Review of the Cost of Hospital Services Furnished to Medicare Patients at the Massachusetts General Hospital

Published by the Government Accountability Office on 1971-02-01.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                                       REGIONAL        OFFICE
                      ROOM    1903 JOHN    F KENNEDY     FEDERAL       BUlLDlNG
                                      GOVERNMENT       CENTER

                             BOSTON~MASSACHUSE~S                       02203

                                                                           February   1, 1971

Mr Millard    P Nute
Reglonal Representative,     Bureau of Health Insurance
Social Security Adminlstratlon
Department of Health, Education,      and Welfare
Boston, Massachusetts,   02203

Dear Mr    Nute

        In order to ascertain        the manner In which Massachusetts Blue
Cross, a fiscal      lntermedlary       under the provlslons        of Title XVIII
of the Social     Security Act, has been determining              the reasonable-
ness of cost of hospital          services    furnished     to Medicare patients,
we reviewed the procedures           and practices      used by Blue Cross in
arrlvlng    at final    settlements      with hospitals       and audited the
statements of reimbursable           costs of three selected hospitals
Questions raised during our review of the cost statements for
two of the selected hospitals,            the Mount Auburn Hospital         and the
CambrIdge Hospital,        were discussed in our letter           to you dated
March 10, 1970

        This letter  is to advise you of certain    questionable  cost
Items found during our review of the cost statements of the
Massachusetts General Hospital       (MGH) In Boston! Massachusetts,
for the year ended September 30, 1967         Based on our examination
of hospital     documents and records and the Blue Cross audit work-
papersp we belleve      that costs charged to the Medicare program
totaling     about $319,600 appear to be questionable

         The MGH is a privately        Incorporated   non-proflt  teaching
hospital     that receives       funds for patient    care from patients    and
from third-party        insurers,     both governmental    and commercial     The
hospital     also receives       funds through Government research grants
and private      contrlbutlons       and endowments.     About 27 percent of
MGH costs are related          to research and other non-patient       care

      MGH has about 1,070 beds         For the fiscal   year ended September                    30,
1967, the hospital    reported    367,874 lnpatlent    days of which 108,021
or about 29 percent were for Medicare patients            The cost statement
submitted by MGH for the same period showed net costs applicable
to Medicare patients     of about $7 7 mllllon.       The net effect  of
adlustments made by the Blue Cross audit staff together with the
use of later statistical      data resulted   In increased costs of about
$200,000 as follows

                             50T’i-i    ANNIVERSARY                1

                                     Medxare costs
                                     clammed by                 Net   _       Medicare     costs
                                     hospital                Increase 1       allowed'

    Medxare costs
        Inpatient                      $7,694,681              $  9,285        $7,703,966
        Outpatient                         676,461              365,835         1,042,296
    Total                              $8,371,142              $375,120        $7,?46,262

    Less Net deductibles
        and co-insurance
        bxlled to Medxare
        patients                           671,620                 175,655         847,275

    Net Medicare       costs           $7,699,522              $199,465        $7,898,987

         %letaxls of the Blue Cross audit revlslons can be found In the
          Blue Cross audit report to the Blue Cross AssoclatLon, dated
          November 26, 1969

         2The hospital    protested   certain  of the Blue Cross dxsallowances.
          Each of the protests      were upheld at either  a local hearrng
          of the Provider     Appeals Review Committee or by the Blue Cross
          Assoclatlon.     Blue Cross has prepared an amended statement,
          and increased MGH's retiursement        by about $64,000.

            Since the Medlcare program absorbs about 28 percent of MGH's
    costs allocable      to patlent       care, any overstatement      of hospital   patlent
    care costs or any underallocatlon             of hospital   lndxrect   costs to non-
    patlent     care actlvltles       results   In an increase In costs to the Medicare
    program.      We found that total hospital         patlent    costs at MGH were over-
    stated and lndlrect         expenses allocated      to non-patlent    care actlvltles
    were understated        resulting     m about $319,600 of questionable         costs to
    the Medxare program as shown below.

