STATEMENT OF THE BLUE CROSS ASSOCIATION, PRESENTED BY

BERNARD R. TRESNOWSKI, SENIOR VICE PRESIDENT

Mr. Chairman, my name is Bernard R. Tresnowski, I am a Senior Vice President of the Blue Cross Association, the national organization of Blue Cross Plans and I appear here today as a representative of those Plans to offer our comments on H.R. 17550-the 1970 amendments to the Social Security Act. Since Medicare went into effect July 1, 1966, the Blue Cross System has processed about 50 million Medicare claims and handled payment of $16.3 Billion in benefits for the nation's elderly. Last year Blue Cross paid out $4.2 Billion in Medicare benefits.

Blue Cross now serves the vast majority of the nation's 20 million elderly citizens covered under Part A of Medicare. As Fiscal Intermediary, Blue Cross serves 91% of the country's hospitals, 88% of the home health agencies and 52% of the extended care facilities.

Figures on administrative costs for processing Medicare claims show that from July through September, 1969, the Blue Cross System administered 3.5 million Medicare bills at a cost of $3.67 per bill-or 1.22% of total benefit payments for the period.

Comparable administrative cost figures for three other Intermediaries show that the next largest Intermediary-in amount of business handled-processed only 97,598 bills at $5.73 a bill-for an administrative cost of 1.59%. The third Intermediary administered 76,647 bills at $5.13 a bill for an administrative expense of 1.31%; and the fourth Intermdiary handled 69,428 bills at a cost of $5.32 a bill, or 2.05%. We are proud of our record.

In its work to make Medicare run smoothly during the past four years, the Blue Cross System has developed a magnetic "Tape-to-Tape" computer program to speed claims processing and to eliminate clerical errors at the Social Security Administration's Medicare Records Center in Baltimore. The Michigan Blue Cross Plan developed the prototype program through which hundreds of paid claims are put on magnetic tape and airmailed daily to the SSA's Baltimore Center. The tapes, when fed into SSA's computers, automatically update and close patient records in the Medicare Master Record files. The System dramatically cut the number of days required to process claims-from 18 days to 2. And, with the savings in clerical time, SSA was able to improve time lags in other processing areas. We estimate that savings through the "Tape-to-Tape" system will be more than $1,250,000 in the current fiscal year. The system's value continues to increase as the volume of Medicare claims grows. Presently, 40% of Medicare claims are processed under this program. By the end of 1970 we expect over 50% of claims on Tape-to-Tape with concomitant additional savings to the program. Volume has more than doubled during the past four years, going from more than six million bills processed in 1967, to nearly 15 million a year at present.

In addition to Tape-to-Tape, other Blue Cross efforts to meet the increased claims volume and ease administration of Medicare include the development of a simplified, in-depth method of auditing the records of hospitals and nursing homes; a new set of guidelines for determining the level of nursing home services covered by Medicare; and the present implementation of an automated model computer program for processing all hospital, nursing home and home health care claims.

Since Medicare's beginning, use of the System's telecommunications system for both regular Blue Cross and Medicare business has risen 500%. In 1970, Blue Cross is scheduled to increase its communications capabilities by another 250%, which will enable it to transmit 100 million characters (nine million words) per day. Under the old system, the volume was about 40 milion characters per day.

In each year of Medicare, the Blue Cross System's performance as Intermediary has shown steady and impressive improvement, and has proved that a public-private partnership can preserve the important element of public accountability in a government program, while capitalizing on the assets of existing private institutions.

As the largest Intermediary under the Medicare program and as a participant in the administration of the Title XIX program in 22 states, we have assisted the Congress through the development and amendments to the legislation affecting these programs. In our various appearances before the Congress we have sought to relate our knowledge of program administration to the various

provisions offered in the light of their impact on the simplification of the program, meaningful controls over costs and use and the development of an atmos phere of innovation and experimentation. Progress has been made in the areas of simplification, predictability and experimentation in the Medicare and Medicaid programs since their enactment in 1965. The first years of the program were directed at eliminating unnecessary administrative burdens and simplifying the system. The second, third and fourth years of the programs have surfaced the need for predictability of costs and use under the program and the apparent need for meaningful controls. In the last few years it has become abundantly clear that experimentation is necessary if our variegated health care system is to provide care with reasonable effectiveness and efficiency.

