[House Hearing, 106 Congress]
[From the U.S. Government Printing Office]




                               before the

                         SUBCOMMITTEE ON HEALTH

                                 of the

                      COMMITTEE ON WAYS AND MEANS
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED SIXTH CONGRESS

                             FIRST SESSION


                           FEBRUARY 11, 1999


                             Serial 106-42


         Printed for the use of the Committee on Ways and Means

                      U.S. GOVERNMENT PRINTING OFFICE
65-630 CC                   WASHINGTON : 2000

            For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC 

                      COMMITTEE ON WAYS AND MEANS

                      BILL ARCHER, Texas, Chairman

PHILIP M. CRANE, Illinois            CHARLES B. RANGEL, New York
BILL THOMAS, California              FORTNEY PETE STARK, California
E. CLAY SHAW, Jr., Florida           ROBERT T. MATSUI, California
NANCY L. JOHNSON, Connecticut        WILLIAM J. COYNE, Pennsylvania
AMO HOUGHTON, New York               SANDER M. LEVIN, Michigan
WALLY HERGER, California             BENJAMIN L. CARDIN, Maryland
JIM McCRERY, Louisiana               JIM McDERMOTT, Washington
DAVE CAMP, Michigan                  GERALD D. KLECZKA, Wisconsin
JIM RAMSTAD, Minnesota               JOHN LEWIS, Georgia
JIM NUSSLE, Iowa                     RICHARD E. NEAL, Massachusetts
SAM JOHNSON, Texas                   MICHAEL R. McNULTY, New York
JENNIFER DUNN, Washington            WILLIAM J. JEFFERSON, Louisiana
MAC COLLINS, Georgia                 JOHN S. TANNER, Tennessee
ROB PORTMAN, Ohio                    XAVIER BECERRA, California
PHILIP S. ENGLISH, Pennsylvania      KAREN L. THURMAN, Florida
WES WATKINS, Oklahoma                LLOYD DOGGETT, Texas
J.D. HAYWORTH, Arizona
RON LEWIS, Kentucky
                     A.L. Singleton, Chief of Staff

                  Janice Mays, Minority Chief Counsel

                         Subcommittee on Health

                   BILL THOMAS, California, Chairman
NANCY L. JOHNSON, Connecticut        FORTNEY PETE STARK, California
JIM McCRERY, Louisiana               GERALD D. KLECZKA, Wisconsin
PHILIP M. CRANE, Illinois            JOHN LEWIS, Georgia
SAM JOHNSON, Texas                   JIM McDERMOTT, Washington
DAVE CAMP, Michigan                  KAREN L. THURMAN, Florida
JIM RAMSTAD, Minnesota
PHILIP S. ENGLISH, Pennsylvania

Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public 
hearing records of the Committee on Ways and Means are also published 
in electronic form. The printed hearing record remains the official 
version. Because electronic submissions are used to prepare both 
printed and electronic versions of the hearing record, the process of 
converting between various electronic formats may introduce 
unintentional errors or omissions. Such occurrences are inherent in the 
current publication process and should diminish as the process is 
further refined.

                            C O N T E N T S



Advisory of February 4, 1999, announcing the hearing.............     2


Health Care Financing Administration, Hon. Nancy-Ann DeParle, 
  Administrator..................................................     7
U.S. General Accounting Office, William J. Scanlon, Ph.D., 
  Director, Health Financing and Public Health Issues, Health, 
  Education, and Human Services Division.........................    37
Anthem Alliance Health Insurance Company, Anthem Blue Cross and 
  Blue Shield, and Blue Cross and Blue Shield Association, 
  Barbara Gagel..................................................    52
EDS, David M. Bryan..............................................    65
Wisconsin Physicians Service Insurance Corporation, and Medicare 
  Administration Committee, Ned Boston...........................    58

                       SUBMISSIONS FOR THE RECORD

American Medical Association, statement..........................    79
American Occupational Therapy Association, Inc., Bethesda, MD, 
  Christina Metzler, statement...................................    82
Association for Ambulatory Behavioral Healthcare, Alexandria, VA, 
  Mark Knight; National Mental Health Association, Alexandria, 
  VA, Al Guida; and National Council for Community Behavioral 
  Healthcare, Rockville, MD, Pope Simmons, joint statement.......    85
Green Cross, Inc., Miami, FL, Miguel A. Nunez, Jr., letter and 
  attachments....................................................    88
Health Insurance Association of America, statement and 
  attachments....................................................    89
Information Technology Association of America, Arlington, VA, 
  Harris N. Miller, letter.......................................    99
National Association for the Support of Long Term Care, 
  Alexandria, VA, Jack Pivar, statement and attachments..........    99



                      THURSDAY, FEBRUARY 11, 1999

                  House of Representatives,
                       Committee on Ways and Means,
                                    Subcommittee on Health,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 2:35 p.m., in 
room 1310, Longworth House Office Building, Hon. William Thomas 
(Chairman of the Subcommittee) presiding.
    [The advisory announcing the hearing follows:]



                         SUBCOMMITTEE ON HEALTH

                                                CONTACT: (202) 225-3943

February 4, 1999

No. HL-1

                      Thomas Announces Hearing on

                   Management of the Medicare Program

    Congressman Bill Thomas (R-CA), Chairman, Subcommittee on Health of 
the Committee on Ways and Means, today announced that the Subcommittee 
will hold a hearing to examine the Health Care Financing 
Administration's (HCFA's) ability to administer the current Medicare 
program and to manage the future needs of growing numbers of seniors. 
The hearing will take place on Thursday, February 11, 1999, in 1310 
Longworth House Office Building, beginning at 2:30 p.m.
    In view of the limited time available to hear witnesses, oral 
testimony at this hearing will be from invited witnesses only. Invited 
witnesses will include HCFA Administrator, Nancy-Ann Min DeParle, 
representatives from the U.S. General Accounting Office, and 
contractors who process and audit claims for the Medicare program. 
However, any individual or organization not scheduled for an oral 
appearance may submit a written statement for consideration by the 
Committee and for inclusion in the printed record of the hearing.


    Medicare serves 37 million Americans, providing health coverage to 
seniors, disabled beneficiaries and kidney failure patients. According 
to recent analysis by the Congressional Budget Office, total Medicare 
spending for Fiscal Year 1999 is expected to be approximately $218 
billion. HCFA, which administers the Medicare program, faces both 
short-term challenges and potential long-term pitfalls.
    The short-term challenge for HCFA is implementing the Balanced 
Budget Act of 1997 (BBA) (P.L. 105-33). The BBA ensures solvency of the 
Medicare trust funds for the next decade by establishing new payment 
methodologies for skilled nursing facilities, home health agencies, 
hospital outpatient departments, and other service categories. In 
recent months, HCFA has delayed implementation of a number of BBA 
provisions. The long-term problems facing the program, including 
demographic changes and rising medical costs, are being addressed by 
the Bipartisan Commission on the Future of Medicare. But, unless the 
short-term challenges are successfully resolved, HCFA will be ill-
prepared to cope with future needs of seniors.
    One year ago, the Subcommittee asked GAO to do a thorough 
examination of HCFA's ability to meet its program management challenges 
and to describe any actions HCFA needed to take to accomplish its 
objectives over the next few years. The GAO found that the program 
growth and greater responsibilities were ``outstripping HCFA's capacity 
to manage its existing workload'' and made several recommendations. The 
Subcommittee has requested that the GAO return to HCFA, one year later, 
to document the current status of the agency and to note any areas of 
particular concern.
    In announcing the hearing, Chairman Thomas stated: ``Taxpayers and 
our nation's seniors deserve a well managed Medicare program that meets 
their health needs. As the Committee begins its work addressing the 
complex issues facing the Medicare program, a natural place to start is 
with a thorough examination of the agency which administers the 


