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Also, closer adherence by contractors to existing requirements regarding justification of contractor-owned aircraft costs seems necessary, and we plan to scrutinize these costs more closely in future audits.

Mr. Chairman, this concludes my prepared remarks.

I would be pleased to answer any questions you or other members of the subcommittee may have.

Mr. STARK. Thank you very much, Ed.

I wonder if in your experiences as an auditor you're not aware that in general the three major private aircraft-Beech, Cessna, and Piper-sell executive aircraft and they rely strongly on the cost effectiveness of those aircraft, taking into consideration such things as the investment tax credit and accelerated depreciation because, without the tax gimmicks, if you will, and assuming at least the 50percent marginal tax bracket, there is very little way with the average use of a large business aircraft you can compare it with either commercial travel and cabs and the hotel or Holiday Inn bills tossed in, that when you have nonprofit tax-exempt organizations they start out way behind in justifying aircraft as it is.

Mr. ŠTEPNICK. I think the most interesting aspect of the comparison between the contractor-owned aircraft and the commercial aircraft is a factor that some of the plans are using to justify the costs of charging the contracts.

The factor is one that is generally allowable under the Federal procurement regulations and it is basically the value of the employee's time.

I wouldn't want to characterize this as a gimmick, but it certainly can be a rather subjective kind of thing.

Mr. STARK. What you are saying, if I can get that right, is that if somebody makes $200,000 a year as a salary, one of the ways you would justify a $700,000 airplane is that the man at $200,000 a year is probably making $259,000 a year straight time.

Therefore, the less time he is in the air the more time he saves the Government. The poor guy slugging along at $50,000 a year really doesn't deserve the airplane because his time isn't so valuable so you get a kind of Catch-22.

Mr. STEPNICK. The higher the salary rate the greater the benefit of owning a privately owned plane.

Mr. STARK. Thank you very much.
Mr. Rangel?

Mr. RANGEL. Who has the responsibility to audit the intermediaries and the carriers in the Federal Government? What agency?

Mr. STEPNICK. The HEW Audit Agency. This is the organization that I represent.

These would be the post-audits of administrative claims.

Mr. RANGEL. Why is it that we have examples, as pointed out by Mr. Duncan and Mr. Stark, of whether or not an intermediary should know whether he can take his family and friends to a motel for educational purposes?

Why is it that in all of these years they do not know what they can or cannot do? Mr. STEPNICK. They have in the past apparently been able to

the justify those costs as reasonable. While our audits have picked up those items from time to time, under the selective testing techniques

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that we have been using, I would have to admit that apparently some have slipped through.

Mr. RANGEL. Excuse me. I do not understand this "some slipped through”.

Mr. STEPNICK. We found it now, but it could have slipped through in prior audits. This is what I am saying.

Mr. RANGEL. I understand, as far as this intermediary is concerned he does not see any wrongdoing. He said that it was an educational meeting at the motel. So, obviously, it did not slip through. He wants his reimbursement.

Mr. STEPNICK. Yes, right.

Mr. RANGEL. My point is, as lawyers, I think we have tried to find out where we can be exempt under the tax code. Could


tell me just what type of medical education was necessary for the wives and whomever else attended this motel meeting?

Mr. STEPNICK. I believe as to the wives and family, as I recall, the specific justification for this meeting is a number of the attendants were board members whose services were being rendered at great inconvenience to themselves and the plan, and it was felt desirable that their families also not be inconvenienced by their absence.

Mr. STARK. If the gentleman would yield.
If I could take all of us off the hook.

Mr. STEPNICK. Don't misunderstand me. I am not trying to justify it at all. I am telling you this is what the response indicated to us.

Mr. RANGEL. If I could find IRS auditors as kind as you are in understanding what I was trying to do, I would be way ahead.

Mr. STEPNICK. Don't misunderstand me. We have questioned this and we recommend that this cost be disallowed.

Mr. RANGEL. What bothers me is that, generally speaking, we know what we can get away with IRS, and we know what is going to be audited if it does not pass through.

Your attitude does not bother me as much as the fact that in 10 years they have no reason to believe that this type of thing is not justified.