In examining the various provisions of H.R. 17750, it is our opinion that many of them contribute to the aforementioned themes while others do not. Some provisions potentially can improve the program but they appear to be excessively complicated or administratively structured to defeat their original intent.

Because a major thrust of the Medicare and Medicaid provisions of H.R. 17550 is to improve the effectiveness of these programs, I would like to comment on the proposed modifications within that context. For ease of reference paragraph identifications which follow are those used in the Bill.

Section 201.-Payment Under the Medicare Program to Individuals Covered by a Federal Employees Health Benefits Program

Prior to the effective date of the Medicare program, Blue Cross developed and made available complementary insurance programs to Parts A and B of the Medicare program. Presently we cover approximately 6 million of the over-65 population on a complementary basis. The provision in the Bill would require an amendment to the Federal Employee Health Benefit Act to authorize the Civil Service Commission to provide a supplementary insurance program for the over65 Federal employee. Because this provision is intended to assure equity in coverage for the over-65 Federal employee, we support it and are prepared. as the nation-wide service benefit plan, to assist the Civil Service Commission to administer an appropriate amendment to the Federal Employee Health Benefit Act drawing upon our experiences with the aged.

Section 221.-Limitation on Federal Participation for Capital Expenditures

This section is especially noteworthy in that it represents an endorsement of the principal that third-party financing of capital expenditures should be linked with participation in planning. The Blue Cross Association and its Mem ber Plans have long supported area wide planning and continue to do so. We believe that the local planning agency must have the right to advise public and private financing agencies concerning the use of funds. Third-party agencies should have relationships and linkages to obtain the advice of planning agencies and internal mechanisms to consider such advice, although they should not be bound by the decisions of planning agencies. We believe that the provisions of this section will stimulate greater use of existing mechanisms by encouraging fiscal agencies, private as well as public, to seek advice and recommendations from local and state planning groups.

We recommend that the definition of capital expenditures cover not only depreciation, interest, and return on equity capital, but be expanded to include the replacement or major renovation of buildings and addition of plan equipment for new services.

When under this section the Secretary decides to withhold reimbursement. there should be a provision to allow a provider formally to request an appeal and a reconsideration of the Secretary's decision.

A note of caution is necessary. The development of planning agencies around the country has been uneven. Some agencies may not be prepared to cope with this responsibility. Cautious administration will be necessary and the Secretary must have discretionary authority in designating and contracting with planning agencies.

Section 222.--Report on Plan for Prospective Reimbursement; Experiments and Demonstration Projects to Develop Incentives for Economy in the Provision of Health Services

The 1967 amendments to the Social Security Act, under Section 402, grants authority for the Secretary of HEW to engage in experiments to develop incer tives for economy in the provision of health services. Some experiments have been

undertaken during the past two years. These experiments hold promise for future returns in controlling costs. However, at the present time the experiments are still in progress and they cannot yet be evaluated. H.R. 17550 would enlarge the scope of such experiments to include in addition to reimbursement systems, payments for services for residents, interns and supervising physicians and utilization review. We support this extension. It further places an additional administrative control point in the Senate Finance and House Ways and Means Committees. It is our understanding that such a control point has been included in this provision to assure that experiments are not developed which would lead to systems which would be inimical to the intent of Congress in the enactment of the Title XVIII and XIX programs. While control is important, it would, in our opinion, if exercised in this way, detract significantly from the adininistrative responsibility of the Secretary and, conceivably, hamper his leadership role in implementing legislative policies and programs.

Section 223.-Limitations on Coverage of Cost Under the Medicare Program Blue Cross serving both as an Intermediary under Medicare and in our role in other Government programs, as well as in the private market, is vitally concerned about the matter of reasonable provider costs. During the past four years there have been many actions taken to assure reasonable purchase of care on behalf of the Medicare beneficiaries by Blue Cross. There have been a significant volume of appeals by providers from cost allowability determinations made by Blue Cross and we have sought carefully to identify situations where costs are incurred under circumstances intended to seek a financial advantage and taken action to disallow these costs. In our private programs we have worked under various approaches to cost containment within the framework of total cost control, such as limitations on the lower of cost or charges; ceilings on cost increases between accounting periods and negotiated target rates on total or departmental costs, among others.

