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Mr. STARK. Out of how many which you have looked at does this occur?

Mr. STEPNICK. There are 19 States that have done this, sir.

Mr. STARK. So, they consider them taxable as it were, either under the franchise concept or profit.

This is an association concept and we exempt them on the Federal level?

Mr. STEPNICK. Sort of a tax of being in business.

Mr. STARK. Thank you.

Mr. STEPNICK. While the tax is imposed usually as a percentage of gross premiums collected, the State laws sometimes refer to this tax as a franchise tax which is ordinarily an allowable cost for allocation to the medicare program.

However, we questioned that they were franchise taxes in the traditional sense of the term and we suggested that they really were a gross receipts tax applicable entirely to the contractors' regular commercial business.

Mr. STARK. Like a sales tax?

Mr. STEPNICK. Exactly.

While the contractors did not agree with our view, SSA and the Secretary made a determination disallowing the cost. The matter has been appealed to the Armed Services Board of Contract Appealswhich has been designated to handle contract disputes on cost issues and such matters-where a decision is pending.

Through 1975, about $7 million of charges to medicare is involved. Inequitable and incorrect allocations of costs to the medicare program are the second general category of costs we have questioned. Problems of cost allocation occur more frequently than unallowable costs and relate principally to cost-finding methods for identifying costs applicable solely to medicare or solely to the contractors' business, or allocating costs that are common to or benefit more than one program or activity.

For example, contractors sometimes erroneously or inequitably in our opinion charge medicare for such things as: (1) Data processing costs applicable directly to their own lines of business; (2) communication expenses allocated on a general rather than a specific basis; and (3) general and administrative expenses which we think would be inappropriately grouped for cost allocation.

These kinds of problems are not peculiar to medicare contractors and are quite similar to those experienced in audits of cost reimbursement contracts under other Federal programs.

Our reports contain specific recommendations to SSA for correcting weaknesses in cost allocation procedures on a contractor-by-contractor basis.

In response to information made available to us by the Oversight. Subcommittee staff, we initiated a limited special audit in April 1976 at 21 Blue Cross contractors to review auto and contractor-owned aircraft travel costs, with specific reference to possible overcharges to medicare for "luxury" and excessive automobile or aircraft travel costs.

This special audit-which was separate from our regular cyclical audits was aimed at determining as quickly as possible the extent to which problems may exist in these areas.

While prior audits had raised questions from time to time on automobile and airplane costs, a special audit was considered necessary because, under the selective testing techniques normally applied, our audit coverage of the alleged specific problems could have been limited. This special audit is not completed and a final report has not been prepared, but we believe that certain observations can be made based on the work done thus far.

With respect to luxury automobile costs, it should be noted that no official program definition of a luxury auto has been established.

While medicare reimbursement principles require the contractor's automobile costs to be reasonable, specific criteria do not exist to define or illustrate costs that would be considered unreasonable.

In the audit, therefore, we considered luxury autos to be top-of-theline full-size automobiles that had high acquisition cost in relation to other automobiles in use at the individual contractors.

On this basis, 11 contractors were found to have been operating luxury vehicles, but in only two cases did it appear that medicare was charged any appreciable excess costs.

In these cases, the excess cost at one contractor was $439 in 1975, and at the other contractor it totaled $848 for the years 1973-75.

At some locations employee cost sharing or longer depreciation periods resulted in less program costs for luxury cars than for other automobiles in use.

Audit information available thus far indicates also that one contractor operated 11 general-use vehicles with low annual mileage which, based on the contractor's established minimum use policy, indicated that some automobiles may not be needed.

In addition, at this contractor we found low mileage/high rentals for 21 leased executive automobiles which were used for nonbusiness as well as business purposes.

According to our calculations, this resulted in $2,758 additional costs to medicare in 1975 than would have been charged had the contractor reimbursed its officials 15 cents a mile for business use of their privately-owned automobiles.

Mr. STARK. Could I interrupt there?

That's just the costs to medicare, but if you extend that to, say, CHAMPUS, medicaid, to Federal employee health benefit programs or just to the private /public sector who pay their Blue Cross premiums, all of those programs are sharing the cost of these items; are they not?

