equal to that for high option enrollees. Consequently, those with dual coverage would not have a choice as to program-a choice open to all other individuals in the FEP program. Subscriber choice has been a hallmark of the FEB program since its inception. We can find no reason to preclude FEB subscribers from an election of benefit coverage.

Section 210 would also require that those eligible for both programs be rated as a separate group. This would result in some real administrative problems. In addition, this variation from existing rating practices would affect the rest of the FEP program, which bases rates on the average health care costs for all enrollees.

Based on our experience with the FEB program, providing enough options to comply fully with the intent of section 210 would require many operational changes, and substantially increase administrative

costs.

Mr. Chairman, NABSP recommends the repeal of section 210, based on the factors we have just discussed:

(1) The Civil Service Commission and the Department of Health, Education, and Welfare find that compliance with section 210 would be difficult, if not impossible; we agree;

(2) Compliance would undercut key philosophical components of the program, and would be counterproductive to the efficient and economical administration of FEP; and

(3) Coordination of the two programs already exists in practice.

PROFESSIONAL STANDARDS REVIEW ORGANIZATIONS

The Social Security Amendments of 1972 created the Professional Standards Review Organizations. The function of PSRO's is to review the utilization and quality of services under health care programs authorized by the Social Security Act, including medicare and medicaid.

The objective of the PSRO program is to eliminate unnecessary utilization, thus improving quality of care, and containing the aggregate costs of the programs.

Blue Shield supports these objectives. However, if the PSRO program is to be successful, it too must be efficient and keep its costs at a minimum.

Section 1155 of the Social Security Act provides the statutory authority for PSRO review. This section does not specify the mechanics to be employed by a PSRO in accomplishing its review. Neither is there specific direction as to statistical techniques or review methodology.

HEW regulations indicate that PSRO's should review 100 percent of all cases. There is no flexibility for a PSRO to use valid and recognized statistical sampling techniques in its review. The use of such methods would reduce costs, with no essential detriment to the quality or integrity of the review.

Consequently, NABSP strongly recommends an appropriate declaration of congressional intent to allow PSRO's to employ more economical and scientific review techniques. This would be in the best interest of the PSRO program. Alternatively, appropriate amendments should be made to section 1155.

A second issue is that under the PSRO law, the secretary of HEW is prohibited from contracting with any other organization other than a professional association to serve as a PSRO until after January 1, 1976. The Secretary may or may not contract with other types of organizations after that date.

It sems evident to us that the intent of Congress was to allow professional associations in a given area a period in which to study the PSRO program and organize their participation in it. Presently, there are 121 contracts with professional associations in 203 designated PSRO areas.

It is a fair assumption that there would be more of these contracts except for the limited level of funding provided the PSRO program. Many local and State professional medical associations have shown a high degree of interest.

If the congressional intent was in fact to involve as many professional associations in the SRO program as possible, NABSP recommends that the January 1, 1976, date be extended. This would provide added assurance to professional associations that as more funds become available and as their own capacities to perform PSRO functions increase, they will be afforded the opportunity for a role.

PHYSICIAN REIMBURSEMENT

Blue Shield recognizes the importance of containing medicare expenditure within reasonable bounds. The medicare carrier plans have worked with SSA to accomplish this objective. Unfortunately, Mr. Chairman, the inflationary trend in the economy has caused the original objectives of a paid-in-full program to conflict with the need to limit the government's financial liability.

Medicare part B cannot continue to be regarded as a paid-in-full program and at the same time attempt to control program costs at a level which does not recognize the economic realities of our time.

A review of the previous medicare hearings will reveal that in 1965, NABSP urged Congress to adopt the Federal employee approach for medicare reimbursement. This would have limited government liability under the program. FEP at that time was a $7.500 limit participating contract. We believed that it was deliverable at that time. However, the opportunity has passed to convert the usual charge methodology of medicare to scheduled coverage without significant problems. This has developed for a number of reasons. First, the method of reimbursement does not address a major component of cost, which is utilization. Second, a schedule must be designed for a specific objective. If the objective is to limit program liability, it can be set at essentially any

level. If its objective is to meet the patient's cost in full, it should be related either to income levels or to usual charge levels.

To move medicare to a schedule approximating usual charge would have an additional inflationary impact, in that those physicians who charge less than average would be expected to move up, and many of those who charge more than average would not move down to accept the schedule.

An additional consideration is the confidence level of physicians in Federal reimbursement policies. They have seen the rules for medicare reimbursement change before. They have also seen Government single them out for special treatment, more adverse than that of other groups, in the economic stabilization program. Whether most physicians would accept that the stated conditions of participation in a fee schedule program would remain unchanged is problematic.

The medicare program opted to supply the UCR methodology. The reasons for using the UCR or the prevailing fee mechanism are more valid today than they were in 1965.

Until the mid-1960's, almost all of Blue Shield's coverage was on fee schedules. For the most part, schedules were linked to income limits, in an arrangement where different income schedules paid different fees for the same procedure, at, naturally, different premiums.

