The system we have in operation is generally effective, we believe, in controlling costs. Perhaps the best evidence of this fact is that the unit costs for handling claims has been relatively constant or lower in the last 5 years despite the impact of inflation on salaries and other costs of the contractors. In the hospital program [part A] the unit cost per bill in fiscal year 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 fiscal year 1972 was $3.18. For the first 9 months of fiscal year 1976 the unit cost was $3.12.

If I might just say one more thing, Mr. Stark: I feel I owe it to your committee's fuller understanding of these costs, to point out that our budgetary analysis and final settlements go far beyond such questions as the type of automobile a given contractor's executive may drive.

I am certainly not here to support their use of Cadillacs, and I would parenthetically seriously question the judgment of their public relations advisers in view of the headlines such items generate, but I think I owe it to your full understanding to point out that even if all of them used Fords, and you said this yourself, the actual dollar difference to the Government would be minuscule.

The real question, which I think such issues raise, is to what extent should the Government interpose itself into the private business operations of its contractors and how much should they rely on the overall reasonableness of the costs of their contractor services? That is a question which I am sure your committee will be considering. [The tables to the prepared statement follow:]

Table I shows the various functions performed by the contractors, the cost of each of those functions and their relationship to the total administrative costs for the July-March period:

Table II indicates the impact of the budget review process on administrative costs:

Mr. STARK. Tom, if I can interrupt there, that is the real question. When you have organizations and I am going to take the whole Blue Cross as an organization, although we recognize they are separate which are tax-exempt, when they are given really noncompetitive contracts, when they make all their information available to the public as part of their contract, when they are competing with the free enterprise system, when they do make headlines because the public is so darned upset about the high cost of their medical care, there are questions to be asked.

But the question isn't really whether it is $3.76 for a hospital bill or $3.12 for a doctor's bill. These programs do nothing but pay bills. They are an intermediary for some reason between the Government and the hospital where the Government is paying or the individual is paying or the corporation is paying or the labor union is paying. The chance that the average citizen has to negotiate with the doctors is through the Blue Cross plans, but they are really not very cautious about their private planes or their vacations for employees. How can we have any feeling that they are going to make any attempt to hold that office visit cost down from $23 to $21 or $20 or $19?

What ought our rule to be then? Are they really quasi-government? Ought they to be combined with HEW perhaps?

Should your institution do it all so we don't have to get a layer like the Blue Cross Association on top of the other plans?

You hit it right there. That is the real question. I think it is the question we are going to have to decide as we get into the question of national medical costs, assistance programs or call it whatever you will. Further, I like to stay away from calling this health "insurance". I am sorry, but that it is not. We just keep passing the costs through. They go higher, the monthly billings go higher, the doctors get paid a little more, the hospitals a little more, the public pays a little more. If we added income tax on there, it still raises the costs. We all understand that.

The question is where is the cat that we bell to hold these costs down? We hear about it here in Congress. You hear about it. The Blue Cross providers hear about it. The physicians hear about it. At some point where do we start reversing the trend? I wish you and I could write those answers today, but we both know we can't. Mr. VANIK. My question and the Ways and Means question is the whole question of tax-exempt status. Does tax-exempt status make it harder to compare these costs with the commercial companies? Is nonprofit status necessarily good? Is there any advantage that falls to the general public, the consumer, for this service because of the taxexempt status?

I think that brings us home to our jurisdictional considerations as to whether or not the commercials can compete without that tax ad

vantage and whether or not the tax advantages is of any real benefit to the ultimate consumer of the services.

Mr. TIERNEY. Mr. Vanik, I am sure Blue Cross and Blue Shield have more eloquent spokesmen than I. Let me say a couple of things about it.

I don't know that the nonprofit status either enhances their performance under this program and under their own businesses or reduces it.

We have, as you know, 17 commercial insurance companies participating in this program. The giants-Prudential, Equitable, Metropolitan, Aetna and Travelers. All the rules I am talking about here apply equally to them. I must say that they have the same question that they continually raise. And it is not really because they are commercial or taxpayers or nonprofit.

They have this strong feeling-and I guess an outfit as big as Prudential maybe has a bigger feeling-that the Government has contracted with them. They have laid out what it is to be done. They have laid out how they are going to be paid.

Now, don't tell us how to run our business. Don't tell us what cars our executives drive and all the rest. I only use that as a recurring example.

We can get into much more difficult things, of what kind of data processing machines they use and that sort of thing. Is the Government's job to see to it that they do a good job and that they do it at reasonable cost? That, I guess, has been the most difficult thing in these 10 years of the program, Mr. Vanik, trying to maintain our responsibility and accountability to you and to the public and at the same time withstand this continuous charge that we are stifling free enterprise and we are stiffling the expertise which they could use.

I remember when this program started, John Gardner was then Secretary. He hailed this use of the public and private sectors. He called it a partnership. But he said it ought to be a very abrasive partnership. If we have accomplished anything, I think we have accomplished that. We have a very abrasive partnership.

But when you get all through the discussions, what it seems to me it gets down to, is that basic philosophy. That doesn't mean for a minute, as I said, that we sit around tolerating people taking the wife and kiddies to wherever they go to and driving Cadillacs. You have got to do something about that because the public wants something done about it. So we are going to do something about it.

Mr. DUNCAN. I noticed a book your Department put out, "An Analysis of Intermediaries and Carriers of Administrative Cost". Apparently it is an advantage with Blue Cross over the commerical insurance carriers because administrative cost, as I have related. earlier, is much less than the commercial carriers. And it could be due to the fact that the commercial carriers are paying taxes.