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February 25, 1999, to A.L. Singleton, Chief of Staff, Committee on Ways 
and Means, U.S. House of Representatives, 1102 Longworth House Office 
Building, Washington, D.C. 20515. If those filing written statements 
wish to have their statements distributed to the press and interested 
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    Chairman Thomas [presiding]. The Health Care Subcommittee 
will come to order.
    This is our first hearing obviously of the 106th Congress. 
We're going to focus on the management of the Medicare Program 
and its administering by the Health Care Financing 
    It's our honor once again to have as our lead off witness, 
the administrator of the Health Care Financing Administration, 
Nancy-Ann Min DeParle. And, as I've often said, one of these 
days, I'm going to reverse the order of the hearing. You get to 
go first this time. But oftentimes when we have additional 
panels, their written testimony references concerns which I 
think would be more properly addressed by having the 
administrator respond to those. So we have to kind of make it 
happen before the panel gets to testify. And the administrator 
came in after we began the organizational meeting, but I'm 
going to talk to her about that because of pending time 
constraints. I do think that kind of a structure might be more 
useful when we're dealing with some of the issues that we'll be 
facing for example today. Oftentimes people will pose 
questions. There are answers to those questions, but if we 
don't get to answer them, they seem like more significant 
questions than they are.
    We are, as was indicated, waiting for the Bipartisan 
Commission on the Future of Medicare to hopefully provide some 
solutions for the long-term solvency of the program. We're 
going to be looking at our ability to deal with short-term 
issues, including obviously the implementation of the Balanced 
Budget Act of 1997. And, as significantly, getting an update on 
the so-called Y2K ability for us to respond because, frankly, 
if we can't handle the short-term structural concerns, we're 
not going to be as prepared as we would like to be for the 
long-term changes.
    All of us are cognizant of the fact that this program needs 
to be restructured. The degree to which it needs to be 
restructured, the manner in which it needs to be restructured 
is obviously open for discussion.
    Following the administrator, we will, as per our usual 
script, have Dr. Scanlon, head of the General Accounting 
Office's Health section, review management and practices. There 
has been extensive interviewing. And it was clear from the 
testimony, if the members read Dr. Scanlon's testimony, that 
HCFA personnel were more than open and cooperative in 
discussing those things that have been successful and some of 
those things that have not been successful.
    And then, as I said, the final panel will be some frontline 
private contractors who deal with contracting on the A and the 
B side of Medicare to provide us with the view from the private 
contractors day-to-day functioning process within the 
structure. And we look forward to hearing from them as well.
    So prior to your testimony, I call on the gentleman from 
California, the Ranking Member, for any comment he may have?
    Mr. Stark. Thank you, Mr. Chairman. I just want to comment 
about enforcing the rules regarding testimony. I was never very 
successful in the past, but perhaps the Chair could be. A 
solution would be to be very tough about requiring witnesses 
submitting written testimony, to submit it 24 to 48 hours 
before the hearing and to distribute it to all of us so we have 
the night before to go through it, or at least have our staffs 
do so. And, it would seem to me, when we have administration 
witnesses, I would think there would be nothing wrong with 
having the testimony shared among the prospective panels. 
There's really no reason they can't get it in. It's just that 
we all procrastinate.
    So I would urge the Chair, and I would be glad to join with 
him, to urge all witnesses and panel members to get their 
testimony in on time. I think it would make the hearings more 
interesting for all of us.
    I would like to congratulate you for this hearing and 
congratulate the administrator, Nancy-Ann Min DeParle, for the 
work that she's done. It was recently reported that her error 
rates dropped from 11 to 7 percent, and it saved us about $10 
billion. Now, if she could just do that every year for the next 
several years, we would be home free. However, she is still, in 
my opinion, overwhelmed by workload and criticism. And it's 
interesting to note that under her administration. HCFA, the 
Health Care Financing Administration, is actually smaller today 
than it was 20 years ago when it was created. So as we've 
increased the responsibilities, we have not increased the 
authority and the flexibility to expand the staff and support 
that they need to keep up with the work.
    It's essential that they look beyond this Y2K problem to 
modernizing their entire system and use market measures to 
obtain fairer prices in buying the services. The contracting 
rules also should be updated. They were last written in 1965. 
For several years, I have worked with the Appropriations 
Committee to make sure that HCFA's administrative 
appropriations have been fully funded. And while I've praised 
HCFA for low overhead, I've also cautioned that we may have 
reduced their overhead too much.
    I would like to paraphrase for a minute and submit for the 
record a letter, an open letter in Health Affairs, by Stuart 
Butler, Bill Gradison, Marilyn Moon, Uwe Reinnard, Bob 
Reischauer, Bill Roper, John Rother, and Gail Wilensky. This is 
an unusual group to be agreeing with each other and sending a 
letter. And without belaboring the point, they point out that 
Medicare spending has increased in 1997 by tenfold, but the 
agency's work force is even smaller. They hammer on that point 
and they criticize both, or all, previous administrations for 
the failure to provide the agency with adequate administrative 
resources. They say that we must reexamine the funding, 
management, and oversight and to do anything else is short-
changing the public and leaving HCFA in a State of disrepair.
    I think we can all find places to criticize, but I think we 
have to look here. We don't have the authority on this 
Subcommittee provide HCFA with the money and the resources they 
need. But, I certainly think we would probably be--and I say 
this with all trepidation--that we probably are in a better 
position to analyze HCFA's need than our colleagues on the 
Appropriations Committee. And I hope that I'll see all the Members
of this Subcommittee joining with me when we go to the Appropriations 
Committee and the Budget Committee to see that HCFA is 
appropriately funded. You can't expect them to do the job we 
want, Mr. Chairman, unless we provide them the resources. And I 
don't say that to assess any blame. Since we can't provide the 
resources, we have to go out and lobby for HCFA and be an 
advocate for them once we tell them what to do.
    Thank you very much for having this hearing.
    Mr. Kleczka. Mr. Chairman.
    Chairman Thomas. The normal rules of the Subcommittee is 
that opening remarks are reserved for the Chairman and the 
Ranking Member and other Members may submit written statements. 
But the gentleman from Wisconsin?
    Mr. Kleczka. Mr. Chairman, we've been joined by a fellow 
Member of the Committee, Mr. John Tanner from Tennessee, and if 
the Chairman agrees, he would like to offer a welcome to the 
administrator since she hails from his State?
    Chairman Thomas. And the Chair would also welcome the 
gentleman from Georgia once again, Mr. Lewis. I would tell the 
gentleman that if he does the introduction, the Chair would 
like to take a brief time between the introduction and the 
administrator's testimony, but I don't want to step on the 
Tennessee welcome to the administrator. Mr. Tanner.
    Mr. Tanner. Thank you, Jay. Thank you, Mr. Chairman. And I 
want to--Ms. DeParle has been a long time friend. She's from 
Tennessee. She worked in administration down there when I was 
in the legislature. I saw an article in the Los Angeles Times 
just the other day about how the error rate in billing has been 
cut in half during your tenure or shortly after you came. And 
this Subcommittee I know is anxious to hear you, and I just 
wanted to stop by and welcome you. And we appreciate the job 
you're doing here for us.
    Ms. DeParle. Thank you so much.
    Mr. Tanner. Thank you, Mr. Chairman.
    Chairman Thomas. I thank the gentleman. Let the Chair say 
that this is an important Subcommittee. Ways and Means has some 
of the brightest and best Members in the House. This 
Subcommittee, in my opinion, selects from that pool. And that 
over the years we have done some very, very difficult work. The 
work is on behalf of the seniors in the United States and the 
Chair has noted, including himself at times, that perhaps the 
way in which the meetings have been conducted probably were not 
at the level of the responsibility we feel to the seniors.
    In casting around to come up with a way in which we would 
not be disruptive of the business of the Subcommittee, in the 
past the Chair has noticed that the way that it has evidenced 
itself has been that Members would follow other Members' 
responses. The Chair's initial reaction was to go with the NBA 
season and provide Subcommittee Members with whistles. That 
probably would be more disruptive than the suggestion I came up 
with since the NFL season has just ended. The idea would be 
that the Chair would pass out to Members a penalty flag in 
which if any Member, including the Chair, were to make remarks 
which clearly would be out of bounds using the test of the 
importance of the mission in front of us, the Chair would say 
that a single flag from the minority side probably is not as 
relevant as a flag from both the minority and the majority 
side. [Laughter.]
    However, two flags from either side should be sufficient. 
The goal being that we don't take up the Committee time in 
terms of the verbal fencing, but that you simply let it be 
known that a penalty in your opinion has been committed and 
then we move on. I think that will at least create an 
atmosphere, if not of civility, no severe physical wound will 
occur from this. Hopefully, a bit of a psychic damage will 
occur and we can move forward.
    With that, I would ask the gentlewoman from the State that 
has the national champions in football, and that's purely 
coincidental, give us her report. Thank you for your report in 
writing. It will be submitted to the record in it's entirety, 
and the administrator has our ear to present her information as 
she see fits.
    Welcome, Nancy.


    Ms. DeParle. Thank you, Chairman Thomas and thank you, Mr. 
Stark and other distinguished Members of the Committee.
    I appreciate being here today to discuss the progress that 
we're making in strengthening the management of the Health Care 
Financing Administration. I also want to thank my colleagues at 
the General Accounting Office for their careful evaluation and 
advice. This is the second of these evaluations that this 
Committee has sponsored, and they've been extremely helpful to 
me as I look at the problems facing the Agency and how I should 
be addressing them.
    I have now been the administrator of the Health Care 
Financing Administration for a year. When I came before you in 
January of last year, I told you that I had several immediate 
goals and they were first to strengthen Medicare, starting with 
implementation of the 335 provisions of the Balanced Budget Act 
that had recently been passed. Second, to ensure that our 
computer systems were Y2K compliant, that there would be no 
disruption of services to beneficiaries or claims payment to 
providers because of the computer system problem. Third, 
sharpening our focus on fraud, waste, and abuse, reducing the 
number of claims that Medicare pays inappropriately. And, 
fourth, launching the new children's health insurance program, 
which was one of the signal achievements of the last Congress 
in providing health insurance coverage to millions of low-
income children whose families couldn't afford it.
    What I've tried to do in the past year are really three 
things: First, to set forth clear goals for the agency, and 
those are the ones that I've outlined for you last year and 
we've stuck to this year.
    Second, I brought in a new leadership team, many people 
from the private sector to help us achieve those goals. And to 
name just a few of them, we now have a physician who was a 
practicing internist for more than 20 years, Dr. Bob Berenson, 
and also ran a PPO, who is now the head for the Center for 
Health Plans and Providers and is leading us in the 
implementation of the Balanced Budget Act. We have a 
geriatrician, Dr. Jeff Kang as the chief clinical officer, 
leading our efforts in quality and working to establish a more 
open and accountable Medicare coverage process, which I know is 
one of the issues of particular interest to you, Mr. Chairman. 
We have a gerontologist, Carol Cronin, who specialized in 
providing health care education for consumers and for large 
corporations and their employees, running our Center for 
Beneficiary Services which was created as part of the 
reorganization. And she is leading the development of the 
national Medicare education program. And we have a veteran of 
the Inspector General's Office, Penny Thompson, who is leading 
our efforts to improve program integrity in the Medicare and 
Medicaid Programs.
    Finally, with this team I've tried to provide leadership to 
the 4,000 HCFA employees who are working to achieve the vision 
that I have for the agency, which is a more efficient, 
responsive, and effective agency. Our job is enormous and it's 
far from done.
    And if you'll allow me one more reference to Tennessee, Mr. 
Chairman, I come from the hills of east Tennessee and we have a 
saying there. When someone asks for directions, we tell them, 
``You go over those hills and then there's some more hills.'' 
That's how it is at the Health Care Financing Administration as 
well. When you're providing health insurance coverage to 74 
million Americans; when you're working with 1.6 million 
providers; when you're the steward of more than $300 billion a 
year in public dollars, there are many challenges and there are 
new challenges every day. But with your help and with Congress' 
help, we have been making solid, steady progress.
    Since I was here last year, we've implemented some 188 of 
the 335 provisions in the Balanced Budget Act. And I'm not 
counting there some of the things like provider updates that 
have been partially implemented but we have to do it again this 
    We're making substantial progress on the other 147 
provisions. And to do this, last year we published 92 
regulations, which I think has to be something of a modern 
record for us. In fact, today we're publishing a rule 
clarifying several aspects of Medicare Plus Choice. It's what 
we refer to as the ``mini-rule'' that responds to some of the 
concerns that plans had about the regulation that we put out 
last July. We're also announcing today the establishment of a 
new Citizens Advisory Committee on Beneficiary Education. And 
we're soliciting nominations from the public and from all of 
you for people who can help us to make sure that we're keeping 
the beneficiary first as we establish our beneficiary education 
    We have made enormous progress on the Y2K computer problem. 
As of December 31, 1998, all 25 of our internal mission 
critical systems and 54 of 78 external mission critical systems 
had been repaired, tested, and certified. We are on track to 
fix and certify any remaining systems by March of this year.
    We have worked aggressively with States, providers, Members 
of Congress, and others to implement the new children's health 
insurance program. We've approved plans for 47 States and also 
the District of Columbia and two territories.
    We have made I think good progress in improving our record 
on program integrity. As Mr. Stark noted, on Tuesday the 
Inspector General announced that the Medicare error rate, the 
rate of claims that we pay inappropriately had dropped to 7 
percent, I'm not satisfied with 7 percent, but I am happy to 
see that we had a 45 percent drop in 2 years. And, again, I 
thank you for the support that you've given us in making those 
    And, finally, we launched a new initiative last summer to 
improve our enforcement with the States of quality in our 
Nation's nursing homes. There are 17,000 nursing homes in the 
country, and many, many of our fellow Americans are living 
there and deserve a better quality of life.
    I appreciate the help that many Members of this Committee 
have given me over the past year. Many of you have worked with 
me personally to identify problems as we've been implementing 
the Balanced Budget Act. You've helped us get the resources to 
deal with those problems, and you've been understanding about 
the difficulty and the magnitude of the job that we're trying 
to do. We're going to, of course, be asking you for more help 
this year, both with our budget and also for help with some 
management changes that we would like to make. Mr. Stark 
referred to one of them, contractor reform. We would like some 
more flexibility to deal with some of the problems we have, and 
we think that would help us to enhance our capacity.
    We share the same goals I think. We all want Medicare and 
Medicaid to be strong, well-managed, and fiscally sound. We all 
want to put the beneficiary first. And we all share a vision of 
HCFA as more efficient, accountable, and a more effective 
    On behalf of our beneficiaries and on behalf of the 4,000 
people at the Agency who worked very hard last year to make 
progress, I want to thank you for your interest and support and 
for your help in achieving the vision I have of a more 
effective HCFA.
    Thank you very much, Mr. Chairman.
    [The prepared statement follows:]

Statement of Hon. Nancy-Ann DeParle, Adminstrator, Health Care 
Financing Administration

