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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.

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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

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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 long

term 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

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became evident that Medicare is unlike other SSA programs and that SSA was not prepared to deal as effectively with this program as it had with others.

(3) While problems continue with the mechanistic processing of claims, the

basic issues are turning more toward using the claims processing systems as a source of improved information, toward developing effective, operational definitions of reasonable costs and necessary services, and toward coordinating government actions with activities of the health professions and

institutions. (4) While Congress accommodated the private sector by bringing it into

Medicare, Congress will not leave the role of the private sector unchanged if its performance does not measure up to the cost and quality expectations of

the day. (5) All parties are looking to Medicare as a prototype for use in designing

national health plans. Some parts of the private sector do not now resist what they view as over-control out of fear of being left out of future health programs or a desire to avoid responsibility for determining future relationships.

(6) While the above is true, it is also a "fact" that extant patterns of Medicare

administration are likely to be adopted in an expanded health insurance program.

(7) Congress is unlikely to change directions completely by not using contrac

tors at all for the administration of health programs.

These "facts” provide two possible directions for the contractor relationship. The first would be the unchanged continuation of the present relationship of accommodation. In many respects this would be the easiest for both the government and the contractors because it is unlikely that Congress will force the health insurance industry out of the program, and a role in future national health programs for the industry would be reasonably assured. The private sector would be free to continue the verbiage surrounding its own use without having to live up to its promises. Flexibility and the advantages of decentralized delivery of administrative services could still be talked about without really being achieved. SSA could continue to describe the advantages of the private sector while, at the same time, increasing controls so that contractor organizations increasingly resemble a normal government bureaucracy. In essence, the original political accommodation would continue supporting certain myths about private sector participation, but the partnership would remain less a shared responsibility and more a dependency relationship. While the extension of health insurance for the aged to the population as a whole would probably mean an extension of that accommodation, the end result would be a captive industry much

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like parts of the defense establishment. If this approach is followed, the basic public administration question, whether the private sector can improve the administration of this public program through participation, will remain unanswered.

The second alternative is for SSA and its contractors to develop a relationship which will enable the private sector to add its full capability to the administration of the Medicare program. This quite clearly would mean attention to ways and means to improve the quality as well as the efficiency of the delivery system and the satisfaction of the recipients. Several basic decisions would have to be made by SSA. Some of them are:

(1) SSA would have to rely on established standards with an emphasis on

results rather than detailed regulations, with recognition of the possible

consequences of such action. (2) SSA would have to reorganize its Medicare administration policy processes,

giving the contractors an earlier and more significant role in establishing

policy and in formulating administrative procedures. (3) Top management of the agency would have to make strong efforts to change

their own and their agency staff attitudes toward the contractors. (4) To accomplish points (1), (2), and (3), top management must take a much

more active role in negotiations and decision-making with the contractors. (5) SSA would have to coordinate closely its activities with other units of the

executive branch, recognizing that it is impossible to separate policy and administration and that it may be necessary to change attitudes in other parts of the government towards the administration of the Medicare

program. The contractors would have to make equally important changes. In essence, they would need to stop talking about the virtues of the private sector and undertake to demonstrate them. This would mean: (1) They would have to accept the idea of public accountability and disclosure,

recognizing that the standards and operating policies which govern their

private business are not necessarily appropriate for Medicare. (2) They would have to be agents of the public interest in dealing with the

providers of service. (3) They would have to accept SSA as having the overall administrative

responsibility for the program, including evaluation of contractor perfor

mance.

(4) They would weaken their option for appeal through the political system, in

all but the most serious circumstances, as they increase their role in policy

determination at the administrative level of government. The Medicare Panel feels that the accommodation relationship should be abandoned and that the second alternative should be adopted. The Panel recognizes that

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