under medicaid. This is an area which California pioneered and in both fields we found that inadequate standards, inadequate regulations, and inadequate monitoring resulted in some incredible costs. occurring that were chalked up to administrative overhead and resulted in less than half of the money available filtering to the persons at the end of the line who were supposed to be served by these programs.

HOMEMAKER AND CHORE SERVICES

The first issue I would like to address is the issue that is sometimes referred to as the third sector of government, that is, the proprietary sector providing services that heretofore have been provided by either nonprofit agencies or by public agencies. Of the roughly 60,000 people in California receiving homemaker and chore services, approximately 8 percent of these people receive services from proprietary agencies. In fiscal year 1973-74, the total cost of delivering services to these 60,000 recipients was $81 million. If you take the average charge of the proprietary agency and apply that to the total caseload of 60,000, the cost of providing the same services to the same individuals increases to $124,416,000-a 54-percent increase.

One small California county with approximately 150 clients requiring homemaker and chore services experimented first with individual providers paid by the county. In fiscal year 1974-75, the county elected to use the services of a proprietary agency who charged them $105,000 to service the same client population. At the end of that. fiscal year, the county canceled its contract with the proprietary agency, thereby reducing its program costs for the ensuing fiscal year to $60,000, or a reduction of 43 percent. The interesting fact related to this county's experience is that essentially, the very same people are providing the actual in-home services under the countysupervised program as were provided previously by the proprietary. contractor. The people providing in-home services are now receiving the same compensation that they did when this service was performed by the proprietary agency at a reduction in program cost of 43 percent.

In one county, a client was receiving homemaker services from a contract agency at an hourly cost of $6. In another county, a client was receiving chore services from a client-employed provider at an hourly cost of $2.50. While no difference in the quality of service being provided could be discerned, the cost of service in the first county was 140 percent higher than the cost in the second county.

Our own analysis of the private agencies providing homemaker and chore services in California indicates that on the average, 42 percent of the total Government funds spent to provide homemaker and chore services goes to the individuals who are actually delivering these services and that 58 percent is absorbed by a combination of overhead and profits. We do not distinguish overhead and profits in this analysis because an analysis of what constitutes overhead and what constitutes profit is in itself rather interesting.

QUESTIONABLE ITEMS IN OVERHEAD COSTS

For example, one California proprietary agency with a yearly budget of approximately $680,000 to perform homemaker and chore.

services showed a yearly profit of 12 percent. However, included in administration overhead for the 1973 and 1974 calendar years were the following items: A pipe and tobacco store expense of $4,088; a liquor store expense of $4,665; out-of-pocket expenses of $7,600; 1973 Washington, D.C. inaugural expense of $925; and Honolulu expenses of $405.

We question how these items, totaling $17,675, constitute legitimate overhead costs of providing homemaker services.

Our second major concern with fiscal integrity related to thirdsector operations refers to title XIX financed prepaid health plans. Under the administration of the California Department of Health, medicaid recipients are provided with health care services in two ways: One way is known as fee for service. Under the fee-for-service method, the provider of health care services the physician, pharmacist, or dentist-is reimbursed by the California Department of Health for actual services furnished to the medicaid recipients. The fee-for-service method currently accounts for approximately 90 percent of the total medical services provided to the medicaid recipients. An alternative to the fee-for-service approach is prepaid health plans-PHP's-established in January 1971. Under the PHP's, the provider of health care services is the PHP contractor under contract with the California Department of Health or a subcontractor of the PHP contractor, either of whom employ physicians and other health professionals. The PHP contractor is paid in advance by the California Department of Health on the basis of a fixed monthly fee regardless of the extent of the health care services furnished to the medicaid recipients. By law, the fixed monthly fee cannot exceed the amount which the department estimates would be payable for the same services on a fee-for-service basis.

Our audit of April 1974 addressed problems of high overhead and poor management. For example, that report stated:

Of the $56.5 million payments made by the California Department of Health to 15 PHP contractors, only an estimated $27.1 million, or 48 percent, was expended for health care services for medicaid recipients. The balance of $29.4 million of the California Department of Health payments, or 52 percent of such payments, was expended by the PHP contractors and their affiliated subcontractors for administrative costs or resulted in net profits.