    Chairman Thomas, Congressman Stark, distinguished committee 
members, thank you for inviting me to discuss our progress in 
strengthening Health Care Financing Administration (HCFA) 
management of Medicare and our other programs and 
responsibilities. I would also like to thank the General 
Accounting Office (GAO) for its evaluation and advice on this 
and other subjects over the past year since I became 
    HCFA is the nation's largest health insurer, providing 
coverage to about 74 million people. Our workload has grown 
immensely with the Balanced Budget Act (BBA) of 1997, the 
Health Insurance Portability and Accountability Act (HIPAA) of 
1996, the challenges of complying with Year 2000 computer 
issues, fighting fraud, waste, and abuse, and meeting the needs 
of the ever-growing number of beneficiaries we serve.
    Our programs--Medicare, Medicaid, and the new Children's 
Health Insurance Program--now provide more coverage, more 
health plan options, and more health care security to Americans 
than ever before. Together they will pay for an estimated $335 
billion in benefits in 1999, and represent the Federal 
Government's third largest outlay. Medicare alone now processes 
about 900 million claims each year, is the nation's largest 
purchaser of managed care, and accounts for 11 percent of the 
federal budget.
    We are working to meet our management challenges despite a 
rapidly growing workload. I want to thank this Committee for 
its support of the President's request for HCFA last year. The 
growth in our workload over the past three years is 
unprecedented in HCFA's history. Our discretionary program 
management appropriation has remained relatively flat in recent 
years. The Congress did provide the Administration's full 
request for an increased management appropriation for fiscal 
year 1999, which represents a good first step. The President's 
FY 2000 HCFA budget request builds on last year's 
appropriation, and includes user fee proposals to allow better 
program efficiency. We are eager to work with Congress to 
secure adequate funding to meet all of HCFA's responsibilities 
in fiscal year 2000 and beyond.
    HCFA spends less than one percent of Medicare benefit 
outlays on Medicare program management, and less than 2 percent 
on administrative costs overall, compared to private sector 
administrative costs of 12 percent and higher. Some of the 
difference is due to efficient management and economies of 
scale. However, our growing workload makes it necessary to 
secure adequate funding to continue to improve our management 
of the program.
    We are accomplishing a great deal with our resources. In 
the past year, we have:
     published 92 regulations and Federal Register 
notices implementing important Congressional directives, 
beneficiary protections, and taxpayer savings, including the 
savings in the Balanced Budget Act that are critical to 
extending the life of the Medicare Trust Fund;
     responded to nearly 7,000 pieces of Congressional 
correspondence, and delivered 15 official Reports to Congress;
     participated in more than 1,000 events around the 
country to help beneficiaries understand health plan changes;
     made remarkable progress in addressing our Year 
2000 challenge, and participated in more than 100 events around 
the country to help providers address this challenge;
     made major strides in fighting fraud, waste and 
abuse and preventing payment errors;
     approved 50 Children's Health Insurance Plans 
which States expect to cover more than 2.5 million children;
     issued more than 50 program guidance letters to 
State Medicaid and health officials on issues such as the 
managed care reforms in the BBA;
     implemented a carefully planned National Medicare 
Education Program to help beneficiaries understand their rights 
and options, and make informed health care decisions;
     converted the vast majority of Medicare HMOs to 
the new Medicare+Choice program, and added 10 new plans and 
expanded service areas for another 10 plans.
     worked closely with state insurance regulators on 
important Health Insurance Portability and Accountability Act 
consumer protections;
     updated our Strategic Plan to reflect our expanded 
mission, set clear goals and specific objectives, and establish 
performance measures to gauge our progress; and
     begun a nationwide initiative to improve nursing 
home oversight and care.

                          Manangement Reforms

    We have made significant strides in improving HCFA 
management since I testified before this Subcommittee on this 
issue last year. In the past year I have tried to articulate a 
clear vision of a more efficient and effective HCFA. I brought 
in a new leadership team to help me achieve these goals. And we 
have taken a number of steps to help us do more and be more 
efficient, effective, responsive and accountable. In addition, 
the fiscal year 2000 President's budget builds on these steps 
by seeking new flexibilities to manage our programs more 
    Our first step was to completely reorganize our agency to 
focus on serving beneficiaries and outside partners like plans, 
providers and States. Our structure is now built around our 
``customers'' rather than internal issues. This has sharpened 
our focus on the changes in our mission, and is helping us be 
more accessible and responsive. Most important, for the first 
time ever we have a Center for Beneficiary Services to ensure 
that we have beneficiaries first in mind in every decision we 
make and every action we take.
    We brought in new staff and leadership from the private 
     A computer scientist and security expert from the 
Los Alamos National Laboratory serves as our first-ever Chief 
Information Officer and heads our information technology team 
and Year 2000 efforts.
     An internist who helped establish a private sector 
preferred provider organization health plan now leads our 
Center for Health Plans and Providers.
     A geriatrician who was a private sector managed 
care plan medical director is our Chief Clinical Officer and 
heads our Office of Clinical Standards and Quality.
     A gerontologist who ran a private sector firm 
devoted to helping corporations educate their workers on health 
care is leading our Medicare beneficiary education program.
     A physician who has worked as a Medicare 
contractor medical director is in charge of implementing much 
stronger oversight of Medicare claims processing contractors, 
with a special emphasis on making sure contractors meet their 
responsibility to be diligent in preventing fraud and payment 
     A physician is leading a review of all our rules 
and regulations to see where they can be simplified, clarified, 
and refined to reduce administrative burdens on physicians and 
better meet beneficiary needs.
     And a former State insurance department director 
is coordinating our new State-level responsibilities under the 
Health Insurance Portability and Accountability Act.
    Overall last year we doubled the number of physicians at 
the agency and hired about 450 new employees to replace 
retirees, fill new positions, and provide us with fresh private 
sector insight and expertise.
    We have taken steps to make sure policies are applied 
fairly and evenly across the country. We have strengthened 
communication between leaders of our Regional Offices and our 
main policy and operations divisions. And we have established 
``Product Consistency Teams'' to make sure that policies and 
procedures are applied uniformly across the country.
    We are creating new advisory committees, pursuant to the 
Federal Advisory Committee Act, that will continually bring 
outside insight and expertise to our agency. They will also 
help bring more openness to our operations and help us make 
sure we are managing our programs to meet beneficiary needs.
     One advisory committee, the Citizens Advisory 
Panel on Medicare Education, will help us make sure we are 
giving beneficiaries the information they need to be informed 
consumers in the new Medicare+Choice program.
     Another advisory committee, the Medicare Coverage 
Advisory Committee, will foster openness and public input in 
our coverage decision-making process. It will include experts 
in medicine, biology, public health, ethics, economics, data 
analysis, and other professions, and work from objective 
medical evidence for recommending when Medicare should pay for 
new medical treatments and services.
     A third advisory committee, announced in the 
President's budget, will include private sector business and 
management experts who can advise the Administrator on how to 
improve HCFA's business processes and incorporate innovations 
that will better serve our beneficiaries.
    We are also seeking new flexibilities to strengthen our 
capacity to manage our programs. The President's budget calls 
     an assessment of our personnel skill mix and an 
evaluation of increased flexibilities in personnel matters that 
would help us pay competitively, hire the right staff to serve 
beneficiaries, and hold employees accountable for results;
     increased accountability by establishing the 
outside advisory committee discussed above to advise the 
Administrator on management issues and by regularly reporting 
to Congress and the public on the status of programs and 
     reengineering our relationship with our Regional 
Offices and with the Department;
     allowing Medicare use market forces to prudently 
purchase care and services so we get the best quality and price 
for beneficiaries; and
     reforming Medicare contracting authority so we can 
hire from a broader pool of private businesses to handle 
Medicare claims and move toward a more competitive and 
effective procurement environment.
    These reforms are needed to help us manage our programs 
efficiently and with a sharper focus on serving beneficiaries 
and ensuring access to high quality care.

                             The Year 2000

    Meeting the Year 2000 computer programming challenge must 
be our highest priority. HCFA got a late start but we are now 
making substantial progress in addressing this critical 
challenge. I want to assure beneficiaries that they should not 
worry. We are working with the health care community to assure 
that beneficiaries will continue to have access to the care 
they need. And I want to assure health providers that HCFA and 
its contractors will be prepared to pay their claims come 
January 1, 2000. However, providers must act now to be sure 
that their computer systems are fixed so they can submit claims 
to us. We continue our work and testing, but I am confident 
that we will be ready well before January 1, 2000. To date:
     all of our 25 internal mission critical systems 
are now certified as Year 2000 compliant (``certified'' means 
that independent experts have overseen renovations and testing 
and validated that they have been done properly);
     our 78 external mission critical systems that our 
claims processing contractors use to pay bills are fully 
renovated, and more than 70 percent are certified as compliant. 
We have experts on-site every day, monitoring and assisting 
contractors who have significant amounts of remaining Year 2000 
     systems for about 95 percent of Medicare managed 
care plans are reported compliant; and
     we have completed the first round of certification 
testing on twenty-four of our sixty non-mission critical 
internal systems.
    There is no question that we have faced an uphill battle in 
achieving Year 2000 compliance. We have a substantial amount of 
work remaining this year to test and validate our systems. We 
are working to encourage and help providers meet their Year 
2000 responsibilities, and to help beneficiaries understand 
what they need to know about the Year 2000 issue. We also must 
work to renovate our non-mission critical systems, and to make 
temporary fixes permanent.
    A number of key steps are getting us where we need to be. 
They include:
     building a ``War Room'' to track Year 2000 efforts 
within the agency and with partners across the country so we 
know the current status of all essential Year 2000 projects;
     negotiating contract amendments with more than 60 
claims processing contractors to establish clear Year 2000 
     establishing contractor oversight teams to closely 
monitor and manage Year 2000 work on-site and full time for 
claims processing contractors who most need help;
     hiring independent expert contractors to give us 
greater assurance that Year 2000 work is done properly by us, 
our claims processing contractors, and States; and
     helping health care providers through a broad 
outreach campaign that includes mailings, publications, an 
Internet site, a speaker's bureau, and a wide range of other 
    I must be clear, however, about what HCFA can and cannot 
do. We are responsible for all our own systems, our claims 
processing contractors' systems, and data exchange interfaces 
among all of these systems and the systems of States, 
providers, banks, phone companies, and other partners. We do 
not have the authority, ability, or resources to step in and 
fix systems for others, such as States or providers. And that 
leads to a rather substantial concern.
    It is not enough for HCFA alone to be ready for the Year 
2000. Health care providers must be Year 2000 compliant in 
order to bill us properly and continue to provide high quality 
care and service to Medicare beneficiaries. States also must be 
Year 2000 compliant for Medicaid and CHIP programs to continue 
uninterrupted service. Our monitoring indicates that some 
States and providers could well fail. We are providing 
assistance to the extent that we are able, but that likely will 
not be enough. This matter is of urgent concern, and literally 
grows in importance with each passing day.
    Our own progress in meeting the Year 2000 challenge is due 
in large part to the outstanding effort and commitment of staff 
throughout HCFA and at our claims processing contractors. I 
also want to thank the Secretary and my colleagues at the 
Department of Health and Human Services, especially the HHS 
Inspector General, for their support. We have been greatly 
aided by wise counsel from the General Accounting Office and, 
importantly, by the expert independent validation contractors 
the GAO recommended we hire to ensure that Year 2000 work is 
done correctly. And, without question, we could not have come 
so far so quickly without the timely support and funding that 
Congress has provided.