                               SCHEDULE OF QUESTIONABLE COSTS

                                                            Dollar effect  on
          Item                                              Medlcare costs

    1.   Unallowable      research costs included
         In patient      care costs                            $84,500

    2    Certain employee health and welfare
         costs not allocated  to non-patlent
         care actlvitles                                           34,000

3.        Part B professional      component portion
          of fringe benefit      and overhead costs
          related    to physlclans   services not
          ellmlnated                                         41,800

4.        Endowment income from restricted       dona-
          tlons not deducted from costs                       1,000

5.        Income from Commonwealth of Massachusetts
          for alcoholism   and VD cllnlcs not deducted
          from related   costs                               15,500

6.        AdrmnlstratXve    and general expenses
          allocated    to non-patlent  care actlv1ties
          understated                                        46,900

7.        Allowance in lieu    of specific   recognit&on
          of other costs                                      3,900

8.        Excessive reimbursement   for professional
          servmes of hospital-based     physlclans           92,000

                   Total                                   $319,600

      The MGH comptroller       advised us that any increase Ln the total
costs allocated    to non-patlent      care activltzes     would be inequitable
and as a result he would not agree with any of our flndlngs              regardless
of their ln&vLdual       merit      The comptroller    also expressed doubt
that retroactive     ad]ustments of costs to the Medicare program could
be made after a final      settlement    has been reached between the hospital
and the fiscal   intermediary.


      Research salaries   totaling   $286,100 were improperly   classified
as patlent   costs thereby Increasing     Medlcare costs by $84,500

        Hospitals     are reimbursed      for the cost of physlclans'     services
directly     related     to patlent    care under the Supplementary Medical Insurance
Benefits     for the Aged (part B) portion         of the Medzare program, and for
research through Government programs other than Medicare.                  At MGH the
physlclans      who received      compensation from the hospital      prepared monthly
effort    reports lndlcating        the time spent perfomng       various    functions
Each doctor's        salary was then allocated      to these functions.

          In fiscal       year 1967 physiciansp     salaries   were allocated      as

      Direct          patient       care                           $909,900

          Research       adrmnlstration           $ 79,200
          Research                                 206,900           286,100

      Other hospital services.
        Teachrng                                   560,000
        Department administration                  416,400           976,400

          Total                                                  $2,172,400

      Although hospital   costs allocated    to the Hospital   Insurance Benefits
for the Aged (part A) portion      of the Medicare program were reduced by
$909,900 for patient    care that was bllled    separately   on a fee for service
basis under part B, we believe      that the part A costs should also have
been reduced by $286,100 for the time spent by hospital         based physicians
on hospital   research activities.

        SSA's Principles  of Reimbursement for Provider    Costs dated May 1966
and succeeding manuals provide       that research costs, over and above usual
patient    costs, are not allowable.      The pertinent SSA reimbursement principal
provides    in part that.

                  Costs incurred        for research purposes, over and above
                  usual patient        care, are not includable         as allowable
                  costs         l

                  There are numerous sources of financing                for health-
                  related     research activities.          Funds for this purpose
                  are provided       under many Federal programs and by other
                  tax-supported        agencies        Also, many foundations,        voluntary
                  health agencies,         and other private      organizations,      as well
                   as individuals,        sponsor or contribute       to the support of
                  medical and related          research.     Funds avarlable      from such
                   sources are generally          ample to meet basic medical and
                  hospital      research needs

                       A further   consideration      is that quality  review should       be
                       assured as a condition        of governmental  support for
                       research.     Provisions    for such review would introduce
                       special difficulties      rn the health insurance program.

                       Where research is conducted in con-Junction with and as
                       a part of the care of patients,      the costs of usual patient
                       care are allowable     to the extent that such costs are not
                       zby     funds provided    for the research."   (underscoring  supplied)

        SSA reimbursement      lnstructlons       define usual patlent           care as
&&se Items and services            (routine     and ancillary)       ordlnarlly       furnished
In the treatment       of patients       by hospitals     under the supervlslon             of
physicians.      According to the SSA lnstructlons,                where research 1s
conducted by a provider          which does not involve          patients,       the research
costs are not allowable.            For research conducted with patients
to be allowable,      records must be malntalned             ldentlfylng        patients     In
the research prolects,        patlent       charges and other statlstlcal               data
necessary m the allocation             and apportlonlng        of costs.        Records
ldentlfylng     research patients         assoczated with the $286,100 of research
costs were not mntalned,              and such costs should not be included In
allowable     costs.

