Professor Law. The second area which I would like to discuss is Blue Cross building programs. I wish I had better data on this. I do not know of any study, Federal or private, that has taken an overall look at this question. But as you travel around the country you do notice that Blue Cross/Blue Shield is housed in these very grand steel and glass buildings, which have been constructed since 1966. Particularly in smaller cities which do not have a large number of such buildings, Blue Cross dominates the urban horizon.

We all know that these major construction projects, besides involving monstrous legitimate costs, afford a rich opportunity for cost which are less than legitimate. In 1971 the Subcommittee on Antitrust and Monopoly of the Senate Committee on the Judiciary looked into a variety of abuses in the administration of the Virginia plan. I am not sure why that was suggested, but maybe because it is just across the river and you can see the building standing there.

They found that the building had cost $8 million. They moved in 2 years after the beginning of medicare. That investigation showed that $1 million was spent to decorate and furnish the building, and most of the purchases were made, without competitive bidding, from a firm whose sales manager was chairman of the building committee of the Blue Cross board.

Over half of the business of the Richmond plan is financed by medicare and medicaid. Senator Phillip Hart expressed amazement that there was no outside authority, in either State or Federal Government or the National Blue Cross Association, that could control or question this situation. He asked, "There isn't any outside discipline ... that could do other than sort of wonder? Nobody could correct, is that right, absent the internal discipline (within the local plan)?"

The Richmond plan executive responded, "Mr. Chairman, I would say you are absolutely right, but that responsibility rests purely on the shoulders of the (local) board of directors. . . The moment they found the level of spending which they couldn't quite stand, they acted immediately..."

That was the situation in 1971. Since that time Blue Cross building programs have proliferated. The oversight situation has not improved in any significant respect.

The third item which I would like to discuss is public relations and advertising costs. The most recent data which I have on advertising is for 1974. According to the national consumer affairs office of Blue Cross, the local plans spent $12 million for advertising during the year. This is in addition to the national advertising campaign conducted by the BCA.

I am sure that many of you will recall during that period the national BCA, as well as the American Hospital Association, were running ads on the TV evening news. This was a time when many believed that Congress was about to act on National Health Insurance. The BCA spent $750,000 on television advertising in this single campaign. These ads were, in the overwhelming number of cases, simply puff pieces extolling the virtues of your friends at Blue Cross. The slogan for that campaign was "Blue Cross: We're here. We're now."

I asked many people what they thought the slogan meant, and most found it incomprehensible. I believe it has meaning only as a

statement on National Health Insurance. As it became apparent that congressional action on National Health Insurance was not imminent, these ads disappeared.

The advertising campaigns of the local plans are financed directly from payments made by individual Blue Cross subscribers, and by Federal funds provided under medicare and medicaid. The national ad campaigns are financed from assessments made from the local plans, which in turn come from subscribers and from Federal funds, and from direct charges to the Federal programs for administrative expenditures.

Use of public funds for these advertising campaigns raises serious legal questions. I believe that Blue Cross, in relationship to its contracts with the Federal Government, is bound by the Federal Procurement Regulations. These regulations strictly limit the advertising costs which a government contract or may recover to expenses incurred in soliciting employees or supplies to perform the contract.

In addition, I believe that the Federal funded Blue Cross advertising campaigns designed to influence the judgment of Congress on National Health Insurance raise serious legal questions under the Fairness Doctrine. Particularly in light of the many recent polls showing that most Americans believe that the private insurers should have no role in National Health Insurance, it seems grossly unjust that these subscribers and taxpayers should be forced to finance an ad campaign puffing a view which they overwhelmingly reject.

Even though it seems that the law prohibits this activity and even though the ads are there for everyone to see, no one in a position of authority is asking these legal questions or challenging the Blue Cross practices. At least no one in authority is asking the questions in any public forum or taking any legally effective action to prevent these abuses.

