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The ratio for the medical insurance-or physician services partprogram is significantly higher than the ratio for the hospital insurance program because of the large volume of claims of relatively small amounts. That ratio doesn't mean that the intermediaries under part A are doing much better than the carriers under part B. In fiscal year 1975, we handled about 10.7 million claims in the hospital insurance program with an average payment of about $945 per paid claim and about 95.6 million claims in the medical insurance program with an average payment of about $48 per paid claim.

About 40 percent of the $699 million in administrative costs was for expenses incurred directly by Federal agencies involved in administration of the medicare program and some reimbursement to State agencies for surveying hospitals and other institutions to determine whether they meet the medicare conditions of participation. One of the things, I think, that is sometimes not fully understood in the administration of medicare, is that about 40 percent of the administrative costs are costs incurred directly by the Federal Government and agencies that are involved in the administration of the program, plus some reimbursement to the Senate agencies which do the job of surveying institutions and recommending their participation.

The Federal Government costs are incurred for such functions as determining eligibility for medicare benefits, issuing health insurance cards, collecting premiums and maintaining national records on beneficiary utilization of covered services. These are functions performed by the Social Security field organization and the Central Data Processing Center in Baltimore.

We have better than 1,200—or 1,300, I guess-district offices around the country, which provide services to medicare beneficiaries as they do other social security beneficiaries. The Federal Government costs also cover the costs of directing and managing the program incurred by the Bureau of Health Insurance and other SSA components and certain DHEW offices. The Public Health Service, for example, has a large role to play in establishing standards for the participation of providers, costs of the Treasury Department in collecting the taxes and of the Postal Service are additional examples.

About 60 percent of the administrative costs, or $410 million in fiscal year 1975, was paid to the medicare contractors for their primary role in making payments to institutions, physicians, and beneficiaries for covered medical services and related activities. The functions involved in carrying out this mission are classified in our budget processes under five major categories.

The first, which accounts for 48 percent of contractor costs in fiscal year 1975, is called "clerical claims review." This includes preliminary screening of claims and submitting inquiries to determine beneficiary eligibility, reviews to determine whether the services are covered under the medicare program, and the appropriateness of the level of utilization of these services and work related to beneficiary inquiries and hearings, which is another facet that I would like to talk about, Mr. Stark, with regard to some of these travel expenses.

The second functional grouping, which accounted for 23 percent of contractor costs in fiscal year 1975, includes the activities involved in electronic data processing of claims; principally data entry, computer processing and programing.

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The third major grouping, which accounted for 16 percent of contractor costs in fiscal year 1975, includes those activities which cut across most of the contractors' lines of business, including medicare. These include professional relations, general corporate services, payroll, accounting and other financial services. Almost 9 percent of total contractor costs in fiscal year 1975 were for the auditing of cost reports submitted by institutions under the hospital insurance program. You may be interested in knowing that for every dollar spent on audit we recover about $3.60. So audit, obviously, is a worthwhile activity.

The last functional grouping which accounted for 4 percent of contractor costs in fiscal year 1975 was for those "general and administration” (G. & A.] costs of the contractors allocated to the medicare program, generally on the basis of the proportion of payroll expense or man-hours for medicare to total corporate payroll dollars or labor-hours. G. & A. costs generally include the salaries of all corporate officers, their immediate staff and the legal department also the space, furniture and other facilities and equipment necessary to support their day-to-day activities.

Because of the committee's particular interest in travel costs, I would like to point out that these costs are distributed among the five functional groupings and, in total amount to $9.4 million or 1.8 percent of total contractor costs. The bulk of travel costs are expended on direct medicare activities including provider auditing, provider consultation and attending meetings and conferences. For example, the amount of travel costs expended on provider auditing alone is $2.7 million.

If you think back to my prior statement, for every one of those we recover $3, that is not so bad.

Mr. STARK. Tom, do you provide any guidance on the amount of travel permitted or such things as can the employee have an auto; should he take the auto home? If you look at the chart, you see that in travel expenses by local plan there is a significant difference between Texas and Massachusetts. Probably understandable—but in the Newark case there is about 700 percent difference between that and Chicago. Why should there be? Each covers the same general number of enrollees and has assets that cover a dense metropolitan area. I don't know whether the business situation is any better in Newark than it is in Chicago. Is there a reason that comes to mind?

