The contract was broadly drawn to give both the Social Security Administration and the Panel latitude and flexibility in relationships and techniques. It did not require specific reports of the Panel nor demand specific achievements of it. The contract contemplated a rather novel relationship, experimental in character and with a potential for an unusually close relationship between the agency and the contractor. The Academy and the Panel saw this as a prototype of similar arrangements between the Academy and other public agencies.

We concluded that we were successful as trusted advisors only to a limited degree. Getting busy Panel members together with busy top level administrators in SSA and BHI for sustained and frequent discussions of complex problems was very difficult. In the absence of frequent discussions and contact, the trusted advisor's role could not develop fully, and the Panel sometimes found itself essentially in a standard management consultant relationship to SSA.

We say this, not in criticism of ourselves or SSA, but simply as a problem with which to be dealt. For example, perhaps future, similar contracts should contain provisions setting forth specific meeting times and persons to help assure the kind and frequency of contact necessary to perform the functions contemplated.

Beyond this, as is the case between SSA and its contractors for the Medicare program, the sine qua nons of effective contractual performance are clear contract terms well discussed and fully understood by both parties.

Richard Brockway
Co-Chairman

Enclosures

Phillip S. Hughes
Co-Chairman

Final Report
of the

Medicare Project Panel

The research reported herein was performed pursuant to a contract with the Social Security Administration, Department of Health, Education, and Welfare.

National Academy of Public Administration 1225 Connecticut Avenue, N.W. Washington, D.C.

June 30, 1973

The use of contractors to perform administrative functions in the Medicare program is a classic case of the continuation of a legislated public policy with inadequate public concern for its consequences. Medicare has been functioning for seven years, utilizing Blue Cross, Blue Shield, and commercial insurance companies as intermediaries and carriers to pay for and, to the extent provided for under the Act, exercise elements of control over the quality, cost, and frequency of services. Yet, from the inception of the program, both the parties at interest and the public as a whole have not addressed the fundamental question of the appropriateness or effectiveness of the use of carriers and intermediaries: Can private sector institutions be effectively utilized to provide public services in a program as complex and politically sensitive as the provision of health services to the aged? What are the administrative requirements which governmental agencies should establish to make such use appropriate and effective?

The confusion that surrounds the many facets of this issue began even before the legislation was passed. The private sector, including providers, health insurers, and prepayment plan officials, vigorously opposed government health insurance legislation. Government, and particularly the Social Security Administration (SSA), had been strongly in favor of a government-operated program which would include direct payment to the providers of services. Congress, having heard years of public testimony about national health programs of the scope of Medicare, was not publicly clear on its preference for a particular strategy of administration.

In the early 1960's, when it became increasingly apparent that some form of legislation would pass, the private sector representatives and, to some extent, the government representatives began jockeying for position in the forthcoming program. At this point the rationale for utilizing the private sector began to emerge as a significant issue. The elements of the rationale were:

(1) The government cannot deal effectively with the providers of service (particularly physicians). They will not participate without an intermediary between them and the government.

(2) There exists an in-place administrative system (health insurance companies and prepayment and group health plans) which can and should be utilized to implement a national program.

(3) The government never could be flexible enough to deal with local conditions; the private sector, with its ability to operate relatively free of debilitating regulations, could better do so. The government should be concerned with delivery of a product, not with detailed control.

(4) The realities of political power are such that the health insurance industry would have to play a role in the program if any legislation were to be passed.

Undoubtedly, this list could be increased. Many would question the validity of these arguments, suggesting that they are a rationalization by the self-interested, attempting to secure for themselves "a piece of the action." Whatever one's view, it is apparent that, when the legislation was passed, the government was utilizing a largely untested technique for which there was little enthusiasm. True, the country had developed a great deal of expertise in using the private sector to administer programs, but this was largely in defense, space, and atomic energy areas that dealt primarily with the development and use of hardware systems and not with the infinitely more complex delivery of social services. It is also true that the insurance industry had been used to administer the Civilian Health and Medical Program of the Uniformed Services (CHAMPUS) and the Federal Employees Health Benefits Program (FEP), but these were relatively small and the private sector remained largely untried as controllers of health costs and quality.