                    Fighting Fraud and Paying Right

    We are making unprecedented strides in promoting program 
integrity. This includes both fighting fraud, waste and abuse, 
and making sure we are paying right. We have set new records 
for restitutions, convictions, and exclusions of problem 
providers by working more closely with our law enforcement 
partners. Since 1993, these efforts have saved taxpayers 
billions of dollars and increased health care fraud convictions 
by more than 240 percent. We also are addressing honest errors 
in billing and payment through good program management and 
business practices, improved education and communication with 
providers, and correcting payment errors regardless of the 
reason for them.
    We have developed a comprehensive program integrity plan to 
build on these successes. The plan calls for:
     increasing the effectiveness of medical review by 
increasing the overall level of review, targeting it on problem 
areas, hiring additional physicians to improve its 
effectiveness, using more computer ``edits'' that prevent 
improper payments, training employees to develop cases for 
prosecution, evaluating local policies to see where national 
policy may be needed, and measuring how well individual 
contractors perform medical reviews;
     stepping up efforts to help providers comply with 
rules, establishing clear enrollment and periodic reenrollment 
requirements; and requiring bonds for certain types of 
     proactively addressing potential program integrity 
problems before they occur in the new programs, benefits, and 
payment systems created under the BBA;
     planning how to deal with potential program 
integrity problems related to the Year 2000 computer issue; and
     focusing on special areas of concern, such as 
inpatient hospital care, congregate care such as nursing homes 
and assisted living centers, community mental health centers, 
as well as addressing the unique program integrity issues 
related to managed care.
    We further expect our program integrity successes to 
increase this year as we begin to use new authority to hire 
special program integrity contractors. We plan to hire payment 
safeguard contractors to focus on medical review, fraud case 
development, cost report audits and related program safeguard 
functions as needed; a coordination of benefits contractor to 
consolidate all activities associated with making sure Medicare 
does not pay for claims when other insurers are liable; a 
statistical analysis contractor to provide on-going analyses to 
help detect fraud; and managed care integrity contractor(s) to 
target issues unique to health plans.
    We expect to start these new, special program integrity 
contractors on the job this year. This is important, because 
the HHS Inspector General reports that not all Medicare's 
claims processing contractors are effectively fighting fraud 
and abuse. We have responded by including fraud case developing 
in the scope of work for our new special program integrity 
contractors, and by ordering existing contractors to report all 
suspected fraud cases immediately to the HHS Inspector General. 
But, clearly, we need to do more.
    That is one reason why the President's budget proposes a 
new legislative package to fight fraud, waste and abuse that 
will save about $3 billion over 5 years. It includes 
eliminating excessive reimbursement for drugs, putting stricter 
controls on outpatient mental health services, requiring other 
insurers to report all Medicare beneficiaries they cover so 
Medicare can make sure it does not pay bills that should be 
paid by other insurers. It also include more authority to 
choose the most effective Medicare contractors.

                          Balanced Budget Act

    The BBA includes 335 provisions that affect our programs, 
with savings that are critical to achieving a balanced budget 
and extending the life of the Medicare Trust Fund for 10 years. 
We have fully implemented more than half of those provisions, 
and many more are partially implemented.
    We have implemented provisions for Medicare coverage of new 
preventive benefits, including expanded coverage for test 
strips and education programs to help diabetics control their 
disease, bone density measurement for beneficiaries at risk of 
osteoporosis, and several colorectal cancer screening tests. We 
also expanded preventive benefits for women so Medicare now 
covers a screening pap smear, pelvic exam and clinical breast 
exam every three years for most women, and every year for women 
at high risk for cervical or vaginal cancer. And Medicare now 
covers annual screening mammograms for all women age 40 and 
over, and a one-time initial, or baseline, mammogram for women 
ages 35-39, paying for these tests whether or not beneficiaries 
have met their annual deductibles.
    We are implementing important demonstration projects 
designed to test whether market forces can help Medicare save 
money and promote high quality care. We will soon begin a test 
in Polk County, Florida of competitive bidding as a way to get 
the best quality and price for durable medical equipment and 
supplies. Bidding documents are scheduled for release this 
week, and a conference for potential bidders is scheduled for 
February 23. A toll-free hotline (888-289-0710) is available to 
answer beneficiary and provider questions about the project.
    We will soon begin a test of competitive pricing for 
managed care, in which a bidding process will be used to set 
rates for Medicare+Choice plans in two local markets. A 
Medicare Competitive Pricing Advisory Commission, chaired by 
General Motors Health Care Initiative Executive Director James 
Cubbin, has made recommendations regarding key design features 
of the project, and selected the markets of Phoenix, Arizona 
and Kansas City, Kansas and Missouri, as initial demonstration 
    We also are developing important new payment systems that 
include incentives to provide care efficiently. We have already 
implemented a new prospective payment system called for in the 
BBA for skilled nursing facility costs. Similar prospective 
payment systems are being developed for rehabilitation 
hospitals, home health care, and outpatient hospital care.


    We are implementing the new Medicare+Choice program, which 
was also mandated by the BBA. It allows Medicare beneficiaries 
to select from a wide range of plan options available in the 
private sector today. It requires a massive new beneficiary 
education campaign, and includes important new protections for 
patients and providers, as well as statutory requirements for 
quality assessment and improvement.
    We believe very strongly that managed care is good as a 
voluntary option next to traditional Medicare. Medicare managed 
care enrollment has nearly tripled under the Clinton 
Administration, from 2.3 million when the President took office 
to now 6.8 million. We are taking steps to help beneficiaries 
understand their new options and encourage plans to provide 
these new options.
    We have launched the National Medicare Education Program to 
help beneficiaries understand the program and receive accurate 
and unbiased information about their benefits, rights, and 
options. The campaign includes:
     mailing a Medicare and You handbook to explain new 
benefits and health plan options;
     a toll-free ``1-800-Medicare'' call center with 
live operators to answer questions and provide additional print 
information on request;
     a consumer-friendly Internet site, 
     a program to teach partners in other organizations 
that serve Medicare beneficiaries how to teach others in their 
organizations and communities to explain the changes;
     enhanced beneficiary counseling from State Health 
Insurance Assistance Programs;
     a national publicity campaign;
     a multitude of state and local outreach efforts; 
     a comprehensive assessment of these efforts. An 
initial pilot test was begun in five states in 1998. Results 
will help to refine the program for a full-scale, national 
campaign in preparation for the 1999 open enrollment period 
beginning in the fall.
    We are taking several steps to reach out to health plans to 
encourage participation in the Medicare+Choice program. Last 
summer we held outreach sessions attended by more than 1,500 
plan representatives. And we are strengthening lines of 
communication with plans. I have named a high-level point 
person within HCFA whom plans can call directly if they have 
trouble resolving issues through normal HCFA channels.
    We have converted the vast majority of Medicare HMOs--more 
than 300--to the new Medicare+Choice program. We have approved 
a total of 10 new Medicare+ Choice plans and 10 service area 
expansions for existing plans since November. We are currently 
reviewing another 28 new plan applications and 19 service area 
expansion applications. The newly approved plans include 
provider sponsored organizations, which are HMOs run by 
hospitals and physicians rather than insurers. One of these 
plans is the first to enter Medicare with a federal waiver from 
State licensure, which is allowed for the first time ever under 
the Medicare+Choice program. We have also taken all necessary 
steps so that Medicare beneficiaries can be offered Medical 
Savings Account options, as well.
    We have taken several additional steps to implement 
Medicare+Choice. We have developed new beneficiary and plan 
enrollment systems, payment systems, appeals and grievance 
procedures, and quality assurance mechanisms. And we are 
collecting data that will be used to phase in ``risk 
adjustment'' to meet the BBA requirement that payments to plans 
take into account the health status of individual enrollees.
    We will soon publish refinements to regulations which 
improve beneficiary access to timely information about plan 
changes that affect them. The refinements also address plan 
concerns and should help encourage plans to offer more options 
to Medicare beneficiaries.
    And, to further facilitate plan participation, the 
President's budget gives plans two additional months to file 
the information that we use to approve benefit and premium 
structures. This ``Adjusted Community Rate'' (ACR) data would 
not be due until July 1, rather than May 1. July 1 is the 
latest we can accept, process, and approve premium and benefit 
package data and still mail beneficiaries information about 
available plans in time for the November 1999 Medicare+Choice 
open enrollment period.
    While I am concerned about the business decision that some 
Medicare HMOs made last October to pull out of the program this 
year, it is important to put those business decisions in 
context. Some of the plans that withdrew had market positions 
or internal management issues that made it hard for them to 
compete. And they faced rising prescription drug prices and 
other commercial pressures. Many of the disrupted beneficiaries 
had several other plans to choose from, and all but 50,000 had 
at least one other plan option.
    It is our understanding that the Federal Employees Health 
Benefits Program (FEHBP) experienced a similar rate of plan 
pullouts. We have observed instances where plans that withdrew 
Medicare service from specific counties also withdrew their 
FEHBP service in many of those same counties. As mentioned 
above, the majority of Medicare HMOs converted to the 
Medicare+Choice program, we have approved 20 new plan and 
service area expansions approved since November, and are now 
reviewing applications from another 47 plans that want to get 
into or expand their role in Medicare+Choice. This suggests 
that plan withdrawal decisions have more to do with internal 
plan and larger marketplace issues than with Medicare rates or 
    Still, the President's budget does include proposals to 
protect beneficiaries from disruption by plan withdrawals. 
Beneficiaries need earlier notification of plan withdrawals, 
and broader access to supplemental Medigap polices if they are 
forced to return to fee-for-service coverage.

                           Other Initiatives

    We have several other important initiatives underway 
addressing children's health insurance, consumer protections 
for Medicaid beneficiaries in managed care, consumer 
protections in the private insurance market, and consumer 
protections in nursing homes.

Children's Health Insurance Program

    We are implementing the new Children's Health Insurance 
Program, or CHIP. We have approved 50 State and Territory 
plans, which States expect to cover more than 2.5 million 
children, most of whom are in working families who do not earn 
enough to afford coverage for their children. Amendments 
expanding state plans have been approved for nine states, and 
we are now reviewing another nine amendment proposals, which 
should cover even more children.


    We have proposed regulations to implement BBA provisions 
mandating strong, new patient protection and quality 
improvement rules for managed care plans that now serve about 
half of all Medicaid beneficiaries nationwide are now enrolled 
in managed care. This is a comprehensive and important change 
that should not affect States or plans ability to make Year 
2000 systems changes. We also have sent State Medicaid 
Directors more than 50 letters with guidance as other Medicaid-
related BBA provisions became effective. These letters address 
provisions that help States expand assistance to low-income 
Medicare beneficiaries, let States cover working disabled 
people with incomes up to 250 percent of poverty, allow states 
to mandate that most Medicaid beneficiaries enroll in managed 
care without obtaining a federal waiver, and many others.

