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? 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, 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, 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 t component of the program has proven to be-was something of a political afterthought. Indeed, supplemental medical insurance-commonly referred to as Medicare Part B was actively brought into the picture only months before final enactment of the program. With less than a year of "lead time," then, the Social Security Administration and its private Part B contractors (mostly local Blue Shield Plans) were faced with a systems design and implementation task of near monumental dimensions. That this effort has succeeded, despite inevitable problems in the early years, is a tribute to the Congressional rationale for utilizing private carriers in the first place: "To provide for the administration of benefits with maximum efficiency and convenience for individuals entitled to benefits and for providers of services and other persons furnishing services to such individuals. Beyond this general mandate for private sector carriers, the original Medicare law also described the range of specific services to be provided by the Part B contractors. Those required services, in turn, implicitly reflected the confidence of the 89th Congress in the private carriers' experience and prevailing reputation for prudent management, efficiency, fiscal integrity and judicious stewardship of insurance trust funds. But in today's clamor over rising health care costs, the steadfast progress, performance, and integrity of Medicare carriers at large are sometimes overlooked or even impugned in the rambling search for scapegoats or dramatic administrative "reforms." There is still room for improvement, to be sure, in the administration of Medicare Part B, but there is more to be commended than is commonly understood. Consider, for example, that according to recently released Bureau of Health Insurance statistics, Part B carriers currently process more than 95 million claims per year-representing $4.5 billion in benefits-at a unit cost per claim which is actually two percent less than it was four years ago. Social Security Commissioner James Cardwell recently was quoted as saying that despite the heavy increase in workload, the Part B carriers' processing time has dropped from 19.4 days in 1973 to 17.1 days at the end of 1974. The latest claims processing time is now down to 14.3 days. In recent testimony SSA's Bureau of Health Insurance Director Thomas M. Tierney went even further and said that the existing administrative systems are generally effective in controlling costs. "Perhaps the best evidence of this fact, is that the unit cost for handling claims has been relatively constant or lower in the last five years despite the impact of inflation on salaries and other costs to the carriers. In the hospital program (Part A) the unit cost per bill in FY 1972 was $6.33. For the first 9 months of fiscal year 1976, the unit cost was $5.76. In the physicians part of the program (Part B) the unit cost per claim in FY 1972 was $3.18, for the first 9 months of fiscal year 1976, the unit cost was $3.12." The force of these accomplishments cannot and should not be understated in the context of rising carrier costs to do business in an inflationary economy at large. This increased productivity-together with the fact that total administrative costs to deliver Medicare benefits are less than five percent of the benefit payments themselves-suggests that Congressional, labor and other critics of Medicare contractors are raising false and counterproductive issues when they slap at carriers' administrative methodology or management prerogatives. For some, however, the record of carrier performance in Medicare-or health insurers at large, for that matter-is a testament to private sector shortcomings no matter what the figures say. This kind of "Catch-22" mentality recently led an inveterate Blue Cross critic, for example, to tell a Congressional oversight committee that if a Medicare carrier's administrative costs are relatively high, the carrier management is greedy and must be squandering public funds on "luxury items." If, on the other hand, the carrier's costs are relatively low, the witness went on, then the carrier is not performing quality claims review and must be paying benefits willy-nilly. In the expectation that at least 51 percent of the Congress does not share that particular mental process, it should be noted that according to one Congressional analyst, the Medicare program-while not without its problems-is "light years ahead" of Medicaid when it comes to fraud and abuse control. It cannot be denied except by some, as we have seen-that a major reason for this difference is the ability, accountability, and expertise of the private sector Medicare carriers (who have not been accorded a parallel role in the Medicaid program). SSA Commissioner James B. Cardwell, in recent testimony before a Senate appropriations committee, put it rather matter-of-factly this way: "I would emphasize that the program's claims processing systems are operated by insurance carriers as contractors to the government. These systems, which incorporate many internal checks and balances to assure proper Medicare payments, have evolved over many years of experience—not just Medicare experience, but commercial experience as well. In this way, the government benefits from many years of commercial experience in the area of fraud detection." In sum, there is little doubt that the existing partnership in the Medicare program between government and the private carriers-and the products of that partnership-are a credit to both sectors. Certainly the program has travelled a fine line over the years in this respect, between excessive government domination on the one hand, and occasional carrier recalcitrance on the other. But the basic pluralistic relationship has survived and succeeded, and it has succeeded well. It deserves to further evolve without the mindless intervention of a cynical few. In the same vein, eliminating some of the burdensome Social Security Administration carrier regulations as suggested by the HEW Advisory Committee on Medicare Administration, Contracting and Subcontracting (the Perkins Committee), and allowing carriers that were selected for their expertise and capability to manage their Medicare operations, would lead to the even greater efficient administration of Title XVIII. If Congress would focus on reforms that would upgrade program administration at the carrier level, the administrative