On Thursday, Rep. Fortney Stark (D-Calif.), a member of the committee, pointed to the association's claim for the franchise tax money as one of many reasons the committee is investigating Blues plans around the country. Stark said he agreed with the auditors that Blue Cross should not be reimbursed for the franchise tax expenses. Mr. STARK. Prof. Sylvia Law of New York University Law School has written "Blue Cross, What Went Wrong?" We are privileged to have Professor Law with us this morning. I will let you proceed in your own way and at your own pace. Welcome. STATEMENT OF PROF. SYLVIA LAW, NEW YORK UNIVERSITY LAW SCHOOL, NEW YORK, N.Y. Professor Law. Thank you very much, Mr. Chairman and Congressman Rangel. I appreciate the opportunity to be here today. I would first like to focus on some facts in three areas: one, executive compensation; two, buildings; and three, public relations. I will then discuss briefly the legal controls which now exist or, more precisely, don't exist to deal with these problems. Finally, I will offer some principles and suggestions for approaching these problems. Limited data on executive compensation, which I am submitting for the record, suggests that there is enormous variation in the amounts that local Blue Cross plans pay their executives. For example, the chief executive in the New Jersey plan receives more than the president of the New York plan even though the New Jersey plan serves about half as many people, and is not known for its high-quality administration. As another example, even though the Cleveland plan serves more people than the Cincinnati plan, Cincinnati pays its chief executive about half again as much as does Cleveland. Most of these plan chiefs, and indeed many of the plan vice presidents, were earning in 1973 more than Members of the U.S. House of Representatives or Federal court judges. There is also evidence that since the enactment of medicare there has been a proliferation of Blue Cross plan executives, and a dramatic increase in their compensation. Data on the New Jersey plan through 1974, which I have submitted for the record, shows that since 1966 the number of plan executives increased from 7 in 1966 to 10 in 1973. From 1966 to 1974 the salary of the president of the New Jersey plan. increased over 100 percent and the salaries of other plan executives increased almost 100 percent. In 1974 the president gave himself an 8.4 percent increase, and other executives increases of 8, 10, 12 and 16 percent. During the same period the unionized employees of Blue Cross were granted a 5.5 percent raise. These figures on executive compensation do not take into account all of the indirect forms of compensation which are from time to time exposed in the press: private airplanes, generous life insurance and retirement programs, private limousines, and so forth. I believe this sort of indirect compensation may represent a more significant cost to Blue Cross subscribers and to the Federal treasury than the direct salaries. 1 65 people listed, all males. 2 87 people listed, 7 (8 percent) are women-all of whom make under $11,500. * 142 people listed, 22 (15.5 percent) women, all make under $15,500. From 1969 through 1974, all people listed are male. 5 During this time unionized employees of Blue Cross were granted a 5.5 percent raise. • Formerly assistant vice president, comptroller. 21, 240. 26 21, 570. 22 7 Formerly assistant vice president, operations. & Formerly assistant vice president, provider relations. • Formerly vice president, operations. 10 Formerly assistant vice president, personnel. 11 Formerly assistant vice president, planning development. 12 Formerly vice president, provider relations. Professor LAW. The second area which I would like to discuss is Blue Cross building programs. I wish I had better data on this. I do not know of any study, Federal or private, that has taken an overall look at this question. But as you travel around the country you do notice that Blue Cross/Blue Shield is housed in these very grand steel and glass buildings, which have been constructed since 1966. Particularly in smaller cities which do not have a large number of such buildings, Blue Cross dominates the urban horizon. We all know that these major construction projects, besides involving monstrous legitimate costs, afford a rich opportunity for cost which are less than legitimate. In 1971 the Subcommittee on Antitrust and Monopoly of the Senate Committee on the Judiciary looked into a variety of abuses in the administration of the Virginia plan. I am not sure why that was suggested, but maybe because it is just across the river and you can see the building standing there. They found that the building had cost $8 million. They moved in 2 years after the beginning of medicare. That investigation showed that $1 million was spent to decorate and furnish the building, and most of the purchases were made, without competitive bidding, from a firm whose sales manager was chairman of the building committee of the Blue Cross board. Over half of the business of the Richmond plan is financed by medicare and medicaid. Senator Phillip Hart expressed amazement that there was no outside authority, in either State or Federal Government or the National Blue Cross Association, that could control or question this situation. He asked, "There isn't any outside discipline . . that could do other than sort of wonder? Nobody could correct, is that right, absent the internal discipline (within the local plan)?" The Richmond plan executive responded, "Mr. Chairman, I would say you are absolutely right, but that responsibility rests purely on the shoulders of the (local) board of directors. . . The moment they found the level of spending which they couldn't quite stand, they acted immediately That was the situation in 1971. Since that time Blue Cross building programs have proliferated. The oversight situation has not improved in any significant respect. The third item which I would like to discuss is public relations and advertising costs. The most recent data which I have on advertising is for 1974. According to the national consumer affairs office of Blue Cross, the local plans spent $12 million for advertising during the year. This is in addition to the national advertising campaign conducted by the BCA. I am sure that many of you will recall during that period the national BCA, as well as the American Hospital Association, were running ads on the TV evening news. This was a time when many believed that Congress was about to act on National Health Insurance. The BCA spent $750,000 on television advertising in this single campaign. These ads were, in the overwhelming number of cases, simply puff pieces extolling the virtues of your friends at Blue Cross. The slogan for that campaign was "Blue Cross: We're here. We're now." I asked many people what they thought the slogan meant, and most found it incomprehensible. I believe it has meaning only as a |