Health Insurance Portability and Accountability Act

    We have undertaken tasks under the Health Insurance 
Portability and Accountability Act that are well outside our 
traditional responsibilities. We are charged with overseeing 
protections for individuals with preexisting conditions and 
other broad private sector insurance reforms, and we must 
enforce these reforms in States that fail to do so. To date, we 
are enforcing all provisions of the law in Rhode Island and 
Missouri, and several major provisions in California. As many 
as 30 other States may not have implemented all provisions of 
the law. Our fiscal year 2000 budget request includes resources 
for direct enforcement and close coordination with State 
insurance departments that are necessary for us to meet our new 
    HIPAA also charges our agency with improving and protecting 
health care data that is exchanged electronically. We are now 
reviewing several thousand, often highly technical, comments on 
Notices of Proposed Rule Making regarding a national provider 
identifier system, an employer identifier system, electronic 
transactions and code sets, and electronic data security. We 
expect to soon publish Notices of Proposed Rule Making for a 
health plan identifier system and for electronic claims 

Nursing Home Initiative

    We have also undertaken a new initiative to improve 
oversight and quality of nursing home care. We are working with 
States to improve inspections, cracking down on homes that 
repeatedly violate safety rules, focusing on prevention of 
physical abuse and neglect such as dehydration and 
malnutrition, and posting nursing home quality ratings on the 
Internet. These reforms build on progress made since 1995, when 
we began enforcing the toughest nursing home regulations ever. 
The Clinton Administration will again submit legislation to 
Congress to require criminal background checks of prospective 
nursing home employees, establish a national registry of 
nursing home workers who have abused or neglected residents or 
misappropriated residents' property, and allow more types of 
nursing home workers to help residents eat and drink during 
busy mealtimes.


    We are making substantial progress in meeting our 
challenges and better managing the programs that so many 
millions of Americans rely on for health care coverage. 
Clearly, we have much more to do. That is why we are 
implementing the many management reforms discussed in this 
testimony. That is why the President's budget includes 
provisions to increase our flexibility in procurement and 
personnel matters, and to establish an official advisory 
committee to help us stay on top of the rapidly evolving health 
care marketplace. And that is why I am grateful for the advice 
and assistance of this Committee and of the General Accounting 
Office. I thank you again for holding this hearing, and I am 
happy to answer your questions.


