is the process we went through. We took 14 indexes, such as cost, productivity, delays in processing, turn-around times, and so on, and we weighted them for these factors, Now, based upon that, we were able to bring those numbers down about 30 percent. That range is within essentially one standard deviation of the average. Now, our focus in that instance is not on who is high and who is low, our focus is on who exceeds that range.

What we say is within that range, there is a normal distribution; anybody exceeding that, it has to be inefficiency or at least a question is raised.

Mr. STARK. Could I get a copy of those indexes and the factors that you used? I assume, and I noticed in your report, that quite often there is a constant dollar reference in there to the cost-of-living adjustment, which I am not sure about. I would like to know if these indexes have ever been applied and the same criteria applied to other intermediaries when you rank them. I guess that is what I was saying earlier. If we applied these same criteria to "Travelers" or to the others then the system might not be as different as you indicate.

Mr. TRESNOWSKI. It has been available to the Social Security Administration. They have certainly looked at it at length. I will submit to you the full statement of what I have just given you in very brief form and the distributions that result from that. I would say the Social Security Administration has asked for a request for a proposal from outside contractors to develop a system along these lines.

Mr. STARK. I would just say the Social Security Administration has to be so inept in dealing with data processing, the SSI program just indicates their almost total inability to deal with numbers beyond 10 with their shoes and socks on. That could use some outside help. I would hope that your developing programs of this type might set a good standard for us.

Mr. TRESNOWSKI. I certainly think that I would characterize them as much more sophisticated than that. They have been very much involved in our development of this. But in any case, it is a badly needed thing that should be pursued.

As I indicated in reply to a question, you got me a bit ahead of my remarks, BCA has developed these performance ranges and weighted statistical indicators. We have used them essentially as a management tool in order to focus what resources we had on our most critical problems. In any case, the standards used by BCA have gone to cost and productivity and we have been able to save the Government and the taxpayers a great deal of money. Our emphasis is on management skills and this will continue to be a prime factor in BCA's work with the plans to bring the organization to an even greater sense of public accountability.

Those are the highlights of my report. More information, of course, is in the detailed report I submitted for the record. That would conclude my formal comments.

Mr. STARK. Thank you very much. I have some more questions that I would like to deal with.

One of the problems that has come up and brought a lot of public attention to the medicare program is the question of excessive management costs. Although we hear they are now being corrected, they

really are beginning to be corrected because we brought them to public attention and not through any internal effort-none of us give up perquisites easily. But the real question is, first of all, the tax-free nature of the Blues. There is some real question as you are aware. States don't treat them as tax-exempt corporations. If you assume that Blue Cross-Blue Shield are merely extensions of bookkeeping services, and that is not a demeaning term but merely to get the structure correct, bookkeeping services of a profitmaking system, and the doctors and dentists in this country are one of the most profitable systems in the world, why then should their collection agency, in effect, or their bookkeepers, be tax exempt? That is something that troubles me some. I see no really good reason. It is as if you allowed General Motors to make their distribution organizations tax exempt and only taxed them at the foundry, at the assembly level.

I have some trouble with that. If, in fact, BCA becomes the sole provider or the sole intermediary, at some point in the future you might make a strong case there for saving the public money. But based on the current context, we are giving BCA a tremendous advantage over Travelers and the few really large competitors in the private sector. Then, I am concerned about a trend toward elitism in management philosophy, the idea that the personnel response is why limousines or Benzes or Sevilles or twin-engine airplanes are used to go to golfing tournaments.

That may well be good for Shackley Products, but I am not sure that it is quite in step with what I think you are trying to project is the Blue Cross image of a nonprofit service organization that really belongs to the people. How do you watch that?

I think you have to go one way or the other. You can opt for Governor Brown's plain blue Plymouth and $350 apartment, or you can opt for the Ronnie Reagan $5 million mansion and go taxable. I don't think you can have it both ways. Which way do you see the Blue Cross Association going?

Mr. TRESNOWSKI. I think the burden of your question is, can Blue Cross be accountable? I would have to say that I feel that it can. I base that on the record of performance, for example, that I have given you in detail in the medicare program. I would also support that by pointing to the payout ratios in terms of our private subscribers, which are at the level of 94 percent.