The most pertinent regulation applicable to Medicare and Medicaid governing cost limitations is Section 405.451 (2) which reads:

"The cost of provider services may vary from one provider to another and the variations generally reflect differences in the scope of services and intensity of care. The provision in Title XVIII of the Act for payment of reasonable cost of services is intended to meet the actual costs however widely they may vary from one institution to another. This is subject to a limitation where a particular institution's costs are found to be substantially out of line with other institutions in the same area, which are similar in size, scope of services, utilization and other relevant factors."

Our interpretation of this regulation and our administration of it to date has been in terms of disallowance on the basis of total costs. With utilization review and accreditation safeguarding quality, focus on total cost, while alert to groundless aberrations in specific elements of cost, recognizes that there is more than one management road to efficiency, is less manipulative of management and assumes a less expensive administrative cost burden. The use of overall cost ceilings rather than individual elements of cost, coupled with the Bill's provision for prospective application would allow for the establishment of understandable criteria for total cost limits; provide an opportunity for the provider to appeal their classification and would also facilitate the Bill's provision for permitting the provider to charge a beneficiary costs in excess of the Medicare ceilings. The application of the overall ceiling would permit variation in the components of cost and would apply an effective control on extra-ordinary high costs as a result of low occupancy rates or other factors related to the inefficiency in the production of services.

Accordingly, we recommend that the committee's provision on prospective application of cost ceilings be retained and that such cost ceilings be limited to overall costs by class of hospital with an opportunity for the provider to appeal such classification.

Section 225.-Establishment of Incentives for States to Emphasize Outpatient Care Under Medicaid Programs

We support the purpose of this provision which is to enlarge the scope of benefits and provide alternatives to expensive inpatient care, but we are convinced that arbitrary limitations on the duration of care in institutions is inappropriate and will not reach this goal. Artificially imposed constraints inhibit the implementation of modern concepts of care and will put the burden on people who cannot afford it.

A flexible approach to patient care should be based on patient's need, therefore we oppose the limitations in this section.

Section 226.-Payment for Services of Teaching Physicians Under the Medicare

Program

We note that this provision identifies that Medicare beneficiaries may elect voluntarily to become recipients of care in teaching institutions under an assigned physician's responsibility. We concur in this provision of the Bill which applies principles established under combined billings for hospital-based physicians by eliminating deductible and co-payment amounts with payment on a cost basis.

Section 227.-Authority of the Secretary to Terminate Payment to Suppliers of

Services

It is not clear in this provision whether the authority to terminate granted to the Secretary relates to providers of care. Providers of care presently have an agreement with the Secretary which identifies terms under which the agree ment can be terminated. To include providers of care under this provision would appear to conflict with the standards established for provider certification, the guidelines for covered care as they serve to define benefits under the programs and existing institutional utilization review procedures. These controls over quality and use plus the existing agreement with providers of care make their inclusion in this provision unnecessary. Accordingly, we recommend that providers of care as defined in the law be excluded from this provision recognizing that other sections of the law and regulations provide controls and speak to termination of payment to them.

Section 229.-Determination of Reasonable Cost of Inpatient Hospital Services Under Medicaid Maternal and Child Health Programs

The definitions of reasonable or allowable costs have been debated and essential agreement achieved. This agreement is reflected in the principles of reimbursement under the Medicare program. Further, the reporting of costs to be applied to these principles has been established under the Medicare program and is being coordinated with Medicaid and the Maternal and Child Health programs. We agree that it is desirable to offer the states flexibility based on the characteristics of their population to establish a varying method of payment, such as RCC, per diem, or such other option which may be equitable to the program and the providers of care. However, variability in method of payment should be related to a common set of definitions concerning allowable costs as developed under Title XVIII with the concomitant opportunity for uniform cost reporting and audit systems.