      Because an equitable   share of employee health and welfare      costs
were not allocated   to non-patlent  care actlvltles,    the costs charged
to the Me&care program appear to be overstated        by about $34,000

         Under the step down method of allocatrng        costs, employee health
and welfare      costs are allocated    to patlent  care and non-patlent      care
actlvltles     on the basis of salaries.       We noted, with a few rmnor
exceptions,      that the salaries   of non-patlent    care actlvltles,     however,
were not Included       m the base for allocating      some of these costs --
personnel     department,   staff health cllnlc,    related    depreciation   and
adrmnlstratlve       and general expenses.     As a result,    the costs allocated
to patlent     care were overstated     by $122,500 and Medicare costs appear
to be overstated,       as shown below.

       Employee health and welfare           costs
       not allocated  to non-patlent          care.

            Personnel Department                              $101,300
            Staff Health Cllnlc                                216,500
            Depreclatlon                                         2,600
            Applicable   Adrmnlstratlve
               and General expense                              145,500

                      Total                                   $465,900

       Percentage of gross salaries
       related   to non-patient care                              26.3%

      Employee related    services         costs
        allocable   to non-patlent          care
        actlvltles                                            $122,500
      Medicare percentage
      Overstatement    of Me&care          costs


      Hospitals     are reimbursed by part B of the Medicare program for
tie patlent     care given by hospital     based physlclans.     Therefore   to
determLne a reasonabLe amount to exclude from hospital            costs reimbursable
under part A for this patlent        care that was billed    separately,   the costs
of physlclan     services   related  to IndlvAdual   patlent  care should be
deducted from hospital        costs.

        In calculating     Lts professional       fee schedule used for bllllng
part B, the hospital        included 8 percent factors        for both fringe benefits
and hospital      overhead expenses.        However, In computing the cost of
physlclans'      services   to be deducted from hospLta1 costs neither          the
hospital      nor the Blue Cross auditors         considered  fringe benefit   costs
or hospital      overhead associated with the physLclan salaries.             As a
result,     the hospital's     allowable    patlent    costs were overstated   by
$145,600 of which $41,800 was charged to Medicare.

       The Provrder     Reimbursement   Manual,   Section   2108, provides         in
part   that.

       "The costs of the medlcal and surgical         services   furnished
       by the physician     whrch are to be excluded from the pro-
       vider's   allowable    costs include the applicable      portion    of
       the physician's     salary and related    frlng benefits      such as
       payroll   taxes, vacation    pay , meals, and other similar       benef-its
       furnrshed    by the provider    at no cost to the physlclan."

      The Blue Cross       audit staff bulletin   on thus subgect (Bulletin   No. 141,
did not specifically        state that fringe benefits    related  to part B salaries
should be deducted       from hospital    costs.  During our review at Mount Auburn
Hospital  a surular      sltuatlon    was found and brought to the attentxon    of the
Blue Cross Medlcare        audit department and a supplement to the staff bulletin
was zssued requiring        that this be done.

       In OUT opinion, the hospital  overhead associated with physlclans'
salaries   at M.G.H. should have been deducted from hospital      costs because
rt was included in the professional     fees established for billing    part
B of the program.


       SSA's Medicare     regulations   provide   that   endowment Income designated

       by a donor for p?ymg speclflc          operating   costs should    be deducted
       from the particular operatmg          cost or group of costs.      ' The reason
       given for this cost prlnclple         1s as follows:

               "Donor-restrlcted       funds which are desrgnated      for paying
               certain   hospital    operatzng expenses should apply and
               serve to reduce these costs or group of costs and benefit
               all patients      who use services    covered by the donation.      If
               such costs are not reduced, the provider           would secure reim-
               bursement for the same expense twice, At would be reimbursed
               through the donor-restrIcted         contributions    as well as from
               patients    and third-party     payers lncludlng    the tztle XVIII
               health Insurance program."

