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program were actually furnished to the Medicare patient; and to see that all furnished and covered services were necessary and appropriate for the diagnosis and course of treatment.

To assure that the program is run efficiently; to see that authorized payment is made to providers or reimbursed to beneficiaries without undue delay; to see that administrative costs are kept as low as possible; and to see that total costs are kept as low as possible while fulfilling the program's mission.

Throughout the growth and evolution of the program, we have been oriented to results and the systems and processes necessary to gain those results. Our approach has been pragmatic; the most pressing needs and main leverage points were targeted and available skills and resources were focused on them.

Today, having processed more than 139 million Medicare bills and having paid out more than $48 billion, we have established an outstanding record of effectiveness and efficiency in carrying out our intermediary responsibilities.

Using our basic performance as the measure of results--as shown by cost and productivity, claims processing, provider audit and provider settlement—we have consistently been the best of any intermediary serving the program. For example, provider audit cost per bill for commercial insurance intermediaries is 53 percent higher than ours; net administrative cost per bill for the commercials is 18 percent higher.

While expenditures involved in fulfilling our intermediary role appear to have risen since the program began, in fact our provider audit and administrative costs—when adjusted for inflation-are lower than they were when the program began. Productivity in all areas has increased year by year. For instance, from 1970 to 1975 our overall productivity increased by 32 percent; claims department productivity increased 44 percent. Some highlights of our record include:

Provider audit.-audit programs have a high (313 percent) return on dollars spent on audits; it is estimated that proper allocation of provider costs to the provider achieved through audit has saved Medicare $50 million per year.

Claims processing.-a tape-to-tape system developed by us and used for transmitting claims from 57 Plans representing over 90 percent of claims volume for the Blue Cross Plans to the SSA has reduced bill errors (a 99.9 percent accuracy rate has been established), speeded claims processing and saved the government an average of $4 million per year since 1968; a Model A claim processing system developed by the BCA also helps assure consistently accurate and timely handling of claims and is used by 24 Plans processing over 50 percent of Blue Cross organization claims volume; the BCA telecommunications system transmits a 100-word message coast to coast for 22 cents compared with a Western Union charge of more than $16.51 for almost the same service; and 98.1 percent of all claims are processed without error.

Provider payment.-because of the speed and accuracy of processing claims, as outlined above, and the fact that less than 1 percent of the more than 10,000 provider cost reports we submit to the government each year are being questioned, provider payment is both timely and appropriate under the regulations of the Medicare program.

Utilization review.—a broad range of support programs and systems has been developed to enable PSROs to establish and operate effective review processes; BCA has developed computer software programs that enable Plans to furnish PSROs with extensive health data profiles; BCA has developed guidelines for three levels of review, enabling use of medical information forms for prospective reviews, and helping avoid retroactive denial of claims. Ongoing cooperation with PSROs has allowed for the transition of intermediary UR responsibilities to these new agencies.

Financial management.-.effective cash management has resulted in average daily Medicare bank balances of less than 1 percent of funds expended per month; and checks outstanding at 14 to 16 percent of funds expended per month; the gain over conventional banking practices for corporate funds has risen to a rate where yearly savings to the government are $14.5 million; BCA has improved Plan cost accounting and budgeting capabilities, developing the Standard National Accounting Program; the percentage of allowed administrative cost for the Blue Cross organization, following HEW audit, is now 99.1 percent and averages 99.0 percent for all years of the program.

While our performance record stands on its own merits, this record of accomplishment becomes even more apparent when contrasted with the performance of other intermediaries.

In essence, the Blue Cross organization's record of overall productivity demonstrates better performance than other intermediaries or the SSA's Division of Direct Reimbursement; its costs of administering the program are lower than those incurred by other intermediaries or SSA.

This performance record was achieved during a period when several major new developments were affecting the basic operation of the program. These included the several phases of the economic stabilization program, and adjustment in nursing cost differential, cost reporting form changes, major amendments to the program by Congress; and inclusion of coverage for chronic renal disease (kidney dialysis) for all ages.

