Mr. TRESNOWSKI. You mean under medicare?

Mr. STARK. Yes.

Mr. TRESNOWSKI. Chicago is our largest medicare subcontractor, that is the Illinois plan, and our smallest, I believe, is Utica, N.Y. Mr. STARK. How about in terms of overall membership?

Mr. TRESNOWSKI. The largest Blue Cross plan is New York City, and the smallest is-I really don't know.

Mr. STARK. We talk about a lot of analytical relationships. I'd like to focus on bill processing. What is the spread between the plan with highest costs and the plan with the lowest costs?

Mr. TRESNOWSKI. At the moment the Florida-Puerto Rico is our highest cost. If you adjust for the factors I talked about, provider density, bill mix and cost of living, you bring that from $11 down to slightly under $7, but they still remain very high.

The lowest on the basis of the Bureau of Health Insurance data is Jamestown, N.Y., but that is not a good figure because Jamestown does not do provider audits.

Mr. STARK. I think I have to take exception on that cost of living. I don't know why you adjust for cost of living.

Mr. TRESNOWSKI. It is an indicator of differing wage rates, that is all.

Mr. STARK. It has no validity, though, when you are using current comparisons.

In other words, if you are comparing the highest cost today between Puerto Rico and a small town in New York, the cost of living doesn't enter into it.

If you want to compare the increase in, say, the 10 years previous, it cost $3 to process a bill and today it costs $12, and you don't want me to tell you that is a 400 percent increase because half of the increase is due to the size of the bill, so you want to compare your billings as a percentage of average size of the bill; that makes some sense.

Mr. TRESNOWSKI. Even when you adjust for wage rates the Puerto Rican operation is highest. What we are really saying is the average salaries paid in, say, New York City are different than they are in Utica, N.Y., and so on, and that is a fact of life that is beyond the control of any manager and, really ought to be corrected for.

The Puerto Rico situation, of course, remains high even after adjustment.

That is related to a lot of factors associated with doing business on the Island that I could get into if you care to.

Mr. STARK. Getting back to Senator Talmadge, he contends further that problem intermediaries aren't terminated. In other words. there is a kind of don't-rock-the boat approach that covers for the weak sister or weak brother in the crowd.

Have any intermediaries been terminated? Is it a problem to terminate them?

You hate to lose a member, I am sure, so that would be one reason. Mr. TRESNOWSKI. In our case, the Puerto Rico Blue Cross plan was a subcontractor, they no longer are. We transferred that operation to the Florida Blue Cross plan.

That has been the only termination. There have been a number of plans dropped because of merger considerations. We are now merging

five plans in the State of Ohio under the Cincinnati plan. I think the question is

Mr. STARK. Is that a forced marriage, so to speak?

Mr. TRESNOWSKI. I don't know how it came about. It does reflect that the realities of life in the State of Ohio, taking into account a lot of considerations, caused them to bring the plans together under one structure.

There is a lot of that going on. We started out with 79 plans when medicare started and we are down to 69 plans and that kind of thing continues to happen.

The business of termination as a device to solve performance problems isn't as simple as it may appear to be. I think Mr. Tierney has made that comment on several occasions, that you just don't take all of the investments in a particular contractor and throw it out.

Your best way to go is to try to bring the performance up. If you can't do the job you have no choice.

Mr. STARK. Aren't we really talking about a management team? Isn't it very likely if you terminate a contractor in effect you are just taking the top 10 or 12 executives in a large plan and the board and saying out you go? Because you are in a nonprofit framework, the plan has rented office space-maybe you should operate it.

You have the tendency to move toward monumental buildings that we in Congress do, maybe the Blue Cross plans are getting the governmental sort of attitude judging by some of the monuments they have built.

Senator Talmadge talks about in effect in S. 3205 of going to a fixed price per claim.

Do you have any feelings on that?

Mr. TRESNOWSKI. Yes, we support a fixed-price arrangement. We think it ought to be experimented with. We don't think it should be universally applied.

There are a lot of unanswered questions. The Social Security Administration has just released requests to five Blue Shield plans. They want to start on the part B side of the program.

