oversight

Opportunity To Reduce Medicare Costs by Consolidating Claims-Processing Activities

Published by the Government Accountability Office on 1971-01-21.

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

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            To Weduc
          Costs By
         ting @hi
Processing Activities              8-16‘4031~4~




Department of Health, Education,
 and Welfare
Railroad Retirement Board




BY THE COMPTROLLER GENERAL
OF THE UNITED STATES



            ,-&
                                            COMPTROLLER     GENERAL     OF   THE      UNITED   STATES
                                                          WASHINGTON.    D.C.      20548




            B- 164031(4)




          To the                 President   of the Senate     and the
/,-
-         Speaker                  of the House   of Representatives


      3   -b
             This     is our report   on the opportunity        to reduce     Medicare     costs                         <_
     ‘by consolidating      claims-  processing      activities    of the Department         of                               .
  f. Health,    Education,      and Welfare     and the Railroad       Retirement      Board.                            “. 5 .i
 .++

                 Our                 review   was made pursuant     to the                 Budget   and Accounting
          Act,  1921                (31 U.S.C.   53), and the Accounting                    and Auditing   Act of 1950
          (31 U.S.C.                  67).

                   Copies   of this report    are being    sent to the Director,         Office                    of
          Management       and Budget;     the Secretary      of Health,    Education,       and
          Welfare;     and the Chairman       of the Railroad     Retirement        Board.




                             !
          ,-
           ,:
                “,
                     _
                         1
                                                                                Comptroller             General
                                                                                of the United           States
    COMPTROLLER
              GENERAL'S                        OPPORTUNITYTO REDUCEMEDICARECOSTS
    REPORT
         TO THE CONGRESS                       BY CONSOLIDATINGCLAIMS-PROCESSING
                                               ACTIVITIES
                                               Department of Health, Education, and
                                               Welfare
                                               Railroad Retirement Board B-164031(4)


    DIGEST
    ------

    WHYTHEREVIEWWASMADE
           Medicare costs increased by $1.3 billion--from     $5.3 billion  to
           $6.6 billion--from     1968 to 1969. Because of these sharply rising
           costs--about     25 percent in 1 year--the General Accounting Office
           (GAO) is exploring ways by which            e can be administered more
           effectively     and economically.

           Under Medicare, payments for physicians'     services are made by 50
           separate organizations    called carriers  under contract with the So-   _/
           cial Security Administration     (SSA) of the Department of Health, Edu-    *
           cation, and Welfare (HEW}. Each carrier makes benefit payments in
           designated geographical areas of the United States.

         'The SSA carriers    do not make Medicare payments on behalf of eligible
           railroad workers and annuitants of the Railroad Retirement Board.
           The Board, under a delegation of authority   from SSA, contracted with
        A- The Travelers Insurance Company to make these payments for about       :,7‘--
       /' 810,000, or approximately 4 percent, of the 18.9 million     people
           eligible  to receive Medicare benefit payments for physicians'    ser-
           vices . (See p. 6.)

           Because of the relatively    small number of railroad workers and an-
           nuitants eligible   for Medicare and because certain administrative   func-
           tions of Travelers appeared to duplicate those of the 50 carriers,     GAO
           questioned whether the use of a separate carrier to make payments for
           these beneficiaries    was the most efficient,  effective, and economical
           way to administer the program.

    FIN?INGSAND CONCLUSIONS
           The present arrangement in which a nationwide carrier      (Travelers)   pays
           Medicare claims on behalf of railroad workers and annuitants of the
I          Railroad Retirement Board--a relatively    small, special group of bene-
I          ficiaries--is  not the most efficient   nor the most effective    arrangement
           for making Medicare payments.


     Tear Sheet




                                           1
Under    SSA regulations,    information    both on customary charges of in-
dividual    physicians    and on prevailing     charges for specific    medical
services in a given area is needed to determine whether              the fees
charged by physicians are reasonable.             In GAO's opinion, Travelers
was unable to determine the reasonableness of charges on a nation-
wide basis because it did not have:

  --Enough data on physicians'   fees for services provided to rail-
     road workers and annuitants to determine the customary charges
     of individual physicians.   (See pp. 17 to 24.)

  --Assurance that the volume and nature of data on physicians'        fees
     pertaining  to Travelers'    commercial health insurance programs
     would enable it to determine customary charges for the majority
     of medical services furnished to Medicare beneficiaries.       Also,
     there had been little     exchange of customary-charge data between
     Travelers and the 50 carriers     acting for SSA. (See pp. 18 to
     22.)
GAO estimated that benefit payments by Travelers were about $2.9 mil-
lion higher than the payments that would have been made by the SSA
carriers for like medical services in fiscal year 1970. (See p. 29.)

GAO believes that any other carrier,   under the same circumstances,
would experience the same difficulties   as did Travel ers in operating
a nationwide system for making benefit payments for such a small num-
ber of beneficiaries.

The use of a separate carrier to process the claims of railroad
workers and annuitants,        in GAO's opinion, also resul ts in increased
administrative     costs.    GAO's comparison of the estimated incremental
costs that would be incurred by four SSA carriers making payments in
nine States with the administrative         costs incurred by Travelers showed
that these carriers       could process the railroad-related      claims for
$321,600    a year less than could Travelers.        GAO believes    that similar
savings in administrative        costs could be achieved at other locations.

If the estimates for the four SSA carriers  are representative  on a
nationwide basis, administrative costs of as much as $2.8 million
could be saved. These savings would accrue to the beneficiaries    and
the Federal Government, which share equally in financing the pro-
gram.

For example, by consolidating   the claims-processing         activities,   there
would be an opportunity   to reduce or eliminate:

  --The necessity of maintaining    125 separate offices to pay claims of
     railroad  employees and annuitants and the supervisory and adminis-
     trative  personnel needed for many small offices.    (See pp. 41 to
     43.)




                                   2
             --The additional     overhead expenses arising from the separation    of
                claims-processing    activities    for railroad-related claims and all
                other Medicare claims.        (See pp. 43 and 44.)

             --The duplication   of effort  involved when raili-oad-related claims
                are sent to the SSA carriers by mistake and have to be rerouted
                to the Travelers field offices.     (See pp. 44 to 46.)


RECOMMENDATIONS
            ORSUGGESTIONS
       The Secretary of Health, Education, and Welfare should arrange to
       have the railroad-related Medicare claims paid by the carriers pay-
       ing such claims for all other Medicare beneficiaries  in the same
       geographical area. (See p. 52.)


AGENCY
     ACTIONSANDUNRESOLVED
                       ISSUES
       HEW advised GAO that SSA was not prepared to accept GAO's recornnenda-
       tion without additional    review of the Travelers-Board    relationship in
       light of the views set forth by the Board and by Travelers.          The
       Board had expressed the view that the interests      of the railroad-
       related beneficiaries    and of the Medicare program would best be
       served by continuing the existing    arrangement.    Travelers stated
       that its performance under its contract with the Board had been ef-
       ficient  and economical.

       SSA acknowledged that the relatively     small number of claims processed
       by Travelers involving  railroad   beneficiaries  posed serious obstacles
       in its development of adequate customary-charge data and that the ar-
       rangement with Travelers as the sole carrier for railroad-related
       beneficiaries  presented inherent administrative    problems.

       As an alternative to GAO's proposal, SSA stated that the Travelers-
       Board arrangement provided an excellent   opportunity  to experiment
       in determining reasonable charges by using fee limitations    to es-
       tablish the maximum allowable physicians'   charges on a State-by-
       State basis.

       Although the details of such proposed experiments have not been de-
       fined, GAO believes that Travelers essentially  has been using such
       fee limitations  since the inception of the Medicare Program. (See
       pp. 47 to 49.)

       As for the administrative  costs, SSA was of the opinion that the
       amount of savings through the consolidation  of claims-processing
       activities had not been clearly shown and that, once these savings


Tear Sheet




                                             3
                                                                                                                I
    could be reasonably           estimated,       SSA would then         have to weigh the cost
    savings against     the       benefits      derived  from the         contractual  arrangements.            I

   SSA also stated            that,     as an alternative        way to achieve           savings      in ad-
   ministrative          costs,      the number of Travelers           field     offices       processing
   railroad-related             claims     could be reduced.          Travelers        proposed      to re-
   duce the number of offices                   from 125 to 63 and to make corresponding
   reductions         in personnel,          which GAO estimated         would save $352,000              an-
   nually.         (See p. 50.)          Travelers     is presently         consolidating         its of-
   fices,       and GAO believes           that this     is indicative        of the even greater
   savings       that    could be realized           by a full     consolidation          plan whereby
   the SSA carriers             would assume the entire           workload       for railroad-
   related       claims.


MATTERS
      FORCONSIDERATION
                    BY THECONGRESS
   Although     GAO recognizes        that     the consolidation          of the claims-
   processing      activities       would entail         some diminution         of the authority
   now delegated        to the Railroad          Retirement     Board,      GAO believes         that    an
   overriding      consideration         is that      such action      would simplify          the admin-
   istration     of the Medicare           program     and would help reduce             program      costs.
   Therefore     GAO is bringing           the results       of its review         to the attention
   of the Congress          for its consideration            in future      deliberations          on
   amendments      to the Social        Security       Act designed       to improve        the operat-
   ing effectiveness           of the Medicare         program.

   Also,      in view of congressional         interest    regarding     HEW plans for ex-
   periments       affecting     Medicare   payments    to institutions,       the cognizant
   legislative        committees     of the Congress      may wish to review       the plans
   for the experiments           proposed   by SSA for Travelers         and the Board in de-
   termining      maximum allowable        physicians'     charges.




                                                4
                          Contents
                                                               Page

DIGEST                                                           1

CHki'TER

   1       INTRODUCTION                                          5

   2       DESCRIPTION OF PERTINENT FEATURES OF THE
           MEDICARE PROGRAM                                      6
               Payments for services   on the basis of
                 reasonable charges                              7
               Carriers'   role in administering   part B
                 of the Medicare program                        10
               Selection   of carriers                          10
               Delegation   to RRB of authority  to
                 select carriers                               11

   3       OPPORTUNITY TO REDUCE COSTS OF THE MEDICARE
           PROGRAMBY CONSOLIDATING CLAIMS-PROCESSING
           ACTIVITIES                                           14

   4       INABILITY OF TRAVELERSTO MEET SSA REQUIRE-
           MENTS FOR MAKING REASONABLE-CHARGEDETERMI-
           NATIONS                                              17
               Earlier    efforts    to establish  customary
                  charges                                       17
               Recent efforts      to establish   customary
                  charges                                       20
               Travelers*     method for making prevailing-
                  charge determinations                         23

   5       COMPARISONOF REXSONABLE-CHARGEDETERMINA-
           TIONS KADE BY TRAVELERSAND SSA CARRIERS              25
               Comparison of reasonable-charge     determi-
                 nation during 1968                            26
               Comparison of reasonable-charge     determi-
                 nations  in 1970                              28
               Analysis of variations   in physiciansg
                 charges allowed by Travelers     and by
                 the SSA carriers                              29
CHAPTER                                                             Page

   6       POTENTIAL FOR SAVINGS IN ADMINISTRATIVE
           COSTS BY USING SSA CARRIERS TO PROCESS
           RRB-RELATED MEDICARE CLAIMS                               33
               Small number of RRB-related            enrollees
                 and claims                                         34
               Description     of administrative        costs and
                 RRB's and Travelers'          views as to the
                 consolidation      of claims-processing
                 activities                                         35
               Analysis     of estimates     furnished     by SSA
                 carriers     shows potential       for savings
                 by consolidating        activities                 39
               Factors supporting        the SSA carriers!
                 estimates     and the potential        for sav-
                 ings                                               41
   7       COMMENTSOF THE DEPARTMENTOF HEALTH, EDU-
           CATION, AND WELFAREAND THE RAILROAD RETIRE-
           MENT BOARD AND GAO's EVALUATION                          47
   8       CONCLUSIONS, RECOMMENDATION,AND MATTERS FOR
           CONSIDERATION BY THE CONGRESS                            51
              Conclusions                                           51
              Recommendation to the Secretary     of                       /
                 Health,  Education,  and Welfare                   52
              Matters for consideration    by the Con-
                 gress                                              52
  9        SCOPE OF REVIEW                                          54
APPENDIX

       I   Percentage of RRB-related       enrolles   to total
              enrollees     under part B of the Medicare pro-
              gram by State as of January 1, 1969                   57
  II       Letter     dated March 19, 1970, from the As-
              sistant     Secretary,  Comptroller,   Department
              of Health, Education,      and Welfare,   to the
              General Accounting: Office           *                61
APPENDIX                                                                    Page

  III       Letter dated October 7, 1970, from the
               Chairman of the Railroad      Retirement   Board
               to the General Accounting Office                              66
    IV      Letter dated December 7, 1970, from The
               Travelers     Insurance Company to the Gen-
               eral Accounting Office                                        6%
        V   Principal    officials    of the Department of
               Health, Education,      and Welfare and the
               Railroad Retirement      Board responsible   for
               the administration      of the Medicare Program               73

                                    ABBREVIATIONS

CRVS        California        relative-value        studies
GAO         General       Accounting     Office
HEW         Department        of Health,       Education,     and Welfare
RRB         Railroad       Retirement      Board
SSA         Social       Security     Administration
COMPTROLLERGENERAL'S                    OPPORTUNITYTO REDUCEMEDICARECOSTS
REPORTTO THE CONGRESS                   BY CONSOLIDATINGCLAIMS-PROCESSING
                                        ACTIVITIES
                                        Department of Health, Education, and
                                        Welfare
                                        Railroad Retirement Board B-164031(4)


DIGEST
--m-m-

WHYTHE REVi-EWWASMADE

    Medicare costs increased by $1.3 billion--from     $5.3 billion  to
    $6.6 billion--from     1968 to 1969. Because of these sharply rising
    costs--about     25 percent in 1 year--the General Accounting Office
    (GAO) is exploring ways by which Medicare can be administered more
    effectively     and economically.

    Under Medicare, payments for physicians'     services are made by 50
    separate organizations    called carriers  under contract with the So-
    cial Security Administration     (SSA) of the Department of Health, Edu-
    cation, and Welfare (HEW). Each carrier makes benefit payments in
    designated geographical areas of the United States.

     The SSA carriers do not make Medicare payments on behalf of eligible
     railroad workers and annuitants of the Railroad Retirement Board.
     The Board, under a delegation of authority  from SSA, contracted with
     The Travelers Insurance Company to make these payments for about
     810,000, or approximately 4 percent, of the 18.9 million    people
     eligible  to receive Medicare benefit payments for physicians'    ser-
     vices.   (See p. 6.)
    Because of the relatively    small number of railroad workers and an-
    nuitants eligible   for Medicare and because certain administrative   func-
    tions of Travelers appeared to duplicate those of the 50 carriers,      GAO
    questioned whether the use of a separate carrier to make payments for
    these beneficiaries    was the most efficient,  effective, and economical
    way to administer the program.

FIiVDINGS AND CONCLUSIONS

    The present arrangement in which a nationwide carrier      (Travelers)   pays
    Medicare claims on behalf of railroad workers and annuitants of the
    Railroad Retirement Board--a relatively    small, special group of bene-
    ficiaries--is  not the most efficient   nor the most effective    arrangement
    for making Medicare payments.
Under SSA regulations,          information     both on customary         charges     of in-
dividual   physicians      and on prevailing         charges   for specific        medical
services   in a given area is needed to determine                 whether     the fees
charged   by physicians       are reasonable.         In GAO's opinion,         Travelers
was unable    to determine        the reasonableness        of charges     on a nation-
wide basis    because    it did not have:

   --Enough     data    on physicians'          fees for services    provided               to rail-
      road workers       and annuitants           to determine   the customary                charges
      of individual       physicians.           (See pp. 17 to 24.)

  --Assurance      that the volume and nature            of data on physicians'              fees
     pertaining      to Travelers'        commercial    health     insurance       programs
     would enable       it to determine       customary      charges     for the majority
     of medical      services     furnished     to Medicare      beneficiaries.           Also,
     there     had been little       exchange     of customary-charge           data between
     Travelers     and the 50 carriers          acting    for SSA.       (See pp. 18 to
     22.)

GAO estimated          that  benefit  payments    by Travelers    were about $2.9 mil-
lion     higher     than the payments      that would have been made by the SSA
carriers        for like    medical  services   in fiscal     year 1970.   (See p. 29.)