Participating physicians agreed to accept the payment as paymentin-full for patients whose incomes were at or below the income limit. This arrangement served to implement the principle that fees should be consonant with the patient's ability to pay. The vast preponderance of physicians appreciated this reasoning, and became participants. The movement away from fee schedules was caused by changes in the economic and clinical environment. These included:

1. Specialization. More work was done by consultants who lacked ongoing relationships with patients, and who tended to standardize their charges, expecting the same compensation from all patients.

2. Inflation. Fee schedules which had survived for years at the $4.800, $6,000, or $7.500 level became obsolete, as increasing numbers of patients earned incomes which put them beyond the limits.

3. Increasing wage scales. As many classes of previously poorly paid patients entered the economic middle class, there became less reason to have massive programs for lower income groups.

Medicare recognized these trends and applied the UCR approach. These factors are in existence today.

In fact, the inflationary trends have accelerated in recent years to the point where the use of an economic index has been mandated by the medicare law. We commented upon this index in a statement to this subcommittee submitted on June 12 of this year.

[The above mentioned statement follows:]

STATEMENT OF THE NATIONAL ASSOCIATION OF BLUE SHIELD PLANS ON PREVAILING CILARGE INCREASES SUBMITTED TO SUBCOMMITTEE ON HEALTH, WAYS AND MEANS COMMITTEE, JUNE 12, 1975

Mr. Chairman, the National Association of Blue Shield Plans consists of 71 locally-based, not-for-profit, medical care prepayment Plans that provide health insurance for over 73 mililon private subscribers. Thirty-two of these Plans also serve as carriers for nearly 13 million enrolled in the Medicare Part B program. (A list is attached.)

We appreciate this opportunity to present our views concerning proposed regulations published in the Federal Register of April 14, 1975 regarding prevailing charge increases under the Medicare program.

The Medicare program's method of reimbursement for physicians' services had some success with a national assignment rate around 75 to 80%. Recently though, there has been a steady erosion so that by 1974 the assignments rate had dropped to 53%. One major reason for this downward trend is that Medicare's present formula for reimbursement is based on physician's charges made during calendar year 1973 at the 75th percentile of the prevailing charge for a given procedure performed in the local community, thus resulting in a lower level of compensation. When the physician chooses not to accept Medicare assignment, he is free to bill the patient his full charge. The patient must then complete and file his own claim and is reimbursed according to the Medicare formula described above.

The end result has a negative impact upon both the beneficiary who is responsible for higher out of pocket expenses and the government, which must pay the higher administrative costs due to longer processing time of unassigned claims. It is about these two areas that Blue Shield is concerned, as follows: As we understand the proposal, the adjusted prevailing levels from fiscal year 1973 will be used as the base year. This level is so far out of step with economic reality as to provide, in our opinion, a substantial disservice to beneficiaries and physicians rendering services pursuant to the program. Since much of the situation is a legislative matter, we urge that expressions of Congressional intent and administrative interpretation through regulations be as liberal as possible for the benefit of beneficiaries under the program.

A level higher than the “adjusted" FY '73 level is justified by economic changes. If the base year is to be calendar year 1971 charges, many serious problems will be present. Such data reflect the restraints of the wage-price controls in effect during 1971, and, if recognized, would in effect continue the impact of that program far differently than on any other sector of the economy. In addition, it is not clear how the proposed implementation would relate to the current (Fiscal 1975) prevailing fee level. A cutback certainly would create problems. We urge the use of calendar year 1973 charges as the base year for the economic index. Many of the problems would be reduced in the interest of the beneficiary and the economic index approach would be off to a better start.

One problem that would interfere with implementation of the index as proposed is the availability of calendar year 1971 charge information. Some carriers either do not have this information or it is not readily available. Retrieving or reconstructing this information would be expensive and extremely time consuming. Many carriers have made improvements in their claims processing systems since CY 1971 (change in procedure code terminology, recognition of specialties, etc.) that compound the problem of reconstructing charge data.

With respect to the economic index formula itself, we urge the additional time be taken to delineate with more detail the precise components of the formula to be used to derive the two major elements outlined in the regulation. We are most concerned that the formula in measuring the cost of doing business would not directly measure physical office expenses. We feel that a specialized overall index more closely related to physicians' cost of doing business should be developed. In addition, we urge that an additional paragraph be included to provide a means whereby present known events could be recognized as part of the formula. For example, historical cost, whether using calendar year 1971 or 1973 data, clearly does not reflect the current rise in professional liability premiums or other special circumstances that may affect a particular locality or localities.

We believe the proposal as outlined will have a negative impact upon beneficiaries, and carriers' administrative costs and processing times. The carriers will encounter substantial increases in administrative costs. The carriers with their own data processing systems will need to develop modifications in their current systems to accommodate the index. The assignment rate will drop dramatically in response to limits on prevailing charges. That decrease in assignment will increase processing costs. The requests for informal claims reviews will increase in proportion to the decrease in assignment rate. Those costs associated with professional relations activities will ncrease to accommodate the need for indepth explanations of the applicability of the index to prevailing charges. The demand for additional beneficiary services will iincrease as bene

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