    Chairman Thomas. Thank you, Nancy. And we have in the past 
covered those concerns that previous administrators had thought 
they were solving the potential Y2K problem with an 
administrative, sweeping administrative change which eventually 
was swept out the door rather than going into effect. And I 
don't want to spend a lot of time on that, but it is something 
that we do have to consider in terms, as you indicated, 
although it seems a lot longer than that, you have been there 
only 1 year? OK. It seems like three already. You did come in 
at a time when not only the BBA and all of the changes included 
in that which would have been more than sufficient, you came in 
following a reorganization which people hadn't physically been 
moved to where they were supposed to go and the Y2K problem as 
well. And I just personally want to say that notwithstanding 
those factors, which have to be dealt with, and, frankly, have 
not been dealt with as well as sometimes we thought they should 
have been, you personally, in my opinion, have done an 
excellent job.
    Ms. DeParle. Thank you.
    Chairman Thomas. You recall the last time that we had the 
audit and I tried to indicate that whatever the amount, $22, 
$23 billion, whatever it was, should not automatically be 
placed in the waste, fraud, and abuse column. That, in fact, I 
wasn't going to use that to beat up on the Administration 
because I thought a lot of it could be attributed to improper 
coding, not understanding exactly from an administrative point 
of view where it was to be classified, and it was all rolled up 
together. At the same time, I don't believe, if you'll allow 
me, that we've dropped that dramatically in our reduction of 
fraud and abuse. My guess is that the second time around we 
wound up finding a home for all of those mis-filed, that had 
wound up as part of the total lost cost. Is that true? Do you 
have any way to quantify the portion of the reduction that was 
actually waste, fraud, and abuse reduction rather than getting 
the administrative classification and the coding correct?
    Ms. DeParle. I think I understand your question, Mr. 
Chairman. And as I understand it the methodology of this audit 
the Inspector General has used has been the same for the last 3 
    Chairman Thomas. But if you'll recall, when we discussed 
the audit there were a number of categories: Incorrect coding, 
lack of medical necessity, there were a series of items that 
were all bundled together to produce the dollar amount, some of 
which were fraud and abuse?
    Ms. DeParle. That's right. And the Inspector General has 
always said there is no way to determine from just this audit 
how many of these claims were fraudulent. What we do do is we 
take the claims that they find and we go back after them and 
some time later you can determine I suppose if there was any 
true fraud involved. But you're right, the categories that they 
divided into are: Documentation, medical necessity, coding.
    Chairman Thomas. Non-covered incorrect?
    Ms. DeParle. Yes, Sir.
    Chairman Thomas. Now, there's nothing wrong with saying 
we've made great strides in putting the piece of paper in the 
right bin because that needs to be done, but I think the 
impression is sometimes left that that means that that 
significant reduction, i.e., putting the right paper in the 
right bin, was in fact reduction of fraud and abuse. I guess I 
would have a little higher comfort level if the report didn't 
come out 2 days prior to the hearing.
    Ms. DeParle. Well, the Inspector General--my audit is due 
to the Office of Management and Budget under the Chief 
Financial Officer's Act on March 1 of this year. And the reason 
why they made it available is because they have to give it to 
Ernst and Young who actually puts together the audit. And the 
Inspector General said they had to give it to them by the 
middle of the month. So I think that's why they did it.
    Chairman Thomas. But there's more material that usually 
comes out on the March 1 date, isn't there?
    Ms. DeParle. Yes, there's an entire audit and it talks 
about things like our accounts payable, our accounts 
receivable, where we've had problems in the past.
    Chairman Thomas. Electronic data processing?
    Ms. DeParle. Exactly, exactly. And that will all be 
available, well, we give it to OMB I think on March 1. And then 
it will be available to the Congress shortly thereafter.
    Chairman Thomas. And my assumption of course is that all of 
the other parts of that report will be as rosy and the 
reduction of what other people are calling fraud and abuse?
    Ms. DeParle. Well, I don't know anything about it yet, but 
I do know that last year we made progress in achieving a 
qualified opinion. The year before, the auditors had said they 
could not render an opinion about our books. Last year they 
said qualified opinion. My goal is to get a clean opinion. I 
don't know whether I'll achieve that this year or not. I 
suspect I won't because there are problems with our accounts 
receivable at the contractors. But, you know, I'm always 
optimistic, as you might imagine, in this job.
    Chairman Thomas. One of the difficulties on the Medicare 
Commission is that we're trying to come up with as many useful 
measuring devices as possible. One of the things we did in BBA 
1997 was ask for a number of tools. One that came across a 
discussion some time ago was the definition of ``homebound.'' 
That was something that was due out of your shop by----
    Ms. DeParle. October 1998.
    Chairman Thomas. October 1, 1998. Where are we on that? 
I've discovered now that it really is something I would find 
useful if we could get it?
    Ms. DeParle. HCFA completed its draft of the report in 
December, and we have been working to get coordinated with the 
rest of the department. This is a report, Mr. Chairman, from 
the Secretary. So we did the initial draft and we're working 
with the other agencies within the department to get a 
clearance on that report. And also we will then need to work 
with the Office of Management and Budget. But we're close to 
having it finished.
    Chairman Thomas. What does that mean?
    Ms. DeParle. That I've personally held meetings to try to 
get things worked out, and I believe that I'll be able to get 
it up here within a couple of months I hope.
    Chairman Thomas. So it will be after we have to make a 
report from the Medicare Commission, OK. Some of those tools 
would be very, very helpful and we thought from the time line 
that the statute they required be available?
    Ms. DeParle. Yes, Sir. I don't want to excuse it because 
you know I take the deadlines very seriously in the Balanced 
Budget Act. The people who are working on the homebound report 
are the same staff who have been working on all the other home 
health changes.
    Chairman Thomas. I understand.
    Ms. DeParle. And they got it done, but they didn't turn it 
in until December. And so it's now been going through a 
clearance process. And knowing of your interest, perhaps I can 
move it a little faster.
     Chairman Thomas. Well, and knowing we did send you a 
legislative second bite of the apple on home health care.
    Ms. DeParle. You did and I appreciated it.
    Chairman Thomas. The gentleman from California?
    Mr. Stark. Just a couple of questions on your budget 
request. I notice that you have already been up to see Mr. 
Porter, and you're asking for a 3.6-percent increase, is that 
    Ms. DeParle. Yes, Sir, that's right, not including the year 
2000 funding for the computer systems.
    Mr. Stark. One of the things I'm concerned about is that 
part of your program includes some user fees as a revenue 
source. What happens if the user fees aren't enacted?
    Chairman Thomas. Can the gentleman yield briefly?
    Mr. Stark. Yes.
    Chairman Thomas. Apparently we have 3 minutes on a vote on 
the floor of the House. And so if the gentleman----
    Mr. Stark. I would reserve the balance of my questions.
    Chairman Thomas. Actually, they'll be available just as 
soon as we get back. The Subcommittee stands in recess.
    Chairman Thomas. The Subcommittee will reconvene. The 
gentleman from California, the Ranking Member, is recognized.
    Mr. Stark. Mr. Chairman, I am concerned about two things in 
HCFA's appropriations request. One is that there is some 
revenue there from user fees which Congress possibly won't 
enact. I wonder what would happen in that situation? Could you 
comment on a statement I make when I give speeches? I've always 
said that HCFA's budget, or Medicare's overhead, was under 3 
percent. I don't know if that's accurate. So, what is the 
correct percentage and if you got your full funding, what would 
it be?
    Ms. DeParle. The last time I looked at this calculation, 
our administrative budget was somewhere less than 2 percent I 
think of our--of the dollars we spend on behalf of the 
taxpayers and the beneficiaries. And I don't believe this 
budget or even the last one which was, as I said, quite a 
substantial increase from what we've gotten in the past and we 
really appreciate it, would really change that calculation 
    You ask about the user fees and I've had----
    Mr. Stark. I'm not sure that continues to be a hallmark. 
Maybe it ought to get to 3 percent, but----
    Ms. DeParle. No, I think that--you and I have talked about 
this, Mr. Stark. And I think that what the President has asked 
me to do and what you all have asked me to do is make the most 
out of the dollars we have and to be as efficient as we can. 
And I believe we are doing that. I think certainly most private 
insurance companies operate with higher overhead. But having 
said that, as I said, last year we did receive a lot of support 
from the Congress and we hope to work with you this year.
    On the user fees, I've had deep philosophical discussions 
with some of you about the pros and cons of user fees, and I 
understand there are a number of different views on it. I think 
I can make the case why these are modest, why given the things 
we have to do, that it makes some sense to charge $100 for a 
provider coming into the program so that we can check them out, 
do a site visit, that sort of thing. But having said that, I 
know they're not necessarily the most popular up here and I'll 
be working with all of you again on what to do if they're not 
enacted. But we hope you'll see fit to look at them and enact 
    Mr. Stark. Thank you. You mentioned that the President has 
some proposals to protect beneficiaries from disruption of 
managed care plan withdrawals. Do you suggest that 
beneficiaries need earlier notification of plans leaving the 
program, becoming unavailable, or closing? Do they need broader 
access to supplemental or Medigap policies if they're forced to 
return to fee-for-service? Now, that only sounds like a bill 
that I just introduced, but can you elaborate at all as to what 
you're going to be asking us for? I think it's on page 17 of 
your written statement. What do you all have in mind?
    Ms. DeParle. I'd be happy to. Starting----
    Mr. Stark. Unless you just want my bill, that would be all 
right too.
    Ms. DeParle. I haven't studied your bill, but I did look at 
a summary of it and it does seem that some of the ideas are the 
same. We started today by providing the plans with more 
information and clarification of some of the things that had 
been in the regulation last year with this mini-rule that we 
put out today. We're also asking on the plan side for some 
changes that we hope will make the system go smoother next 
year, as you noted, changing the submission deadline for the 
ACRs to July 1, which we think makes more sense both from the 
standpoint of the plans and giving them more information about 
the market and also from the standpoint of running our 
beneficiary education campaign. We are phasing in risk 
adjustment, which is part of the Balanced Budget Act. We're 
phasing that in so as to promote stability in the marketplace. 
We want to do some things to reduce administrative burdens on 
plans. And, as I said, the mini-rule that we're putting out 
today, we're publishing today, should help with that as well. 
We're asking for some reforms that would allow the expansion of 
Medigap protections for disabled and ESRD beneficiaries that 
would allow beneficiaries who are affected by plan termination 
and service area reductions access to all Medigap plans. And we 
want to work with you all on that.
    We would like a one time special open enrollment period for 
beneficiaries who didn't have a Medicare Plus Choice option. 
After the plan terminations last year, there were about 50,000 
beneficiaries who were left without a choice and for some of 
them, some insurance carriers didn't properly answer inquiries 
and some of them got left out in the cold, and we want to make 
sure they're given some more rights.
    Mr. McDermott. Mr. Chairman? Mr. Chairman? Could I have a 
clarification on what Ms. DeParle said? You said that people 
who were out of plans can get into the Medigap, into all 
Medigap policies at the same premium they had before or can 
that be changed?
    Ms. DeParle. I believe it's just access. Right now----
    Mr. McDermott. Just access?
    Ms. DeParle [continuing]. The Balanced Budget Act made an 
improvement, as you know.
    Mr. McDermott. But they can be underwritten?
    Mr. Stark. I believe they prohibit pre-existing conditions 
but if you're older, you pay more.
    Ms. DeParle. That's right.
    Mr. Stark. In other words, if it's an age-related premium 
and you had it at 70 and you want to get it back and you're 75, 
you have to pay the 75-year-old premium.
    Chairman Thomas. The law says that within 1 year, you can 
go back and there is no pre-existing requirement. However, in 
this situation, and the gentleman from California is correct, 
they could charge a different price, but it cannot be on 
physical pre-existing condition. It would be age-related.
    Ms. DeParle. That's my understanding. And what we're doing 
is, the Balanced Budget Act made an improvement here for 
beneficiaries but, given what happened last year, we would like 
to go further and extend further protections.
    Mr. McDermott. Thank you, Mr. Chairman.
    Mr. Stark. Thank you very much.
    Chairman Thomas. The gentleman from Louisiana.
    Mr. McCrery. Thank you, Mr. Chairman. Ms. DeParle, last 
summer I guess when you were before this Subcommittee, I talked 
with you about the hospital wage index and how it was weighted 
toward certain regions of the country and it didn't seem fair. 
And you agreed and you said that you all were going to 
undertake a revision of the formula. And in an effort to help 
you to get the data for that, I think the American Hospital 
Association put together an effort to do a couple of things: 
No. 1, provide HCFA with the data necessary to reformulate that 
wage index; and, No. 2, in the interim, their group, their task 
force that they formed, came up with an interim formula, if you 
will, to serve as a change for the index while you were 
gathering the data, are you familiar with that? And what are 
your plans to utilize the efforts of that task force and their 
    Ms. DeParle. Mr. McCrery, sitting here, I don't have the 
latest on that. I need to talk to Dr. Berenson and his staff 
about what they've done. I would like to get back to you on 
    Mr. McCrery. OK. If what I've told you is correct, and the 
industry has gotten together and agreed on an interim formula 
to tie you over until you get the data that you need to 
reformulate the index on your own, would you be inclined to use 
that industry agreement as long as it's revenue neutral?
    Ms. DeParle. Well, what I would want to do is, obviously 
the industry's analysis is something that I would want to look 
at. And I will talk to Dr. Berenson and I'll look at it as soon 
as I can. What I would want to do is work with all of you to 
make sure that it is what Congress intended. I would also need 
to work with our lawyers to be sure that they think I have the 
authority to do that. But, yes, Sir, I would be happy to take a 
look at it.
    Mr. McCrery. OK. With respect to the Y2K problems, you did 
talk about that in your testimony. And I just want to get some 
more assurance from you that this is not going to cause a 
problem to beneficiaries. After all, we've been told before 
that HCFA is working on computer problems only to find out that 
the work didn't really produce any good results. Specifically, 
the Medicare Transaction System that we were told was going to 
solve all the problems and $50 million later, it didn't amount 
to much. Can you give us some further assurances that computer 
problems are not going to cause beneficiaries to go wanting 
after the year 2000?
    Ms. DeParle. Yes, Sir, I can. And let me be clear. The Y2K 
problem is not a computer software problem or design of an 
infrastructure problem like the Medicare Transaction System 
was. And I understand and I regret that we all had a bad 
experience with that. The Y2K problem is a management problem. 
And it has been the No. 1 priority that I've had at the agency. 
I wouldn't say that I came to the Health Care Financing 
Administration to work on it, but I had no choice and we've 
really put all of our resources and efforts on it.
    We also, thanks to the recommendations of the General 
Accounting Office when I first got there--we've done a number 
of things to make sure that we have the proper oversight in 