Even the 1965 hearings, which preceded the passage of the legislation, were not characterized by a thorough discussion of the issues. Proponents for utilization of the health insurance industry argued strongly for industry participation in the proposed government program, offering testimony that generally followed their own experience in doing business.

Proponents of increased government involvement argued for alternative arrangements utilizing state health departments as planning agents and monitors of cost and quality and health insurers as processors of bills. It was not clear until the final passage of the legislation what the private sector role would be in administering Medicare. SSA, anticipating only a modest hospital program, was "geared-up" and felt able to administer such a program. It was only with the combining of Congressman Byrnes' medical care and the Administration's hospital care bills that the role of the private sector was decided. Not only was SSA unprepared to handle an expanded institutional care system (Part A), but it had almost no plans to administer physician payments (Part B). Further, the politics of gaining acceptance among the physicians and general support within the Congress merged with the need to have an administrative system that could handle at an early date virtually all the medical needs of our aged population. Thus the administrative apparatus of the Medicare program was born. It was made up of a largely untried partnership, carrying with it a great deal of ideological verbiage and reflecting both political and administrative expediency. Both SSA and the health insurance industry distrusted each other, and many within the health insurance industry were in competition with each other. The private sector was trying to insure its own future role in government health programs, and the public sector was unable to take on directly the full job and thus was forced to turn to outsiders.

In establishing the outlines of the public/private sector relationship, Congress selected from a variety of proposals which often reflected the political or persuasive abilities of the various interest groups. This led to the establishment of an

administrative system based upon competitive checks and balances. Blue Cross and Blue Shield, private insurance companies, physicians, health care institutions, and state health departments, each with separate responsibilities, would work together under the Department of Health, Education, and Welfare (SSA) to run the program. Unfortunately, the disparate goals, capacities, and attitudes toward the program caused each party to follow its own directions, and the diffusion of responsibility and authority established a management climate that made goal determinations, after the initial period of the program, increasingly difficult. The first phase of the Medicare program was characterized by the "magnificent" administrative job that was done by both SSA and its contractors. The sheer magnitude of organizing so massive a national system in such a short time is a credit to both the public and private sectors. It reflected the consummate ability of SSA to enroll beneficiaries, establish eligibility, and implement legislation and of the contractors to administer a complex insurance system.

However, the priority was to establish a system to pay bills; untested was the question of the long term viability of the plan to have the public and private sectors "manage" a health program together. In fact, that first phase in many ways obfuscated the question, since the paying of bills led to such a crisis in cost that the more fundamental questions were crushed in an avalanche of controls designed to maintain the fiscal integrity of the system. The results were (1) an increase in the direct controls placed on contractors by SSA; (2) a general atmosphere wherein the private sector organizations were willing, or forced by the adverse cost publicity, to accept whatever level of control would enable them and the government to reduce costs; and (3) a lack of time on the part of the parties concerned to attempt agreement on a long-term relationship. In many respects the current Medicare administration is still operating on this basis. However, increasingly, the issue is becoming one of quality and cost (competence, need, and charges for services), and the need is for a much more sophisticated approach on the part of government and the private sector to deal with the administrative question.

Whatever the answer to the cost/quality question, the Medicare Panel feels both SSA and its contractors should recognize certain "facts."

(1) At the present time, there is a pause in the pressures of administration which would allow some long-term thinking about the relationship between SSA and the contractors.

(2) The initial administration of Medicare proved very little about the longterm viability of the relationship. What was proved was that initially the contractors were unable to control the quality and cost of medical care in a fashion that met the expectations of public authorities, and that government, if it wanted such control, would need to take strong measures. Likewise, it