On October 16, 1975, these findings, as they related to one of these health plans, were confirmed by a General Accounting Office audit which recommended that the Federal Government recover up to $4.6 million that the GAO says was overpaid to that health plan.

As one example of the administrative costs, a PHP contractor had employed a physician as plan administrator at an annual salary of $120,000, plus expenses. The contract with the physician stated:

Employer recognizes employee is involved in other medically related ventures such as inhalation therapy contracts and other nonmedically-related business ventures. These ventures shall at all times remain under the strict control and ownership of employee.

In other words, this man was paid a salary of $120,000 per year for a part-time job.

If you are interested in more details regarding medicaid abuses I suggest that you question Mr. John Svahn, who is now the acting director of social and rehabilitation services and who I understand

will be addressing this committee later today. Prior to his appointment to this position, Mr. Svahn was chief deputy director of the California State Department of Social Welfare which was the sister agency of the California Department of Health which administered these medicaid programs during the period of these abuses.

The California Department of Health has contracted for the operation of PHP's, primarily with nonprofit corporations. All of the 15 PHP's we reviewed, except 2, were organized as nonprofit corporations. However, the officers or directors of eight of the PHP's we reviewed had formed profitmaking partnerships, associations, and corporations, often with the same corporate officers, which supply various services to the nonprofit PHP contractors.

PROFITS REAPED FROM "NONPROFIT" OPERATIONS

Through these affiliated profitmaking subcontractors, officers and directors of the nonprofit PHP contractors are able to obtain profits from what is ostensibly a nonprofit operation. Also, the complex relationship created by the use of these interlocking firms makes it more difficult to determine how much of the California Department of Health's payments to the PHP contractor actually is expended for health care services for medicaid recipients and how much results in net profits or is expended on executive salaries and other costs of administration. It is this type of activity that causes us concern over the provisions in 45 CFR part 249 that permit subcontracting but does not require adequate audit trails.

Administrative costs and net profit data for certain affiliated subcontractors were not readily available and were therefore excluded from cost and profit estimates in our report. Also the salaries of some physicians who are involved in administration of PHP's and who care for few, if any, patients were not readily identified in the financial statements, and so have been excluded from the administrative costs. Therefore, our estimated administrative cost and profit amounts are low.

I spoke earlier of home chore services being fragmented from the medical needs of the same client population. There is another area of fragmentation I would like to mention. That is the area of training unemployed and AFDC recipients to perform some of these services. The unemployment rate in California exceeds 10 percent. I see no references in 45 CFR part 249 to encourage this army of unemployed and welfare dependent persons to qualify for positions in this new industry. I would like to submit to the committee, as part of this presentation, the experiences of one Los Angeles organization that is doing precisely this.

[The material referred to follows:]

STATEMENT REGARDING TRAINING OF LOW-INCOME PERSONS FOR EMPLOYMENT AS HOMEMAKERS, BY JOHN ALEXANDER KODICK, TRAINING COORDINATOR, HOMEMAKER TRAINING PROGRAM, LOS ANGELES, CALIF.

Regarding East Los Angeles Action Council-Community Bilingual Homemaker Training Program: The homemaker training program was designed and created to provide two basic services to the community of East Los Angeles and the greater San Gabriel Valley. One service was the creation of jobs for welfare

70-652-76-3

recipients, the unemployed, underemployed and low-income residents of the target area. The second purpose was to create a pool of supervised and certified homemakers not employed by the agency, but working directly for the client in need of home care.

TRAINING ACT OFFERS FREE PLACEMENT TO CLIENT

The program, as it is now operating, is funded by the Comprehensive Employment and Training Act. Because we are a funded program, we can provide training placement services and supporting services to our participants without any cost to the client requiring in-home care. Consequently, we are able to furnish homemaker services to aged, blind, disabled, or chronically ill persons at very low and reasonable rates. Our homemaker fees are based on the source of payment for the service. In the case of supplemental security income recipients and other persons eligible for a services grant under title 20 of the Social Security Act, as amended, we base our homemaker rates on that rate the county of Los Angeles provides-namely $2.73 per hour.