Mr. STEPNICK. This is correct. The $2,700 figure would just be the cost to medicare.

There were some charges to other Federal programs.

Mr. DUNCAN. The luxury vehicles you are referring to, are they owned by the agency or the contractor?

Mr. STEPNICK. In the 11 contractors that we referred to, they were owned by the contractor and then in addition

Mr. DUNCAN. Were they bought with medicare funds?

Mr. STEPNICK. They were purchased out of their general funds but the costs of operating them, including the depreciation, which would be a portion of the acquisition cost, was allocated to medicare along with the other programs.

Mr. DUNCAN. Some place, I heard that the plan owned two luxury type automobiles, a Cadillac and a Buick Riviera. Is that true?

Mr. SIMMONS. Excuse me. In this particular plan, two automobiles were owned.

The 21 executive vehicles referred to, which include the 13 that we contracted for on the line, they were leased.

Mr. DUNCAN. By whom?

Mr. SIMMONS. By the contractor.

Mr. DUNCAN. And charged to the medicare plan?

Mr. SIMMONS. A portion of the costs were charged to medicare, yes, sir.

Mr. DUNCAN. Wouldn't it be better just to require certain mileage allowance instead of owning the vehicles?

It looks to me like a pretty sloppy operation.

Mr. SIMMS. We are coming to that, Congressman.

Mr. DUNCAN. You mean in your statement?

Mr. SIMMS. Yes, sir.

Mr. DUNCAN. Thank you.

Mr. STARK. Proceed.

Mr. STEPNICK. At another contractor, we found that an incorrect allocation formula resulted in charges to medicare of $11,466 during 1973-75 for costs of using automobiles for nonbusiness purposes. Mr. STARK. And that was where, if I may ask?

Mr. STEPNICK. This was at Blue Cross, Maine.

Mr. STARK. Thank you.

Mr. STEPNICK. At four other contractors tests of reported vehicle usage did not indicate that the number of vehicles was excessive.

We checked into use of contractor-owned aircraft at five contractors. In one case, none of the aircraft costs was charged to medicare, and in another case the flight costs charged to medicare were reasonable based on comparisons with the costs of similar trips by commercial airlines and privately owned automobiles.

Limited tests at the other three contractors, however, showed that alternative modes of transportation were from 40 to 57 percent less costly than the contractors' aircraft.

Further analysis is required to develop the total dollar impact on medicare.

Mr. STARK. Could I interrupt there?

If you are looking at that chart, as I do while we are talking, if we could take Blue Cross Maryland with about 1.5 million membership and travel expenses of $135,000 in round figures, and then take Blue Cross of Milwaukee, Wis., which is one that has come up in the question of owning the plane and so forth, with a few more members, 1.7 million roughly, though it has the same membership, it has $815,000, about five or six times the travel expense.

I don't know whether Maryland's name has come up as a luxury auto State and aircraft State, but I know the Milwaukee plan has. I know from driving across and throughout and travelling and living in both of those States that there isn't a whole lot of difference to cover Maryland as there is in Wisconsin.

There would be a little more snow in Wisconsin. I wonder again. in your opinion, unless you would also say that Maryland is a State where you discovered a lot of loose travel, that there is an indication that maybe these people just run around a whole heck of a lot more. Maybe they have a third as many executives and they move faster so the travel costs are higher and their salaries are a lot lower.

Is that maybe an indication that they are just used to being comfortably transported because the numbers just seem so glaringly out of kilter?

Can you comment on that, Mr. Stepnick?

Mr. STEPNICK. Wisconsin was one of the places that had contractor

owned aircraft.

In that case we thought that the costs charged to medicare were in line with the costs of alternative modes of the transportation.

I am unable to explain the variation between Maryland and Wisconsin.

Mr. STARK. There was the plane in Wisconsin that was used for personal travel, I understand, by the executives. I don't know whether that was brought up in your study or by the press.

I don't know whether your audit found it, because they may not have been charged to the Federal Government.

Mr. STEPNICK. I think that this was the conclusion that we reached, that it wasn't being charged to the Federal Government.