We are quite anxious to do that, if we really believe what we say in terms of measuring us by results. We would like to test that idea, very much so.

Mr. STARK. Your contract runs about $7 million or $8 million? Mr. TRESNOWSKI. This year we will spend about $6.8 million with the Blue Cross Association.

Mr. STARK. What is your contract with the Bureau of Health Insurance?

Mr. TRESNOWSKI. That is the one I am talking about.

Mr. STARK. In Mr. Tierney's letter to you in February of 1975 regarding that year's contract negotiation, "With the maturing of the medicare program in its components structure we find the local Blue Cross plans already independent organizations gaining selfsufficiency in medicare operations." Do you agree?

Mr. TRESNOWSKI. Yes, I think they have improved.

Mr. STARK. He quotes again, "Similarly, our Bureau of Health Insurance regional staffs have grown in size and sophistication." Would you agree with that?

Mr. TRESNOWSKI. They have certainly grown in size.

I think they have learned a lot, too. I don't know how sophisticated they are.

Mr. STARK. Going on, he says:

Inevitably, some functions have become overlapping and redundant and we need to look carefully at the rationale for the present arrangements by which your organization, acting as the prime contractor or subcontractor of its major functions and duties to Blue Cross plans and whether such rationale continues to be valid.

Would you like to comment on the validity of that rationale? Mr. TRESNOWSKI. The rationale was that under the statute the providers had an opportunity to nominate an intermediary, and in our case the majority of them nominated the Blue Cross Association. That was because there was merit in having a single point of accountability for the Blue Cross system, to see that it performed well under the medicare program.

I guess my reply, Mr. Chairman, is that our record shows that we have performed well.

Mr. STARK. I guess you could take the Republican philosophy, though, if we talk about bloc grants, we want to have the States do it and not have it centralized, and I might be willing to be more sympathetic to that if we said, “OK, we will take the average and give you $7 a claim; now, you take the money from Youngstown and give it to Puerto Rico and you fight that battle." Now, that might be worth more than $7 million a year to us if we could, in fact, say, for all the claims we will give you $6 or $9, I guess, we would have to give, $7.50, and if you want to cut that kind of a deal I think the savings would be phenomenal.

But what we are paying for is a decentralized system, we are paying at that level, we are paying the $11 or $12, whatever it is, in Puerto Rico and the $3 in New York, but we don't seem to be getting any of the advantages of what a centralized system ought to do.

Mr. TRESNOWSKI. Of course, I think the burden of my remarks today, I hope, will illustrate that we are not talking about an either/or situation.

We do centralize what can best be done centrally. For example, it would be foolhardy for the plans to have a telecommunications system; it would be foolhardy for them to develop the tape-to-tape system or a model-A system and maintain it.

It would be foolhardy for them to develop the kinds of managerial initiatives we have done. On the other hand, it would be foolhardy for BCA to do the claims processing out of Chicago.

The question of centralization, decentralization, has plagued management for years. Mr Sloane wrote a book on it as it applied to General Motors Corp.

Mr. STARK. He later started a school on it which I attended, and I do not think he had much success either.

Mr. TRESNOWSKI. It was a very fascinating book, though. The Government has gone decentralized and has gone back centralized. It is cyclical. The important point here in the contract negotiation is since the Government is on a path to decentralization, what does that do to the BCA prime contract. I think you have to answer that in individual situations.

For example, we have under negotiation at the present moment, with regards to the contracts-the question of drawdown of administrative expenses from the Treasury.

Now up to this point the drawdown is done by BCA, and the money is distributed to the plans for their administrative expenses. Up until this point, everybody has agreed that this arrangement has been the most efficient system. We have a series of arrangements where float is minimized or is nonexistent with corresponding savings to the Treasury.

Now comes the Government, and they say under the "checks paid" regulations of the Treasury, it would be more efficient that the plans draw all their money and benefits under that arrangement through their individual letter of credit.

That matter is being negotiated right now. It is not a question that BCA is stubborn on the points. What we are saying is what is in the best interest of the program. Once that change is made-and it will be made in the next contract-we are asking that from a managerial point of view we continue to monitor cash management performance.

