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Washington, D.C. The subcommittee met at 10:10 a.m., pursuant to notice, in the committee hearing room, Longworth House Office Building, Hon. Fortney H. Stark presiding.

Mr. STARK. This is the second in our hearings on medicare administrative costs, and in particular, the role of private generally, tax-exempt intermediaries in managing the $15.5 billion medicare program. This issue is of double interest to the committee, since we are concerned with the efficient administration of medicare and with the laws governing tax-exempt organizations.

The administration of our medicare system is an unusual blend of public and private activities. Currently, there are 130 medicare contractors, including 74 Blue Cross organizations, 32 Blue Shield plans, 23 commercial insurance companies, and one State agency. In fiscal year 1976, these organizations made payments of $16.8 million for medical services provided to beneficiaries. Together, they had medicare reimbursable administrative costs totaling $461 million.

First, let me say that by all the standards of measurement we have available to us, most intermediaries do a very good job and their performance has been steadily improving over the 10 years of the medicare program. Having said that, the fact remains that some intermediaries do not perform well, that there is enormous public concern about intermediary health insurance premium increases; and that congressional offices receive a constant stream of constituent mail complaining about delays and unexplained actions by intermediaries in the processing of medicare bills.

Earlier this year and at my request, the Ways and Means Oversight Subcommittee staff collected information about certain medicare administrative expenses. With almost no searching at all, we have found medicare intermediaries running up huge bills for executive luxuries such as limousines, private aircraft, and luxurious, vacationlike conventions, and billing portions of those costs to medicare.

As a result of our inquiries, Social Security is questioning a number of claims and is recovering thousands of dollars improperly billed to the medicare trust funds.

I am deeply concerned, however, that in the 11th year of medicare these types of improper billings would still be occurring.

As the GAO testified at the August 2 hearing, "numerous HEW audit reports contain findings of improper auto expenses and commercial and private aircraft expense.” The HEW Audit Agency testified


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at the August 2 hearing that "under the selective testing techniques that we have been using, I would have to admit that apparently some (improper charges) have slipped through.

At a time when health insurance costs are skyrocketing to catastrophic heights, I find it shocking that these intermediaries-most of which are nonprofit, tax-exempt, Blue Cross plans--would have any luxury expenditures whatsoever. I do not understand how a Blue Cross plan can have a fleet of luxury cars or a private airplane and yet advise its subscribers that it will not pay “for personal comfort,

* * * radio, television, and telephone" in a hospital. We would like to hear from the representatives of the Blue Cross Association here today what they feel the national association can do to police these types of abuses and improve the efficiency of intermediary operations.

Specifically, I wrote to BCA on July 1 requesting information on:

(1) The relationship between BCA and the Blue Cross plans, which serve as medicare intermediaries;

(2) The type of guidance which BCA provides the State plans in determining what is an acceptable administrative or overhead charge;

(3) The type of assistance BCA provides the State plans for improving their efficiency; and,

(4) An analysis of the charges BCA makes to medicare for executive guidance and administrative costs.

In this series of hearings, we are interested in issues that reach far beyond the question of administrative costs.

We are interested in:

What should be the role of a group of tax-exempt, nonprofit organizations when directly administering medicare and, in all probability, when they come to administer some future national health legislation? Should they be treated as private corporations? As utilities? As public, TVA-type corporations?

How to require such tax-exempt organziations to provide for truly public representation in their management.

How to insure that these intermediary middlemen, who historically have been so closely connected with hospital management and medical professionals, work for the public and for the protection of the taxpayer's dollar?

What the Blues are doing to improve their consumer complaint operations? One of the most common and difficult types of congressional casework is the flood of complaints we receive from medicare beneficiaries who are unable to obtain assistance--and in some cases, common courtesy-from their intermediaries and carriers in their area.

What the Blues are doing to help hold the line on improper health expenditures-on the profiteering which occurs in many lab tests and on the gross overutilization which is occurring in many home health visits? The Blues provide a vital function through their audit process; it is imperative that their audit systems work and work well-otherwise we will have to redesign the format for administering this and any future health insurance program.

Finally—and this is an issue we would like to discuss today-after examining the Federal Government/BCA contracts, we are concerned that the Blue Cross Association is simply running interference as a middleman to lobby for and protect the interests of local Blue Cross plans (and their clientele, such as hospitals and the medical profession). We have a series of letters between Social Security and Blue Cross in which the Bureau of Health Insurance Director strongly calls into question the worth of BCA's services,

Therefore, we are interested in knowing precisely what services the BCA provides in exchange for its $7 million-plus contract with Social Security.