The problem of Blue Cross advertising costs is essentially one of enforcement of existing laws. The problems of excessive executive compensation and wasteful building programs involve, I believe, inadequacies in the law as written. There is not to my knowledge any restraint whatsoever on the amount that Blue Cross, locally and nationally; pays its executives, or the amount that it sinks into lavish building programs. Blue Cross can spend whatever it wants and charge a proportionage share of that expense to the Federal account.

The Federal statute vaguely requires the payment of reasonable administrative costs. Either statutory change or stronger regulations implementing the vague statutory mandate are needed. One possible approach to the question of executive compensation might be to mandate that Federal reimbursement for executive compensationwhether in the form of salary or limousines-should be limited to increases which are equal to or less than the increases in compensation paid to nonexecutive Blue Cross workers.

Of course this does not deal with existing or past abuses. The difficulty of the executive compensation problem is compounded by the fact that at least sometimes high-powered executives actually implement programs that serve people's needs. Therefore, a very low administrative budget may reflect conscientious restraint, or it may

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simply reflect a plan that does nothing in terms of controlling the excesses of hospital costs and utilization.

The only way to know is to look at each individual plan. I believe all of this simply underscores the need for a publicly administered health program. The Civil Service, whatever its problems, at least provides uniform and publicly defined criteria for determining salaries and for controlling administrative expense.

The Blue Cross building program cries out for comprehensive and close scrutiny. I expect that such an examination will reveal, as one national BCA official said of the Richmond building program, "a can of worms." The BHI's contract evaluation report, issued in the fall of 1974, notes that while the national BCA reviews the local plan's administrative cost budgets to make sure that they are asking for enough money from the Federal Government, there is no systematic review to make sure that plans are not asking for too much money. The BHI report deplores this situation, but to my knowledge nothing has been done to change it.

The testimony of the other witnesses raised, I thought, a lot of interesting points. I would like to make two general points and two suggestions in terms of general solutions.

One general point-and this point was made by other witnesses— is that the cost allocation problems in medicare are not limited to medicare. The cost allocation problems are inherent in providing costbased reimbursement from public sources to an organization that does both public and private business.

I think that those problems are even more acute in the case of health insurance where, unlike defense, there is no cost-conscious purchaser on the private side. At least when the Government contracts with McDonnell Douglas they can look at the kind of prices Eastern is paying. When the Government contracts with Blue Cross, it cannot hope to get some reasonable guidance by looking at what private Blue Cross subscribers pay, because they are in no better position to get reasonable premiums than the medicare beneficiary is to get reasonable taxes.

That is inherent in the program and I think that, in and of itself, provides sufficient justification for moving toward a national health program that doesn't rely on these private organizations with inherent conflicts and that inherent necessity to deal with the allocation problems.

The second general point is that, in determining whether buildings or salaries are reasonable, it is not enough to look comparatively. It is useful to look comparatively to see which ones are the worst. But I think that there is an overall problem in the area of executive compensation, that there is an overall problem in the area of Blue Cross building programs, and it is not enough to ask that plans be as good as the average because the average is lower than what we can legitimately expect.

The notion that these disputes are being resolved by the same body that resolves disputes within the defense contracting industry would, I think, be shocking to most taxpayers. The costs in the defense area have never been held up as a model to emulate.

Furthermore, there are some fundamental differences in dealing with the profitmaking industry that produces a definable product and

dealing with an industry that is by and large nonprofit and that doesn't produce a definable profit.

A third general point, responding to some of your questions about the function of tax exemption, Congressman Vanik. I think you have to seriously question whether in the area of health insurance you can rely on profit motivation and competition to give people reasonable costs and a fair deal. What competition means in the health insurance area is primarily competition for coverage of those people who are not going to have health problems. Therefore, any legitimate profitmaking organization is going to try to cover those people who are going to be most likely to not need the services that are being insured. Second, if they cover them, they are going to charge correspondingly more to those people who are likely to make greater use of the services. So old people will pay more and poor people will pay more and people with kids will pay more and black people will pay more.