               As discussed below, we believe    that durzng fiscal year 1967
       Medicare costs were overstated      by about $1,000 because income of $3,588
       restricted     by the donors of the Tralnlng   School for Nurses Fund was not
       deducted from nursing school costs

            We also believe  that the hospital     and the Blue Cross auditors     were
      rmstaken in their classlficatlon      of income from the George Robert White
      Fund as unrestricted,     Although the unrestricted     classlflcation   of this
      endowment income resulted      m no increase In Medicare costs in 1967,
      Medicare costs have been overstated       In other years as explained    below.
       Tralnlng    School   for   Nurses Fund

               The Training School for Nurses Fund was transferred to MGH by a
    8 decree     of the Massachusetts Supreme Judicial Court, which states in

              "It is ordered,      ad-Judged and decreed that the plaintiff     cor-
             poratlon     do forthwith     turn over all the funds In its hands
             to the Trustees of the Mass. Gen Hosp. in trust to hold
             and safely invest the same and to apply the net income and
             profits     arlsrng   from said fund to the lnstructlon     and training
             of nurses for the sick and that the M.G H. be authorized             and
             directed     to receive    said funds and hold the same on the trust

             The comptroller     informed us that the fund had been supplemented
      by sundry other gifts,        some of which may not have been restricted,
      thereby altering      the restrlctlve   nature of the fund.  We do not belleve
      that the provlslons      of the court decree can be changed because of these
      sundry gzLfts*

       Comblung the funds received    by the court decree-with   another
fund, the MGH Tralnlng   School for Nurses Endowment Fynd, was con-
sldered In 1949 but relected       At that time the assistant  treasurer
wrote to the hospital   Chief Accountant as follows.

      "I think the chief,      If not the only, reason for combining
     the funds 1s that they are parallel           In purpose and would
     avoid some confusion        15 there were only one fund.          As far
     as I can see the only way to do It would be to have the
     Deed of Grft of the Endowment Fund amended by votes of
     the Trustees and the Assoclatlon.            Such votes would necessarLly
     provide     that the combined fund should be operated under
     the terms of the above Court Decree.              In other words the
     dlsposltlon      of the income would be solely In the hands of
     the Trustees and llmlted         to the lnstructlon      and training    of
     nurses for the sLck.***"

     In our oplnlon the income from the Tralnlng   School for           Nurses
Fund 1s restricted, and therefore  should have been deducted            from
the nursing school costs.

George Robert   White Fund

        The George Robert White Fund was establ&shed by a gift In codlcll
2, dated December 31, 1928, to the will of Harriet        J Bradbury, Mr. White's
sister.     The prlnclpal    of the White Fund as of September 30, I.967 was
$4,119,730,    and the income LS about $330,000 a year.      The donor provided
that a permanent trust fund be established       with the income used first
for the maintenance and equipment of the George Robert White Bulldlng,
and second, for the general purposes of the hospital.          The hospital
did not classify      the income from the White Fund as restricted,     in our
oplnlon It should have been so classlfled.

      In 1967 equipment purchased for       the White Bulldlng   exceeded the
endowment Income.     However, in other     years, the White Fund endowment
income exceeded equipment costs, but        the difference   was not used to
reduce hospital   maintenance costs of      the White Burldlng,   as shown
In the schedule below

                  Endowment              Equipment and                Income Available
Fiscal Year        Income                Construction   Costs         for Maintenance
    1966          $307,600                     $278,700                   $ 28,900
    1967           320,900                      325,900                      -O-
    1968           337,400                      199,200                    138,200
    1969           356,500                      274,100                     82,400

                   Amount available     for maintenance                  $249,500

       Had the zncome In excess of equipment and construction        costs
been used to reduce mantenance        expenses of the White Bulldlng,
Medrcare costs would have been about $60,000 less during the above
four years, assunung that the 1967 Medlcare rate of utlllzation           of
hospital    faclllfles was representative     of the utllizatlon  over the
entire   four year period.