Mr. STARK. Mr. Tierney proposed a number of amendments in the 1975 contract, and you replied-I think-that, "Those amendments would effectively eliminate BCA as intermediary, and it was contrary to the provisions of the act and the supporting facts."

Then BCA sends Mr. Tierney a personal letter dated April 4, 1975, saying, "There was a negotiating deadlock on the major issues which BCA viewed as threatening its role as intermediary and stating, therefore, we shall seek an early opportunity to meet with the Commissioner of the Social Security Administration to seek his assistance in the resolution of these matters." Did you meet with the Commissioner?

Mr. TRESNOWSKI. The personal reference, you have to understand relates to the Government mail system. Tom Turney told me that if I wanted to get a letter to him, to mark it "Personal," otherwise it ends up in the mailroom and is delayed.

Yes, there were very fundamental issues whch we met with the Commissioner on. I would have to say the 1975 negotiations revolved around a question of not just BCA's role but the very fundamental question of the contractor's ability to manage their affairs. We had before us at that time the whole business of the Government's involvement in our subcontracting. I do not mean BCA and other plans, but when they subcontract for goods and services, they wanted extensive involvement.

Mr. STARK. Such as affirmative action, minority business?

Mr. TRESNOWSKI. No. Mostly prior approval rights on EDP acquisitions.

Mr. STARK. Were there any major changes in that 1975 contract which concerned you?

Mr. TRESNOWSKI. Oh, yes, a whole series of changes which occurred mostly in the subcontracting language of the contract. There was give and take around that.

Mr. STARK. What significant changes of the nature that would have tended to eliminate your role were there in 1975? Maybe you could just submit for me a list of what you consider those major changes in

the 1975 contract to be? Then your contract expires at the end of September?

Mr. TRESNOWSKI. The end of September, right.

Mr. STARK. Will there be any significant changes in the new one? Mr. TRESNOWSKI. Yes, many. As I recall, there are about 18 proposals as it relates to all contractors and six proposals as they relate specifically to the BCA contract.

Of the six I mentioned the one with regard to direct drawdown of administrative expenses which we are very close to agreement on. It will be decentralized. The others have to do with the budget process. Several contract negotiations ago we delegated to the plans the authority to negotiate with the BHI regional offices.

Under the new contract we will change the BCA role with an obligation to monitor the activities that go on between the regional office and the plan.

The business of negotiating final settlement of administrative costs will be between the plans, BCA, and the Secretary. That will be a change. There are some technical changes with regard to how we transfer providers between plans.

We are now amending the contract to give the Secretary a prior approval on any move of that kind, and finally a change on the matter of telecommunications. The Secretary is asking that there be an opportunity to evaluate the telecommunications system and to make modifications to it.

What we are arguing in the negotiation is that if there is a change, there ought to be a proper notice to us and an opportunity for consultation to see if the cost considerations make sense.

We are working on contract language right now to accommodate both points of view on that. So there will be those changes.

Mr. STARK. Does the minority counsel want to get in here?
Mr. MALONE. Yes, Mr. Chairman, I would appreciate it.

I understand that a statement was submitted to the subcommittee by the Blue Shield people and they would like it included in the record.

Mr. STARK. Certainly. We will be pleased to add it.

[The document referred to follows:]

NATIONAL ASSOCIATION OF BLUE SHIELD PLANS,
Washington, D.C., August 26, 1976.

Hon. CHARLES A. VANIK,

Chairman, Subcommittee on Oversight, Committee on Ways and Means, U.S. House of Representatives, Washington, D.C.

DEAR MR. VANIK: The National Association of Blue Shield Plans herewith submits a paper for inclusion in the hearing record of the recent hearings by a study group of your subcommittee on the issue of Medicare Administrative Costs. Thank you for your consideration. Sincerely,

Attachment.

CHARLES B. SONNEBORN,
Vice President.

WHITE PAPER: MEDICARE ADMINISTRATION

When the Medicare Act became law-on July 30, 1965-it represented many years of legislative planning, development, and compromise in an effort to provide the nation's elderly with a significant measure of protection against the economic costs of hospitalization.

By comparison, Medicare coverage for physicians' services-as desirable as that component of the program has proven to be-was something of a political