Mr. STARK. But you had no cases, just parenthetically, of the plane being used for personal travel by the executives and then you went on to examine further and found that it was not billed to the Government?

Mr. SIMMONS. Sir, I don't have information to indicate that that would be true.

Our specific tests were as to medicare usage and I don't have information to indicate that we found it to be used for personal


Mr. STARK. All right. Thank you.

If you dwell on that at a later date and would care to submit for the record, as I say, it appears when you have five or six times as much travel costs for one Blue Cross plan, which seems approximately the same geographic and membership distribution, roughly the same asset sort of structure, there might be an explanation for that, other than just inefficient administration.

I would be interested, if you would ponder that a little later, if you would care to submit any ideas you have on that.

Mr. STEPNICK. All right, we will, sir.

Mr. STARK. Thank you.

Mr. STEPNICK. At one contractor-this is the concluding portion of our special audit on transportation- we noted two other types of questionable charges to medicare:

1. Unjustified first-class airfares rather than the lower tourist


2. Costs of meetings at locations which required extensive travel and at expensive lodging rates.

Additional audit work will be done on these points.

Mr. STARK. One last interjection here. Is this the reference to the Des Moines, Iowa plan?

Mr. STEPNICK. This is the situation that you talked about in connection with the last witness, yes, sir.

Mr. STARK. I would like to quote from your May 13 audit report on this plan and see if you could correct me if there have been any changes since the transmittal of that report.

You cite an example of extensive travel with family members to expensive places.

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An example of this was a 4-day meeting, June 29 to July 2, 1975, at the Four Seasons Lodge in the Lake of the Ozarks, Mo. The total cost incurred for the 4 days was $24,000, of which $3,800 was charged to Federal programs.

This meeting was attended by 40 plan employees and board members. Included in the total of incurred costs and the amount charged to the Federal program was the lodging and meal costs of family attendance of the attendees.

My question is whether that is still accurate. Is that the case? Mr. STEPNICK. We received the response from the plan. As you know, this information was included in the draft report. The response did not dispute the facts in the situation at all.

They indicated that it was considered necessary for part of an educational program and they felt the costs were reasonable.

Mr. STARK. Is this the same plan which replied to your comment on their luxury automobiles?

Our policy is based on the fact that it reflects success, inspires other employees, and presents an image commensurate with the position?

Mr. SIMMS. It is the same plan.

Mr. STARK. Thank you.

Mr. DUNCAN. Why do you have to travel at all?

I thought that administratively you handle these cases in your office. I mean, not you but the contractor, and they are supposed to be experts in the field, so why does it take 40 employees to go to the Lake of the Ozarks for a meeting for 2 or 3 days?

I can't see why you have excessive travel and why it is absolutely


Mr. SIMMS. You mean why do Blue Cross plans have travel?
Mr. DUNCAN. All of your contractors.

Mr. SIMMS. All the intermediaries have to visit the hospitals and nursing homes.

Mr. DUNCAN. Why?

Mr. SIMMS. Periodically for audit, utilization review visits.

They have to monitor the plans, not annually but quarterly sometimes. Even monthly they make these visits. That is part of the reason why some of this travel varies between these plans, even though the dollars may seem the same.

This is spread between the distances between the hospitals.

Mr. DUNCAN. Do you have statistics which would show the percentage of costs per caseload that the various offices handle as far as travel is concerned, the percentage related to travel?

Mr. STEPNICK. We don't.

Mr. DUNCAN. Can you supply that information?

The percentage, for example, let's say, for Blue Cross Dallas or any of them, your figures show the percentage that is related to travel or the cost per case that they handle.

Mr. STEPNICK. I think we can arrange with the Social Security Administration to calculate those figures.

Mr. STARK. Would the gentleman like it just on some of these examples here on the chart?

Mr. DUNCAN. Yes, sir.

Mr. STARK. Thank you very much.

Mr. STEPNICK. In summary, we believe that doubts as to the reasonableness of automobile travel costs charged to medicare would be minimized if the amounts allowable were limited to a specified mileage rate regardless of the type of vehicle used.

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