Our results were based on the effectiveness of the prime/sub-contract format with the Blue Cross Association as prime contractor and the Plans operating under a sub-contract.

The leadership of the BCA, coupled with the operational skills of 69 Blue Cross Plans, has strengthened our ability to function effectively, helping assure national regional and local performance integrity for the Medicare program.

One indication of the impact of BCA leadership and services to the Plans has been a steady decrease in the variances between Plans for audit costs: variance dropped 50 percent from 1972 through the second quarter of 1976.

Other accomplishments which highlight the role of BCA include provision to Plans of the Model Part A claim processing system, the tape-to-tape claims transmitting system, BCA telecommunications system, performance standards for use in a management information system, a wide range of training programs such as those that have helped increase in-house audit capabilities to more than 83 percent, and the preparation and distribution-through administrative bulletins-of guidelines, procedures, manuals and forms to clarify and help implement Medicare policies and instructions.

In this latter area, we have helped sharpen and refine regulations and instructions to make them more effective in carrying out the aims of the Medicare program.

As this leadership has grown, it has come to stand as a key element in accountability, in performance, and in the establishment and maintenance of effective relations with providers, SSA and Medicare beneficiaries. This role is not unique to the Medicare program since the BCA also administers prime contracts for the Federal Employee Program and the Civilian Health and Medicare Program of the Uniformed Services (CHAMPUS). Many of our Plans also serve in administrative capacity in the Medicaid program and provide coverage for state and local governmental employees.

Our record of performance and accomplishment demonstrates the wisdom of those who formulated the Medicare experiment in public administration.

However, the public/private sector mix and the role of the Blue Cross organization itself have been targets for change by government seeking a lesser private sector role through contract renegotiation. The wisdom of this direction was seriously challenged by two independent panels organized by HEW to study the contract relationship.

These major Medicare studies by the National Adacemy of Public Administration and the Advisory Committee on Medicare Administration (Perkins Committee) underscored the merit of utilizing a contract through which the assets of the public and private sectors can be joined.

Importantly, both studies call for the government to place increasing reliance on standards and results when working with the private sector in health care financing programs.

The NAPA panel called for giving carriers “an earlier and more significant role in establishing policy and in formulating administrative procedures.

The Perkins Committee stated that with the development of better evaluation criteria and performance incentives, "SSA should reduce its role in carrier decision-making and rely on its capacity to test carrier performance by results.” In turn, carriers should (and they will) accept increased accountability.

By following the recommendations of these reports, the private sector's accountability can be ensured while its special capabilities and effectiveness are sustained.

Another key to the future success of the Medicare program and a basic ingredient in an effective public/private sector mix, is a focus on management effectiveness.

BCA has developed performance ranges and weighted statistical performance indicators to be used as guides or standards of performance evaluation. These measurements are a key to assessment and control of performance and help assure a high level of performance.

Early efforts to design these management tools have been refined and revised and in January, 1975, a new, more effective method for establishing statistical performance ranges was introduced by BCA. It was further refined in fiscal 1976. The use and application of these BCĂ materials and documents are providing the only management-oriented performance reports that exist in the Medicare program today.

These standards are used by BCA to focus its limited resources on Plans most clearly demonstrating a need for improved performance. By studying the key indicators of cost and productivity, BCA has been able to improve the performance of several Plans, thereby saving the government and taxpayers a great deal of money.

The emphasis on management skills will continue to be a prime factor in BCA's work with Plans to bring the organization to an even greater sense of public accountability and service in fulfilling Medicare responsibilities, documented through continually impriving performance.

Those are the highlights of our performance in the Medicare program. They would perhaps be enough in themselves to establish the quality of the job we have done.

However, for the full information of the Subcommittee, I would now like to elaborate on the various aspects of our Medicare performance.

For each project or activity, I will show "results;" followed by "actions” taken to achieve those results; and “cost.”

Audit and Settlement Administrative Cost

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RESULTS

Variance in audit costs per Blue Cross Plan decreased 13 percent from 1972 to 1975, with the entire range from high to low moving downward 13 percent.