superstructure would be less of a concern. The role of the carrier in Medicare B is further described in Attachment 1. ATTACHMENT 1 MEDICARE PART B CARRIER ROLE Some 32 Blue Shield Plans now serve 12 million Americans in their role as carrier in the administration of the Medicare Part B Program. In perspective, 71 Blue Shield Plans underwrite the health insurance benefits for some 73.4 million Americans under their regular business program. Section 1842 (a) of the Social Security Act provides that "the Secretary is authorized to enter into contracts with carriers, . . . and, with respect to any of the following functions which involve payments for physicians services on a reasonable charge basis, the Secretary shall to the extent possible enter into such contracts: (1)(A) make determinations of the rates and amounts of payments required pursuant to this part to be made to providers of services and other persons on a reasonable cost or reasonable charge basis (as may be applicable); (B) receive, disburse, and account for funds in making such payments; and (C) make such audits of the records of providers of services as may be necessary to assure that proper payments are made under this part; (2) (A) determine compliance with the requirements of section 1861 (k) as to utilization review; and (B) assist providers of services and other persons who furnish services for which payment may be made under this part in the development of procedures relating to utilization practices, make studies of the effectiveness of such procedures and methods for their improvement, assist in the application of safeguards against unnecessary utilization of services furnished by providers of services and other persons to individuals entitled to benefits under this part, and provide procedures for and assist in arranging, where necessary, the establishment of groups outside hospitals (meeting the requirements of section 1861 (k) (2) to make reviews of utilization; (3) serve as a channel of communication of information relating to the administration of this part; and (4) otherwise assist, in such manner as the contract may provide, in discharging administrative duties necessary to carry out the purposes of this part." These functions spelled out by Congress are the general elements contained in the carrier's role. The wording of these functions is noteworthy and for purposes of emphasis, key wording in the above has been underlined to identify the general nature of carriers' performance responsibility and authority in these functions. Congress has provided that the Secretary of Health, Education, and Welfare should utilize to the extent possible the private and prepayment health insurance industry as carriers to perform these functions. The key element in the carrier's role is the determination and execution of payment for services provided under the Medicare program. Section 1842(b) (3) (Å) and (B) establish the role of the carrier as a general contractor with respect to payment for services by providing that "the carrier (A) will take such action as may be necessary to assure that, where payment under this part for a service is on a cost basis, the cost is reasonable cost (as determined under section 1861 (v)); (B) will take such action as may be necessary to assure that, where payment under this part for a service is on a charge basis, such charge will be reasonable and not higher than the charge applicable, for a comparable service and under comparable circumstances, to the policyholders and subscribers of the carrier, To assure that carriers could be utilized to the extent possible and "provide for the administration of the benefits under this part with maximum efficiency and convenience for individuals entitled to benefits," Congress further provided that "Contracts with carriers under subsection (a) may be entered into without regard to section 3709 of the Revised Statutes or any other provision of law requiring competitive bidding.” Thus, it is intended that the services provided by the carriers be noncompetitive in order to assure that the general contractor has the maximum opportunity to direct and control the functions under his jurisdiction for meeting the needs of the beneficiary. The experience of the carrier, and the carrier's experience in a given locality, in rendering the various services required by the functions is a key characteristic of the carrier. Medicare pays a portion of the personal health care services of this nation's senior citizens. The law anticipated that carriers experienced in local areas would utilize their existing administrative services, already familiar to many of Medicare's beneficiaries, in making payments under the Medicare program. The carriers employ many services developed through years of private business experience in carrying out the required Medicare functions. Among these are claims examination; public, professional and provider relations; claims reviews and appeals; reasonable charge determination; utilization review; and contract, financial, and medical policy management. In performing these services, the carrier employs a number of tools and resources available from his private business. These resources include professional advisors, business managers, technical personnel, skilled clerical staff, and data processing. As a general contractor, the carrier determines, consistent with budgetary limitations, the extent and nature of the resources to be utilized in the performance of carrier functions. The carrier's role as a general contractor established in the law (i.e., "takes such action as may be necessary") carries with it an exclusive reliance on the carrier for a determination of how the required services are to be discharged from the resources available to the carrier. Generally, the carrier relies exclusively upon its own resources and experience in the required services. On occasion and as required by circumstances for specific periods of time, the carrier elects to augment its own resources through subcontracts for such services as management consultation, facilities planning, legal advice, systems software development and data processing. This is not usually a preferred or standard practice for extended periods of time since the outside supplier of such services lacks the carrier's experience in the services vital to the carrier's functions under the law. The decision to subcontract is an exclusive responsibility of the carrier and the carrier alone is accountable for the performance of the subcontractor. Such subcontracts are designed to augment the carrier's services and to contribute special skills and resources