     Our oplnlon that the White Fund income should have been classified
as a restrzcted  endowment 1s supported by the terms of the donor's ~~11
and also by an lnterpretatlon   of the will prepared by a law firm for
the hospital.   The will states in part that

          "The other half of all the rest and residue of my property
      I give to the Massachusetts General Hospital,              a Massachusetts
      corporation     an amount not less than One Million           Five Hundred
     Thousand ($1,500,000)        Dollars      and not exceeding Two Million
     Five Hundred Thousand ($2,500,000)             Dollars of this bequest
     to be used as soon after my death as the trustees                 of the
     hospital     shall decide that a bulldlng          of mayor importance
     to the hospital      LS needed for the construction          of such
     building,     which shall be known as the George Robert White
     Memorial Building        in memory of my late brother        and the
     remainder of said one-half           (l/2) of the rest and residue
     or all of It not so used for construction,               to be held by
     said Massachusetts General Hospital             as a permanent trust
     fund to be known as the George Robert White Fund, the
     income of which only shall be used first              for the maintenance
     and equLpment of such building             and second for the general
     purposes of the hospital."
      (Underscoring     supplied)

       In 1939 the law flnn    for   the hospital    made the following         In-
terpretatlon   of the will.

      "The word 'maLntenance'          is 'a large term whose meaning depends
     on the surrounding         circumstances    and the connection    In which
     It LS applied,'          38 C.J. 338. As used in a ~~11 the mnter-
     pretatlon      should be m harmony with the broad intent of the
     testator     If that intent can be determined.           This testatrrx
     clearly    had m rend fust          and foremost an important     burldmg,
     fully    equipped,    and mantalned       by her gift as 'one of the main
     bulldlngs      of the Hospital'      for 'use directly    to the care of
     the sick.'       Only as an alternative        &d she give income to
     general purposes.          If the bu&ldLng should be erected then
     general purposes were expressly            said to be of second importance
     to her       It seems to be a fair assumption that thus testatxlx
     &d not want the monument to her brother               to be a drag on other
     hospital     re$ources,      but that she tid want it to be a contrlbutlon
     to the Hospital       itself    m further     aid of xts work.

      These considerations      lead me to the view that the word
       'maintenance'    is not to be narrowly       construed tocmean only
      the repairs     and upkeep of the building        structure   itself,
      but that it may properly       include at least the recurring
      expense for keeping the building          ready for the use of
      srck people for which It was expressly intended,              such as;
      repairs,    care and cleaning,      heat, light,     and water.***"

       The Comptroller     advised us that he considers    the fund income
to be unrestricted       and the word "maintenance"   to mean capital    expeni-
turres only.      We believe     that both the will and the law firm's    in-
terpretation    indicate     that the income from the fund is restricted
for maintenance and equipment of the White Building.


        The Commonwealth of Massachusetts       reimburses cooperating        hospitals
for the net costs of operating       alcoholism     clinics    and venereal    disease
 IV, D.) clinics.     In fiscal year 1967, MGH received         $22,900 and $63,100
respectively      from the State for its alcoholism         and V.D. clinics.

      The hospital   did not reduce the cost of its outpatient   clinics
by these amounts, however , and as a result Medicare costs were over-
stated about $15,500.     The Blue Cross auditors  advlsed us that it was
an oversight   on their part and that the income should have been used
to reduce the operating    costs of the clinics.


        MGH elected to use the step-down method of cost allocation                    in
its statement of reimbursable           costs       Under this method Administrative
and General (A&G) expenses are allocated                to patient    and non-patient
activities     based on departmental        costs, including        depreciation    expense
Non-patient     departmental    costs were understated           by $2,598,700 because
depreciation      expense, research and other contract              expenses were omitted,
and also because certain        credits were deducted.             As a result,   the A&G
expenses allocated       to non-patient      activities     were understated       and
Medicare costs were increased by $46,900.

Depreclatlon       of ma]or movable      equipment    ormtted   _

      Depreclatlon      of ma]or movable equlpment totaling     $733,000 was
not included In non-patlent        care costs, although this type of expense
was included in patlent        care costs.   To be equitable  and reasonable
In allocating     A&G expenses, deprecLatlon     expenses should be treated
consistently     (Included   m the base for both patlent     care and
non-patlent     care or excluded from both).