place, including hiring outside independent experts to come in 
and look over our shoulders and over the shoulders of our 
contractors as they make the changes. And that gives me more 
assurance, and I think it should give you more assurance.
    And I would also like to ask the Members of the Committee 
to help me, as you have in other areas. I've sent a letter out 
to all 1.6 million providers that we deal with telling them 
what they need to be doing to get Y2K compliant. I am convinced 
that we're going to be ready to pay their claims, but we need 
your help in making sure that the providers are making the 
changes that they need to make to be able to submit claims to 
us first of all. And, second, of course to be able to provide 
services to all of our friends who may be in the hospitals or 
needing health care around that time. If we can do anything in 
your districts to provide more information to your health care 
providers, to your doctors or hospitals, I hope you'll let me 
    Mr. McCrery. OK. Thank you. On the hospital wage index 
question, would you get back to me when you discover more 
information on that?
    Ms. DeParle. I will call you tomorrow.
    Mr. McCrery. Let me know what that's doing?
    Ms. DeParle. Yes, Sir.
    Mr. McCrery. Thank you.
    Chairman Thomas. The gentleman from Wisconsin wish to 
    Mr. Kleczka. Administrator DeParle, I have a couple of 
concerns. The first involves the improper payments. The audit 
indicates that there has been a significant decrease in actual 
improper payments. My question to you is what percentage are 
you at now of total program cost versus improper payments? Are 
we down to 7 percent I think?
    Ms. DeParle. Seven point one percent I believe, Sir.
    Mr. Kleczka. Is there a health insurance industry standard 
for errors in billing and things of that nature? Is there a 
norm we can compare that to?
    Ms. DeParle. No, in fact, it's sort of interesting. This is 
a rather esoteric area, as you might imagine. There's a few 
people who have done work in this area, one is Professor 
Malcolm Sparrow at Harvard. And what he says is that, in fact, 
that Medicare is ahead of the rest of the industry in that we 
at least measure it and say what it is and then publicly go 
about attacking it. And that's consistent with the experience 
I've had. And I've been working a lot with the private health 
insurance industry, and they've told me that our efforts here 
have helped them a lot. In fact, they're working with us now on 
some of these things.
    Mr. Kleczka. Ultimately you're responsible for the entire 
$12.6 billion in overpayments. However, the amazing part is 
that the bulk of it is out of your hands; it's the 
responsibility of the contractors you select. In selecting new 
contractors or renewing contracts, is their error in billing a 
factor in that decisionmaking?
    Ms. DeParle. Yes, it is. And, in fact, one of the things 
that we did over the past year is we're moving to strengthen 
our contractor oversight. You're right that it's not in our 
hands. A lot of people don't understand that we don't actually 
pay the claims in Baltimore. This happens all over the country 
with these 77 contractors. But we do have an obligation to 
oversee them and we're strengthening our oversight of them and 
that includes looking at their error rate and looking at how 
they're doing here as part of selecting contractors to do 
    Mr. Kleczka. How many contractors do you employ nationwide?
    Ms. DeParle. The ones that process claims, I believe it's 
77 or 80. Something like that.
    Mr. Kleczka. OK. And for all 80, you know what their error 
rate is? You have a pretty good fix on it?
    Ms. DeParle. I don't know what their error rate is sitting 
here, Sir, no.
    Mr. Kleczka. No, not off the top of your head, but you do 
have some record of that back in the office?
    Ms. DeParle. We probably don't have it on an individual 
contractor basis. I have asked for that and we've talked to the 
Inspector General about doing that. To do that, would be very 
expensive and the sample would have to be much larger because 
what they do right now is a statistical sample; and they pick 
600 beneficiaries and then look at all their claims. And I 
think it would be valid maybe for some contractors, but not for 
all of them.
    Mr. Kleczka. But if that's part of the criteria you use to 
select a contractor or renew a contract, I would think it would 
be important that you have a little better fix on what the 
error rate is per contractor. For the bad actors, when renewal 
time comes, or when they're vying for a contract in another 
region, that deficiency might be enough to doom their request. 
Let's give that some further thought.
    Do you still think we need some contractor reform 
    Ms. DeParle. Yes, I do.
    Mr. Kleczka. And what would that consist of?
    Ms. DeParle. Well, the Medicare contractors by statute, by 
the 1965 statute, are treated differently than any other 
government contractors. And I believe that it's in the 
government's interest and Congress' interest for us to have 
more flexibility with who we contract with. Some of our 
contractors do a very good job. With others it's been 
difficult, frankly, to improve their performance. An example is 
on Y2K. We've come a long way over the last year, but when we 
started out the GAO recommended to me that I have a contract 
amendment to each of my contracts requiring them to be Y2K 
compliant. And a lot of them balked at that and told me that I 
had no right to ask for that. The statute is too narrow and we 
need more flexibility.
    Mr. Kleczka. OK, you just led into my second question. From 
what I understand, your agency is mostly prepared for Y2K. 
Where are you and the contractors? You did issue the change in 
the contracts but where are they as far as coming up to the 
standards? I know with 1.6 million providers, we're definitely 
going to see some problems there but the contractors are 
something you control.
    Ms. DeParle. Well, I hope not and that's what we're working 
toward. And that was Mr. McCrery's question. We've made a lot 
of progress. On our internal systems, as you say, for our 
mission critical systems as of December of this year, we were 
compliant on Y2K with all of them. On the external systems, we 
went from 0 last year to 54 of 77 this year. And I'm working on 
correcting all the others and getting them tested by the end of 
    Mr. Kleczka. You went from zero to what?
    Ms. DeParle. To 54 of 77, which is around 70 percent of the 
external ones are done.
    Mr. Kleczka. OK.
    Ms. DeParle. And, as I said, this was a tense situation, 
but I want to thank the contractors for really focusing on this 
and helping us get the job done this year.
    Mr. Kleczka. So you have about 30 percent more contractors 
to come up to snuff?
    Ms. DeParle. That's right.
    Mr. Kleczka. Thank you very much, Mr. Chairman.
    Chairman Thomas. Thank you. It's been noted, or at least 
indicated to me, that the press corps wishes to have yellow 
flags issued so they can throw them at us. [Laughter.]
    You don't have your tables that you normally have in 1100, 
so if you'll allow us to get through the hearing. I do hope 
there is no reporter that is left outside. Any reporter left 
outside raise your hand? [Laughter.]
    Let's just make sure, and I don't mean that facetiously. 
Who's on the door? Have we got everybody in? Everyone is 
created equal but some folks write and others don't. 
    The gentleman from Texas.
    Mr. Sam Johnson of Texas. Thank you, Mr. Chairman. Welcome.
    Ms. DeParle. Thank you.
    Mr. Sam Johnson of Texas. In your testimony, you say that 
HCFA has doubled the number of physicians that you have on your 
staff. How many do you now have? You know twice one two?
    Ms. DeParle. I know that. And we have about 30. When you 
asked me this last year, we had about 15.
    Mr. Sam Johnson of Texas. I know. Are they actively 
    Ms. DeParle. Yes, Sir, they're at the very senior levels of 
the agency.
    Mr. Sam Johnson of Texas. And do they have some----
    Chairman Thomas. If the Chair could interrupt, these 
microphones are very uni-directional, you need to speak 
directly into it.
    Ms. DeParle. I'm sorry.
    Chairman Thomas. No, you're fine.
    Ms. DeParle. I was answering Mr. Johnson's question in 
saying that we have 30 physicians now working at the agency and 
we had 15 last year. And this is an area that he and I have 
talked about in the past.
    Mr. Sam Johnson of Texas. And they are physicians that have 
actually practiced medicine?
    Ms. DeParle. Yes, Sir, they are.
    Mr. Sam Johnson of Texas. That's great. OK, I want to 
pursue the question Mr. Kleczka was talking about a little bit. 
You're requiring all contractors to be certified as Y2K 
compliant. Do you have oversight in HCFA to pursue that and 
make sure they are, No. 1? And, No. 2, what happens to 
contractors that aren't ready? You said they don't have any 
right--they told you you didn't have any right to ask for that, 
well, what did you do with the ones that told you that?
    Ms. DeParle. In the end we worked it out and they all 
signed a contract amendment. So I have that now.
    Mr. Sam Johnson of Texas. They did?
    Ms. DeParle. They did.
    Mr. Sam Johnson of Texas. Or they were going to be 
terminated, right?
    Ms. DeParle. No, I don't----
    Mr. Sam Johnson of Texas. Would you do that?
    Ms. DeParle. I don't know what it would have come to. I 
don't know--the problem is that under the statute that we have, 
their position legally was that I didn't have any authority, 
the Secretary didn't have the authority to require that of them 
because the statute is written very normally. I mean very 
narrowly. I think I probably could have done that. I'm glad 
that we didn't have to. They've worked with us. And, as I said, 
we're making good progress. Your question was, I'm sorry, Sir?
    Mr. Sam Johnson of Texas. Do you have some oversight and 
some way of testing them?
    Ms. DeParle. Yes, Sir. In fact, I would venture to say 
there's more oversight on this project than there's ever been 
on anything at HCFA before. There is one person who is in 
charge of contractor oversight now. And she is, in fact, one of 
the physicians I was talking about, Dr. Marjorie Kanoff, who 
worked at a contractor in Massachusetts before she came to 
HCFA. There is also Dr. Gary Christoph, who I brought in as our 
chief information officer from Los Alamos, and he is also 
overseeing that effort. And we have HCFA employees out 
stationed at the contractors. So especially at the ones I was 
mentioning before where they're still not compliant, we've had 
people on the premises checking them and making sure that we 
know on a day-to-day basis where they are because the problem 
when I first got there was we weren't sure and all we had was 
what they were telling us about where they were. And that, 
given I think what we all recognize as the problem here, wasn't 
enough. So we have HCFA staff who are out there.
    Mr. Sam Johnson of Texas. Are all your reimbursements 
    Ms. DeParle. Virtually all of them. I think we may be the 
most electronic-billing insurance company in the world.
    Mr. Sam Johnson of Texas. So if you get a regional blackout 
somewhere, are you capable of writing checks manually?
    Ms. DeParle. We will be. We're doing right now a 
contingency plan that we hope to have ready, the final draft of 
it, sometime this spring. And it will describe plans for doing 
something like that. Now, I will be honest with you. I don't 
know that anybody could write checks for 900 million claims. So 
what we are preparing is what we believe is more likely to 
happen, which is a short-term small regional, a few States, 
that kind of thing. If this happened everywhere, we wouldn't be 
able to do it. We would not be able to process paper claims 
with the staff that we have.
    Mr. Sam Johnson of Texas. You indicated 77 contractors. 
Then you said it might be 77 or 80. And then in answer to a 
question, you said you lacked 30 percent having it done. Can 
you clarify that for me, those numbers?
    Ms. DeParle. Well, the reason I said 77 or 80 is because 
when I'm talking about mission critical external systems that 
pay Medicare claims, I know the number is 77. But there may be 
some overlap, there may be some higher number of contractors 
that we have. And Mr. Kleczka was asking how many contractors?
    Mr. Sam Johnson of Texas. I know.
    Ms. DeParle. So it's 77 mission critical external systems.
    Mr. Sam Johnson of Texas. OK, let me ask you one more quick 
question. It's my understanding that you currently have about 
70 data centers. Could they be consolidated? In other words, 
could you more efficiently operate the data centers if there 
were a smaller number of them?
    Ms. DeParle. Yes, and I think that's something that we've 
been looking at. The problem has been that with all those 
contractors originally there were many different actual 
computer systems. What we've been trying to move toward is a 
standard system for Part A claims, a standard system for Part 
B, a standard system for durable medical equipment. And when 
that is done, I would think we could consolidate the number of 
data centers.
    Mr. Sam Johnson of Texas. With back-ups, of course?
    Ms. DeParle. Yes, Sir.
    Mr. Sam Johnson of Texas. OK. Thank you very much. Thank 
you, Mr. Chairman.
    Chairman Thomas. Does the gentleman have off the top of his 
head any idea where he would locate this centralized? 
    Mr. Sam Johnson of Texas. Well, Dallas is pretty central.
    Chairman Thomas. Does the gentleman from Georgia wish to 
    Mr. Lewis. Thank you very much, Mr. Chairman. Madam 
Administrator, thank you for being here.
    Ms. DeParle. Thank you.
    Mr. Lewis. Why should the Congress be concerned about 
contracting reform? What problems are we trying to solve? The 
current contractors seem to think that the system is working 
pretty well as a current structure and doesn't need to be 
changed. I would like for you to respond?
    Ms. DeParle. I would be happy to. As I said, I want to be 
clear that many of the current contractors are doing a very 
good job. And we are going to be doing a very good job of 
overseeing them. So we're going to make sure that we get good 
value for the taxpayer's dollar. But the authority under which 
Medicare contractors are hired and the way they operate is 
different from any other authority for contractors. The rest of 
the Government operates under what are called the FAR 
regulations, the Federal Acquisition Regulations, and they 
provide more flexibility to the Government in competing 
contracts. The statute right now says that we're limited to 
dealing with insurance companies for claims processing for Part 
B, for example. It says on the Part A side, we're limited to 
dealing with entities nominated by groups of providers. And 
since 1965, that's been essentially one group.
    And I just happen to believe it's in the Government's 
interest and in the beneficiary's interest to have a broader 
group and more of a marketplace and more competition for that. 
And, again, I'm not saying that every single, that if we get 
contractor reform, which I hope we can work with you to do, 
that the next year there's going to be a whole new set of 
contractors. Some of them will be the same. But I will have 
more leverage. I will have more oversight authority. Even 
terminating contractors is a difficult thing to do right now 
even when there are program integrity problems. And I just 
think that's not in the Government's interest.
    Mr. Lewis. Health Affairs said that many of your problems 
stem from funding, flexibility to accomplish your tasks. Is 
that correct? What do you need from Congress to be able to 
successfully manage your agency and accomplish your tasks and 
fulfill the challenges that you're facing?
    Ms. DeParle. Thank you. One of the things that I need from 
Congress are hearings like this one today and the interest that 
this Committee has shown in helping us to improve our 
management capacity. Resources are scarce, and I understand 
that, across the Government, but the programs that we're 
running are very, very important and I appreciate that this 
Committee recognizes that and has tried to help us to get the 
resources we need to do our job.
    I also think that we need some more management flexibility. 
Again, this Committee has tried to give us some of those 
authorities in terms of being able to do competitive bidding 
for some of the things that Medicare does. There's no reason 
why Medicare should pay so much more than the Veterans' 
Administration does for certain products for its beneficiaries. 
So there are things like that that we can work together on, and 
I would like to work with the Congress and with this Committee 
to get those things done.
    Mr. Lewis. Will you be so kind to help us understand the 
rationale for the President's proposal to use 15 percent of the 
budget surplus for Medicare?
    Ms. DeParle. Yes, I think what the President has in mind is 
ensuring the solvency of the trust fund through 2020. And I 
believe that he has made this proposal to the Congress as a way 
of ensuring that the health care of our Medicare beneficiaries, 
like our Social Security beneficiaries, comes first in the 
debate that's going to follow about how we handle the surplus.