GAO believes     that    any other  carrier,           under the same circumstances,
would experience       the same difficulties             as did Travelers   in operating
a nationwide     system for making benefit               payments  for such a small num-
ber of beneficiaries.

The use of a separate             carrier      to process      the claims     of railroad
workers      and annuitants,         in GAO's opinion,           also results    in increased
administrative         costs.      GAO's comparison          of the estimated        incremental
costs     that would be incurred             by four SSA carriers          making payments          in
nine States        with the administrative             costs     incurred    by Travelers        showed
that    these carriers         could process        the railroad-related         claims      for
$321,600       a year less than could Travelers.                    GAO believes     that    similar
savings      in administrative           costs   could be achieved         at other     locations.

If the estimates     for the four              SSA carriers   are representative      on a
nationwide   basis,    administrative               costs of as much as $2.8 million
could be saved.      These savings              would accrue    to the beneficiaries      and
the Federal    Government,      which          share equally   in financing      the pro-
gram.

For example, by consolidating               the    claims-processing          activities,           there
would be an opportunity      to         reduce     or eliminate:

   --The necessity      of maintaining      125 separate     offices  to pay claims     of
      railroad  employees     and annuitants      and the supervisory      and adminis-
      trative  personnel    needed for many small        offices.     (See pp. 41 to
      43.)




                                           2
      --The additional     overhead expenses arising from the separation of
         claims-processing    activities    for railroad-related claims and all
         other Medicare claims.        (See pp. 43 and 44.)

      --The duplication   of effort involved when railroad-related claims
         are sent to the SSA carriers by mistake and have to be rerouted
         to the Travelers field offices.    (See pp. 44 to 46.)


RECOMMENDATIONS
            OR SUGGESTIONS
    The Secretary of Health, Education, and Welfare should arrange to
    have the railroad-related Medicare claims paid by the carriers pay-
    ing such claims for all other Medicare beneficiaries  in the same
    geographical area. (See p. 52.)


AGEf?CY
      ACTIONSANDUNRESOLKED
                        ISSUES
    HEWadvised GAO that SSA was not prepared to accept GAO's recommenda-
    tion without additional    review of the Travelers-Board    relationship in
    light of the views set forth by the Board and by Travelers.          The
    Board had expressed the view that the interests      of the railroad-
    related beneficiaries    and of the Medicare program would best be
    served by continuing the existing    arrangement.    Travelers stated
    that its performance under its contract with the Board had been ef-
    ficient  and economical.

    SSA acknowledged that the relatively     small number of claims processed
    by Travelers involving  railroad   beneficiaries  posed serious obstacles
    in its development of adequate customary-charge data and that the ar-
    rangement with Travelers as the sole carrier for railroad-related
    beneficiaries  presented inherent administrative    problems.

    As an alternative to GAO's proposal, SSA stated that the Travelers-
    Board arrangement provided an excellent   opportunity  to experiment
    in determining reasonable charges by using fee limitations    to es-
    tablish the maximum allowable physicians'   charges on a State-by-
    State basis.

    Although the details of such proposed experiments have not been de-
    fined, GAO believes that Travelers essentially  has been using such
    fee limitations  since the inception of the Medicare Program. (See
    pp. 47 to 49.)
    As for the administrative  costs, SSA was of the opinion that the
    amount of savings through the consolidation  of claims-processing
    activities had not been clearly shown and that, once these savings




                                       3
    could be reasonably estimated, SSA would then have to weigh the cost
    savings against the benefits derived from the contractual  arrangements.

    SSA also stated that, as an alternative       way to achieve savings in ad-
    ministrative     costs, the number of Travelers field offices processing
    railroad-related      claims could be reduced. Travelers proposed to re-
    duce the number of offices from 125 to 63 and to make corresponding
    reductions in personnel, which GAO estimated would save $352,000 an-
    nually,      (See p. 50.) Travelers is presently consolidating     its of-
    fices,    and GAO believes that this is indicative    of the even greater
    savSngs that could be realized by a full consolidation       plan whereby
    the SSA carriers would assume the entire workload for railroad-
    related claims.


iUTTER FORCOflSIDERATIOiV
                      BY THE CONGRESS
    Although GAO recognizes that the consolidation        of the claims-
    processing activities      would entail some diminution of the authority
    now delegated to the Railroad Retirement Board, GAObelieves that an
    overriding   consideration    is that such action would simplify     the admin-
    istration   of the Medicare program and would help reduce program costs.
    Therefore GAO is bringing the results of its review to the attention
    of the Congress for its consideration      in future deliberations     on
    amendments to the Social Security Act designed to improve the operat-
    ing effectiveness     of the Medicare program.

    Also, in view of congressional   interest regarding HEWplans for ex-
    periments affecting   Medicare payments to institutions, the cognizant
    legislative  committees of the Congress may wish to review the plans
    for the experiments proposed by SSA for Travelers and the Board in de-
    termining maximum allowable physicians'   charges.
                               CHAPTER1

                             INTRODUCTION

       The General Accounting Office has reviewed selected as-
pects of the administration       of the supplementary      medical
insurance benefits     (part 3) portion     of the Health Insurance
for the Aged (Medicare)      Program.     Part 3 of the Medicare
program covers physicians'       services and a number of other
medical and health benefits.         Payments for these services
and benefits   are made primarily       by 50 separate organizations
under contract    with the Department of Health, Education,           and
Welfare (HEW) to perform this function         in specific    geograph-
ical areas in the United States.          These organizations     are
referred   to as carriers.

       The carriers    under contract      with HEW do not make pay-
ments on behalf of eligible         railroad     employees or individ-
uals receiving      annuities   from the Railroad Retirement         Board
(RRB), who have enrolled        under part B of Medicare.          These
payments are made on a nationwide            basis by a separate
carrier --The Travelers       Insurance Company--under a contract
with RRB, through its network of about 125 field              offices.
RRB entered into this contract           pursuant to a delegation      of
authority   from the Social Security          Administration    (SSA)
which has primary responsibility           for the administration      of
the Medicare program.

        We examined into the practice    of using a separate car-
rier to process Medicare part B claims on behalf of railroad
employees and RRB annuitants      to determine   if it was the most
efficient,    effective,   and economical way to administer   this
portion    of the program,

       The scope of our review is described      in chapter 9. The
principal    officials   of HEW and RRB responsible   for the ad-
ministration      of the Medicare program are listed    in appen-
dix V.




                                      5
                               CHAPTER2

                DESCRIPTION
                      ---   OF PERTINENT
                                       -.--FEATURES
                      OF
                      -- THE MEDICARE PROGRAM
        Title XVIII of the Social Security             Act (42 U.S.C. 1395--
1395111, which was enacted on July 30, 1965, established                 the
Medicare program, effective              July 1, 1966, to provide two ba-
sic forms of protection             against the costs of health care to
eligible      persons aged 65 and over.          One form, designated as
Hospital      Insurance Benefits         for the Aged (part A), covers in-
patient      hospital      services   and posthospital    care in an
extended-care         facility     or in the patient's    home. This form
of protection         is financed by a special social security        tax
paid by employers and their employees and by self-employed
persons.

      The second form of protection,designated            as the Supple-
mentary Medical Insurance Benefits         for the Aged (part B) Pro-
g-h     is a  voluntary  program   and  covers    physicians'   services
and a number of other medical and health benefits.              This re-
port concerns the administration        of part B of the Medicare
program.     Part B is financed,    in part, from premiums col-
lected from each participating        beneficiary    who has elected
to be covered under part B. The premiums are matched by
equal amounts appropriated       by the Congress, and the total
amounts are deposited     in the Federal Supplementary Medical
Insurance Trust Fund. Effective         April 1, 1968, the basic
monthly premium was increased from $3 to $4; effective
July 1, 1970, it was increased from $4 to $5.30.

       Under part B of the Medicare program, the beneficiary
is responsible    for paying the first   $50 for covered medical
services   in each year, and the Medicare program pays 80 per-
cent of the reasonable charges for covered services       in ex-
cess of $50 in each year.      Claims under part B may be paid
either   to the patient   or to the physician   or others furnish-
ing the services.

      According to SSA statistics     as of January 1, 1969,
about 18.9 million  persons were enrolled      for supplementary
medical insurance benefits.       About 810,000 of the enrollees


                                     6
were eligible     for coverage by virtue     of their entitlement      to
railroad   retireme.nt   benefits, including     285,000 persons en-
titled   to both social security     and railroad     retirement    bene-
fits on the basis of their earnings under both programs.
Benefit payments on behalf of the 810,000 enrollees              were
made by Travelers      under its contract    with RRB.

PAYMENTSFOR SERVICES ON THE
BASIS OF REASONABLECHARGES

      The Congress, in establishing        the Medicare program, pro-
vided that payments for physicians'          services be made on the
basis of reasonable charges and that,          in determining   the rea-
sonableness of charges, consideration          be given to (1) the
customary charges for similar       services generally      made by the
physician    and (2) the prevailing     charges of physicians      in
the locality    for similar  services.

       In regulations    implementing  the reasonable-charge    cri-
teria    set forth in the Medicare law, SSA defined "customary
charge" as the uniform amount that a physician         charges, in
the vast majority      of cases, for a specific    medical service.
SSA recommended that the uniform amount be based not only on
physicians'     charges under the Medicare program but also on
information     obtained from other sources, such as the carri-
ers' own medical insurance programs.         If the individual   phy-
sician varies his charges so that no one amount is charged
in most cases, SSA instructions       provide that the mean or me-
dian charge should be used as the customary charge for the
service.

       SSA regulations     define "prevailing     charges" as those
charges falling     within   the range of charges most frequently
and most widely charged by physicians          in a locality     for a
particular    medical service.      The regulations     state that, ex-
cept for unusual circumstances,         the upper limit     of the range
of prevailing     charges is the highest amount that should be
accepted as reasonable for a given medical service.                Accord-
ing to the regulations,        the upper limit    is the average




                                    7
(arithmetic       mean> of the physician's          custlomary   charges   for
each service       plus   one standard       deviation    above the mean.

        In other words, in making benefit    payments, a carrier
is supposed to determine that the fees for medical services
do not exceed (1) the individual     physician's    customary charge
for the service rendered or (2) the upper limit         of the pre-
vailing    charges in the area.  Furthermore,    the reasonable
charge cannot exceed the actual charge made by the physician.

        The following examples illustrate      how this criteria  is
to be applied in determining     reasonable charges under part B
of the Medicare program.      Assuming that the prevailing
charge for a specific    medical service is $100 in a certain
locality    and that Doctor A customarily      charges $80 for this
procedure and Doctor B customarily        charges $125:

         1. If Doctor A's bill  is $75, the reasonable charge
            would be $75 since, under the law, the reasonable
            charge cannot exceed the actual charge.

         2. If Doctor A's bill   is $85, the reasonable charge
            would be $80 because that is his customary charge.
            Even though his actual charge of $85 is less than
            the prevailing  charge, the reasonable charge cannot
            be more than his customary charge.

         3. If Doctor A's bill  is $80, the reasonable charge
            would be $80 because it is his customary charge and
            it does not exceed the prevailing   charge for that
            locality.

         4. If Doctor B's bill  is $125, the reasonable charge
            could not be more than $100, the upper limit  of the
            prevailing charge in the area.

     For fiscal   years 1968 and 1969, benefit payments made
by carriers  under part B of the Medicare program amounted to


1 Standard  deviation--   a basic statistical measure of the aver-
 age difference     of the amounts in a series measured from
 their    mean.


                                         8
about $1.3 billion and $1.5 billion,             respectively,    of which
about 95 percent was for physicians'             services.     The adminis-
trative   costs   of   the   carriers   making   such   benefit   payments
which are also borne by the Medicare program amounted to
about $100 million     and$118 million,    respectively.       Benefit
payments made by Travelers     under its contract        with RRB for
fiscal   years 1968 and 1969 amounted to about $55 million             and
$60 million,   respectively;   and the related      administrative
expenses were about $4.2 million        and $4.5 million.
CARRIERS' ROLE IN ADMINISTERING
PART B OF THE MEDICARE PR@ZAM

       To administer    the benefits    under part B of the Medicare
progr=,     section  1842(a)    of the  Social Security     Act autho-
rized the Secretary       of HEW to enter into contracts         with car-
riers   to (11 determine the rates and amounts of payments on
a reasonable-charge       basis and (2) receive,     disburse,      and ac-
count for funds used in making such payments.             Section 1842(b)
of the act provides that no such contract           be entered into
with any carrier     unless the Secretary      finds that the carrier
will perform its obligations         under the contract     efficiently
and effectively.

       The reports    of the House Committee on Ways and Means
and the Senate Committee on Finance on the bill           that became
the Medicare law expressed the view that medical benefits
under part B should be administered        by private    carriers  be-
cause private     insurers,   group health plans, and voluntary
medical insurance plans had had experience          in reimbursing
physicians.      Both Committee reports    also stated that the Sec-
retary of HEW should, to the extent possible,          enter into con-
tracts with a sufficient       number of carriers,    selected on a
regional    or other geographical    basis, to permit a comparative
analysis    of their   performance.

SELECTION OF CARRIERS

       In November 1965 SSA published qualification              criteria
which had to be met by prospective            carriers    before they could
be selected to participate      in the administration           of part B
of the program.    The criteria      provided that a carrier           be
able to administer   its own health insurance programs which
require many of the skills,       statistical        data, and experience
needed to administer    the part B program, including             the abil-
ity to determine the reasonableness            of charges.

      Beginning in February 1966, SSA entered into contracts
with 50 carriers     to administer    part B of the program in spe-
cific  geographical    areas of the country.      Of these carriers,
33 were Blue Shield organizations,         16 were private  insurance
companies, and one was a State agency.          Travelers  was se-
lected by SSA as the carrier       for the State of Mississippi
and for certain     counties in Minnesota and Virginia.

                                    10
DELEGATION
         TO RRBOF

        RRB was established        by the Railroad Retirement            Act of
1935 (49 Stat. 967) and derives its authority                   also from the
Railroad Unemployment Insurance Act approved June 25, 1938
(45 U.S.C. 351-367).         RRB administers        a social insurance
system outside the jurisdiction             of SSA. The RRB programs
provide a wide variety         of benefits       to railroad      workers,    in-
cluding sickness,       disability,      unemployment,       retirement,      and
survivors     benefits.     Upon the enactment of the Medicare law,
RRB was given the responsibility              for certifying       to SSA the
eligibility     of railroad      employees and RRB annuitants             for
hospital    insurance benefits        under part A of the Medicare
program and for administering            the part A program for these
beneficiaries      in Canada. RRB was also given the responsibil-
ity for enrolling       RRB annuitants       under part B of the Medi-
care program.

        In May 1966 SSA, in an agreement with RRB, delegated
certain    of its responsibilities        under part B of the Medicare
program to RRB. Under this delegation             of authority,     RRB is
responsible     for (1) enrolling      aged railroad     workers and
their spouses, (2) collecting          premiums for about two thirds
of the 810,000 RRB-related         enrollees,1    and (3) selecting
the carriers      to administer    part B benefits      for railroads
employees and RRB annuitants.            This delegation      was made be-
cause, under the Medicare law, the authority               to enter into
contracts    with carriers      was vested only in the Secretary         of
HEW; RRR was not given such contracting             authority.

       Under the delegation   of authority, the carriers    se-
lected by RRB would have to (1) meet the same criteria        for
experience and financial    responsibility  as those for the
carriers   selected by SSA and (2) follow the same policies
and regulations    as those for SSA for determining    what

1
 About 285,000 of the 810,000 RRB-related         enrollees            are also
 entitled     to Social Security  benefits.    SSA collects             the
 premiums for these individuals.         The Social Security              Amend-
 ments of 1970 (H. R. 17550) as passed by the House                    of Rep-
 resentatives     on May 21, 1970, provides that RRB be                respon-
 sible for collecting     premiums from all RRB-related                enroll-
 ees.
medical expenses are covered and paid under the Medicare
program.     According to the SSA-RRB agreement, the delegation
of authority    was considered advantageous because the pro-
gram for aged railroad      workers would be administered    by the
agency to which they turned during their working years and
to which railroad     annuitants   regularly  turn for all other
matters having to do with their        social insurance protection.