The figure of $2.73 per hour includes a 16-cent employer's social security contribution resulting in a net hourly wage of $2.57 an hour. From this figure of $2.57, the homemaker must also contribute 16 cents to social security. It is important to remember that the 32 cents goes to the homemaker's social security account. A client evaluated by the Los Angeles County Department of Public Social Services, at a need of service equalling 100 hours per month, would have the following calculations in effect: 100 hours times $2.73 equals $273 minus $31.94 employer and employee SSA contributions resulting in a net of $241.06. The entire cost of service in this case would be taken care of by the homemaker service grant.

For a private client not eligible for a grant, the computation is as follows: 100 hours times $2.73 equals $273. In this case the employer's social security contribution of 5.85 percent is added to the $273 so that the homemaker's social security deduction is taken from a figure of $288.97 leaving a net of $273. In addition, we ask that the private client furnish the cost of transportation for the homemaker up to a maximum of $1 per day.

Should the client require a live-in homemaker, the calculations are no longer done on an hourly basis. The maximum provided under the homemaker's services grant for a live-in provider is $505 per month including room and board. We have not yet placed a privately employed live-in homemaker, but we have placed homemakers for clients having county grants.

We base our homemaker rates on the amount of money available to purchase service with homemaker services from the county of Los Angeles. The key to adequate home care lies in the creation and support of community based nonprofit homemaker programs to provide meaningful and quality training coupled with services, without additional charge, to the client already burdened with old age, blindness, chronic illness or disability. I thank you for the opportunity to supply this information. Should you require further information on our program, the problems with homemakers services, or the need that exists for such services, please do not hesitate to contact me.

Mr. HAWES. I have dealt almost exclusively in my presentation today with the abuses in the proprietary or third sector. This is not to imply that there are no abuses in the nonprofit or public sector. We have seen poorly managed public sector programs staffed by persons inadequate for the job, but never in my 9 years of performance auditing and program evaluation have I seen abuses of the magnitude of those I have mentioned as occurring in the proprietary sector. At the same time, I do not want to imply that a for-profit organization is inherently inferior or corrupt. What I am saying is that there is a desperate need for controls-controls relating to both quality of service and fiscal integrity.

If the executive branch is not responsive to this need, then Congress must fill the void with specific legislative requirements.

Senator Moss. Thank you, Mr. Hawes, for an excellent statement, and one that raised a lot of questions, which, I am sure, we would want to ask of you.

Dr. Warner has now arrived, and we are glad to have you, sir. We were going to hear from each of the members of the panel on their statement, and then have questions of the members of the panel.

We are asking the panel to keep their oral statements as brief as possible; we do have many people to hear.

Our next witness is George Warner, M.D., special assistant, Health Facilities, Economics, and Preventive Health Services, New York State Health Department, Albany, N.Y.

STATEMENT OF DR. GEORGE WARNER, SPECIAL ASSISTANT, HEALTH FACILITIES, ECONOMICS, AND PREVENTIVE HEALTH SERVICES, NEW YORK STATE HEALTH DEPARTMENT, ALBANY, N.Y.

Dr. WARNER. Thank you, Mr. Chairman.

Public health law in New Lork State delegates certain policy and rulemaking responsibilities in the health field to the State Public Health Council. This august body, affiliated with the New York State Department of Health, includes in its membership distinguished representatives of the consumer sector and the health professions. This council has some functions not unlike those of the boards of health in some other States.

Among its many responsibilities, the Public Health Council has the, perhaps, unique function of making final decisions on whothat is, what person, partnership, corporation, or governmental agency, whether for profit, not-for-profit, or public in natureshould own and operate health facilities and health services. The council has final authority whenever new health facilities or services are proposed or whenever changes in existing ownerships are contemplated.

State law decrees that the Public Health Council must consider at least three factors in arriving at its decisions regarding the establishment of new providers of health services or changes in the ownerships "establishment" of existing ones. These three criteria are:

First: Public need for the health facility or service-at the time, in the geographic location and under the circumstances in which it is proposed.

Second: The character, competence, and standing in the community of the person or persons applying to operate the proposed health facility or service, and

Third: The financial resources of the proposed institution and its future sources of revenue.

The council, in arriving at its decision, considers advice and recommendations from area wide and statewide health planning organizations, department of health staff, and other sources. These input sources also examine, each to the extent of its own expertise, one or more of the three aforementioned criteria: public need, competence, and financial feasibility of the proposed new health facility or change in ownership of the existing provider of health service. The council's reviews and decisions are applicable to nearly all types of organized