I also have this vague feeling that I would like to get more into focus. The Blue Cross Association and its members may indeed be directly or indirectly a price-setting function for the medical care professionals. I find an absence in the whole medical delivery system of any bargaining to lower prices on behalf of the consumer but more or less a willingness to just pass on the increased costs that particularly the medical profession feels they must constantly pass on.

I find no countervailing force in the system and I would like any indication of where one bargains to get, say, a physician to hold down the cost of a hospital visit rather than just give in and pass it along to subscribers.

I hope these will be a productive series of hearings and not only provide some improvements to the present system, but provide some information that will help in making the decisions concerning the future direction that health legislation will take.

At our August ? hearing, medicare Director Thomas Tierney said that at the beginning of the medicare program, HEW Secretary Gardner hailed the administrative structure of medicare as a use of 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.

Sometimes abrasive partnerships are the best way for providing balances and checks. I hope that these hearings, however, will not be viewed as wholly abrasive. I hope, rather, that they will be a productive series of hearings which will not only provide improvements in the present system, but which will help us in making decisions concerning future health legislation.

Mr. Tresnowski has an excellent statement and it provides more specifics than I have ever seen before in this type of testimony. To help sharpen the focus of certain issues, I would like to ask questions as we go through the statement.

I understand there were some differences of opinion on some questions as to whether the staff had made some errors in drawing up these charts which were used in a previous hearing. I would like very much if there are any errors to have your staff now or later correct these and make that correction a part of the record so that we are not offending anybody or blaspheming them here gratuitously and we will get that straightened out at the end of the hearing, if you would like to do that later and have it made a part of the record at the first hearing. We would like to do that and put a correction in if those are in order.

Why do you not proceed, however you would like.



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Mr. TRESNOWSKI. Thank you very much. Mr. Chairman. I am Bernard R. Tresnowski. I am senior vice president of Federal programs and health care services of the Blue Cross Association and I am here to represent that association.

We very much appreciate and welcome this opportunity to present our statement of what we consider to be an outstanding record of performance as you consider the matters identified in your opening remarks.

I would like to present a very brief oral statement, and with your permission, submit for the record the more detailed statement that we gave to the committee, if that is acceptable.

Mr. STARK. That would be fine, thank you. [The prepared statement follows:)

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Mr. Chairman and members of the Oversight Subcommittee. My name is Bernard R. Tresnowski. I am senior vice president of federal programs and health care services of the Blue Cross Association and am here to represent the Association.

BCA 1 is prime contractor to SSA for Part A of Medicare, which includes hospital services, skilled nursing care and home health services. BCA subcontracts with eligible Blue Cross Plans which principally handle claims payment and provider audits, The total organization now serves a majority of providers participating in Part A of Medicare.

During the first year of the program, we handled $2.3 billion in benefits. In fiscal 1971, the fifth year, benefits had risen to $5 billion. For fiscal 1974, benefit payments totaled $8.5 billion; and for fiscal 1975, $9.6 billion.

BCA's most important function as prime contractor is to serve as the single point of accountability for the performance of contractual responsibilities by all Plans. In its role as performance manager, BCA has expanded the scope and frequency of management reports covering all aspects of Medicare performance, productivity and quality. BCA has also developed statistical standards of Medicare performance ranges for use as a key management tool.

On such basis of such reports, BČA staff highlights Plan performance discrepancies and, when necessary, asks for Plan programs of action to correct them. BCA also conducts on-site reviews to assure that Plans are performing in the most efficient manner and are applying all policy and program instructions correctly.

With that much background, I would now like to present an overview of the Medicare program itself, and of the role of BCA in administering it-including some specific challenges our organization has faced and successfully met.

Medicare was the first instance in which the federal government had contracted, on such a vast scale, for management services in the social services area. And it was the first involvement of the private sector with the government at the level of developing major program policy. Even the major participants did not fully appreciate the uniqueness and intricacies of this relationship as the program began. We assumed our responsibilities as Part A intermediary in an active partnership with SSA, working closely with its Bureau of Health Insurance to initiate and operate this pioneering program.

As Part A intermediary, our responsibilities are principally twofold:

To assure that the program is run accurately; to see that Medicare funds are spent only for services covered by the program; to see that services billed to the

1 Please see Appendix B (last page of the statement) for an explanation of initials used most commonly throughout this presentation.

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