       RRB advised us that the delegation         of authority   was
advantageous because there was a logical           connection between
the payment of part B Medicare premiums and the payment of
benefits   that would lead the beneficiary         to associate   the
two with the same agency.          RRB stated that part B Medicare
premium notices      for active railroad     employees, who are also
covered by Travelers'        health insurance policies,      were given
by these employees to their         employers for payment by Trav-
elers to the Medicare program.          RRB stated that most of
these employees whose part B Medicare premiums are paid by
Travelers    or collected     by RRB would look to the RRB-
Travelers    operation    for service in connection with their
claims for Medicare benefits.

       According to RRB, in the absence of the delegation    of
authority,    RRB would be expected by its beneficiaries  to
provide claims service but would not be in a position     to do
so.

Selection      of The Travelers
Insurance      Company

       In January 1955 Travelers        entered into a contract     with
numerous railroads       and with certain     unions of nonoperating
railroad   employees to provide health insurance for active
nonoperating    railroad    employees, such as maintenance and
shop personnel and their dependents.             In 1966 the coverage
was expanded to include active operating            employees, such as
enginneers and conductors and their dependents.              The pre-
miums for this health insurance were paid by the employers.
We were advised by Travelers         in March 1969 that its policies
covered about two thirds        of the 600,000 active railroad        em-
ployees in the United States.

         Travelers   also offered,    on a voluntary   basis, group
health      insurance to retired     railroad  employees and their

                                     12
dependents who had been covered as active employees.         The
premiums were paid by the beneficiaries.     Upon the inception
of Medicare,   these policies  for active and retired   railroad
employees and their dependents were revised to include only
those benefits    that were not covered under Medicare.

      Because of their prior experience with Travelers             and
because they would continue to contact Travelers           regarding
complementary benefits      not covered by Medicare,      railroad
union and management officials,        in December 1965 and in Jan-
uary and February 1966, recommended to HEW that Travelers
be selected as the nationwide      part B carrier   for railroad
workers and RRB annuitants.       These railroad   officials       stated
that it would be more feasible       for their members to deal
with one carrier     because such an arrangement would result
in greater efficiency      and more timely benefit    payments.
In February 1966 officials      of railroad   management and labor
organizations    pointed out to the Undersecretary        of HEW that
about 166,000 RRB-related beneficiaries        who would be eli-
gible for Medicare had health insurance with Travelers.

       Accordingly,   the selection     of Travelers    in July 1966
as the nationwide     RRB carrier    was made primarily        for the
convenience of about 22 percent of the 761,000 railroad
workers and annuitants     who were eligible       for Medicare,       or
about 1 percent of the total        17.6 million     beneficiaries      who
had enrolled     under part B of the Medicare program.             Further,
of the 810,000 railroad     workers and RRB annuitants            who were
eligible    for part B benefits     as of January 1, 1969, only
about 125,000, or about 15 percent,         had complementary cov-
erage with Travelers.




                                     13
                               cHAFYrER3

     OPPORTUNITYTO REDUCE COSTS OF THE MEDICARE PROGRAM

         BY CONSOLIDATING CLAIMS-PROCESSING ACTIVITIES

       Our review of Travelers'          claims-processing       activities
under its contract      with RRB indicated          that,   if the claims of
railroad    workers and RRB annuitants           under part B of Medicare
were processed by the same carriers              that process the claims
of other Medicare beneficiaries,             (1) the benefit      payments
would be made on a more consistent              basis and would have been
about $2.9 million      lower in fiseal         year 1970 and (2) on the
basis of projected       fiscal    year 1971 workloads,        the costs of
administering      the program could be reduced by as much as
$2.8 million     annually.       Our conclusions,       which are discussed
in detail     in the following       chapters of this report,          were
based on the following          considerations:

      --Under SSA regulations,     information  concerning both
         customary and prevailing     charges is necessary for the
         proper determination    of the reasonableness    of charges
         upon which payments for physicians'      services under
         part B of the Medicare program are to be based.

        During the first   3-l/2 years of the program (July
        1966 through December 19691, Travelers     paid Medicare
        benefits  of about $172 million   under its contract
        with RRI8. During this period,    because of circum-
        stances which were beyond Travelers'     control,     Travel-
        ers was not able to make reasonable-charge        determina-
        tions in the manner prescribed    by SSA, principally
        because the volume of RRB-related    claims was not large
        enough to permit the determination     of customary
        charges.   (See ch. 4)

      --The SSA delegation    of authority     provides that RRB en-
         sure that payments made by Travelers        for physicians'
         services   conform as closely   as possible     to the pay-
         ments made by the SSA carriers      for comparable ser-
         vices in the same locality.       During the first     2 years
         of the Medicare program, the incidence         of inconsis-
         tencies  in the amount of payments for comparable


                                     14
 services of the same physicians    appeared to be rela-
 tively  low because neither Travelers    nor the SSA car-
 riers were reducing many physicians'     charges except
 in those few geographical    areas where the SSA carriers
 had developed procedures to compare charges claimed
 with the physicians'   customary charges.

 SSA statistics     showed, however, that during fiscal
 year 1970 SSA carriers'      reductions     to allowable     phy-
 sicians'    charges had substantially       increased after
 1968 and that, on a nationwide        basis, the SSA car-
 riers,   in determining   reasonable charges, had reduced
 allowable    charges by an average of $3 a claim more
 than Travelers.      Had Travelers    reduced allowable
 charges at the same rate as the SSA carriers,             the ben-
 efit payments applicable       to m-related       beneficiaries
 would have been about $2.9 million          lower in fiscal
 year 1970.

  Our comparison of the reasonable-charge             determinations
  made by selected Travelers        field   offices    with those
  made by the SSA carriers       operating      in the same geo-
  graphical   areas showed that the $3 difference             in the
  average reductions    to physicians'        allowable    charges
  was almost entirely     attributable      to the SSA carriers"
  reducing claims that exceeded the physicians'               custom-
  ary charges whereas Travelers          was unable to make
  such reductions    because it could not determine cus-
  tomary charges.     (See ch. 5.)

--A comparison of the estimates         made by four SSA car-
   riers making benefit      payments in nine States of the
   increases    in their total    administrative   costs with
   the administrative      costs incurred by Travelers     showed
   that administrative      costs would be reduced if these
   SSA carriers    were to add the relatively      small number
   of m-related       claims in a given locality     to their
   existing   workloads.

  On the basis of these estimates     by the four SSA car-
  riers, we believe that, nationally,      the elimination
  of a separate carrier   to process FCRB-related claims
  could result  in lower Medicare administrative       costs
  by as much as $2.8 million    annually.


                              15
        We believe that the estimates               furnished       by the four
        SSA carriers    are reasonable because, by. consolidating
        claims processing        activities,there            would be an oppor-
        tunity   to reduce or eliminate             cl> the necessity           of
        maintaining    separate Travelers             field    offices      along
        with many supervisory           and administrative           personnel,
        (2) the additional         data processing           and general over-
        head expenses arising           from the separation            of claims-
        processing    activities        between MB-related             claims and
        all other Medicare part B claims,                   and (3) the dupli-
        cation of effort        involved when W-B-related                claims are
        erroneously    sent to the SSA carriers,                partially       pro-
        cessed by them, and rerouted              to-Travelers         for reproc-
        essing.     (See ch. 6.1

         By letter    dated March 19, 1970 (see app, II>, HEW ad-
vised us that,        although SSA agreed that the arrangement with
Travelers       as the sole carrier     for RRB beneficiaries       pre-
sented inherent        administrative     problems, SSA was not prepared
to accept our proposal to consolidate             claims-processing      ac-
tivities.        HJZWsuggested as an alternative         that the Travelers-
RXB arrangement provided an opportunity              to experiment in de-
termining       the reasonableness     of charges on the basis of pre-
vailing     charges only.       Our views concerning the alternative
proposed by HEN are discussed in chapter 7.
                                CHAPTER4

       INABILITY    OF TRAVELERSTO MEET SSA REQUIREMENTS

          FOR MAKING REASONABLE-CHARGEDETERMINATIONS

        During the 3-l/2 year period July 1, 1966, through De-
cember 31, 1969, Travelers         paid Medicare benefits    of about
$172 million      under its contract    with RRB. Although Travel-
ers made various efforts        to comply with SSA regulations       re-
garding the screening or comparing of claims against a phy-
sician's     customary charge for a particular      service,   these
efforts     were severely hampered by the lac’k of volume of data
for physicians'      charges applicable     to RRB-related   benefi-
ciaries,      As a result,   Travelers   was not able to determine
the physicians'      customary charges for the vast majority         of
medical and surgical       services for which benefit      payments had
been made.

EARLIER EFFORTS TO ESTABLISH
CUSTOMARYCHARGES

        In July 1967, Travelers         established     procedures for de-
veloping profiles       of physicians'       charges at each of its 125
offices    which processed RR&related             Medicare claims,       For
each physician      within     the area served by a Travelers          field
office,     the profile    listed   all charges submitted         to that
office    for railroad     employees and RRB annuitants           during the
preceding 6 months,          From these profiles,        which were updated
periodically,      the Travelers      field    offices   were supposed to
determine how much each physician              customarily    charged for
his services.

        Data furnished    us by Travelers      in April 1968 showed
that about 87 percent of the charges included in the profiles
for all Travelers       RRB field  offices     were for single in-
stances of medical or surgical          performed by individual       phy-
sicians,      Under these circumstances,        physicians'   customary
charges could not be established           for the vast majority      of
services.       Moreover, during our visits        to 11 Travelers    field
offices     during 1968, we observed that these offices           were not
using the profiles       in processing     claims because they rarely



                                     17
contained enough data which could             be used to determine         a
physician's customary charge.

        For example, at one Travelers         field     office,      we examined
the physicians'      profiles    applicable     to four surgical          proce-
dures for the 6-month period ended March 31, 1968. Accord-
ing to SSA statistics,        these four procedures            (cataract,
transurethral     resection     of the prostate,        herniotomy,       and
cholecystectomy)       were the most common surgical              procedures
performed on Medicare beneficiaries             and accounted for about
33 percent of the total         amount of Medicare surgical              charges
and about 14 percent of the total            number of surgical           proce-
dures performed.        For these four surgical          procedures,       the
physicians'    profiles     at the Travelers       field     office    contained
charges for 32 operations         which were performed by 31 differ-
ent physicians,      or, essentially,       one operation         for each phy-
sician.

       At two other Travelers           field   offices,    we made similar
analyses of physicians'           profiles    for the same four surgical
procedures for the Q-month period ended September 30, 1968.
At one field     office,     the profiles       contained charges for 57
operations    which were performed by 51 different                 physicians;
at the other field        office,     the profiles       contained charges
for 51 operations        performed by 45 different            physicians.
There was, therefore,          not enough data on physicians'             charges
applicable    to railroad       employees and RRB annuitants            to en-
able Travelers      to properly       establish      customary charges for
any of the physicians          performing     these four procedures,         al-
though they were the most common surgical                  services rendered
to beneficiaries       under the Medicare program.

        In December 1966, SSA instructed       its carriers    that an
exchange of reasonable-charge         data between Travelers      and the
carriers    acting for SSA was necessary to ensure comparabil-
ity in amounts paid for like medical services.              In April
1968, however, we were informed by Travelers           that, although
it obtained information        on prevailing   charges from 28 of the
50 SSA carriers,     Travelers    had been successful     in obtaining
customary-charge    data from only one SSA carrier.           SSA car-
riers were apparently      not complying with SSA's instruction
because (1) many had not compiled physicians'            customary-
charge data for their own use in processing           Medicare claims


                                       18
or (2) they considered   information     on individual  physicians'
charges, some of which related      to their   own commekial    in-
surance activities,   to be proprietary      in nature.




                              *   19
RECENT EFFORTS TO ESTABLISH CUSTOMARYCHARGES

       In December 1968, SSA requested advice from Travelers
as to how and when Travelers         would improve its methods of
determining      the reasonableness     of charges in paying Medi-
care claims for physicians'         services.    In January and Feb-
ruary 1969, Travelers       made proposals    to SSA and RRB that
featured    the inclusion    of charge data from Travelers'          com-
mercial insurance business into the physicians'            profiles.
Travelers     stated,  however, that this step would increase
the annual administrative        costs under the RRB contract         by
$548,000 and that only a small percentage of claims under
its commercial insurance business would be relevant              to the
Medicare program.

      Because of the additional     administrative      costs in-
volved and because there was no assurance that the volume
and nature of Travelers'     commercial-charge      data would en-
able Travelers    to develop physicians'      customary charges on
a nationwide    basis for the vast majority       of medical and
surgical   procedures furnished   to Medicare beneficiaries,
SSA did not approve Travelers'      proposal,

        In April 1969, however, SSA approved an alternate              pro-
posal by Travelers         under which it would develop more sophis-
ticated    profiles     of the physicians'     charges applicable      to
RRB-related      claims to show a specific       amount--rather     than a
listing    of a physician's        previous charges--which     would rep-
resent the customary charge of a physician             for a specific
medical or surgical         procedure.     In accordance with guide-
lines approved by SSA in July 1969, Travelers               would need
10 or more prior charges made by a physician              to establish
the physician's        customary charge for each medical,        X-ray,
or laboratory       procedure and five or more charges to estab-
lish each physician's          customary charge for each surgical
procedure,

        Although this proposal was approved, in a letter      to
RRB dated September 29, 1969, SSA pointed out that it did
not believe that this or any other methodology could effec-
tively     bring meaningful    results  and that the factor of in-
sufficient      volume of prior charge data would continue to be
the primary obstacle        in properly  developing customary
charges.

                                     20
                  c




       In December 1969, Travelers   advised SSA and RRB that
revised physicians'   profiles   had been developed and used in
processing RRB-related Medicare claims from September 1,
1969.

         We inquired   into the methods used by Travelers        in de-
veloping these revised profiles         and reviewed their useful-
ness in determining        customary charges for 100 claims paid
in March 1970 at each of four Travelers           field offices,     in-
cluding three field        offices  we had previously   visited    in
1968. We found that the contents of the revised profiles
were essentially       a rerun of 1968 charge data and, although
Travelers     had produced profiles     in a more readable format,
they were of little        more use, if any, than the profiles
initially      developed in July 1967 because the basic problem
of insufficient       volume of data still    existed,

        Included in the 400 claims reviewed by us were 719 dif-
ferent physician/procedure              combinations     (i.e.,    one physi-
cian charging one or more beneficiaries                  for one specific
procedure represents            a physician/procedure         combination;    an-
other physician         charging one or more beneficiaries              for an-
other specific         procedure represents         another physician/proce-
dure combination).            Of the 719 different         combinations,    the
Travelers      field    offices    had customary-charge         data in the
profiles     for 113, or only about 16 percent,                 Of the physi-
cians' charges of $25,587 included in the 400 RRB-related
claims, Travelers          field   offices    were able to compare charges
of only $2,491 to the physicians'               customary charge profiles,
or only about 10 percent of the charges,                     Our findings   at
each of the four Travelers              field  offices     are summarized in
the following        table.
                                                   Number of                                      Amount of
                                                 combinations                                      charges
                                    Number of       for which                         Total       compared
     Travelers        Number of    physician/       customary        Percent       amowt     of     with        Percent
          field         claims      procedure    charges      were        of     physicians’      customary          of
      --office        reviewed    combinations      available         total         charges        charaes       -total

            A             100           153                11              7.2      .s 5,638       $      527       9.4
            B             100           182                17                          8,590              335       3.9
            C             100           242                34           12:            6,925              614       a.9
            D            -100          -142               51            35:9           4.434           1,015       22.9

                         2             2                G              u            $25.587        $a              z




                                                                21
       In summary, for the vast majority     of medical and sur-
gical services,   Travelers   had not been in a position     to
comply with SSA regulations     for developing customary charges
because (1) there was not enough data on physicians'         charges
relating   solely to RRB-related beneficiaries      from which
customary charges could be determined,       (2) there was no as-
surance that the volume and nature of physicians'        charge
data applicable   to Travelers'    commercial health insurance
programs would enable the carrier      to determine customary
charges for the services provided to Medicare beneficiaries,
and (3) there had been little      exchange of customary-charge
data with SSA carriers.