Audit cost per bill decreased 34 percent from FY 1972 through FY 1975. The cost reduction was 48 percent when adjusted to reflect inflation (CPI 1967= 100.0). Provider audit cost per bill remains 53 percent higher for commercials than for Blue Cross Plans.

Audit cost variance per bill among Plans dropped from $3.08 to $1.56 (49 percent) from 1972 to the second quarter of 1976.

Adjusted for 1967 dollars, total audit costs were reduced 18 percent from 1972 to 1975. Provider cost settlements (cost reports settled as a percentage of those to be settled) rose from 43 percent in 1970 to 91 percent in 1974, an improvement of 112 percent. Currently cost reports due for the first 7 years of the program are 99.8 percent settled; cost reports for FY 1974 and 1975 are 89 percent settled, thus reflecting a high degree of currency.

Considering the 18 percent reduction in total audit cost and a 33 percent reduction in the actual number of audits peformed, there was a net increase in audit cost of only 15 percent--notably efficient when seen in the light of major program developments that tended to increase the complexity of audits: The economic stabilization program; inclusion of coverage for kidney dialysis; 1972 amendments to the Medicare law; increased proportion of hospital providers compared with SNF's; cost reporting form changes; nursing cost differential adjustment; and, increasing emphasis on quality of the cost report audit process.

ACTIONS Training

BCA has made a major effort to train quality staff members and place them in Plans, keeping the audit process internal and reducing its cost. As a result, the number of in-house audits has risen from approximately 70 percent in 1972 to 80.5 percent in 1974. BCA's reimbursement and audit training program has been a vital part of building toward a totally internal audit process in the Plans. Procedures

In 1970, BCA presented to Plans a way of establishing priorities for selection and scope determination for audits, to increase the efficiency of the audit program and to develop desk review. The techniques enabled Plans to (1) make initial settlement determinations (and settlement procedures were further simplified

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later); (2) determine the scope of the audit; and (3) establish time and cost esti-
mates and conserve program funds (AB 225, 227 and 354).? It is particularly
significant that in the year following those ABs, Blue Cross Plan audit produc-
tivity increased 24 percent.
Budget

In 1972, BCA refined and expanded required budget data, reporting and procedures for audit and reimbursement, increasing BCA's control over Plan reimbursement and audit activity. The budgeting concept was adopted by BHI and is now part of the government's required process. (AB 617)

BCA has continued to offer extensive counseling and guidance to Plans on specific budget issues and has been successful in materially reducing some individual Plan budgets.

BCA developed new budget forms to increase the uniformity of computing and reporting audit costs to enhance the accuracy of budgets. Plan Visits and Personnel

In 1972, BCA began a series of Plan visits with the specific objective of improving Plan productivity in the cost report process. More than 50 such visits have been conducted, covering such things as desk reviews, audit and settlement procedures, organization, staffing, subcontracts, appeals and budget.

BCA has also supplied Plans with trained personnel, either on a permanent or loan basis. Through visits and placing personnel, BCA has helped resolve backlogs of certain types of cost reports or misunderstanding of procedures.

COST

The direct and indirect costs (including overhead) of this activity in FY 1975 were $1,364,594 or 18 percent of total BCA Medicare expenditures.

Other Administrative Cost Control

RESULTS

Actual Plan and BCA net administrative costs have changed little through 1973, 1974 and 1975 and reflect a reduction of 18 percent when adjusted for inflation.

Adjusted for 1967 dollars, recurring net administrative cost per bill (excluding BCA) for the first six months of FY 1976 is 11 percent lower than in the first six months of FY 1967 ($2.64 vs. $2.96). This, however, is a reduction of 21 percent from the high point of $3.35 in FY 1971.

Plan productivity, having improved year by year in all areas, shows better performance than the commercials or SSA/DDR. Overall productivity increased each year from 1970 to 1975 for a total improvement of 31 percent. Claims Department productivity increased 44 percent.

Plan variance between highest total cost and lowest total cost decreased from $11.15 in 1973 to $10.04 in FY 1975, or 10 percent.