Commissioner Denenberg, one of our sharpest critics, as you know, issued a consumer's guide to health insurance and pointed to Blue Cross as very favorable-with special reference to the payout ratios. I think the most important point I would make in support of our accountability is the consumer choice. The consumer in the free expression of his desire, can decide about the benefits structure and the payout ratio, and so on.

You look to the Federal employee example where some 60 percent of the Federal employees select the Blue Cross-Blue Shield program, and so on. Now that does not deal with the other part of your question in terms of these perquisites and so on.

I would have to say those judgments, to the extent that they detract from this otherwise good performance, is probably not acceptable. In the light of the current environment and what we have seen over the past years, clearly those need to be examined in that light. We

have performance guidelines, those are being examined. They have been for several months. Those matters will be taken into account, because we do not want to tarnish an otherwise very good record of performance in the eyes of the American people.

As far as the tax question is concerned, as you know, we are exempt from Federal income taxes under the Federal Revenue Code. That is because of the basic structure.

We are not-for-profit corporations and any excess of income over claims and administrative expenses must be held for the purposes for which Blue Cross plans are formed and that comes about through certain characteristics, largely the service benefits idea.

There are open enrollment periods required of plans, there must be automatic conversion privileges when you move from plans, no subscriber membership can be canceled because of health reasons. There must be a consistently high payout ratio, as I mentioned-service benefits must be entered and all of these characteristics taken together, the not-for-profit and all of these, serve as the basis for the Federal income tax exemption.

Mr. STARK. Are not those same benefits you just cited available to the public in other plans?

Mr. TRESNOWSKI. No. The Federal employee program you are talking about now?

We are the only service benefit program in the country other than the medicare program. Medicare is patterned after our structure, contractural relationships with providers and so on. The others are indemnity programs and they have rights to put in underwriting regulations which are much stiffer than we are allowed to do.

You know we operate under unique enabling legislation in each State, with careful scrutiny by insurance commissioners.

Mr. STARK. In the States you operate in, you are taxed as an insurance company in many of them, aren't you?

Mr. TRESNOWSKI. No; we are not. In some jurisdiction they pay real estate taxes.

Mr. STARK. Premium taxes?

Mr. TRESNOWSKI. Premium taxes are mostly franchise taxes. Mr. STARK. In California that is almost in lieu of the State income tax?

Mr. TRESNOWSKI. I am not familiar with the California situation. Mr. STARK. I have a couple of questions that deal with your prepared statement. On page 10 you cite that there are 69 plans as intermediaries and only 22 are above the average for administrative costs. Using average and mean do you get a lot of distortion, if one saw the figures? Is there a lot of skewing or do they cluster pretty much? Would you see significantly different results if you used medians rather than averages?

Mr. TRESNOWSKI. I am sorry, I have page 10 but I don't see the reference.

Mr. STARK. The number of plans above average in that administrative cost in 1967 was 31, in 1975 the number of plans above average. has been reduced to 22.

What I am getting at is, does that mean that the 22 that are above average are way out, looking at it on a statistical spread? Would that kind of representation be changed significantly if you used median

figures, the number of plans above median and how far above and how far below?

Mr. TRESNOWSKI. I really don't know the answer to that question. The only point we are making here is from 1967 to 1971, if you used the average as an indicator, there have been less. This material that I will supply to you will give you a better feel for how that distribution is developed.

Mr. STARK. On page 11 you referred to delays in obtaining regulations from BHI, and we would wonder if you could supply for us a complete list of the areas where you are still awaiting clarification and the issuance of regulations if indeed that is being held up.

Mr. TRESNOWSKI. The point on page 11 is not intended as an unrestricted criticism of the Bureau of Health Insurance. We are pointing to the 1972 amendments to the Social Security Act. The problem is that in many of these instances that we indicate, such as waiver of liability, chronic renal disease and so on, they are very complex matters.