I don't know, but there is a considerable saving, according to your own statistics.

Mr. TIERNEY. Mr. Duncan, I think those statistics need some explanation, too. As you know, the medicare law provided that hospitals and institutional providers could nominate an intermediary to stand between them and the Government or to purify Government funds on their way to them; 95 percent of the hospitals in the country nominated Blue Cross. Blue Cross plans therefore, are serving local

hospitals and are handling well-prepared, standardized bills which they are pretty much doing routinely in their own business, whereas the commercial insurance companies only have 5 percent of the hospitals, spread around the country among them with the rest of their providers made up with home health agencies, and skilled nursing facilities. They require a much different kind of service in many ways and their costs are higher.

I am not defending the costs of either one, but I think that is the real difference between them.

Mr. DUNCAN. The fact that they are is important though, isn't it? Mr. TIERNEY. Pardon me?

Mr. DUNCAN. The fact that they are, that they do have less administrative costs, is important in relation to benefits is important, I would think.

Mr. TIERNEY. Yes.

Mr. DUNCAN. It has happened that way?

Mr. TIERNEY. No matter why it happens, that is a good thing. Mr. DUNCAN. You can go out one door and in the other, but you are getting it. That is important.

A question: I don't know if you care to elaborate on it, but some of the hospitals, in particularly my State, indicate that the failure to pay the full costs of medicare and medicaid benefits is that it causes a shift of the cost to nonbeneficiaries.

Mr. TIERNEY. On the medicare side of it, Mr. Duncan, the law again provides that medicare will pay the costs of providing services to its beneficiaries to the end that none of their costs will be borne by nonmedicare patients, nor will other patients' costs be borne by them.

The facts of the matter are that people over 65 do not receive, obviously, certain services or procedures. For example, they obviously don't have maternity procedures. They tend to have a longer length of stay with a chronic medical disease and, therefore, their actual per diem costs are lower than the overall population's per diem costs.

Recognizing that, we have worked out a formula which relates a hospital's medicare charges to its total patient charges. That ratio is applied to the hospital's costs to determine a medicare reimbursement. Some can claim that that is too low. We think it is fair to accomplish the job of paying for medicare beneficiaries.

Some say: Well, but you don't recognize bad debts. You don't recognize charity and these other things and those are costs to us, and you should.

Those, I guess, are philosophical arguments that we can engage in On the medicaid side, as you well know, that is a State-administered program with a lot of State determination and I can't tell you what the answer is to that.

Mr. DUNCAN. What are your views on the Talmadge bill in the Senate?

Mr. TIERNEY. You got me now. If I may, Mr. Duncan

Mr. DUNCAN. The medicaid and medicare administrative reimbursement format.

Mr. TIERNEY. I think Senator Talmadge has addressed some real problems that have existed not only in medicare and medicaid, but in the whole health insurance system of the Nation for 25 years, and is proposing solutions to them.

I have been intrigued by his attitude that if you don't like this provision, tell me something better, but let's get the problem answered.

Mr. DUNCAN. I happened to be the cosponsor in the House. I wanted to find out your opinion about it before I submitted it. Mr. TIERNEY. It will undoubtedly, I assume, in the process, get some amendments, but I think it is a good one.

Mr. DUNCAN. You feel it is in the right direction?
Mr. TIERNEY. Yes, sir.

Mr. DUNCAN. Thank you.
Mr. STARK. Mr. Rangel?

Mr. RANGEL. No questions, Mr. Chairman.

Mr. STARK. Just one other question, Tom.

There was a question where you were disputing a BCA claim from 1971 of $49,000 for a first-class airfare over tourist fare and $322,000 for incorrect salary allocation and $3,400 for entertainment.

Mr. TIERNEY. I beg your pardon, what was the second one?

Mr. STARK. It is my understanding dating back to 1971 there was a disputed claim with the Blue Cross Association for $49,000 for firstclass airfare over tourist fare, $322,000 for incorrect salary allocation, and $3,400 for entertainment. I wondered if that claim was still in dispute with BCA.

Mr. TIERNEY. I would have to give you a definitive answer on that. It is a good example of the type of dispute that you get into on this allocation business. I don't know that it is criminal for an organization to say, "We are going to ask for every dime we can get, because if we don't, our own subscribers will carry that bill."

On our side we say, "We are going to cut down every dime we can." I will have to find out if that has been settled.

Mr. STARK. The point is, here again we get to the final item, which it is criminal to ask for every dime you can get. I certainly don't feel this in the case of your agency. I want to make that very clear. But in my opinion, when we withhold medical care to the low-income or elderly, just in the interest of getting that extra dime, that may border on the criminal.

That is a point to be considered.

Mr. TIERNEY. I agree with that, Mt. Stark. I am not sure it is totally germane to what we are talking about, but that is a much bigger problem.

Mr. STARK. Thank you. I appreciate your taking the time to be with us.

Mr. TIERNEY. Thank you, sir.

Mr. STARK. I would like to enter in the record at this point a series of newspaper articles from the Milwaukee Journal by Neil D. Rosenberg and David L. Beal concerning many of the issues we have been discussing.

[The newspaper articles follow:]

[From the Milwaukee Journal, May 30, 1976]

INSURERS' PROBLEMS MOUNT

(By Neil D. Rosenberg and David L. Beal of The Journal Staff)

Fueled by a special legal status and left virtually unregulated by the state, Wisconsin Blue Cross and Surgical Care-Blue Shield have become the state's two largest health insurance firms covering more than one of every three residents.