                                22
TRAVELERS' METHODFOR MAKING
PREVAILING-CHARGE DETERMINATIONS

        As discussed on page 7, SSA regulations             provide that,
in establishing      the upper limits        of prevailing     charges in a
locality     for specific    medical services,        the carrier    should
use the average (arithmetic          mean> of the physicians'          CUS-
tomary charges for each service plus one standard deviation
above the mean. Because Travelers               did not have adequate
customary-charge       data applicable       to its RRB business,       it
did not initially       establish    its prevailing       charges (fee lim-
 itations)     by the method prescribed         by SSA but used an al-
ternate method.        The resulting      fee limitations      were the
primary control      used by Travelers         for determining     reason-
able charges for RRB-related           claims.      .

        The alternate    method used by Travelers       featured  the
use of the Ca1 i f ornia relative-value        studies (CRVS). CRVS,
which was initially        developed in 1956 by the California
Medical Association,        has been periodically     updated.    Essen-
tially,    CRVS consist     of five separate sections or studies
(medicine,     anesthesia,    surgery,  radiology,    and laboratory)
and show within       each section the relative      value of one ser-
vice or procedure to another.

       For example, in the surgery section,       CRVS assigns a
value of 40 units to an appendectomy and 80 units to a cat-
aract operation.    This is another way of saying that a phy-
sician's   fee for a cataract   operation     should be twice as
much as his fee for an appendectomy.         Under Travelers'     sys-
tem, for a given locality     a fixed-dollar     conversion   value
per unit was established.      For example, if a $6 conversion
value was established,     the prevailing    charge for these sur-
gical procedures would be computed as follows:           appendectomy,
40 units x $6 = $240; cataract      operation,     80 units x $6 =
$480.

       From the inception     of the Medicare program in July
1966, CRVS have been used by all Travelers         field   offices    as
the principal     basis for making reasonable-charge       determina-
tions for RRB-related      claims; however, the fixed-dollar
conversion    value varied among field     offices   to reflect    the
differences    in the prevailing    charges in each locality.


                                    23
For the 11 field    offices  visited by us in 1968, the unit
conversion value    ranged from $5 to $7.50.

       Travelers,   concurrently    with implementing     the revised
customary-charge      profiles   in September 1969, also developed
fee limitations      in accordance with the SSA-prescribed        cri-
teria.     We noted, however, that SSA had authorized         Travelers
to use a single charge by a physician          as a customary charge
for the purpose of developing the revised prevailing
charges.      Because the revised prevailing       charges were gen-
erally    higher than the fee limitations       then in effect    which
were based on the CRVS factors,         SSA did not authorize     Trav-
elers to use these new fee limitations          because of SSA's
policy that carriers        were to use fee limitations,     in effect
in February 1969, through June 1970.




                                   24
                              CHARTER 5

                 COMPARISONOF REASONABLE-CHARGE

                           DETERMINATIONS

                         MADE BY TRAVELERS

                         AND SSA CARRIERS

       The SSA delegation    of authority,     which gave RRB the
authority   to contract   with carriers      to process the Medicare
part B claims of railroad      employees     and RRB annuitants,  pro-
vides that:

      "The Railroad   Retirement   Board shall take such
       action as may be necessary to assure that pay-
       ment made for services     by the *** [carriers]
        it selects will   conform as closely   as possible
       to the payments made for comparable services
        in the same locality    by any *** [carriers]
       acting for the Social Security      Administration."

       The purpose of this provision     was to rerduce disparities
between reasonable-charge    determinations      for similar  ser-
vices furnished   by the same physicians       by the two carriers
operating   in the same geographical     area.

        We noted that the differences      between charges allowed
or allowable     in the same geographical      areas by Travelers
and by the SSA carriers       during 1968 and in 1970 increased
partially     because the SSA carriers     began screening claims
against the physicians'       customary charges.       The differences
between charges allowed by Travelers          and by the SSA carriers
became larger      because the SSA carriers     were making signifi-
cantly larger      reductions  in physicians'     allowable    charges.
Had Travelers      reduced allowable   charges at the same rate as
the SSA carriers,       the benefit  payments applicable      to RRB-
related    claims would'have     been about $2.9 million      lower in
fiscal    year 1970.

      Our comparison in 1968 of charges allowed at the 11
Travelers  field  offices with charges allowed or allowable


                                   25
by the seven SSA carriers     operating    in the same areas
showed some inconsistencies      at almost every office.       The
potential   for inconsistent   reasonable-charge     determinations
between Travelers     and the SSA carriers    appeared to be great-
est at those few locations     where the SSA carkers       at that
time were screening Medicare claims against both the physi-
cians' customary charges and the fee limitations.           As dis-
cussed in chapter 4, Travelers       had not made such customary-
charge determinations     nor does it appear that it is in a
position  to do so.

COMPARISONOF REASONABLE-CHARGE
DETERMINATIONS DURING 1968

        In the areas served by two of the 11 Travelers     field
offices,     we noted that, at the time of our visits    in 1968,
the two SSA carriers       serving the same areas were screening
Medicare claims against the physicians'        customary charges
and the fee limitations.

        In areas served by the remaining nine Travelers          field
offices,     we noted that, at the time of our 1968 field          re-
views,    the  five  SSA carriers   serving  the  same  areas   were   not
screening Medicare claims against the physicians'            customary
charges.      The five SSA carriers     were reviewing    Medicare
claims in essentially      the same manner as Travelers--by          com-
paring the amounts charged by the physicians           with overall
fee limitations.

        Our review indicated,    however, that the SSA carriers'
difficulties     in developing customary-charge         screens involved
problems which appeared susceptible        of solution,        such as
(1) a high incidence of errors in recording             physicians'
charges, which resulted       in the accumulation       of unreliable
data that the carrier      was reluctant   to use (2) the limita-
tions in carriers'     data-processing    capabilities,        and
(3) the failure     to use customary-charge     data that had been
developed.

      In establishing  prevailing     charges during 1968, four of
the five SSA carriers   were also using relative-value       studies
which were the same as or similar       to the CRVS used by Trav-
elers with some differences      in the unit conversion   factors.
We noted that, although there was some exchange of


                                    26
prevailing-charge    data among the nine Travelers          field offices
and the five SSA carriers,     the fee limitations         used by the
carriers    varied in many instances.

        For example, in one field      office,    Travelers    would allow
$480 for a cataract     operation     and, at another field       office   in
the same State, Travelers       would allow $400, whereas the SSA
carrier    serving generally    the same areas as these two offices
would allow‘$430.     A third Travelers        field    office  would
allow $480 for a prostate       procedure,     whereas the SSA carrier
would allow $440.      Similiar    variances     in the allowable
charges were noted at every field office             visited.

      SSA statistics,       based on a 5-percent    sample of paid
claims, showed that, during fiscal        year 1968, about 99 per-
cent of the number of charges claimed for services            furnished
to RRB-related      beneficiaries   were allowed by Travelers       with-
out being reduced and that the total         amount of reductions
amounted to about 1 percent of the total          charges.    During
the same period,      the seven SSA carriers     allowed from 99.8
percent to 93.5 percent of the number of charges without
making reductions       and the total   amount of reductions     ranged
from one tenth of 1 percent to about 4 percent of the total
charges.   The two SSA carriers       that were making customary-
charge screens in 1968 had the highest percentage            of both
the number and amounts of reductions.

      Under these circumstances,      the incidence of actual in-
consistent   payments made to the same physicians        by Travelers
and by the SSA carriers      for like services would be relatively
low because neither     Travelers   nor the SSA carriers    were mak-
ing many reductions     in the physicians'    allowable   charges
except in those few areas where the SSA carriers          were making
customary-charge    screens.




                                     27
COMPARISONOF REASON@@+CHARGE
DETERMINATIONS IN 19tB

       SSA data compiled for fiscal      year 1970 indicated        that
both the incidence      and amounts of SSA carrier       reductions      in
physicians'    allowable    charges had significantly       increased.
Although SSA@s fiscal       year 1968 data is not entirely        compa-
rable to the data compiled for fiscal         year 1970, our analy-
sis indicated     that the rate of reductions       in amounts al-
lowed for physicians'       charges had more than doubled and
that the Travelers'      rate of reductions     for RRB-related
claims was much lower than the national           average for the SSA
carriers.

      As shown in the following       table,  the national average
of reductions     by all carriers   in the charges allowed for
physicians'   services was $2.94 a claim more than those re-
ported by Travelers      for the quarters ended September 30 and
December 31, 1969, and $2.96 and $3.09 more than those re-
ported by Travelers      for the quarters    ended March 31 and
June 30, 1970, respectively.       Also the number of claims re-
duced by Travelers      was much lower than the national    average
for all carriers.
                                                     Reductions in allowable physicians'
                                                             charges as a result of
                                                       reasonable-charge    determinat&ons
                                                                  Average  for
                                                   Average        RRB-related
                                                   for all     claims processed
                                                   carriers       by Travelers      Difference
  Average reduction per allowed claim (note a>:
      Quarter ended September 30, 1969               $4.38            $1.44            $2.94
          0       1, December 31, 1969                4.83             1.89             2.94
          II      If March 31, 1970                   5.01             2.05             2.96
          II      II June 30, 1970                    5.77             2.68             3.09
  Percentage of allowed claims reduced:
      Quarter ended September 30, 1969               25.6              6.0             19.6
          II      II December 31, 1969               28.7             10.2             18.5
          8,      ,I March 31, 1970                  32.3             12.7             19.6
          II      II June 30, 1970                   35.3             14.0             21.3
  'An allowed claim represents a claim    submitted on an SSA Form 1490 which was either
   .paid or applied toward the $50 deductible payable by the beneficiary.     (See p. 6.1
    The SSA Form 1490 is the form used to claim part B benefit payments for physicians'
    services when the physician has not made arrangements with a hospital or extended-
    care facility  to bill Medicare on his behalf.




                                             28
       As shown above, there was almost a $3 difference               be-
tween the reductions         per allowed claim made by Travelers
under its contract        with RRB.and the national        average of re-
ductions for all carriers.           Because Travelers      processed
about 1.3 million       allowed claims in fiscal        year 1970, the
$3 a claim difference         in reductions    amounts to about
$3.9 million     for that year.       After subtracting      the portion
of charges payable by the beneficiaries             for deductibles      and
coinsurance     (about 27 percent of the allowed charges for
paid claims),      the difference     represents    about $2.9 million
in benefit     payments.1       For example, if Travelers       had
achieved the same rate of reductions             in allowable    charges
for physicians'       services    on a nationwide     basis as the SSA
carriers,    the benefit      payments for RRB-related       benefi-
ciaries   would have been about $2.9 million            lower in fiscal
year 1970.

      Although there may be a number of reasons for the dif-
ference between Travelers     and the SSA carriers       in the re-
ductions in allowable    physicians'    charges such as lower
physicians*   charges for RRB-related     claims,   our analysis    of
selected payments showed that the difference          were actually
caused by variances   in the amounts determined as reasonable
charges and that Travelers      made higher benefit      payments
than the SSA carriers    for like services     involving    the same
physicians.

ANALYSIS OF VARIATIONS IN PHYSICIANS' CHARGES
ALLOWEDBY TRAVELERSAND BY THE SSA CARRIERS

      To obtain information    on the reason for the differences
between the reductions     per allowed claim made by Travelers
and the national   averages, we compared the amounts Travelers


1Although it is unlikely,
                               this estimate may be overstated
 by as much as 12 percent,       because available  SSA statistics
 relating  to the beneficiaries8       share of the allowed charges
 were based on paid claims and did not include those claims
 where the allowed charges were applied wholly toward the
 $50 deductible.




                                     29
allowed for 362 claims which were systematically    selected
at four field offices  to the amounts the SSA carriers     would
have allowed as reasonable charges for these c1aims.l

       As shown by the following      table, in each of the four
field    offices,    Travelers was allowing  from $2 to $3.31 a
claim (overall       average of $2.67 a claim) more than the SSA
carriers      for like medical and surgical    procedures,
                                                                                                     Difference       between
                                                                                                     charges     allowed     by
                                                          Physicians’        charges                   Travelers      and the
                                        Physicians’          allowable       baaed                   charges     allowable
                                           charges           on SSA carriers’                        by the SSA carriers
      Travelers        Number of         allowed    by     reasonable-charge            Travelers’                                  Average
          field          claims          Travelers                 criteria             allowances                        Net     difference
        office         reviewed            (note a)                 (note a)           Higher      Lower          difference      per claim

           BA               100
                            100           $ 5,467                  $ 5,227             s      295   $ 55               $240         $2.40
            C               100             8,380                    8,049                    405     74                 331         3.31
           D                 62             6,606                    6,334                    280       8                272         2.72
                           -                2,173                    2,049                 -- 12s       1               -124         2.00
           Total           z              $u                       $M                  SW           SE                 $Z           SW
      a
          Amounts   adjusted      to eliminate      any   differences        due 20 disallowances           for      noncovered   services.




          As previously                          stated,  in making benefit  payments,                                                         a
carrier      is required                          to consider the prevailing   charge,                                                         which


1One Travelers     field   office     which we visited     was processing
 nearly all RR&related          claims for two States, as well as
 all RRB-related      claims for annuitants         who were members of
 the Union Pacific       Railroad     Employees Hospital      Association
 regardless    of the State in which the services were ren-
 dered.     Of the 100 claims selected for review, 38 were for
 annuitants    who were members of the Association              in eight
 other States.       Because    there   were  eight   States    involved   we
 did not compare any charges allowed by Travelers                  with the
 amounts that the SSA carriers           would have allowed for these
 38 claims,      This accounts for the difference            between the
 400 claims selected for review (see pa 21) and the 362
 claims for which comparisons were made with the SSA carri-
 ers 1 reasonable-charge        determinations.




                                                                          30
  sets the upper limit,     and the customary charge, which is
  the amount an individual     physician    usually  charges.   Having
  considered these factors,     the carrier    should allow the
  lesser of the two but no more than the actual charge.             Be-
  cause the prevailing    charge is the upper limit,       we believe
  that Travelers,    in having to rely only on this factor        as a
  guide in making benefit     payments more frequently      than the
  SSA carriers    have to rely only on this factor,       would tend
  to allow higher charges than the SSA carriers.

          This was borne out by our review.             For example, at
  Travelers     field   office    A, of the $240 in higher charges al-
  lowed by Travelers,          $218 pertained    to 11 claims for which
  the SSA carrier      had the physicians'         customary charge for 14
  procedures,      whereas Travelers       did not.     Likewise,   at field
  office    B, of the net difference          of $331 in higher charges
  allowed by Travelers,          $306 pertained     to 12 claims for which
  the SSA carrier      had the physicians?         customary charges for
  14 procedures,      of which 12 were less than Travelers'             pre-
  vailing     charge and two were greater.            Travelers   had a cus-
  tomary charge for one of the 14 procedures but did not ap-
  ply it because it was higher than the prevailing                 charge.

         In commenting on our analysis of the variations              in
  physicians'     charges allowed by Travelers        and by the SSA
  carriers,    RRB and Travelers     stated that the analysis         in-
  volved a small sample of claims which was not necessarily
  representative      of the whole distribution       of charges and
  services    for all SSA carriers      and Travelers,       (See apps. III
- and IV.)      Travelers    also suggested that our analysis         in-
  cluded a built-in       bias because the SSA carriers         knew the
  purpose of the analysis        and knew that their      determinations
  of allowable      physicians'   charges  would   be   subject   to our
  review.

        We acknowledge that the sample of claims we selected
  for analysis    was relatively     small and may not necessarily
  be representative     on a national     basis.     For example, for
  the quarter ended March 31, 1970, the average reduction             of
  an allowed claim     for all carriers     was $5.01 whereas the av-
  erage reduction     of an allowed claim for the four SSA carri-
  ers was $3.56, which suggests that, had we selected four
  other SSA carriers,      the variations     noted in our sample may
  have been even greater.        Nevertheless     the $3 difference   for

                                      31
fiscal   year 1970 between the reductions           of an allowed claim
made by Travelers      and the national       average of such reduc-
tions was not based on a sample.            This data was based on
reports   submitted    to SSA by the SSA carriers           and by Travel-
ers and related     to total    claims processed during the year,,
The purpose of our analysis         of selected     claims at the four
Travelers    field  offices   was to ascertain        a plausible     expla-
nation for this difference.          For the field      offices    visited,
we found that the differences         in reductions      to allowable
charges was due to Travelers'         inability     to make customary-
charge determinations       which, we believe,       has resulted       in
higher benefit     payments for RRB-related         beneficiaries.