Section 230.-Amount of Payments Where Customary Charges for Services Furnished are Less Than Reasonable Cost

This provision relates directly to the cost containment provisions under Sec tion 223 of this Bill and would serve as a motivation to relate charges to cost. We have followed this practice many years in Blue Cross and found it productive We support it. The opportunity to carry-over the difference between cost and charges to a subsequent period provides adequate relief to allow for low ocen pancy either for new providers or those undergoing building programs.

We recommend that this provision authorize the Secretary to develop, through regulation, reimbursement systems for providers who make nominal charges or have no charge schedules. The reimbursement system should include per diem cost or percentage thereof; an option made available earlier in the program for all inclusive rate hospitals.

Section 231.-Institutional Planning Under the Medicare Program

It is essential that providers of care vigorously engage in the process of plarning by establishing objectives identifying their operating assumptions and appropriately allocating their resources in accord with these planning objectives We endorse a provision in the Bill which would further motivate providers to engage in this type of planning process.

We note, however, that the development of operating and capital budgets won'd not necessarily serve this planning function and be viewed as an unwarranted intrusion in management.

We recommend that this provision be amended so that operating and capital expenditure budgets be redesignated as program plans which identify the objec

tives, the services to be provided and a plan of anticipated income and expensesin support of the institutional plan for a three year period.

Section 232.-Payments to States Under Medicaid Programs for Installation and Operation of Claim Processing, Information Retrieval Systems

The major administrative and planning problem under the Title XIX program has been the lack of program information or the establishment of easily accessible eligibility files and effective utilization review systems. We endorse this provision which will provide additional Federal financing for the development and maintenance of such information retrieval systems where none exist.

We would strongly urge, however, that the Congress give recognition to the existing capability for such systems by those organizations contracting with the state agencies under the Title XIX program. The Task Force on Medicaid and Related Programs specifically recommended that:

The operation of health-service activities should be decentralized through contractual agreements with public and private agencies. The principal features of such agreements should be specification of desired outcomes, rather than specific methods of operation and evaluation and information systems that can assess performance in terms of output or results.'

In commenting on this recommendation the Task Force noted that the setting of standards and policy and the evaluation processes were especially appropriate functions of Government.

To assure that the opportunity is available we recommend that the authority of the Secretary under this provision be extended to include the financing of management information systems developed by either public or private organizations with demonstrated capability to establish and maintain such systems under contract with the state agencies.

Section 233.-Advance Approval of Extended Care and Home Health Coverage Under the Medicare Program

One of the most serious administrative problems affecting the beneficiary under the Medicare program has been the retroactive denial of benefits for care in extended care facilities and home health agencies. The committee's provision would authorize the Secretary to establish criteria by medical condition for approved periods of stay in extended care facilities and home health agencies. We note that this provision gives authority to the attending physician to certify a plan for furnishing the care in accord with the criteria established and authorizes the utilization review committee to examine the stay during the duration of the approved period.

It is further provided that abuses by certifying physicians under this provision would be monitored by Intermediaries and that physicians who were found to be unreliable would lose the privilege of certifying patient needs in subsequent periods.

We recommend that the provision be amended to assure that physicians whose reliability in certifying patients needs is questionable the opportunity of notice and hearing. Such procedure to be structured as a fair hearing with opportunity to present evidence concerning their use of the advance approval procedure prior to suspension from the procedure on any subsequent patients. Section 237.-Notification of Unnecessary Admission to a Hospital or Extended Care Facility Under the Medicare Program

Retroactive denial of ECF and HHA benefits arises from established criteria of covered care by these providers. The criteria for reasonable and necessary care in hospitals have not been clearly established by the program or the Intermediary. Such criteria represents a statement of medical practice standards. This authority has been granted to the utilization review committee in their sample review of the medical necessity of admissions.

This provision of the Bill offers an opportunity for the utilization review committee to terminate payment after a three-day notice period on admission found not to be medically necessary. This additional authority granted to the utilization review committee further underscroes the importance of establishing criteria for medical necessity which will be applied by the utilization review committee in this new responsibility as well as to the Intermediary in its claim review responsibility. It should be understood that the Secretary would have to direct that the Intermediary solicit from the utilization review committee such criteria as used in the determination of unnecessary admissions so that these same criteria could be developed for use in claim review for reasonable and necessary care in the hospitals and extended care facilities.