     Had depreclatlon   expense been treated consistently,      addltlonal
A&G expense would have been allocated     to non-pat-lent  care activities
with a corresponding  reduction  In the amount allocated      to patlent   care.

Research       and certain   contract    expenses    excluded

       For 1967 the non-patlent     care cost base did not          include research
and other contract      expenses of $787,000.    We were not          given any ]ustl-
ficatLon    for this ormsslon.     An associate comptroller           informed us that
he believed     s~rmlar  costs were included   In subsequent          years

Credits    deducted     from direct     costs

     Certain credits,    totaling   about $1,078,700  were improperly   deducted
from non-patlent   costs m computing the base for allocating        A&G expenses.
Based on our analysis of these credits       for one month, we belleve   they
could be categorized    as follows:

      1.    Uscellaneous    revenue for professional       services such
            as from laboratory    tests - This revenue 1s similar
            to income from patlent     care which 1s not deducted
            from pakent    care costs m computing the base.         To
            be consrstent   comparable non-patient      income should
            not be deducted from non-patlent       costs.

      2.    Sundry gifts consldered  by the hospital      to be un-
            restricted  - Comparable unrestricted    gifts related
            to patlent  care, such as funds from the Comnunlty
            Fund, were not deducted from patlent     costs.

      3.    Research grant holding        account balances - When re-
            search grants were received,            MGH transferred    amounts
            for lndlrect       costs to a holding account.          The holding
            account was reduced monthly during the lives of the
            grants.     In computing the amount of non-patlent             care
            costs for allocating        A&G expenses, the balance 111.the
            hokkng account was deducted from non-patient                care
            costs,   resultxng      Ln an understatement       of the A&G base.


      The amount charged to Medicare for the two percent allowance
m lieu of speclflc    recognltlon of other costs wz~ll be reduced by
about $3,900 If all of the above questionable    costs are resolved  In
favor of the Medzare program.


        MGH professional  fees for radlologlcal     services were established
at a level which we estimate ylelded        about $316,000 In excess of
related    costs during fiscal   year 1967      We estimate that the Medicare
portion    of this excess was about $92,000.       As set forth In more detail
below, the reason for the excessive reimbursement           was that the fee
schedule used to bill part B of the Medlcare program for radiology
services was too high, and this should have been determlned at the
tie     the fee schedule was lnltlally    approved by Blue Cross.

        Prior to Medicare almost all x-rays of service patients               were
read by house officers         and x-rays of private       patients   were read by
staff radiologists.          House officers    (residents     and Interns)   are not
authorized      to bill   on a fee-for-service       basis under part B, instead
their salaries        are reimbursed to the hospital        under part A Following
the lnceptlon       of Medicare, staff radlologlsts         began revlewlng     house
officers'     reports    and maklng second readings of service patlent            x-ray   films

        The hospital  antlLlpated    that income of $542,600 would be required
to meet its professIona         component expenses and that 33 l/3 percent
of the charges of staff radiologists         would yield thus amount. Howevex,
no consideration     was given to addltlonal      revenue whzch would result
from second readings by staff radlologlsts           of non-Medicare service
patlent    x-rays.

      As shown below, although non-Medicare   service patients   accounted
for 34 percent of the proJected    radiology workload, MGH antlclpated
that no professional  componefit revenue would be generated from this

                        of                Gross               Profe$sional     Component
Type of patlent       Workload           Revenue              Percent           Amount

Private                  47            $1,170,962              33 l/3          $390,321

Medicare    service      19                456,862             33 l/3           152,287

  sernce                 34                848,458                -O-
                       loo             $2,476,282                              $54256008

         In July 1966 the MGH Radlologlcal          Associates was formed           One of
the purposes of thus organization            was to expedite the collection            and
tistributlon       of fees received    for professional         services rendered by
Its members. During fiscal          year 1967, the Radiological            Associates
gradually     assumed the bllllng      function,     starting     with private    ambulatory
patients.       According to the Chief of Radiology a fee 1s charged when-
ever a staff radlologlst         makes a second reading of x-rays If the reading
contributes      to patlent   care.    During the first         3 months of fiscal       year
1967, when the hospital        was doing most of the billing,             all patzents
were charged for professional          radlologlcal       services without dlstlnctlon
as to who performed the service - staff ratiologlst                    or house officer.
Accordmngly,       at the time that the professional            component factor      (33 l/3
percent)     was subnutted to the lntermedlary            for approval     on November 29,
1966, there were lndzatlons          that Lt was excessive because all patients
were being billed.