not then available to the carrier from those utilized in his private business. Where a subcontract is employed, the carrier does not relinquish its accountability under the law for management of the assigned functions and direct administration of the required services. The Secretary holds the carrier responsible for determination of the resources required and the carrier alone makes the decision on whether or not subcontracts for a given period of time are required to augment its own resources and services. Once the decision has been made to subcontract, the carrier has the responsibility to determine that the services and resources to be employed under the subcontract are the most cost effective available. If such services are available from more than one source, the carrier follows standard government subcontracting procedures in developing a request for proposal and in soliciting and evaluating bids through open competitive bidding. The Secretary bears the responsibility of assuring that the carrier's evaluation of the subcontract proposals results in the selection of a cost effective subcontractor. The carrier is accountable for cost effective administration of its contract, and the Secretary is responsible for assuring Congress of the carrier's cost effectiveness in the administration of the Medicare program. Thus, the carrier bears the responsibility to continue to seek new ways to improve the cost effectiveness of its administration within the services it performs. Substantial cost benefits to government are available through the carrier's ability to carry out Medicare program administration in concert with its private business. Carriers may elect, where improvements in cost effectiveness can be obtained, to share cooperatively in selected services required for the Medicare program. This cooperative sharing of services is, but should not be, subject to competitive bidding since such services are jointly developed as a mutual part of the carrier's own resources. This, then, would be consistent with the provision of law exempting the carrier contracts from competitive bidding. Should the carriers collectively decide to contract in common with an outside supplier of the desired services, then the requirements for competitive bidding would apply. The complexity of the essential services performed by the carrier in carrying out its Medicare functions is frequently overlooked. Accurate claims examination is required in order to discharge the function of receiving, disbursing and accounting for funds and to make determinations of the rates and amounts of payment. Accurate claims examination requires the carrier to draw on its experience in the development and application of comprehensive and detailed conventions for the coding of medical and health related services. Extensive interrelationships between the health care services and the coding conventions must be described, maintained and updated. Extensive knowledge of community resources for delivery of health care services is essential. Experience in applying a given set of benefits to the conditions and environment of local medical practice is required. Extensive knowledge of the problems and concerns of beneficiaries under health insurance and prepayment programs also is a necessary resource in carrying out the responsibility of claims examination. Medicare program carriers utilize their extensive experience in public, professional and provider relations when they serve as a channel of communication of information relating to the administration of the Medicare program. Skilled personnel are required to deal with the providers of service and physicians if determinations of rates and amounts of payment are to be effective. Government must be assured that it receives accurate and effective information concerning professional and provider satisfaction with Medicare program reimbursement. The complexities of Mediacre program administration must be dealt with by the carrier through communication in a manner which minimizes their impact upon the providers and the medical profession. The use of experienced carriers provides substantial assurance to providers and the profession that Medicare claims and payments will be handled in an established and accustomed manner. Carriers experienced in communicating effectively with providers and physicians concerning aspects of their private business constitute the most effective means available to government for communicating information regarding the administration of the Medicare program. Claims reviews and appeals under the Medicare program are necessarily more complex than those experienced by the carriers in their private business. However, the experience of the carrier's personnel in claims examination and legal and financial relationships between patients, providers of service and third parties is essential to effectively carry out the provisions of the Medicare program for hearings and appeals. The carrier's responsibilities in this regard are essentially no different from responsibilities of other government contractors where such hearing and appeal procedures apply. As a general contractor, the carrier's responsibility to conduct such hearings and appeals is an exclusive one and subject only to guidance by the Secretary. Reasonable charge determination is the key service performed by the carrier in carrying out its functions for making determination of rates and accounts of payment. While the Medicare Law provides the carrier with the general conditions he must take into account in determining reasonable charge reimbursement, the carrier's own experience and resources are essential to implementing the provisions of the Law. Medicare carriers are experienced in dealing with the complex decisions required in the development, maintenance and updating of physician charge profiles. Professional and provider relations are particularly important in assuring that communications regarding the maintenance and updating of reasonable charge profiles is effective. Extensive knowledge of physician charge patterns, trends in medical economics, and the relationships of health care resources to health care financing is required. Applying this knowledge to the actual charges claimed by physicians requires the carrier to compare the charge with the physician's usual charge for the service provided and to the charge usually made by physicians within his area and specialty of medical practice for the same service. If satisfactory charge information is not available to permit these comparisons on a direct basis, the carrier then employs a series of complex decisions which |