I mean, they are not paying the $2. They are fighting it. It does not bother me that it is one. I just do not know how many others believe that this is a legitimate expense that they can pass over to the Federal Government.

Is there anything in the regulations that cover this type of thing?

Mr. Simmons. Sure. I think the thrust of the contractor's argument in this case was that it was a general educational meeting.

Apparently, they had approval from the State insurance commissioner to go outside the State and they took their wives along, what they stated to be the directors, who are not paid, to educate them and explain to them why their husbands had to be away attending these meetings.

Mr. STARK. Did they take the State commissioner with them?

Mr. SIMMONS. I don't have information to indicate they did or did not.

Mr. RANGEL. I think the Congress should think of ways to have wives with us just to show how important it is for them to be with us.

Mr. Simms. State insurance commissioners may allow these when they establish their Blue Cross and Blue Shield rates. They think the Federal Government ought to pick it up, too.

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This is their rationale.

Mr. RANGEL. Do you see any reason why these organizations should be tax exempt?

Mr. STEPNICK. I haven't really examined into that question, sir. It is a policy question.

Mr. RĂNGEL. We have commercial businesses that do basically the same service; don't we?

Mr. STEPNICK. Yes. There are several private insurance carriers who also participate in the program.

Mr. RANGEL. Do they do the same thing?
Mr. Simms. But these are subsidized by the citizens.

These Blue Cross plans are nonprofit. If you increase any of their expenses by adding taxes, the Blue Cross rates go up, Blue Shield rates go up, and the citizens pay it.

Mr. RANGEL. How do the insurance companies survive?

Mr. Simms. The actuarial basis for the private insurance carrier premium basis is designed to make a profit for them.

Mr. STARK. Will the gentleman yield at this point?

I question that last answer that they work on an actuarial basis. I don't believe in the administration of medicare there is any actuarial competition at all. We have examples of the private carriers as profitmaking, taxpaying institutions.

Mr. Simms. Not medicare. The Congressman asked me why they were taxable. I say their overall business, private business is based actuariarily to produce a profit, but not on the medicare program.

Mr. STARK. Aren't there private profitmaking, taxpaying institutions administering medicare contracts at a competitive price with the nonprofit tax-exempts?

Mr. Simms. Right, but they don't make a profit on medicare. It is actual cost reimbursement.

Mr. Duncan. I was noticing that administrative costs for the commercial carriers is quite a bit more than for Blue Cross. Isn't that true?

Mr. Simms. I don't have those figures with me.

Mr. DUNCAN. I notice on the administrative costs data for July to March of 1976, most of the Blue Cross cities it was less than 2 percent and for the same commercial service it was above 2 percent.

Mr. Simms. I don't remember it that way, Congressman. The Bureau of Health Insurance puts out these comparisons. As I remember, if you start with the lowest and go to the highest, they are intermixed.

The Blue Cross plans are right next to some of the commercials. Some of the commercials are a right high cost. There is a mixture right on through their list.

Mr. DUNCAN. I found that the percentage of Blue Cross administrative costs to the benefits is much less, though, than the commercials.

Mr. RANGEL. It has been brought to my attention that in the
Bureau of Health Insurance study on “Health Insurance Administra-
tive Costs,” published by the Social Security, and known as the Vogel-
Blair study-

Mr. SIMMS. I didn't hear that.
Mr. RANGEL It states:

Our findings of economies of scale for commercial insurers indicate that national health insurance ought to be centralized in the hands of large, competitive firms.

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Thank you.

This is not to say that BC-BS has no role to pay in national health insurance. Our findings on the Blues, however, indicate that the Blues' artificial competitive advantages probably should be eliminated to remove one impediment to the achievement of economies of scale in the competitive process.

Are you familiar with this study at all?
Mr. Simms. Not with that statement.

Mr. STEPNICK. Congressman, the questions that you are raising now are really basically broad policy matters that I think are better addressed to the policymaking officials of the Department.

The Audit Agency hasn't done any specific work with respect to that report.