        Section 405.485 of the Prlnclples        of Reimbursement for Provider
Costs and for Services by Hospital-Based            Physlclans provides    that
"Once the portlon       of a physlclan's     compensation attributable     to pro-
fesslonal     servLces to supplementary       medical insurance beneflcLarles
has been detemuned,        a schedule of charges can be developed            To be
deemed reasonable       the charges should be designed to yield In the
aggregate,     as nearly as may be possible,        an amount equal to such
portion    of his compensation."        After giving consideration      to estLmated
bad debts and collection        costs we calcul.ate that the approved fee
schedule yielded $754,000, whereas related            expenses amounted to
$438,000, a difference       of $316,000.

     Hospital officials   -ntaLn     that their part B charges are reasonable
as compared to prevailing    charges m the area      They also stated that
cash receipts for radiology    approximate   actual expenses and that there

was no excessive reimbursement.        In their calculation     of Income,
no conslderatlon,was    given to cash collected       by the hospital   during
the 3 months when the hospital      did most of the bllllng,       as contrasted
to cash collected    by the Radiological     Associates,    nor did they estimate
the cash yield from outstanding      receivables     at year end, September 30, 1967.

       During the audit of MGH's fiscal          1967 Medlcare cost submissIon
the Blue Cross auditors      made no adlustment for the difference               In radiology
professional     component Income and expenses             The SSA principles      of
reimbursement     makes no speclflc     provlslon      for retroactive     adlustment
at the time of audit and final         settlement      for part B payments made to
a hospital    for the professional      component of the compensation paid by
the hospital     to Its hospital-based       physlclans       However, In a letter
to us dated April 30, 1970, you indicate             that Section C, Article         IV,
of the Agreement between the Blue Cross Assoclatlon                 and the Secretary
of Health, Education,     and Welfare,       concerning the recovery of overpayments
would apply to excessive part B payments to hospitals.


        The HEW Regional Audit staff and the Blue Cross Medicare auditors
are not coordlnatlng       their audit effort      or apprlslng    each other of the
results     of their independent      reviews.   In large teaching hospitals,
particularly,       such coordlnatlon     would be helpful    because of the detailed
reviews of research grants performed by the HEW audst staff.
       The Boston Regional Office of the HEW Audit Agency and the Blue
Cross Medicare Audit staff performed       independent  audits of MGH's fiscal
1966 and 1967 costs.     The HEW Audit Agency submitted their report on
lndlrect   cost rates for research grants for both years on March 7, 1969.
Although the Blue Cross auditors      began their review of both years one
month later,    on April  7, 1969, they did not ask for the HEW audit report
or workpapers.

       The scope of both audits were dupllcatlve     In certain     respects
For example, both included tests of lndlrect       costs and verlflcations
of the apportionment    of IndIrect   costs between patient     care and research
actLvltres.    Also, both audit groups verlfled     some of the same statlstAca1
data such as the square foot base used to allocate        operation     and malnten-
ante of plant and housekeeping      costs.

       We reviewed the audit adlustments made by the HEW Audit Agency in
their report.      Although the 1967 Medicare reimbursement      would not have
heen much different      had these fIndings    been considered by the Medicare
auditors,    there 1s no assurance that the result would he the same in
other years or at other hospitals.          We could not readily  estimate the
probable reductLon 111 audit effort       had the Medicare auditors    made use
of the HEW audit work.