      Also, we do not believe that our analysis was biased,
because, as explained previously,       the variations    in physi-
cians' charges allowed by Travelers        and by the SSA carriers
were principally    due to the fact that the SSA carriers          had
determined the physicianss      customary charges for specific
medical services whereas Travelers       had not.     We verified
that either    the SSA carriers   had the customary--charge       data
or they did not have it; and if they did not have it, there
was not much they could do to develop the data during the
brief  periods of our visits,

      The RRB and Travelers      also pointed out that effective
July 1, 1970, SSA had included in its contracts            with the
SSA carriers   a specific    provision    for the transfer     of
customary-   and prevailing-charge       data between the SSA carri-
ers and the RRB carrier.        According to RRB and Travelers,
this action should minimize the variances          in the physicians'
charges allowed by Travelers        and by the SSA carriers.

       This contract    provision     had not been implemented at
the time of our field       reviews,    and therefore    we were not in
        .
a posltion   to evaluate its effectiveness          nor to determine
whether any increased administrative           costs would result--
particularly    in the voluminous exchange of customary-charge
data involving     specific    physicians.     Nevertheless    it seems
to us that a requirement        to exchange detailed      customary-
charge data between the SSA carriers           and the RRB carrier    is
inconsistent    with SSAOs March 1970 proposal          (see ch. 7) to
use the Travelers-RRB       arrangement as a basis for determining
reasonable charges using only prevailing            charges (fee limi-
tations) a

                                      32
                                CHAPTER6

            POTENTIAL FOR SAVINGS IN ADMINISTRATIVE

                  COSTS BY USING SSA CARRIERS TO

               PROCESSRRB-RELATED MEDICARE CLAIMS

        During fiscal   year 1969, Travelers       incurred     adminis-
trative     costs of about $4.5 million       under its contract         with
RRB as the nationwide       carrier   for railroad     employees and RRB
annuitants      under part B of the Medicare program.            During the
same period,      the 50 SSA carriers     incurred    administrative
costs of about $113.9 million         under their     contracts     with
SSA.

       The carriers'     administrative     costs are paid from the
supplementary medical insurance trust fund which is financed
by the premiums paid by part B beneficiaries               and by matching
funds appropriated       by the Congress.        Because the portion     of
the program administered        by Travelers      at each of its 125
field    offices    under its contract     with RRB is relatively
small as compared with the portion            being administered     by
each of the 50 SSA carriers,           we believe that it would be
feasible      to give the SSA carriers      responsibility      for pro-
cessing the Medicare part B claims presently               being processed
by Travelers.

       On the basis of estimates       furnished     by four SSA car-
riers,   we estimate that the consolidation           of these claims-
processing   activities      on a nationwide     basis would decrease
the overall    administrative     costs of the Medicare program ky
as much as $2.8 million        annually because of the economies
that are present in the larger claims-processing              operations
of the SSA carriers.


1
 These economies refer       to factors that reduce the average
 unit-processing costs       as the number of units processed
 increases.




                                    33
SMALL NUMBEROF RRB-REiXI'ED
ENROLLEESAND CLAIMS

        SSA statistics      show that, as of January 1, 1969, there
were about 18,872,OOO pers?ns enrolled             in th-Yesupplementary
medical insurance program;            of this number, 810,000, or
about 4.3 percent,        were railroad     employees or RRB annuitants.
The percentage        of railroad   employees and RRB annuitants       en-
rolled    in part B in each State to the total           number of per-
sons enrolled       in the part B program in the State ranged from
a high of 10.3 percent in Wyoming to a low of about 1 per-
cent in Rhode Island.           The largest   number of RRB-related
beneficiaries       was in Pennsylvania,      which had about 72,000
enrollees.      A comparison of the number of RRB-related bene-
ficiaries     to the total      number of persons enrolled      for each
of the 50 States and other areas as of January 1, 1969, is
shown in appendix I.

       SSA statistics   show also that, during fiscal       year 1969,
about 31.2 million     Medicare payment records* were processed
for payment, of which about 1.2 million,        or about 3.8 per-
cent, were applicable      to RRB-related  claims processed by
Travelers.      Thus, on the basis of the number of railroad
employees and RRB annuitants      enrolled   in part B of the Medi-
care program and the number of payment records processed,
the portion    of the program administered     by Travelers    nation-
wide is small in relation      to the size of the total Medicare
part 3 program.


1Of the 18.9 million     persons enrolled    in the supplementary
 medical insurance program,about       270,000 persons are members
 of group practice    prepayment plans which deal directly       with
 SSA and which are reimbursed for their        services  to Medicare
 beneficiaries   on the basis of reasonable costs.
2
 A payment record is a standard work unit measure used by
  SSA and excludes claims which do not result    in benefit   pay-
 ments, such as claims which are applied against the $50 de-
  ductible.   Also, when a claim submitted by a beneficiary
  involves more than one physician  or supplier,   it results
  in more than one payment record.



                                   34
DESCRIPTION OF ADMINISTRATIVE COSTS
AND RRB'S AND TRAVEL,ERS' VIIZWS AS TO
THE CONSOLIDATION OF CLAIMS-PROCESSING
ACTIVITIES

        The administrative          costs incurred      by Travelers        in making
benefit     payments under its contract            with RRB were for the
salaries,       payroll     taxes, and employee benefits            of field       of-
fice employees who examined Medicare claims and for related
overhead expenses in the 125 field                offices.        Overall,      the
field    office     expenses represented        about 64 percent of Trav-
elers'    administrative         costs for fiscal       year 1969.         The bal-
ance of Travelers'            administrative    costs    was    for  other      ex-
penses directly          related    to the carrier's       functions       under its
contract      with RRB and indirect          expenses, such as home office
general and administrative              expenses, which were allocated                 to
Travelers'       Medicare and non-Medicare           activities      on the basis
of direct       labor costs.        From the inception        of the program on
July 1, 1966, through June 30, 1971, the administrative
costs incurred          by Travelers      under its RRB contract           will
amount to about $22 million.

       Because these administrative       costs are similar     to those
incurred   by the SSA carriers     operating    in the same geographi-
cal areas, we expressed the opinion in a draft of this re-
port that the consolidation       of claims-processing      activities
would provide a potential      for savings in administrative
costs *

       In earlier    comments on our draft report,    RRB and Trav-
elers stated that our conclusion        was not supported and that
such consolidation      would result  in increased   administrative
costs.    Travelers'    and RRB's position   was based on the fol-
lowing considerations.

       1. According to RRB and Travelers,           all cost measurement
          indicators     showed that, under its contract        with RRB,
          Travelers     was operating    below the average cost of
          all the SSA carriers.         Travelers    stated that, for
          the first     9 months of fiscal      year 1969, its ratio   of
          administrative     costs to benefits       paid on behalf of
          RRB-related     beneficiaries    was 7.38 percent;     the




                                           35
           average cost for each payment record processed was
           $3.49 whereas the national    averages were 7.79 per-
           cent and $3.53, respectively.

Although Travelers'        administrative     cost exper'ience compares
favorably      with other carriers,       we believe that Travelers'
position     is not related     to the central      issue, which is
whether administrative        costs could be reduced if the SSA
carriers     assumed the Travelers'        RRB-related     workload.    As
discussed in further        detail   in this chapter,       we believe that
the annual incremental        costs 1 which would be incurred         by the
SSA carriers       would be significantly      less than the annual ad-
ministrative       costs of about $4.5 million         incurred   by Trav-
elers.

      2. RRB and Travelers     stated that certain       costs incurred
         for the total    Travelers ' Medicare involvement           were
         shared by SSA and RRB on the basis of number of pay-
         ment records processed and that these costs would
         not be eliminated     by transferring     the RRB part B
         program to SSA carriers        but would result     in the
         costs ' being absorbed by the Travelers'          part B opera-
         tion.   Examples of these costs identified            by Trav-
         elers were programming and systems efforts             in estab-
         lishing  physicians'     profiles    and developing      programs
         to produce statistics       on physicians    receiving     Medi-
         care payments of $25,000 or more a year.

       We agree that some of the costs incurred        by Travelers
would be transferred    to the SSA contract    under which it acts
as the SSA carrier    in three States if the RRB contract          was
terminated.    Although the amount of such transferable          costs
is not susceptible    to precise determination      because of the
operating   changes that could result     from limiting     Travelers'
Medicare part B activities      to the three States, we estimate--
on the basis of the items of cost identified          by Travelers


1 Incremental costs are defined as the changes in aggregate
 cost that accompany the addition   or subtraction     of a unit
 of output.   As applied to claims processing,     this means that
 the increase in the total   costs of each carrier     to process
 RRB-related  claims would be the incremental     cost to the pro-
 gram.

                                     36
during our field review --that these transferable  costs
amounted to about $54,000 during fiscal   year 1969.

       We also identified     other items of cost which were rela-
tively   fixed,   such as Medicare administration       and home office
claim administration,       and which would probably be allocated
to the SSA contract       in greater    amounts if there were de-
creases in the volume of RRB-related          claims processed.     We
estimate that such costs identified          by us would amount to
about $28,500 a year.        Therefore,    our analysis  of the allo-
cation of administrative        costs between RRB and SSA indicated
that the total     amount which would have been absorbed by SSA
for fiscal    year 1969, if the RRB contract        had been termi-
nated, would have been only about $82,500, or 7 cents a pay-
ment record.

      3. RRB and Travelers       indicated      that, assuming consis-
         tent, equitable,       and proper accounting        practices      for
         all carriers,      savings in indirect         cost items would
         not be realized       by transferring       the claims-processing
         function    to the SSA area carriers.            According to
         Travelers,      the cost of such activities         as accounting,
         internal    auditing,     office    services,    and general and
         administrative      costs are developed as a relationship
         to direct     labor costs; and, if the direct           labor
         costs were transferred           to the SSA carriers,      it would
         follow that these carriers           would account for and
         claim the related       indirect      costs, therefore     result-
         ing in no savings.
       On the basis of our discussions         with officials      of four
SSA carriers       and our analysis of their methods of allocating
indirect     costs to the SSA contracts,       we believe that RRB's
and Travelers'        assumption that indirect     costs were consis-
tently     developed as a relationship       to direct   labor costs is
incorrect;      therefore,    it does not follow that indirect         costs
would always be increased if the SSA carriers'              direct   labor
costs were increased.           We found that two of the four SSA




                                      37
carriers      did not use direct labor costs as a basis for dis-
tributinglindirect      costs such as general and administrative
expenses.

        One of the two carriers     had separate fie'ld offices   for
its part B operations,      each of which accounted for payroll
and administrative      expenses directly    in expense accounts
used solely for Medicare.        When personnel of the home office
performed support operations        for Medicare, the time was
charged directly      to the SSA contract    from daily time reports.
The other SSA carrier,      depending upon the type of indirect
cost involved,     developed a variety    of allocation   ratios.
Officials    at both of these SSA carriers       advised us that,   if
the RRB-related     claims workload were taken over by them, in-
creases would not be made in the amounts of generai and ad-
ministrative     expenses allocated    to the SSA contract.


1
 Our comparative    analysis covered only four SSA carriers
 making benefit   payments in nine states.     Data on two addi-
 tional  carriers   for which we have this information   also
 showed that direct     labor was not the only basis used to al-
 locate overhead expenses.       Some of these expenses were
 charged directly     to Medicare whereas others were allocated
 on various bases such as square footage and time studies.




                                  38
ANALYSIS OF ESTIMATES FURNISHED
BY SSA CARRIERS SHOWSPOTENTIAL FOR SAVINGS
BY CONSOLIDATING ACTIVITIES

      TO obtain additional      information  as to the potential
for  savings  in administrative      costs by consolidating   claims-
processing      activities,      we requested four SSA carriers        (two
commercial insurance companies and two Blue Shield organi-
zations)    to furnish        us with estimates     of the incremental
costs that each would incur if they were to process the RRB-
related   claims in addition           to their other Medicare claims.
We examined these estimates              and tested their validity     by
verifying     the workload        statistics     of claims examiners used
in the estimates         and by comparing the estimated        costs with
budgeted amounts and actual costs for previous years.                    These
four SSA carriers          processed part B claims in nine States and,
during fiscal       year 1969, made about 9 percent of the total
benefit   payments under part B of the Medicare program.

       Cur analysis  of the data furnished    by these four SSA
carriers   showed that they could process the additional       RRB-
related workload in the nine States at an incremental         cost
ranging from $0.35 to $1.87 a payment record,        or an overall
average of $1.30 a payment record.       These incremental    costs
ranged from $3.96 to $1.64 less a payment record than the
costs incurred by Travelers     during fiscal   year 1969 in the
nine States.     The overall average of estimated     savings was
about $2.40 a payment record.

      Therefore,. considering     the incremental       costs that would
be incurred,     and the Travelers'     administrative      costs which
would be absorbed by SSA (see p. 371, the four SSA carriers
could process the RRB-related        claims for their nine States
for about $321,600 less than Travelers.              The results  of our
analysis   are presented below by carrier          and by State.




                                     39
                                        Amounts        per   unit         (payment         record)                           Estimated
                                                                                     TraXWl&                                 number of
                                                                                     cost to be                            RRB-related
                          Travelers’                                                  absorbed                             units       to be
                            cost for             SSA                                     under               Net             processed           Estimated
                             fiscal        carriers’                                   its SSA            savings              during              savings
        SSA                    year        incrcmen-            Cross                  contract           (~01.   5        fiscal        year      6201. 7
    carrier      State          1969                                                  (note      6)     - col.    6)              1971           x col.    8)
    -m-o                       (31                                                     0                   0                     -m              0

             I     1        $3.95                $1.87              $2.08              so.07               $2.01               33,000           $ 66,330
          II       2          3.08                0.57                2.51                 .07              2.44                8,300             20,252
       III         3         4.18                 1.65               2.53                  -07              2.46               19,500             47,970
       III         4          3.77                1.83                1.94                 .07              1.87               10,800             20,196
       III         2          3.20                 1.56               1.64                 -07              1.57               19,900             31,243
          IV                  3.08                   .48              2.60                 .07              2.53                6,700             16,951
          IV        7        4.31                    .35             3.96                  .07              3.89                8,400             32,676
          IV        !         3.59                   .80              2.79                 .07              2.72               27.800             75,616
          IV                  3.32                   .37              2.95                 .07              2.88                3,600             10,368

                            $3.70                Q&J                $2&                S&                                     138,000           $321,602
                             -

     ‘See page 37 for      an explanation           of Travelers’               administrative           costs     which     would      be absorbed
       under Travelers’      contract     with      SSA to make              part   E benefit         payments      in     three     States.




       If the estimates    of incremental     costs furnished     by the
four carriers      paying part B benefits     in nine States are rep-
resentative     of the incremental    costs that would be incurred
by other SSA carriers9      we estimate    that, on a nationwide
basis, the SSA carriers       could process RRB-related       claims for
as much as $2.8 million       a year less than Travelers.         This
potential     savings represents    about 2.4 percent of the total
fiscal    year 1969 administrative     costs incurred     by carriers
under part B.




                                                                              40
FACTORSSUPPORTINGTHE SSA CARRIERS'
ESTIMATES AND THE POTENTIAL FOR SAVINGS

       We believe that there       are several factors which explain
why the carriers'    estimates      of their incremental     costs to
process RRB-related claims         were substantially    less than the
costs incurred by Travelers         to process the claims.       These
factors,   including  Travelers'      comments thereon (see app. IV),
are discussed below.

Elimination     of Travelers   field
offices    and reductions    in related
claims
..        processing   personnel

       In evaluating        the SSA carriers'      estimates    of the incre-
mental costs to process RRB-related claims, we analyzed the
major elements of administrative              costs incurred     by Travelers
and related       these costs to the incremental           costs that would
be incurred by the SSA carriers             if they assumed the in-
creases in workload.           The single largest       factor   contributing
to the potential         administrative    cost savings is the capabil-
ity of the SSA carriers           to assume the additional        workload
with little       or no increase in claims-processing            personnel
and no overall        increases in supervisory         personnel or office
space.      This capacity exists,        in our opinion,       because of the
economies which are present in a going concern capable of
processing      a large volume of claims as compared with the
Travelers     field    offices    which process relatively        smaller
volumes, ranging from under 1,000 to 60,000 claims during
fiscal   year 1969,

      The additional  volume of claims which would be assumed
by the four SSA carriers     represents  only a relatively      small
part of their projected     monthly workload for fiscal      year
1971. The following     table shows the relationship       of the
RRB-related   claims which would be assumed by the SSA carri-
ers to their projected     workload on annual and monthly bases.