Mr. RANGEL. Have you made any specific recommendations to the Congress as to what legislative changes should be made in order to make your job easier in areas of audit? Have you recommended measures so that the carriers and the intermediaries would know in advance what is allowable?

I have a problem with reasonable costs, which was referred to throughout the testimony. Congresswoman Holtzman has brought to this committee's attention the number of people in the area of New York who are not paid what is normally expected under the legislation, because all of our doctors are charging unreasonable costs and our citizens, especially our elderly citizens, can only obtain reimbursement for reasonable costs.

Is that just a problem in my city or do you find this nationally?

Mr. STEPNICK. As the prior witness indicated, making judgments on reasonable costs frequently puts you in the position of being able to show that it is unreasonable under the general Federal procurement regulations and, while the Social Security Administration has selected certain areas and tried to make the criteria a little bit more specific, we still have the general problem.

I haven't regarded it as something that could be solved through legislation.

We are suggesting, as my statement indicated, that there are some ways you can tighten up on some of these debatable items simply by agreeing, in effect putting them on a fixed price-basis, based on a study-in other words, paying for automobiles at the rate of $0.15.

In the very sensitive area of executive compensation, even though the Federal procurement regulations are pretty much silent in terms of general guidance, other than reasonableness, there is nothing to prevent the Social Security Administration from amending its contracts with the medicare carriers to put a limit on the amount of salaries or any other expense that should be charged against medicare.

It seems to me this would be a better way to go about doing it at this point, based on some broad legislation.

Mr. STARK. Would the gentleman yield?

Mr. Stepnick, you indicated earlier that often when you, the auditors, suggested unreasonableness in a cost, that it is contested by the contractor and comes back to you. I would assume, your management and you feel somewhat frustrated, your auditors do, that they generally are decided against.

Do you think that if you maintained the role of advocate in suggesting unreasonableness and the deliberations were public, that there were in fact some kind of a public meeting or a meeting open to the press and reporters, which would allow you to make your statement, the auditor to say, "This is unreasonable cost” and require the contractor to defend it, some of these things seem to get resolved by a few letters and just get swept under the rug, I pressume.

I It must make the auditors feel somewhat powerless in not being able to say why raise the question if you keep getting hammered down.

Do you think you might be more effective if you or the audit arm were directed to be an advocate and to say, "We are going to determine this cost is unreasonable based on the following empirical evidence," and then let the contractor come back and contest you in more of a hearing format.

Would something like that make you more effective in pushing for reasonableness, do you think?

Mr. STEPNICK. Yes. I think that would certainly elevate the forum in which the issues would be debated.

Mr. STARK. Thank you.
Mr. Duncan?
Mr. Duncan. Thank you.

Mr. STARK. Thank you, gentlemen. I appreciate very much your being with us this morning and taking the time to give testimony,

There will be some questions that we would like to submit in writing, and I would like to invite any of you who want to elaborate on answers

you look over our transcript, if you would like to submit additional written material for the record, we would be pleased to have you do so.

Mr. STEPNICK. Thank you.

Mr. STARK. I would like to call at this time Mr. Thomas M. Tierney, Director of the Bureau of Health Insurance of the Social Security Administration.

Tom, welcome. It is good to see you again. I would like to have you introduce your colleagues and proceed in whatever manner you are comfortable.




Mr. TIERNEY. Thank you, Mr. Chairman, Mr. Stark-whatever your title is when Mr. Vanik is in the room.

On my left is Mrs. Mildred Tyssowski, who is Deputy Director of the Bureau in charge of program operations. And on my right is Mr. Lamont Williamson, who is now Mrs. Tyssowski's deputy and has been in charge of contract operations.

Mr. Chairman, if I may, I would like to read some portions of the statement. I promise I will leave out all I can.

I, first, would like to put, the whole financial picture into some perspective so that you can understand the magnitude of the various elements of cost within the program. During fiscal year 1975 we paid out about $14.1 billion in benefit payments, and administrative costs totaled $699 million or 5 percent of benefit payments. The ratio of administrative costs to benefits for the hospital insurance program was 2.5 percent and for the medical insurance program, 11.6 percent.

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