       We note that     the HEW publlcatlon,     "Audit Program for Hospitals
Under the Health      Insurance for the Aged Act, Title XVIII,"        provides
that the scope of       the Medicare audit should be determlned      In part by
a review of audit       reports prepared by the hospital      staff, independent
public accountants,        or others.    No mention LS made of HEW Audit Agency


      Our overall    recommendation   1s that you instruct     the fiscal   Inter-
medlary to prepare a revised hospital        statement of reimbursable      cost
giving conslderatlon      to the questions   raised by us In this report.
In addltlon,   we are making the following       speclflc  recommendations.

      1.   Because there are 32 hospitals         recelvlng funds from the
           Commonwealth of Massachusetts for their V.D. and/or alcoholic
           clinics     (See Appendix I), we recommend that the BHI assure
           Itself    that appropriate     adJustments are being made at these
           hospitals.      It 1s estimated that the Commonwealth gives
           these hospitals     about $420,000 a year for alcoholism      cllnlcs.
           We could not readily       deterrmne the amount given by the
           Commonwealth for V.D. clinics.

      2.   We understand that the Medicare part B fiscal              lntermedlary      1s
           evaluating     the reasonableness       of MGH's radiology      fee schedule,
           but that to this date no conclusions             have been reached.       We
           belleve    that the special nature of the MGH Radlologlcal               Associates
           should be considered       In determlnlng       whether the Radiological
           Associates 1s a separate entity.             All the earnings of the
           lndlvldual     members are assigned to the hospital. In return
           for which they receive salaries           from the hospital          The salary
           levels are governed by the fixed salary schedule of the Harvard
           Me&Cal School faculty,          rather than by the amounts of fees earned
           Under these circumstances          we recommend that a cost rather than a
           reasonable     charge crlterlon      be used 3n evaluating        the fee schedule

      3.   We recoxmnmend that you advise SSA to notify     Its lntermedlarles
           and the HEWAudit Agency of the need for close liason to assure
           that dupllcatlon     of audit effort will be rmnlrmzed, and that the
           results  of provider    reviews ~~11 be exchanged.

      We would appreciate  being advised at an early date of               any action
taken by you and Blue Cross.     Copies of thus letter   may be            furnished  to
the Blue Cross Association    and to the local Blue Cross Plan               for that
purpose.   If we can be of any assistance    to you please let             us know.

                                                          Sincerely    yours,

                                                    &     Joseph Eder
                                                          Regional Manager
                                                                                        -15 -
                                                                     APPENDIX I
                                                                        Page 1
                                LISTING OF ALCOHOLISM AND

                                                      Alcoholism   Disease
                                                         Clinxzs   Clinics

       Beverly      Hospital                                          X


       B&h Israel    Hospital
       Boston Cz~ty Hospxtal
       The Boston Dispensary
       Massachusetts General Hospital
       Peter Bent Brigham Hospxtal
       New England Hospital
       UnlversIty   Hospital                                          X
       Washington Hospital


       Brockton      Hospital                               X         X


       CambrIdge City Hospital                              X         X
       Mount Auburn Hospital                                X         X

Cape Cod

       Barnstable      County Hospital                      X

Fall   Silver

       St, Annes Hospital                                             X


       Burbank Hospital                                    X          X


       Franklin     County Public          Hospital        X


       Lawrence     General     Hospital                   X

                                                                        APPENDIX I
                                                                         Page 2 (Continued)
                                 LISTING OF ALCOHOLISM AND
                                                     I          /
                                              Alcoholism          DLsease
                                                 Cllnxcs          Clinics

         Lowell General Hospital                                    X
         St. Josephs Hospital

         Lynn Hospital

New Bedford

         St. Luke's      Hospital                                   X


         Newton-Wellesley           Hospital

North Adams

         Dlvx.lon     of Plttsfleld            General   Hospital


         Plttsfxeld     General Hospital
         Berkshire     Medxal Center


         Qulncy CLty Hospital


         Salem Hospital


         Sprlngfleld     Munlclpal   Hospital
         The Springfield      Hospxtal                                        X


        Waltham Hospxtal                                                      X

        St. Vincent HospI?ltal                                      X
        Worcester Cz.ty Hospatal                                               X