                                     41
                                            Estimated         payment records
                                                     to be processed
                                              durinp       fiscal     year 1971
                                 SSA                         Travelers'
                            carriers'                        projected
                            projected               workload         for RRB- Percent     iacrease
                            workload                   related      claims      in SSA carriers
       Carrier          Yearly        Monthly          Yearly       Monthly         workload

               I      1,576,OOO      131,300          33,000     2,800                  2.09
            II           100,000       8,300           8,300        700                 8.30
          III            410,500      34,200          19,500     1,600                  4.75
          III            369,400      30,800          10,800        900                 2.92
          111            373,300      31,100          19,900     1,700                  5.33
            IV           116,000       9,700           6,700        600                 5.78
            IV           126,900      10,600           8,400        700                 6.62
            IV           558,700      46,600          27,800     2,300                  4.98
            IV            33.400       2.800           3.600        300                10.78

       Total          3.664.200      ~305,iOO      ~138.000    -11.600                  3.77



      The additional   workloads in the nine States which
would be assumed by these four carriers         averaged 3.77 per-
cent of their projected     fiscal    year 1971 workload,   which is
comparable to the nationwide       relationship   of RRB-related
claims to total    Medicare part B claims of 3.8 percent as
discussed on page 34.

       This increased workload does not exceed the normal
fluctuations       of the four SSA carriers'         monthly workloads.
For example, the additional            projected    workload for carrier        I
would average only 2,800 claims a month, yet the fluctuation
in the regular workload of this carrier                varied from 4,777
fewer payment records processed in February than in January
1970 to 31,040 more payment records processed in March than
in February 1970.          This latter     monthly fluctuation         is about
the same as the yearly workload for RRB-related                   claims to
be processed by the corresponding              Travelers    field    office.
For the other three SSA carriers,              there were smaller but
still    significant     fluctuations      in workloads.

       According to one of the four SSA carriers,         the rela-
tively   small increases     in the number of payment records to
be processed could easily be absorbed by the existing            work
forces.     In some instances,     however, the SSA carriers      in-
cluded in their    estimates    the costs for the additional
claims examiners that would be required          on the basis of the
number of claims processed by each examiner,            In no in-
stance, however, did an SSA carrier         estimate that additional


                                                 42
supervisory   or administrative     personnel would be required
or that additional   office     space would be needed.

       In commenting on this factor,      Travelers  pointed out
that the assimilation       of the RRB-related claims by the SSA
carriers      would increase the base from which fluctuations
were determined and would not be handled within          the existing
fluctuations,      thereby increasing  the direct   and indirect
costs of the SSA carrier.

        In our opinion,    this observation    is not entirely    ger-
mane to the basic point which is that the SSA carriers'
workloads are not static         but vary from month to month.       For
example, during the 6-month period ended June 30, 1970, the
total number of claims processed by all carriers            varied by
about 6 percent to 18 percent from the previous month's ac-
tivity;     whereas, during the same 6-month period,        the ratios
of the RRB-related claims processed to all part B claims
processed ranged from about 3.1 percent to 3.8 percent,
Therefore,     it seems reasonable to us that the addition         of
the relatively       few RRB-related claims to the SSA carriers'
fluctuating      workloads would not be disruptive     to their Medi-
care claims-processing        systems.

Reductions in data processing
and general overhead costs

        Data-processing      costs and general overhead costs were
other elements of cost% where there are potential             adminis-
trative    cost savings.       We were advised by two of the four
SSA carriers1      that the incremental      computer running time
that would be required         to process RRB-related    claims would
be negligible.        Further,    although the initial   cost of a com-
puter and the system design and programming effort             may be


1One SSA carrier  was in the process of changing to a new
 data-processing   system and was reluctant       to provide us with
 other than a straight-line   projection     (i.e.,    total  costs
 divided by units of production).       Another SSA carrier       was
 in the process of finalizing     a contract    with an independent
 computer firm to handle its data-processing         function   on
 the basis of a unit price for each payment record processed,


                                   43
substantial,    an increase in the volume of claims processed,
particularly    the relatively     small volume of RRB-related
claims, would not increase the data-processing             costs.
Therefore,   it appears that certain      SSA carriers       could pro-
cess the RRB-related       claims with negligible      incremental    cost
increases.     During fiscal     year 1969,  Travelers     incurred   data-
processing   costs of about $1.1 million        to process these
claims.

      Also, as stated on page 38, two of the four SSA carri-
ers advised us that their assumption of the RRB-related
workload would not result    in any increases in the amount of
general and administrative    expenses allocated     to the SSA
contract.   For the remaining two carriers,      increases  in the
general and administrative    expenses which would be allocable
to the SSA contract   were included in their estimates.       Dur-
ing fiscal  year 1969, Travelers    charged about $313,000, in
general and administrative    expenses, to the RRB contract.

       In commenting on data-processing     costs, Travelers
stated that,    assuming average efficiency     of all carriers      and
equivalent    computer running time costs, it was difficult          for
it to see how any savings in data-processing        costs would
result   through the consolidation    of claims-processing      activ-
ities.

       According to officials      of the two SSA carriers       that had
estimated negligible      incremental     data-processing    cost in-
creases, the carriers      had relatively      high fixed costs and
were operating    their data-processing        systems at less than
optimum capacity;     therefore,    the assimilation      of the RRB-
related   claims workload would have the effect           of reducing
their unit-processing       costs.

Elimination    of
misrouted   claims

       Another problem- -which would be eliminated       if the SSA
carriers    processed RRB-related    claims--is    the SSA carriers'
receiving    and, in many instances,     processing up to the
point of payment a substantial       percentage of the RRB-related
claims,     This problem arose partially       because 285,000 RRB



                                    44
annuitantsl  are also eligible   for Medicare           benefits by vir-
tue of their  entitlement   to Social Security           cash benefits
and have SSA identification    numbers.

      These claims were generally         sent to the SSA carrier;
and, in many instances,        it was not until     the SSA carrier
queried SSA headquarters         in Baltimore,   Maryland, regarding
the eligibility      of the claimant that the carrier       found that
it was an RRB-related       claim which should be paid by Travel-
ers.   In other instances,        even though the RRB beneficiaries
had RRB identification       numbers, the claims were sent to the
SSA carrier     by mistake,    apparently    because the physicians
were accustomed to dealing with SSA carriers.

      This problem was one of the reasons why the SSA carri-
ers estimated     that little   or no increase in claims-
processing    personnel would be required     if they processed the
RRB-related    claims.     For example, personnel at one Travelers
field  office   advised us that 90 to 95 percent of its claims
were received from the SSA carrier.

        For the 21-month period ending March 31, 1970, an av-
erage of about 1,200 claims a month were misrouted                   and had
to be rerouted to the Travelers            field    office   by the SSA
carrier.      The SSA carrier     estimated      that about 25 percent
of these misrouted     claims were detected during various
stages of processing,       and the remaining 75 percent were
processed up to the point of payment.                In other words, ex-
cept for printing     and issuing the payment checks, these
claims were processed twice --once by the SSA carrier                   and
once by the Travelers       field    office.       In addition     to the du-
plicate    claims processing,      the SSA carrier         estimated    that
about 10 days elapsed before it detected that these claims
had been misrouted.

       Each of the other three SSA carriers            advised us that
it   was experiencing  similar problems with           misrouted claims


1 See footnote1  on page 11 regarding  the proposed change in
  legislation.   This problem may be alleviated   if the premi-
 ums for those beneficiaries    who are eligible  for benefits
  under both programs are collected   by RRB and RRB Medicare
  identification  cards are issued.

                                     45
but not of the same magnitude as this particular      SSA car-
rier.   In our opinion,    the high incidence of misrouted
claims does not seem to support RRB's contention      that most
of its beneficiaries    lodk to the RRB-Travelers  operation
for service   in connection with Medicare part B benefit     pay-
ments.    (See p, 12.1




                                46
                               CHAPTER7

                           COMMENTS
                           --     OF THE

        DEPARTMENTOF HEALTH, EDUCATION, AND WELFARE

                AND THE RAILROAD RETIREMENT BOARD

                        AND GAO'S EVALUATION

       In our draft report we proposed that SSA withdraw RRB's
authority    to select carriers to make part B benefit    payments
for railroad    employees and RRB annuitants  and that RRB-
related   claims be processed by the SSA carriers    that make
benefit   payments for all other Medicare part B beneficiaries
in the same general geographical    areas.

      In response to this proposal,     HEW advised us by letter
dated March 19, 1970 (see,app.     II),  that SSA was not pre-
pared to accept this proposal without considerable       additional
review of the Travelers-RRB   relationship.

       SSA acknowledged that the relatively          small number of
RRB-related    claims had posed serious obstacles           in Travelers'
development of adequate customary-charge           profiles     and that
the arrangement with Travelers        as the sole carrier         for RRB-
related    beneficiaries  had presented inherent          administrative
problems.     SSA also stated,    however, that unilateral           action
on its part to revise the delegation          of authority      to RRB
could be regarded as unwarranted        interference       with RRB ad-
ministration     and could result   in harm to RRB programs.

       As an alternative       to our proposal to consolidate     the
claims-processing      activities,    SSA stated that the Travelers-
RRB arrangement provided an excellent          opportunity  to experi-
ment, in determining       the reasonableness    of charges, with the
use of only prevailing-charge         screens on a State-by-State
basis.    According to SSA, such an experiment would give SSA
an opportunity,     within given geographical      areas, to measure




                                      47
the results   of differing  reasonable-charge                methodologies.
The experiments   would feature relative-value                 studies employ-
ing a system of conversion factors.1

       SSA stated also that these experiments        would yield in-
formation     useful to both the legislative     and executive
branches in improving the administration         of the Medicare
program.      SSA concluded that the potential     advantage in con-
ducting such experiments       evinces the merit of continuing      the
current    arrangement.     In a letter   to us, dated October 7,
1970 (see app. III),      RR3 endorsed SSA's proposal.       RRB
stated that the reasons for the delegation         of authority   were
still   valid and justified     the continuance   of the delegation.
(See pp. 11 to 13.)

        In March 1970 SSA advised us of its planned experiments,
but the details        for the proposed experimentations               had not
been defined by June 1970 and therefore                  we were unable to
fully     evaluate the SSA proposal.            Although experiments          in
the determination         of reasonable charges for physicians'                 ser-
vices may be a desirable            objective     in order to develop al-
ternatives      to the present customary-            and prevailing-charge
criteria,      we question whether the Travelers-RRB                arrangement
provides the most appropriate              vehicle for such experimenta-
tion.      SSA already has had considerable               experience    in using
only prevailing-charge           screens (fee limitations)           featuring
relative-value        studies in evaluating          the reasonableness         of
physicians'       charges.      Travelers     essentially     has   been   using
them since the inception            of the Medicare program in July
1966, and many SSA carriers              used them during the earlier
years of the program.            This approach was unsatisfactory              to
SSA, however,       and   the   carriers    were   required     to  establish
customary-charge        profiles      as a condition       for further     partic-
ipation     in the program.

      Further, because the RRB-related       portion    of the Medi-
care program represents    such a relatively       small part of the
total  program in a given geographical       area, the experiments,
even if successful,   would not necessarily        demonstrate their


1Relative     value   studies     are discussed      on page 23.



                                         48
general   acceptance by the beneficiaries     and the physicians
on a programwide basis.      We believe that,  although experimen-
tation  in determining  the reasonableness    of physicians'
charges may be desirable,     it would be more appropriate      to
conduct such experimentation     in a given geographical     area
where the general acceptance and feasibility       of the experi-
ments could be better demonstrated.

        As for the potential         savings in administrative        costs
through the consolidation           of claims-processing      activities,
SSA was of the opinion that the amount of savings that would
result    from the termination         of the RRB-Travelers      contract
had not been clearly         shown and that,      once these savings
could be reasonably estimated,             SSA would have to weigh the
cost savings against the benefits             derived from the RRB-
Travelers      contractual     arrangement and the possibilities            that
this arrangement offered           for creative    experimentation.         SSA
stated that this left it in a position              of being unable to
ascribe sufficient         weight to the administrative         costs factor
to tilt     the scale in favor of our proposal.

       Because SSA was unable to ascribe sufficient              weight to
this factor without       an estimate of the savings involved,           we
obtained additional       information     showing the potential       savings
in administrative      costs from four SSA carriers          that were
making part B benefit        payments in nine States.         As discussed
in chapter 6, our analysis of the estimates              of incremental
costs furnished     by these SSA carriers         showed that they could
process the RRB-related         claims at a cost which was about
$321,600 a year less than the cost incurred              by Travelers     in
these nine States.        Also,    if the  estimates    of incremental
costs furnished     by the four SSA carriers         are representative
of the incremental       costs that would be incurred          by other SSA
carriers,    we estimate     that, on a nationwide       basis, the poten-
tial   for savings in administrative          costs by consolidating
claims-processing      activities     could amount to as much as
$2.8 million     a year.

       SSA also stated that,    as an alternative       way to achieve
savings in administrative      costs, certain     efficiencies       could
be realized    by reducing the number of Travelers          field    offices
involved in processing     the RRB-related     claims.      We inquired
into this alternative     at the Travelers     home office       and
learned that Travelers     had proposed to reduce the number of


                                       49
its field  offices   processing   RRB-related  claims from 125 to
63. A Travelers'     study indicated   that there would be a cor-
responding reduction     of 71 man-years, which we estimate would
save about $352,000 annually.

      Travelers   is presently    consolidating       its field   offices
and, although we agree that there should be some savings, we
believe that this action is indicative            of the even greater
savings that could be realized       by a full      consolidation      plan
under which the SSA carriers       would assume the entire workload
for RRB-related     claims.    In our opinion,      the Travelers'
study further    supports our conclusion        that there is a poten-
tial   for administrative    costs savings by having RRB-related
claims processed by the SSA carriers          that make benefit        pay-
ments for all other Medicare part B beneficiaries               in the
same geographical      area.




                                    50
                              CHAPTER 8

          CONCLUSIONS, RECOMMENDATION,AND MATTERS

               FOR CONSIDERATION BY THE CONGRESS

CONCLUSIONS

       At the time of our field reviews in 1968 and in 1970,
Travelers     had not made, and in our opinion was not in a
position    to make, reasonable-charge     determinations    on a na-
tionwide basis in the manner prescribed         by SSA regulations
and instructions,      Our review showed that, primarily       be-
cause of the relatively      small volume of RRB-related      claims
processed by Travelers     field  offices,   Travelers    had been
unable to accumulate enough data to determine physicians'
customary charges for the vast majority         of medical services.

       The use of two separate carriers      in the same geograph-
ical area to pay part B claims has resulted           in inconsisten-
cies in making reasonable-charge       determinations      for physi-
cians'   services.  We observed   that    such  differences    had
tended to increase as the SSA carriers         improved their      sys-
tems for making reasonable-charge       determinations.

       We found that the amounts allowed by Travelers           as rea-
sonable charges for medical services for RRB-related             claims
often differed     from the amounts allowed by the SSA carriers
for comparable medical services           in the same geographical
areas.    This  situation    was    inconsistent  with the SSA dele-
gation of authority       which provides that the payments made
by Travelers    conform as closely as possible         to the payments
made by the SSA carrier        for comparable services in the same
locality.     We estimated     that,    in fiscal year 1970, Travelers
made benefit   payments which were about $2.9 million           higher
than the payments that would have been made by SSA carriers
for like medical services.

       We believe that the use of a separate carrier          to pay
RRB-related     claims, in addition   to resulting     in the lack of
uniformity    in part B benefit    payments for physicians'       ser-
vices,    also results  in additional   administrative      costs of
as much as $2.8 million     a year to the Medicare program.


                                   51
      Finally,     we believe that the primary reason for select-
ing Travelers      as the nationwide        RRB carrier       was for the
convenience of certain          beneficiaries       who had complementary
medical insurance with Travelers.               Although beneficiary        con-
venience is an important          consideration         in the administration
of any health insurance program, we noted that,                   as of
January 1, 1969, this consideration                applied to about 15 per-
cent of the RR&related           beneficiaries--about          1 percent of
the total     18.9 million      beneficiaries       enrolled    under part B.
In our opinion,        this consideration        is not of sufficient        im-
portance to offset          the economies and improved administration
that could result         from discontinuing        the use of a separate
nationwide     carrier      to pay RRB-related        claims.