And all of that is actuarially justified and makes perfect sense within. the context of the competitive profit-motivated industry.

My question is, is that appropriate when you are talking about insurance to meet people's health needs? Blue Cross was originally founded on the notion that that is not appropriate, that there should be one rate for all the people in the community, that to the extent that we are fortunate enough to be healthy, we should be expected to pay a little more to help out people who are less fortunate in that respect. Finally, I would like to suggest two ways of dealing with this administrative cost situation. One way and the way that seems obvious to me is administration.

Whatever problems are involved in public administration, at least we have standards to go by and they are standards that are, I believe, fundamentally different from the standards applicable to the private profitmaking industry and I believe are more appropriate in dealing with people's health.

The other possible way to deal with the administrative cost situation is to contract with private plans on the basis of advanced budgets. Mr. Tierney's testimony seems to indicate that even though budgets are submitted by Blue Cross in advance, they are not sufficiently detailed to reveal situations like the people going off to the resorts in the Poconos. Those things are only discoverable after the fact in audits.

Certainly there are models of the Government contracting with local organizations to do a job under a budget that is sufficiently detailed to reveal that sort of thing. The model with which I am most familiar is the Legal Services Organizations. Certainly Legal Services Organizations can't pay people salaries like that because they contract with the corporation and there are standards as to what you can pay people and you determine in advance what you are going to pay people. You don't fight about it after the fact.

If Legal Services is going to move into a new building, that will have to be a line item in their budget before the Federal Government pays out any money. If they are going to have conferences, somebody puts in an application to a national fund and says, "We want to have a conference. We want to pay people's expenses.

Somebody looks at it and says, "That is legitimate" or "It is not" and approves it or disapproves it. That is very different from saying

"have conferences" and then we will come along 2 years later and decide whether it was a legitimate expense or not.

I think that that is kind of line-by-line budget submission; and examination before the fact is the only way possible, really, to deal with these very difficult problems. I appreciate the opportunity to be able to come here today.

Mr. STARK. Can you give us 10 minutes to answer a quorum call and come back?

Professor LAW. Ten minutes now?

Mr. STARK. We will recess for 10 minutes and come right back. [Whereupon, a brief recess was taken.]

Mr. STARK. The hearing will come together.

Thank you for your testimony, Professor Law.

In your book you say that "perhaps the strongest argument for preserving the role for private insurance in the administration of national health insurance is that the system operated by the Federal Government could be simply inaccessible."

I am assuming you mean as Blue Cross is or was unresponsive to consumer public interest.

In your testimony you say the facts that are available "indicate a need for increased congressional surveillance, perhaps amendments in the law, and I believe ultimately a national health program that does not provide insurers with a tap of the Federal Treasury."

What went wrong or have you changed?

Professor LAW. I don't know if I have changed or not. In the book I say that I don't think it matters that much if you have a national health insurance program that is publicly administered or whether you contract with Blue Cross, provided you do a half dozen things that would fundamentally change the nature of Blue Cross like, say, no private business; like requiring that they be bound by basic principles of due process, as is the Federal Government.

I think that, once you do those things, the difference is largely a matter of form rather than substance.

If it makes people more comfortable to say, "We are contracting with this organization in much the same way we contract with local legal services offices," which are private local corporations, then I don't see any difference in substance there.

The second problem, the fact that the Government could be as bad as Blue Cross, is more a problem that relates to questions of utilization review and control, access to services, and quality of services rather than specifically to fiscal controls. I think that the Government has a better record in fiscal controls than does the private sector.

In order to make a health insurance program responsive to people's needs in those other areas, you have to structure in some things like local boards that are selected in some democratic means and required to report to the public in some regular way, so that there is some opportunity for oversight that goes beyond the periodic investigation of a congressional committee, because we can't expect Congress to keep tabs on a whole system as vast as Medicare.