Let me describe the problem that you have. The intermediary is faced with essentially a real time system. The patient comes in and he is sick. You need to move the paper. Social Security is worried about policy considerations and therefore they have to deliberate extensively on these. So we are caught in the middle between a patient who needs care and the need for a resolution of the policy question. The point we are making here is we need to cut that time frame down considerably to get the paper moving.

Mr. STARK. That has been 4 years of deliberation. Are they going to deliberate another 4, or under the new administration will we cut that to 2 years?

Mr. TRESNOWSKI. We have an awful lot of dialog with them. I don't want to cast aspersions on them because there are a lot of dedicated, hard-working people there. I am only pointing out that Congress placed responsibilities on them to issue these instructions and they are hard to come by.

Mr. STARK. Really, is getting in effect a list of practical requests where these decisions are still hanging out?

Mr. TRESNOWSKI. No, we can identify them.

[See attachment 6, p. 224 at conclusion of hearing.]

Mr. STARK. I don't want you to be put in the position of making your relations less pleasant with BHI, but there are two sides to this, and it is our job to see that everybody is performing as they should be.

Do you have any guidelines which would be of use in evaluating a business in the home health agency area, or any printed or written memos that your auditors employ, that you could submit to us so we could see what you are looking for in performance figures to tell when something is wrong? It would be useful for us if we could have those.

Mr. TRESNOWSKI. I think we have supplied your staff a copy of our home health manual which we have developed for our private sector benefits and it goes into some of this in detail. It doesn't get to certain questions-Mr. Stark, if I may, I would like to put this in a better perspective. I know you will be conducting hearings on the home health benefits area. I would have to say the vast majority of home health agencies are really quite responsible and have done a good job in the medicare program.

What we have seen happen in the last year or so and especially in Florida and California is the creation of so-called nonprofit home health agencies who are largely 100 percent medicare and under those circumstances they incur costs that could be questionable or they promote the use of services that could be questionable.

Now that has been the challenge.

Mr. STARK. To protect California, isn't the highest cost one in the Nation in Chicago?

Mr. TRESNOWSKI. Maybe it is Chicago. The ones I am familiar with specifically were Florida and California. There may be in Chicago and others also. I think in terms of controls you have to begin with certifying the provider. Should the provider be in the program? That is the first order of business, to look at their qualifications to be in and under their nonprofit status.

Once they get in you have to stregthen your audit procedures. Really the only thing we have going for us now is the so-called prudent buyer policy, which is a policy the medicare program adopted, which simply says you look at the costs to see if they are purdent.

The other control we have available is section 223 of the 1972 amendment, which is the cost limitations. That is, there are certain limitations applied on a per-diem basis, and that is for hospitals.

Fortunately we do not have as yet from BHI the limitations for home health agencies. Probably the bigger problem is the use of services, and in that case what we have tried to do, and we can supply this information, is to develop certain diagnostic-specific areas; in other words, given a certain diagnosis, what would you normally expect the services to be and then you audit it.

In addition to that, in Florida what we did was issue letters to the beneficiaries and ask them, did you receive these kinds of services as a sort of countercheck against them. I don't want to mislead you and say we have solved the problem of ripoff artists in the medicare program, but we have certainly done something.

Mr. STARK. I am inclined to agree with you. I don't think there are any more cheats among the providers of medical care than there are among welfare reciepients, but I do think in both groups there are some people who break the law, who steal. They should be dealt with the severest penalties that the law provides.

I suspect, and we always see in the press these scary cases of people charging for prescriptions not filled or hospital beds not used or tests not given. Do you have in your organizations, or do your larger members have any kind of a security group that looks for fraudulent, dishonest practices?

Do you retain outside people like the Wilmark System or people to shop as retailers would, or do you just wait until statistically the numbers show up and then turn it over to public law enforcement?

Mr. TRESNOWSKI. Under the medicare program the instructions are rather clear in terms of our obligations. Any suspected abuses or fraud are turned over to the Bureau of Health Insurance.

Mr. STARK. I am also wondering about your policy in the private

sector.

Mr. TRESNOWSKI. In the private side our effort is largely through our audit capability. We go after a situation based upon the receipt.