What I am concerned about is that $1.2 million a year again is a flyspeck in the medical costs. But if there are other vast differences when you are comparing comparable plans, that could result from the way that the burden is allocated. Maybe one has more employees stationed around, as your agency does. What does that say to you?

Mr. TIERNEY. It certainly says, Mr. Stark, there is disparity. I think you really have to go beyond those figures and look into the basic facts. For example, taking the enrollees of these organizationsand this is their own private business—I doubt that comparing things on an enrollee basis is very significant. Let me just give you a couple examples.

I know that Blue Cross of Maryland's total travel expenses for their total business is about $134,000 and Blue Cross of Milwaukee is about $814,000. I don't know the answers, but let me tell you a few factors that might go into it.

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Blue Cross of Milwaukee also participates in a full medical surgical benefit program, so they are, in effect, a Blue Cross and a Blue Shield program. Therefore, they do all the other things that a Blue Shield plan does in their professional relations programs.

Mr. STARK. You mean the doctors ride first class more often than hospital attendants?

Mr. TIERNEY. No. A Blue Shield plan spends a great deal of time not with doctors, but with doctors' business offices. The gal in the business office in the final analysis is the one who prepares the bill and sends it in and codes it and all. They seem to find a greater significance in dealing with them than they do in having a nice philosophical dissertation with doctors.

I just point some of these things out as possibilities which underlie the difference.

I am sure that the organization involved would have to give you more.

I looked at another one there-I quess it was on salary--that indicated that on an enrollee basis Indianapolis, Ind., was way ahead of others. I don't know all the details, but Indianapolis, Ind., is actually a mutual insurance company and they have a very large group life insurance company.

If you note their assets were double anybody else's. Those things you have to go into at least. You have to at least look at them.

Having said that, our rules of allocation are the same for every one of them. But they sure do vary. Why, I don't know.

Let me give you another one. The Chicago, Ill., plan is very high on the list. In earlier days we were having trouble with the provider auditing program. When we started out, for example, I think after the end of 2 years about 34 percent of the total administrative costs in part A-hospital insurance—was going into auditing. While it was very productive, it nevertheless was a tremendous expenditure. That was going largely to outside audit agencies.

So we made a big push for these people to develop their own internal capacities. In this respect, the Chicago plan was providing some auditing support to the Florida organization and Oregon and, perhaps some others, although it may not have occurred during these same periods.

Mr. STARK. What you are indicating is some of this may show on the other side of the balance sheet as outside income and we aren't seeing the offset to it.

Mr. TIERNEY. Right, sir.

Mr. STARK. That kind of information would be very helpful to us, if you would submit it. I think there may very well be some extenuating circumstances.

Mr. TIERNEY. I want to look into it further at least.
Mr. STARK. Thank you.
Mr. TIERNEY. If I may skip to our budget process

Mr. STARK. Why isn't it that this is the place to use a little gentle persuasion, first of all, when you have people who have been questioned by audit for past unreasonableness, to call the auditors in? Wouldn't this be the time to look at somebody and say, "Look, we have three cases going back 5 years'?

Mr. TIERNEY. It is the time. That is exactly what we do. For example, Mr. Stepnick brought up the issue of the $7 million under dis

pute in premium taxes. We don't advance that. They still claim it because they feel very strongly that they have a right to it, that it is a cost of doing business, just the same as heat, light and power, and that they ought to get it. But until that question is decided, we don't advance

any funds. Mr. STARK. Would you hold up on the Lake of the Ozarks meeting until that one gets ironed out?

Mr. TIERNEY. Yes, sir. We would do that. If it were this general a question, should meeting and conference attendance at all be allowed, then we would simply say, "Well, until that is determined, there will be no funds advanced for those things.”

As for these other things, you have to remember that is one of the purposes of audit, to find out if the folks took the wife and kiddies along. They do it, I guess, for the reasons Mr. Stepnick said, thinking, "Well, it is a good rationalization." Only upon audit do they become revealed, and only then is the issue joined.