        In summary, it is our opinion that the existing         ar-
rangement under which a separate carrier       makes benefit       pay-
ments on a nationwide    basis on behalf of a relatively         small
special group of beneficiaries      is neither  efficient     nor ef-
fective    and that any other carrier,   under the same circum-
stances, would experience the same difficulties           as Travelers.

RECOMMENDATIONTO THE SECRETARY
OF HEALTH, EDUCATION, AND VELFARE

        In line with the foregoing conclusions, we recommend
that the necessary arrangements be made to have the RRB-
related    Medicare part B claims paid by the carriers paying
such claims for all the other Medicare beneficiaries    in the
same geographical    area.

MATTERSFOR CONSIDERATION BY THE CONGRESS

       Although we recognize        that the consolidation     of the
claims-processing      activities      would entail   some diminution
of the authority      now delegated to RRB, we believe that an
overriding    consideration       is that such action would simplify
the aoministration      of the Medicare program and would help
reduce program costs.          Therefore    we are bringing  the results
of our review to the attention            of the Congress for its con-
sideration    in future     deliberations      on amendments to the
Social Security     Act designed to improve the operating           ef-
fectiveness     of the Medicare program.




                                       52
      Also, regarding    SSA's proposal to use the Travelers-
RRB arrangement as a basis for experimentation            in making
reasonable-charge    determinations      for physicians'    services,
we noted that,    in the Committee on Ways and Means report
(H. Rept, 91-1096) on the Social Security           Amendments of
1970, interest    was expressed in reviewing        HEW plans for ex-
periments    and demonstration    projects   involving   payments or
reimbursements    to institutions     under the Hospital     Insurance
Benefits   for the Aged (part A) portion        of the Medicare pro-
gram.

       According to the Committee report,       such reviews would
provide an opportunity      for congressional    study before the
reimbursement     experiment or project    is carried    out.   Because
a cognizant legislative       committee of the Congress had ex-
pressed an interest      in reviewing   experimental   reimbursement
projects    under part A of the Medicare program, the cognizant
committees may also want to review the reimbursement            ex-
periments    proposed by SSA for Travelers      and RRB under part
B of the program when SSA finalizes        its plans relating     to
the experiments.




                                   53
                                CmPTER 9

                            SCOPE OF REVIEW

       We evaluated   (1) the role of Travelers        under its con-
tract with RRB as the nationwide         part B carrier      for making
benefit   payments on behalf of eligible        railroad     employees
and RRB annuitants,      (2) the methods used by Travelers           for
determining    the reasonableness      of charges for physicians'
services,   and (3) the administrative        costs incurred by Trav-
elers in comparison with the incremental            administrative
costs that would be incurred by the SSA carriers               if they
processed the RRB-related       claims.

     We reviewed the Medicare law, its legislative      history,
and SSA regulations  and related  instructions  dealing with
the reasonableness  of charges for physicians'   services,

       We reviewed also records and other data at the Travel-
ers home office         in Hartford,      Connecticut,     and reviewed se-
lected claims data at 11 Travelers               field    offices  in 1968 and
at four field       offices    during April,       May, and June 1970.     In
addition,    we reviewed the methods for making reasonable-
charge determinations          for physicians'        services used by nine
SSA carriers       operating     in the same geographical         areas as the
Travelers    field     offices    visited    by us.     For four of these
SSA carriers      operating      in nine States, we also compared
their estimates        of incremental       costs that would be incurred
for processing       RRB-related claims with the costs incurred
by Travelers,,

         In addition, we reviewed various statistical        reports
and other data relating      to carriers'   claims-processing       ac-
tivities     at SSA Headquarters   in Baltimore,    Maryland.




                                     54
APPENDIXES
                                                        APPENDIX I
                                                            Page 1

  PERCENTAGEOF RRB-RELATED ENROLLEESTO TOTAL ENROLLEES

             UNDER PART B OF THE MEDICARE PROGRAM

                           BY STATE

                     AS OF JANUARY 1, 1969 (note       a)
                                                        Percentage
                                                           of RRB-
                                                           related
                                            RRB-         enrollees
         Area of              Total        related       to total
        residence           enrollees     enrollees      enrollees

                                (000. omitted)

TOTAL                         18,872             810        4.29

NEW ENGLAND                    1,227              28        2.28

   Maine                            115            5        4.35
   New Hampshire                     76            2        2.63
   Vermont                           47            2        4.26
   Massachusetts                    614           13        2.12
   Rhode Island                      99            1        1.01
   Connecticut                      276            5        1.81

MIDDLE ATLANTIC                3,745                        3.95

    New York                    1,880             54        2.87
    New Jersey                     662            22        3.32
    Pennsylvania                1,203             72        5.99

EAST NORTH CENTRAL              3,634            168        4.62

    Ohio                           942            48        5.10
    Indiana                        466            25        5.36
    Illinois                    1,045             59        5.65
    Michigan                       727            20        2.75
    Wisconsin                      454            16        3.52



                               57
APPENDIXI
    Page 2

  PERCENTAGEOF RRB-RELATED ENROLLEESTO TOTAL ENROLLEES

             UNDER PART B OF THE MEDICARE PROGRAM

                            BY STATE

                     AS OF JANUARY 1, 1969 (note a>
                                        (continued)

                                                      Percentage
                                                         of RRB-
                                                         related
                                             RRB-      enrollees
        Area of                Total       related     to total
       residence             enrollees    enrollees    enrollees

                                 (000 omitted)

WEST NORTH CENTRAL              1,842        103          5.59

    Minnesota                      398           24       6.03
    Iowa                           342           16       4.68
    Missouri                       531           29       5.46
    North Dakota                    64            3       4.69
    South Dakota                    78            2       2.56
    Nebraska                       175           11       6.29
    Kansas                         254           18       7.09
SOUTH ATIXNTIC                  2,580        116          4.50
   Delaware                         42            3       7.14
   Maryland                        260           13       5.00
   District   of Columbia           62            2       3.23
   Virginia                        331           22       6.65
   West Virginia                   188           14       7.45
   North Carolina                  376           10       2.66
   South Carolina                  175            5       2.86
   Georgia                         338           14       4.14
   Florida                         808           33       4.08
                                                      APPENDIX I
                                                          Fage 3

 PERCENTAGEOF RRB-RELATED ENROLLEESTO TOTALENROLLEES

           UNDER PART B OF THE MEDICARE PROGRAM
                         BY STATE

                    AS OF JANUARY 1, 1969 (note a)
                                        (continued)
                                                      Percentage
                                                        of RRB-
                                                        related
                                          RRB-         enrollees
       Area    of             Total      related       to total
      residence             enrollees   enrollees      enrollees
                               (000 omitted)
EAST SOUTHCENYFGJL             1,173           57         4.86
   Kentucky                      323           20         6.19
   Tennessee                     360           18         5.00
   Alabama                       298           12         4.03
   Mississippi                   192            7         3.65
WESTSOUTHCENTRAL               1,688           66         3.91
   Arkansas                      220           10         4.55
   Louisiana                     268           10         3.73
   Oklahoma                      279            8         2.87
   Texas                         921           38         4.13
MOUNTAIN                          633      3              6.79
   Montana                         67           6         8.96
   Idaho                           64           4         6.25
   Wyoming                         29           3        10.34
   Colorado                       179          11         6.15
   New Mexico                      61           4         6.56
   Arizona                        135           7         5.19
   utah                            71           6         8.45
   Nevada                          27           2         7.41



                                59
APPENDIX I
    Page 4

  PERCENTAGEOF RR&RELATED ENROLLEESTO TOTAL ENROLLEES

              UNDER PART B OF THE MEDICARE PROGRAM

                               BY STATE

                       AS OF JANUARY 1, 1969 (note a>
                                          (continued)

                                                             Percentage
                                                                of RRB-
                                                                related
                                                  RRB-        enrollees
           Area of                Total          related      to total
          residence             enrollees       enrollees     enrollees

                                       (000 omitted)

PACIFIC                                2,236            79       3.53

    Washington                            305           12       3.93
    Oregon                                208           10       4.81
    California                         1,677                     3.40
    Alaska                                  5          (2;
    Hawaii                                 41          (b)

OTHER AREAS                              114             2       1.75

aprepared from data recorded as of July 10, 1969, by the
 Office of Research and Statistics, Social Security Adminis-
 tration.
b Less than   500 enrollees.




                                  60
                                                                                         APPENDIXII
                                                                                             Page 1

                                                  DEPARTMENT          OF
                                      HEALTH,   EDUCATION,           AND   WELFARE
                                                        WASHINGTON



      OFFICE    OF
THE     SECRETARY




                     Mr. Philip Charam
                     Associate Director,  Civil Division
                     U.S. General Accounting Office
                     Washington, D.C. 20$8

                     Dear Mr. Charam:

                     Enclosed are the Departmentfs conznents on GAO's draft
                     audit report entitled,     "Opportunity   for Improvement in
                     Administration    of the Medicare Program by Consolidation
                     of Claims Processing Activities       Covering Physicians'
                     Services".     we understand that you have &ready received
                     directly    from the Railroad Retirement Board copies of the
                     comments you requested us to get from RFEBand the Travelers
                     fnsurance Company.

                     We appreciate     this opportunity  to express our views prior
                     to publication      of the final report.

                                                              Sincerely    yours,    .


                                                       ,‘-
                                                              James F. Kelly
                                                   i
                                                   ,          &sistant  Secreta          Comptroller

                     Enclosure
                                                   ii . .




                                                               61
APPENDIXII
    Page 2
             OPPJRTLXtTY FOR IIQRO%%ERT IN ADKIXX3I%AT~O~ OF TP3 KEDICAPB
                PROGRAXBY CONSOLIDATIONOF CLAX4S PROCESSINGACTMTIES
                             COVERINGPHYSICIANS' SERVICES
                   (GAO draft report transmitted October 31, 19693

                                   Proposed Recommendation

         "We recommend that the Secretary provide for amending the SSA
        delegation   or' authority   to RRB by withdrawing      RRB's authority
        to select carriers      to administer   Part B benefits   for railrod
        eaployyees and RRB snnuitants.        We recommend also that provision
        be made for RRB-related ciaims under Part B to be processed by
        the carriers    operating   under contracts    with SSA in the various
        geographical    areas which make benefit      payments applicable      to
        all other Part B b!edicare beneficiaries."

   SSA is not prepared to accept this proposed recommendation without
   considerable      additional     review of the relationship   in the light of more
   recent develoments          as well as the considerations   set forth by the
   Railroad    Retirement      Board (RRB) and the Travelers   Insurance Company in
   their responses to the draft report.

   Of great importance         is the consideration       now being given to some revision
   of the legislative        provisions      dealing with reasonable charge       determinations.
   Some possible      revisions     were discussed at the recent hearings before the
   Senate Finance Committee.            Whatever the developments may be in this area,
   however, it appears the Government would be served better                   by turning    the
   RRB-Travelers      arrangement to advantage as the basis for experiments                 on
   controlling     paymznts to physicians           than by Caking the action recommended
   by the auditors.         These experiments would yield information            useful to
   both the legislative          and executive branches in improving Medicare
   administration.        For purposes of experimentation,           Travelers   nationwide
   set-up offers      some unique advantages that cannot otherwise be easily
   duplicated.      In brief,      we think that important       gains can be realized       by
   taking positive       action in this situation,         rather than just the negative
   action of terminating          Travelers.

   It appears that SSA would be advantaged by using the RRB-Travelers
   arrangement     for an experiment      in determining    reasonable charges on a
   prevailing     charge screen only.       This screen could be established,        perhaps,
   on a State-by-State       basis.    It would utilize     a relative    value study
   approach employing a system of conversion factors.                Such an experiment
   would give SSA opportunity        within given areas to measure the results
   of differing      reasonable charge methodologies.          The potential   advantage
   to SSA in conducting        such an experiment evinces the merit in continuing
   the current     arrangements,    with a careful     reassessment made by GAO after
   sufficient     data is secured.       Accordingly,    GAO may wish to consider
   rewording    the audit recommendation.

   As requested by GAO, we obtained comments from RRB and the Travelers
   Insurance    Company so that we could consider the views of these organizations
   in preparing    our response to A&e draft report.  In comments transmitted




                                                 62
                                                                                  APPENDIX II
                                                                                      Page 3

by letter     dated December 3, 1969, to SSA, with a copy to GAG, RF3
vigorously     argued for continuance of its authority        to select carriers   to
handle claims from railroad         workers and FiHE3annuitants,   end for
continuance      of the resultant    contract between HRB and Travelers.       333
maintained that the present arrangement was necessary for effective
administration      of its programs and to enable HRB to provide,        in sn
economical and expeditious         manner, the claims service expected by its
constituency.       Similarly,    in comments dated December 2, 1969, Travelers
maintained     that the existing     arrangement should be continued.

When making the origin&L delegation            of authority,   SSA foresaw that
special problems might arise; however, it appeared that the delegation
was necessary to serve HHB administrative             needs. Now that the FZB-Travelers
 set-up is in existence and has been operative for some 3f years, the matter
takes on a new dimension since changing our original               decision would
require making a number of adjustments that could have sn adverse effect
on the relationships        HE3 4is.s with its beneficiaries      who have been
conditioned   to look to HHB and Travelers as their sources for information
and service.     Unilateral      action on our part could, therefore,           be regarded
as unwarranted interference          with HHB administration,      with resultant
harmtoHHBprograms.            Although SSA agrees that the existing            arrangement
tith Travelers as the sole Medicare carrier              for RR;s beneficiaries      presents
some inherent administrative           problems, we think it is apparent that any
corrective   action ought to be acceptable to HRB as well as to us. In
view of RFB's vigorous opposition            to GAO's proposed reconunendation,         it
is obvious that the audit recommendation would not meet this criterion
of being mutually acceptable.
Certainly,       some of the observations        made in the GAG report represent valid
appraisals       of the experience in the first          years of the program's operation.
It should be recognized,           however, that there are potential        changes which
on implementation         can perhaps overcome the deficiencies          or difficulties
identified.        In addition,     gains may be achieved through a closer operating
liaison     both between SSA and RR3 and between Travelers and the area
carriers.        In this connection,       some recent 55.4 actions should minimize
the reoccurrence         of whatever liaison      problems there may have been in the
past.      These actions include the placement of a resident representative
in Travelers Hartford office and the designation                 of a single liaison        point
in the Bureau of Health Insurance to assure that copies of sll pertinent
material,      including    material originating        in our regional offices,        are
provided F3B. we are obliged, however, to take issue with the charges
in FEB's comments of past lack of cooperation                 on our part.   An objective
review of SSA's coordination            efforts,   giving due consideration        to the
administrative        completities    of the medical insurance program and the
many coordination         points involved, will not sustain such charges.

The proposed     audit   recommendation      results    from three GAG findings:

     1.   Under the circumstances,  it is impossible for Travelers to
          make reasonable charge determinations    on a nationwide   basis
          in the manner prescribed by SSA regulations    and related
          instructions.




                                               63
APPENDIX II
    Page 4
         2.    The existence of two separate carriers      in the ssme geographical
               area gives rise to inconsistent    reasonable charge criteria;
               differences  in criteria   can be eqected     to increase as the
               SSA carriers   improve their systems.

         3.    Consolidation    of claims processing    activities    in one area
               carrier    would reduce administrative    costs.

   Our views on these GAO conclusions          are given below.
   Inability     of an RFB carrier     to meet requirements     for determining     reasonable
   charges
    Certainly,    the lack of volume in Travelers RRB related operations          poses
    serious obstacles     to its development of adequate customary charge profiles.
    The basic concern is whether the RRi3 carrier could get in the position
    of making accurate reasonable charge determinations            under the prescribed
    criteria    and in so doing achieve consistency with the determinations           made
   *by the area carrier.       With the difference    in the data base available
    to the area carrier and Travelers RRB operation,           even with precise
    application     of the customary and prevailing      charge criteria    by each
    there would undoubtedly be differences         in the identification     of
    reasonable charges for some services rendered by some physicians.
   Considering    that the basic problem is control of program cost, however,
   and the appropriateness        of experimenting    with o+&er approaches to
   determining    reasonable charges, it appears, as mentioned earlier,              that
   we could be advantaged at this time by utilizing             the RFfB carrier    operation
   as the base for a special study.          The use of a relative     vaXue study
   approach in determining        reasonable charges would build on the method
   Travelers is currently        using but would introduce the use of conversion
   factors tailored      to state or regional medical fee experience.             Additional
   controls    would be added, as deemed essential,         such as appropriate      recognition
   of differences     between specialists      and non-specialists.      In pursuing such
   an approach, we would expect to establish           a range of controls       over the
   data collected     to assure effective      comparison of results of the experiment&L
   methocioloffir with experience of the area carrier.