Actual total cost per bill decreased 8 percent from FY 1973 through FY 1975; and 23 percent when adjusted for inflation. Commercials' total cost per bill remains 24 percent higher than the Plans'.

The number of Plans above average in net administrative cost in 1967 was 31. In 1975 the number had been reduced to 22.

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ACTIONS

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Procedures Analysis

The BCA systems office was transferred from Baltimore to Chicago to support
Plan services. For example:

AB 300 series to identify, analyze and help solve Plan problems in telecommunications and claims processing.

Consulting and solving problems on claims systems bill and batch processing in connection with the SSA/BHI Bureau of Data Processing (including the telecommunications system).

Resolving difficulties involving interpretation and reconciliation of SSA operating reports dealing with blocking open items, orbit bills, bill errors, workload, items returned to intermediaries, batch status and telecommunications.

9 "AB" notes refer to BCA Administrative Bulletins sent to all Plans. They are the BCA's mechanism for transmitting directions, information, etc., to all Plans simultaneously.

Initiating actions in 1972 between BIII and Plans having more than 4,000 blocking open items each. Because of that effort, blocking open items are no longer a major problem.

BCA is working to test a uniform bill in three primary state test sites to replace the many forms that now exist for public and private programs, the Federal Employee Program, Medicare, Medicaid, CHAMPUS and private contracts. The development is tied to the compatibility of such a form with Medicare claims processing and program requirements, and is being accomplished in cooperation with the American Hospital Association and SSA/BHI systems staff. Policy Development and Clarification

Since Medicare began, there has been a continuing need for policy clarification on all aspects of the Medicare program such as coverage, billing, claim processing and medical review. Although P.L. 92–603 was enacted October 31, 1972, many of the provisions contained in the legislation have not been fully implemented due to the lack of final policies. The need for precise instructions has necessitated ongoing Plan assistance and efforts to secure clarification and operational procedures from BHI. In addition, there are various program areas not related to legislated modifications which continue to need clarification, amplification or refinement. Some examples follow. Waiver of Liability—(ABS 878, 905, 956, 971, 985 and 1056)

BCA has expended an extensive amount of effort to clarify waiver of liability procedures and to ensure that program payment for services not covered under the program are restricted to the legislative intent. The lack of BHI operating policies and problems with that policy have necessitated ongoing communications with Plans and BHI to seek resolution and formulation of policies necessary for proper implementation of this provision. Program Integrity (AB 973)

Due to fraud and abuse identified in the Medicaid program, BCA developed guidelines for fraud and abuse procedures in each Plan to ensure proper identification of potential fraud and abuse situations and appropriate resulting actions Privacy Act-/ABs 947 and 1028)

With the enactment of the Privacy Act there were many questions that had to be clarified in regard to intermediary responsibilities. To meet these needs, BCA formulated a question and answer series and also drew problems to the attention of BHI to affect the formulation of SSA regulations. Physician Certification (ABS 787 and 787-A)

Although application of waiver, where physicians failed to certify or re-certify, had been required since 1973, there were differing opinions as to how it should be applied. BCA's first bulletin provided instructions and the second focused them to the point that they would apply under any circumstances. Renal Diseases-AB 759)

Many questions and delays resulted from the provision to add kidney dialysis to Medicare coverage. BCA issued its AB to answer Plans' questions while awaiting BHI development of necessary policies. Physical Therapy-AB 819)

BCA has worked to make sure physical therapy coverage was not abused and that published guidelines were applied uniformly. Numerous meetings with BHI resulted in the AB concerning physical therapy aides and assistants under the home health benefit. Budget Development—(AB 760)

This AB expressed BCA's intent to tie costs to claim performance measures, a step toward achieving uniform and acceptable performance goals with identifiable costs. Through an analytical method of budget preparation, desired program results could be met at small cost. Medical Review—(AB 769)

There was no published instruction concerning the extent to which outpatient cases should be reviewed. The claims volume was large, but the dollar volume was small, raising questions about the effort justified. The AB outlined a minimum amount of expected activity to (1) make sure providers were not abusing the program and (2) keep the costs of the activity to a minimum.

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