The point I wanted to make was that you had seemed to feel where there was a question raised about an expenditure they just went right on submitting that cost each year. I think that implied that we went right on advancing funds for it. They go right on submitting it, but we don't advance any funds for it.

BUDGET PROCESS

The principal mechanisms for enforcing adherence to the reimbursement regulations and for controlling costs are the budget process and the audit of final cost proposals. I would like to briefly describe these processes. Contractors are required to file budget requests with the Bureau of Health Insurance on April 15th each year for the forthcoming government fiscal year. These requests estimate the number of claims to be processed and the necessary manpower, facilities and services necessary to accomplish this task.

In addition, they identify the impact of any new legislative or regulatory requirements. These budget requests contain several schedules which identify costs within various functions to be performed and, in total, the contractors identify the various elements of costs that make up their budget requests, such as, salaries, fringe benefits, travel, space and equipment.

The BHI regional offices review the budget requests addressing such issues as changes in average salary on a corporatewise basis, changes in productivity, and the need for additional space or equipment. The budgets are reviewed against the background of historical experience for individual contractors, national and peer group averages of actual costs, and guidelines developed within BHI central office.

The regional office review and approval effort is controlled by the BHI central office by means of allotments relating to both workload and dollars. The regions cannot authorize budgets in excess of the amount provided by central office. Once the annual budget is approved, a quarterly distribution of cost and workload is prepared, and this distribution serves as a control factor in determining the amount of payment which can be made to the contractors during the fiscal year.

On an interim basis contractors file quarterly cost reports which are reviewed by the regional offices for conformity with the approved

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quarterly distribution of funds as well as for making determinations that work performed is proceeding in accordance with budget projections. Where actual experience deviates from authorized limitations contractors are required to submit variance analyses explaining the causes for the variances. These variances may be resolved by: revising the quarterly distribution, amending the annual budget, directing the contractor to abate various activities, or taking other actions which will assure that the contractor does not exceed the annual budget amount.

At the end of the accounting year the contractors file final cost proposal with the full explanation of all costs incurred. This report is audited by the HEW Audit Agency in accordance with the FPR and contract reimbursement principles. BHI negotiates audit exceptions with the contractor and closing agreements are then prepared. This has been a problem in the past, where maybe the Audit Agency picked out a relatively small amount of the total budget.

Nevertheless until the final cost settlement was executed, we carried that as an open item. In the contract negotiations which we are now conducting for the new contract, to be effective October 1, there is a provision for settlement of everything in which there is no dispute and leaving only disputed amounts, open pending decision on appeal.

Where the contractor and BHI are unable to reach agreement on an issue of cost a final determination is issued which may then be appealed to the Armed Services Board of Contractor Appeals as the agency to make the final decision. That is where the matter goes from there.

Mr. VANIK. May I inquire, how do we get to the Armed Services Board of Appeals? Is that a convenient tribunal or is it all agreed upon?

Mr. TIERNEY. No. Back in 1965 when the legislation was going through, I don't know whether the word "convenient” is particularly applicable, Mr. Vanik, but there obviously was a recognized need for some official board to have the responsibility of making final decisions on these disputes.

So the Secretary was given authority under the law to select an appropriate review board and he selected the Armed Services Board of Contractor Appeals which had experience in this field.

Mr. VANIK. That has never been challenged by any of the parties involved?

Mr. TIERNEY. No, sir.
Mr. VANIK. They accepted that decision?

Mr. TIERNEY. It seemed clear under the law it was left to the Secretary's discretion to appoint or select whatever appropriate board ho thought could best do the job.

Mr. VANIK. Thank you.

Mr. TIERNEY. I would like to describe briefly the significant impact in cost which is exerted by BHI in its budget and cost review program. During the 1976 annual budget review the contractors requested a total of $469.8 million. BHI approved $454.6 million.

Well, that is not a great reduction, but it does reduce $15.2 million from proposals which the contractors already believed were reasonable.

Through negotiated final cost settlement during fiscal year 1975, we disallowed $1.8 million.

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