   Differences      in reasonable    charge determinations
   These differences,      and the consequent disparity        in payments by carriers,
   have created some problems particularly           frcm the standpoint   of acceptance
   by the public (physicians       and beneficiaries).       However, if SSA
   deliberately    experiments with differing        reasonable charge methodology                 .
   in a given area, ample notice would be given to the physician             community.
   Accordingly,   while disparity     in reasonable charge determination       would
   be a matter of interest       and perhaps some concern, depending on the results,
   it would not occasion the adverse reaction that is now obtained when the
   two carriers    involved are supposedly following         the same methodology.

   Even under present methods and procedures there is a requirement to report
   disparities to SSA or pJB, which is designed to assure that both agencies




                                                 64
                                                                          APPENDIX II
                                                                              Page 5
are continually      aware of the dimensions of the problems and to permit the
resolution    of specific   cases at the local level.     There is reason to
believe that, with continued attention       to detection   and resolution    of
disparities     on the local level, the instances of incomparability       of
payments till     be reduced to au acceptable minimnn.

Reducticz   in administrative   costs
The amount of savings that would result from termination        of the RRR-
Travelers contract has not been clearly shown. GAG recognizes that
some of the costs incurred by Travelers would have to be picked up by
the SSA carrier were there no RRB-Travelers contract.         Once these savings
could be reasonably estinated,     we would then have to weigh the cost
agaiust the benefits    derived from the contractual   arrangement end the
possibilities  it offers for creative expertientation.        This leaves us
in a position  of being unable to ascribe sufficient      weight to the cost
factor to tilt   the scale,.in favor of the GAO recommendetion.
As an alternative      way to achieve savings, it would seem that certain
efficiencies    could be obtained by reducing the number of Travelers'
field offices     involved in carrying out the functions    of the RIB contract.
Not only might this reduce costs, but the consolidation        of Medicare
capability    should improve quality    of a&&nistration   and stipfify
cooperation    and coordination    among SSA, RRR, the other carriers,   aud
Travelers.




                                           65
APPENDIX III
     Page 1

                                      UNITED    STATES    OF AMEAICA

                                 RAiLRoAD RETIFEMENT                 BOARD
                                            S.44 RUSH    STREET
                                       CHICAGO,     ILLINOIS    60811



                                           OCT 7- 1970




    Xr. Philip Charem
    Associate Director,  Civil Division
    U. S. General Accounting Office
    Washington,  D. C. 20548

    Dear Xr. Charam:

    Pie appreciate    very much the opportunity   of reviewing the draft report
    of the General Accounting Office on the Railroad ?Xetirement Doard's
    operation    under the delegation  of authority    from the Social Security
    Administration.

    In our opinion,  the reasons for the delegation  set out on Pqes 7-10
    of the draft report are just as true now as they were when the dele-
    gation was made, and they justify   continuance of the delegation.

    We endorse the proposal of the Social Security Administration        that
    the Railroad Retirement     Board-Travelers    arrangement be used as an
    experiment  for determinirg    physician fees.     Suggestions have been
    made to Social Security for an experimental        approach along the lines
    mentioned in their comments.

    The potential    for savings in administrative    costs that the report finds
    for the transfer    of Travelers'   work may be applied as well to other
    carriers.     More important considerations    of service to beneficiaries,
    and the need for comparative analysis 04 performance,        appear to have
    been behind contracts     by Health, Education and Welfare with as many
    as 50 carriers.      (cf Eeports of Eouse Eays and Xeans Committee Ko. 213,
    Page 46, and Senate Finance Committee Xo. 404, Part I, Pages 53-54, on
    H.R. 6675 of the 89th Congress, 1st Session.)

    Progress is     being made in bringing      about greater uniformity   between
    reasonable     charge determinations      of Travelers and area carriers.     The
    disparities     reported by GAObetween reasonable charge determinations
    of Travelers      and area carriers    are for a small sample of cases and not
    necessarily     representative    of the whole distribution     of chsxges and




                     KEEP   FREEDOM   IN YOUR    FUTURE    WiTH   U.S.   SAVINGS   BONDS




                                                   66
                                                                      APPENDIX III
                                                                           Page 2

services for all area carriers   and Travelers.     Hevertheless,    action
is being taken with the cooperation    of SSA to provide for greater
sharing of customxy and Drevailing     rate info=ation     by area carriers
with Travelers.   Contracts with carriers    now provide qecifically        for
the release of this inforiaation  to Travelers.

We are reasonably confident that Travelers’        performance has &proved
and will continue to ix;?rove in the areas       in which the report indicates
improvement is needed.
On the basis of the evidence so far       submitted,    the Board firmly   supports
the contiauance of the delegation.
                                            Sincerely    yours,




                                       67
    APPENDIXIV
        Page I


                            THE   TRAVELERS           INSURANCE    COIMPANY
                                              .--a.
GROUP   DEPhRTbfEKT                                                                ONE    TOWER   SQUARE
                                                                              BARTFORD,    CONNECTICUT     06115



                                                                                   December 7, 1970


                      Mr. Philip Charam
                      Associate Director,   Civil Div.
                      U.S. General Accounting Office
                      W&-dngton,   D.C. 20548


                      DearNr.Charam:

                      Attached are The Travelers comments on the
                      GAO report Cmortunitp   To keduce Costs Of
                      The I-kdicare Prowan ThrouFh The Consolidation
                      Of Claims Processing Activities.
                      It is our understanding  with &. Louis Lucas
                      of your office that these comments will be
                      inserted as an appendix to the report.

                                                       Sincerely    yours
                                                       .




                                                       Medicare

                      cc:   Mr. Louis Lucas
                            U.S. General Accounting Office
                            1903 John F. Xennedy Federal Bldg.
                            Government Center
                            Boston, Massachusetts   02203




                                                           68
                                                                                  APPENDIX IV
                                                                                       Page 2

                     The Travelers Insurance Company
            Comments on General Accounting Office Draft ?eport
           &titled:  "Opportunity   to ileduce Costsof tne Medicare
    Program Through The Consolication     of Claims Processilw Activities"


We appreciate  this opportunity   to comment on the General Accounting
Office Report.    Although we feel that our comments previously   made to
the Draft Report of October 31, I.969 remain valid,   changes have occurred
in both the Medicare Program and the administration    of it since that
time.
The report reaches the conclusion that the responsibilities              of The
Travelers     as carrier for the Pailroad Retirement Board ullcer Part B
of Medicare should be transferred       to the SSA area carrier.         In reach-
ing its conclusion,      t&e report is concerned wimarily        -with two areas,
administrative     costs and claims processing.     Cur connents are designed
to Provide additional      information  as to -both of these areas and are
brief due to our previous comments on the earlier         draft.

In developjnp   its nosition that transfer of the RF&related    claims to
the SSA area carriers will result in a reduction in benefit payments
under the program, the report relies on the premise that because in
some areas volume is relatively   low (in cornection with FW?--related
Medicare claims) The Travelers is unable to produce sufficient      data as
to physicians  customary charges, thus resulting    in a lack of substantial
reasonable charge profiles.

Having reached this conclusion based upon a survey of four field                       offices
of The Travelers and corres-onding             claim offices of SSA area carriers,
the report then utilizes         Bureau of Health Insurance statistics              on
reasonable charge determinations           to project reductions      in benefit pay-
ments.      As to the survey utilized        in the report, given the nature of
medical care, neither the size of the sample (.C22% of the universe)
nor the sample selection         process produce a satisfactory         reliability         level
for    purposes of projection.        Variations     in conditions   between offices
are shown by the fact that the average dollar per claim reduced in
The Travelers offices        selected was $9.97, whereas the naticnal               average
for all Travelers      offices was $17.52. ~l]Also, we have not been convinced
that the comparison process itself             - involving   revieti by area carriers
of claims previously        processed by The Travelers - did not contain a
built-in     bias due to knowledge by area carriers            of the purpose of the
review and that these specific determinations               by the area carriers          would
themselves be subject to General Accounting Office review.                    Also, since
many claims fall into a judgment area (whereunder, for example, considera-
tion as to effect on beneficiaries             must be taken into account) a carrier
making determinations        without having to consider effect of the deternina-
tion on beneficiaries,        vendors, etc., could not be expected to carry out
the claims processing function in complete routine.
1
    GAO note:      These reduction     amounts    are not on a comparable
                   basis to the average       reductions  per allowed
                   claim for Travelers      shown on the table     on
                   page 28.
APPENDIX IV
    Page 3

   Bureau of Health Trsurance statistics    utilized  in the report. in pro.jectinq
   savinns show only the averze reduction in nhgsician charges oec claim.
   Therefcre,  they do not show 'total charges made oy the nhysicians         nor the
   amount raid on the charses.    This is significant   for statistics      are
   available  (c.f. Senate Finance Committee Staff Report - Feb. 7, 1970,
   Table II) which indicate that charges made to RR&related         beneficiaries
   tend to be less than those made to S&A-related beneficiaries.['l

   Also, the GAO report itself       shows total lower cayments per enrollee
   for IXR-related    beneficiaries    than for SSA-related beneficiaries
   (P-R&related    beneficiaries    payments accounted for 4.2% of total pay-
   ments in Fiscal Year 1968 and 4% of total yayments in Fiscal Year 1969,
   whereas such beneficiaries       account for 4.3% of total beneficiaries).
   Overall,  various factors and statistics       support the possibility     that
   there may be sufficient    differences    between -related      beneficiaries
   and S&A-related beneficiaries       based upon economic and other reasons
   which run counter to attempts to treat the two groups as equal.
   The low volune of RR&related           claims in some areas is stressed as the
   key factor in The Travelers inability            to nroduce customary charge
   profiles    acceptable to the General Accounting Office.                Tne Travelers
   agrees that its profiles         in low volume areas would be significantly
   improved -q the addition of information             as to reasonable charges from
   the area carriers,        Cooperation between the RRB carrier and the SSA
   carriers    was called for in the original          delepation     of authority     and
   there has been significant         cooperation.      However, in order to stimulate
   cooperation,      in negotiating    revised    contracts     for all carriers      effective
   July 1, 1970, SSA included a specific provision                 for transfer    of data
   between SSA carriers and the P-33 carrier.               This specific     contractural
   obligation    to exchange necessary data has already produced significant
   increased cooperation between The Travelers and area carriers.                      Full
   cooperation     betxeen The Travelers and area carriers             will result in minimal
   differences     in reasonable charge determinations.

   In addressing itself     to administrative   costs, the report acknowledges
   that The Travelers performance compares favorably with other carriers,
   as is indicated     by SLA figu:.es as to ratio of administrative     costs to
   benefits    and unit costs per payment record.      However, the report states
   the central issue as one of potential       savings through application     of
   incremental    costs theories of accounting rather than tinne relative
   efficiency    of The Travelers and area carriers.       This approach goes
   beyond the proper scoce of our response; however, it should be indicated
   that to a greater or lesser degree this concept could be applied to the
   consolidaticn    of any area carriers activities     into those of any other
   area carrier.

   In estimating  savings as to administrative   costs the same offices    of
   both The Travelers   and the area carriers  as used with respect to
   reasonable charge determirations   were surveyed and compared.     Here
   1 GAO note:
                      The statistics        cited    relate     to   fiscal    year   3.968
                      claims   activity.
                                                                               APPENDIXIV
                                                                                   Page 4
again, statistics      can be pointed to which run contrary to the results
projected    (e.g., for the first      three quarters of Fiscal Year 1969,
the national     average for.administrative      costs per oayment record increas-
ed from 53.C6 to $3.14, whereas comparable'fimrures          for the states
sampled decreased from 92.84 to $2.78; also, the cost per Fayment
record for The Travelers offices          sampled was substantially  higher than
The Travelers actual overall figures).
Several specifics concerning        projected    satings   of administrative      costs
are commented on as follows:
In the area of 'direct claim costs, the report concludes that claims.
pr0cessir.g of X33-related   claims can be assumed by area carriers
"with little  or no increase in claims processing personnel and no
increase in indirect    or supervisqq   personnel or office space."     This
area accounts for thedinost important portion of projected      savings and
is based upon ap?lication    of "incremental   costs" theories.

According to the report the average wo;rkload increase of area carriers
in assumption of MB-related         claims would be tithin     average workload
fluctuations     and therefore    can be assimilated    with the above results.
This app&ication is contrary to normal budget routines in the ikdicare
Program.     Further, we feel any such increase would in fact increase
the base from which fluctuations         are determined and not be merely handled
within fluctuations,       thereb. increasing    ‘wth direct and indirect    costs
of the area carrier.        Equally as important,     any average workload increase
figure apnears meaningless in this situation           since the percentage
increase with respect to each carrier         must be taken into account in
considering    the effect on its operation.

The resort indicates          the second largest   element of cost where there is
potent&         cost savings is that of data proceM.ng.            It states that the
incremental        comouter runr.ing time of area carriers       for assumption of
-related          cla&s would be negligible       and therefore      assumes that a
substar.tidl      portion of present Travelers R-related             cIaims costs in
this area kbuld be avoided.             Assuming average efficiency       of all carriers
and equivzl-lt         computer running time costs it is difficult          to foresee
any savings in this area.            Also, since The Travelers is an SSA area
carrier     it must have com:uter capability         established     and in fact utilizes
the same computer programs in processing             both .X33- and %A-related
claims.       In the data processing area as in other areas costs of The
Travelers       are shared by SSA and RFB. Although the report acknowledges
that certain         costs are shared and that those costs would not be
eliminated,        tut only tracsferred     to SSA, it does not fully take into
account the amount of shared costs which would not be eliminated.
As indicated      in the report,   The Travelers had previcusly        questioned
projected     savings in icdirect     administrative     costs upon transfer      of
functions     from The Travelers on the theoq that such costs could will
be a function       of direct labor costs in the area carriers accounting.
Nevertheless,       the report projects    savings on the theory     that there
would be no increase in area carriers            general and administrative       expenses
despite the fact that, according to the report itself,             only two of the
four carriers       surveyed support this premise.




                                            71
APPENDIX IV
     Page 5
  In conclusion,    w'r2l.e we feel that the General AccodSng          Office's
   study kill be a stiniius      to continuous reviebc of program perfomance,
  the above comants,       as stunroarized in part in the table belon (figures
  taker? from GAO’s re;ortj      show that The Travelers performance on VP!-
   related claim has ken efficfect          and economical.   Further,      that
  benefit    xyments to WE-related        beneficiaries  are not greater than
   those for SSA-related beneficiaries.

                                                                PERCEKT

                                         Railroad         !!a       Railroad

  Enrollees             18.9million      8lO,ix>o         lGO%         4.3%
  Benefit fayments
      1968              $1.3 tziUion     $55mfulon        loC%         4.2%
       1969             $1.5 bXiUon      $60 miU.ion      lM$          4.0%
  Administrative     Costs
       1968             $100millloa      $4.2 klxtllion   lm%
       1969             $118 million     $4.5 million     100%




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                                                                        APPENDIX V


                                     PRINCIPAL OFFICIALS

                                           OF THE

                  DEPARTMENTOF HEALTH, EDUCATION, AND WELFARE

                                           AND THE

                                  RAILROAD RETIREMENT BOARD

                             RESPONSIBLE FOR THE ADMINISTRATION

                                           OF THE

                                     MEDICARE PROGRAM


                                                             Tenure of office
                                                             From             To
                                                                              -
  SECRETARYOF HEALTH, EDUCATION,
    AND WELFARE:
      Elliot L. Richardson                            June      1970    Present
      Robert H. Finch                                 Jan.      1969    June 1970
      Wilbur J. Cohen                                 Mar.      1968    Jan.    1969
      John W. Gardner                                 Aug.      1965    Mar.    1968

  COMMISSIONEROF SOCIAL SECURITY:
     Robert M. Ball                                   Apr.      1962    Present

  CHAIRMAN, RAILROADRETIREMENT
    BOARD:
      Howard W. Habermeyer                            Nov.      1956     Present




U.S.   GAO   Wash.,   D.C.

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