    Mr. Lewis. Thank you very much. Thank you, Mr. Chairman.
    Chairman Thomas. Thank you. Does the gentleman from 
Minnesota wish to inquire?
    Mr. Ramstad. Thank you, Mr. Chairman. Administrator 
DeParle, as a new Member of the Subcommittee, I have more 
questions than the time will allow. So I assume, Mr. Chairman, 
that I can submit them for the record in writing and there will 
be written responses?
    Chairman Thomas. You certainly can and I think you'll find, 
and I want to thank the gentleman for his attendance today, 
that we have enough of these that this isn't a one time shot. 
This is an ongoing road show.
    Mr. Ramstad. The most pressing question I have, and I ask 
it as somewhat of a follow-up to Mr. Lewis' question, I think 
you know Blue Cross/Blue Shield of Minnesota recently notified 
HCFA that it will end its participation as an intermediary for 
Medicare Part A. I know this also happened in Illinois last 
year. In addition, in 1995 in Minnesota, HCFA awarded Medicare 
Part B administration to United Health Care over the previous 
administrator, Blue Cross/Blue Shield. Again, as a follow-up to 
Mr. Lewis, I was wondering if you could clarify how a new 
contractor for Medicare Part A is chosen? And I ask this 
because I want to make sure that no Minnesota beneficiary, or 
for that matter, provider, is harmed by this switch?
    Ms. DeParle. Well, we look at a number of factors. I can 
name off some of them and this does happen with some frequency, 
that contractors come and go. One of the examples you cited was 
from a program integrity problem, in fact. And what we do is we 
look at their record for program integrity, meaning have they 
paid claims appropriately, are there problems there? We look 
at, wherever we can, we try to make sure that the jobs can be 
maintained in the place that they were. And we have a pretty 
good track record there as well. And we look at how it will 
affect the providers because if providers have to change from 
one system to another, I've described before that the 
contractors use different computer systems. So if we were 
changing the Minnesota providers over to another system, 
another contractor, it would be in their best interest if it 
could be the same computer system so they wouldn't have to make 
changes to their computer system. So we look at things like 
    Also, I must make clear that under current law, the Blue 
Cross and Blue Shield Association chooses replacements for Part 
A contractors known as fiscal intermediaries, not HCFA, and 
that is one of the things we propose to change with contracting 
reform legislation.
    Mr. Ramstad. I appreciate that response. Let me shift to a 
different area, Administrator DeParle. I know that HCFA's rules 
delineate the criteria for determining whether a reimbursement 
level is grossly excessive or grossly deficient. Yet the DMERC 
notices on inherent reasonableness do not reference any of 
these criteria. I would like to know what criteria were used to 
determine that the payment levels were inherently unreasonable?
    Ms. DeParle. I believe, Mr. Ramstad, you're referring to 
the notices that were put out some time in the fall under the 
inherent reasonableness authority that the Congress gave us. 
And what we were looking at--there are items of durable medical 
equipment and we did do analyses. The DMERC medical directors 
did do analyses. And what I recall about it is they looked 
particularly at what the Veterans' Administration is paying, 
and in some cases we were paying two to three times what the 
Veterans' Administration was paying for certain items of 
durable medical equipment. I would be happy to provide you with 
a briefing on the analyses behind that.
    Mr. Ramstad. That I would appreciate, thank you. Let me ask 
finally I know under current law the Medicare Plus Choice plans 
are paying for most of the beneficiary education programs even 
though the health plans currently enroll, as I understand it, 
only about 15 percent of Medicare beneficiaries. It's been 
suggested to me by a number of people in Minnesota that the 
fee-for-service Medicare should contribute to the user fee 
since it's also one of the choices. Can you respond?
    Ms. DeParle. Well, this is an area that the Committee and 
the Committee staff have paid a lot of attention to. What we 
tried to do with the $95 million is make sure that we used it 
only as the statute said. In the handbook, for example, if we 
were providing information that is more about fee-for-service 
Medicare or general Medicare that was not part of what the 
Congress talked about in this education campaign, we funded 
that out of our regular program management budget because I 
wanted to be sensitive to what you all intended with the user 
fees. And I understand the health plans' position on the user 
fees. I've met with a number of them and I understand how they 
feel and we're open to working with the Congress on what you 
think is equitable here.
    Mr. Ramstad. Thank you, Administrator. Mr. Chairman, I 
yield back.
    Chairman Thomas. Thank the gentleman. The gentlewoman from 
Florida wish to inquire?
    Mrs. Thurman. Thank you, Mr. Chairman. Administrator 
DeParle, thank you for being here. This is my first time on 
this Committee, so I don't have some of the advantages of some 
of the work has done. However, as was maybe mentioned in the 
opening, I probably do have a lot of Medicare and more than 
most on this Committee. And one of the issues hitting Florida, 
and quite frankly hitting all across the country, has been the 
issue of HMOs pulling out and leaving hundreds of thousands of 
people without any care. I know that you've recently done some 
information on the Internet, which I thank you for. It's been a 
great help. Can you give us some ideas of some other things 
that might be taking place over the next couple of months that 
will help these people who have lost this care?
    Ms. DeParle. Well, as I mentioned, we want to work with the 
Committee on some proposals that we've come up with to try to 
help the people who were affected this year; and also to 
provide more of a safety net for folks next year in case there 
are more plan withdrawals. Florida was particularly heavily hit 
on this, and we did something like a thousand meetings around 
the country sitting down one-on-one with beneficiaries in 
townhall meetings to try to help them work through this. We 
want to have a more concerted campaign next year so that they 
know where to go for information and help.
    It is interesting in looking at the pattern around the 
country, we've been analyzing this some, and there are some 
parallels to what happened in the Federal Employees Health 
Benefit Plan. In fact, in some counties, it was precisely the 
same counties where they pulled out, and in that program it's 
interesting I think there was a 5-percent increase last year. 
So we're trying to analyze exactly what happened, and we're 
doing what we can to work with the plans to minimize disruption 
next year. One of the things we want to do is change the 
deadline for the submission of ACRs, the Adjusted Community 
Rate documents, which we hope will give the plans more time to 
fully assess the market and know where they intend to be 
because it is extremely damaging to beneficiaries to hear at 
the last minute that their plan isn't going to be there. So we 
want to work with you to try to make improvements.
    Mrs. Thurman. I appreciate that because they really are 
very concerned. For most of them, it's the pharmaceutical 
assistance but it really has put them in a feeling of just 
being left out. So they're very concerned about it.
    I know that on the MSNs we've cleared that up, and I 
appreciate the help you gave on this because we started to hear 
from our folks at home. On the other side of that though, it 
really won't go into effect until July of this year. Are there 
some other places where our patients can get this information 
before it actually is reinstated so that they would have that 
available to themselves?
    Ms. DeParle. There are and I want to say that I appreciate 
your bringing this problem to my attention because I hadn't 
been aware of it. What Mrs. Thurman is talking about is that 
some beneficiaries were not getting the explanations of 
Medicare benefits, or Medicare summary notices, because of a 
change that had been made last year to suspend them in certain 
cases. If there's a beneficiary who wants one and they're not 
getting them yet because it hasn't been phased in--we expect to 
have them all in by July--they can call the carrier or 
intermediary that's in this document that all the beneficiaries 
got last year. They either got the handbook, if they were in 
Florida, or they got this bulletin that gives the number for 
their intermediary or carrier. If they call there, they can get 
a copy of their Medicare summary notice.
    Mrs. Thurman. Let me follow-up with that then because at 
any time that we do legislation there's unintended consequences 
that maybe wasn't thought all the way through or as rules go 
and change. As you've gone through in implementing these, you 
said you've been through like 188 of them. You have 300 of them 
to do. And we're starting to hear from these constituents who 
have now been placed under these rules. And there are some that 
I don't think we thought was going to happen, and I think, Mr. 
Chairman, you talked about one with the homebound. We've got an 
awful problem with people with disabilities that are not 
getting the home health care and don't really fall under the 
homebound that may end up going into nursing care homes when 
they're perfectly capable of staying home. But are there some 
other areas that we have gotten some unintended consequences 
that we need to be aware of or that we can be helping work on 
over this next year?
    Ms. DeParle. Well, one of them is one that we've been 
discussing a little bit this afternoon, which is some of the 
filing dates in the Balanced Budget Act. And I don't think when 
we were working on that, anyone thought about the impact that a 
May filing date might have on plans, for example. And that was 
a domino effect on beneficiaries later on. So there are things 
like that that I think we can work together to fix.
    There were things in the regulation that we put out that we 
didn't realize were going to be difficult for plans to meet. 
And, as I said, today we issued a regulation to try to deal 
with those things. Some of them we can deal with 
administratively. Some of them we'll need your help on. 
Certainly in areas like home health, we've been monitoring that 
very closely around the country to sort of see what the 
patterns are.
    I was very concerned about were there going to be increases 
in nursing home admissions? And so far we're not seeing that. 
But we want to continue to work with the Committee and identify 
those areas as quickly as we can. And then if we need to 
address them, we'll do whatever we can to work with you to get 
that done.
    Mrs. Thurman. Thank you.
    Chairman Thomas. Thank the gentlewoman for her questions. 
The gentleman from Maryland is no longer a Member of the 
Committee. His ticket has expired. Apparently he went for power 
such as it is within the minority side to become Ranking Member 
on another Subcommittee. [Laughter.]
    Mr. Cardin. I was just following the term limits I thought 
that was in the rules package from the---- [Laughter.]
    Chairman Thomas. Unfortunately, that's on our side of the 
aisle and not yours. But I do appreciate his commitment to me 
personally that he will stay with us on the major issues. His 
knowledge and background is invaluable. You were not here when 
I passed out the penalty flags, so you can have an honorary 
one. The idea is instead of us talking over each other, we're 
just going to throw penalty flags at each other. And no one has 
thrown one today. So I'll be the first to throw it. [Laughter.]
    Mr. Cardin. Well, Mr. Chairman, let me thank you----
    Chairman Thomas. Let the Chair first of all say that if we 
had these over the last several Congresses, the gentleman from 
Maryland would never have gotten one. [Laughter.]
    Mr. Cardin. Now he says that. When I was on the Committee--
-- [Laughter.]
    Chairman Thomas. I don't need your vote any more. 
    Mr. Cardin. Well, I'll take this and I might use it from 
the audience. Let me first thank you for the courtesy.
    Chairman Thomas. I'll tell the gentleman I've already told 
that reporters don't get any. [Laughter.]
    Mr. Cardin. Oh. I might trade this for a vote from the 
Committee. But first let me thank you for the courtesy of 
allowing us to participate in this hearing and subsequent 
hearings. The work of this Subcommittee is very important to 
all of us and I very much appreciate that.
    If I might, I just really wanted to ask the administrator, 
following up really on Mrs. Thurman's questions on outreach to 
our constituents. Our health care system is very complicated. 
It's difficult for seniors to understand what's covered and 
what's not covered. The President in his initiative on long-
term care is suggesting more resources to HCFA in order to 
assist seniors in understanding what their options are to cover 
long-term care. With Medicare Plus Choice and many HMOs pulling 
out of the market, my State had I think the fifth largest 
number of dis-enrollees in HMOs and our telephone lines were 
ringing off the hook, so I can imagine what was happening at 
HCFA at the time. You have established a 1-800 hotline in I 
think five States. Maryland is not one of those States that had 
those services.
    My question to you is do you have adequate resources in 
order to help our seniors understand the complexities of our 
system, whether it's Medicare Plus Choice or whether it's long-
term care or whether it's prescription drugs, we're all getting 
questions about that. Do you have the capacity to help us in 
getting the information out to our seniors as to what the law 
is, what their options are, and how they can best cover their 
own health care needs?
    Ms. DeParle. Well, that's a very good question, Mr. Cardin. 
And I would say this. We're trying to build something new here. 
And we started from the ground up and it's not going to be 
perfect overnight. And it was a shame that last year the 
disruptions in the market occurred at the same time that we're 
trying to run this new beneficiary education campaign.
    Having said that, in the five States where we did the 
initial work--we piloted it last year--we've done focus groups, 
and I think the Committee will be glad to know that in general 
beneficiaries liked the information. I think something like 80 
percent of them said they saved the handbook because they 
thought it was going to be useful as a reference tool. So over 
time, I think that we're going to see that that makes a big 
difference, that this campaign, which is not just a handbook 
and not just a toll free line, but is a whole system really, is 
going to make a difference. And I hope that part of that will 
be educating people on long-term care because that's something 
many of them don't begin planning until it's almost too late. 
And we are asking for resources to do that.
    As far as whether we have enough, we have asked for more 
resources. We did last year as well, and that was the one area 
of our budget that we were not successful in. And we want to 
work with the Committee to make sure you understand what we're 
trying to do and to seek your support for more resources to do 
a better job on the beneficiary education campaign.
    It's clear to me that while beneficiaries like the handbook 
and they like the toll free lines, and by the way we are 
expanding that nationwide over the next 6 to 8 months, a lot of 
them want individual contact. We can't do that. Many of your 
States, you should know, should be complimented because the 
insurance commissioners, I met with this weekend, and the 
insurance commissioners in your States have been active in 
trying to help us with this as have the agencies on aging and 
those networks and the State insurance counseling programs. We 
need to put all of this together to make this work for our 
beneficiaries. And I believe we can do it, but it's going to 
take more work on both of our parts. And I'm eager to work with 
you on it.
    Mr. Cardin. I appreciate that and I hope that we'll 
continue to work on it. Just one last point, to underscore 
again what Mrs. Thurman said about the rationale of HMO pull-
out and that in some regions in our State, which are the so-
called low-cost areas, beneficiaries don't understand why they 
have to pay more money for an HMO to get coverage than someone 
who enrolls in a high-cost area. So it doesn't seem to make a 
lot of sense, and I think we need to re-think how Medicare Plus 
Choice should operate to guarantee citizens of a State equal 
access to the variety of options that are out there. And we 
look forward to working with you on that particular issue.
    Thank you, Mr. Chairman.
    Chairman Thomas. Thank the gentleman. The gentlewoman from 
Connecticut wish to inquire?
    Mrs. Johnson of Connecticut. Thank you very much, Mr. 
Chairman. First of all, let me say welcome and I appreciate the 
tremendous workload that you have shouldered since you've 
become head of HCFA; and feel that the American people should 
be grateful for your intelligence and capabilities. I thank 
    Ms. DeParle. Thank you.
    Mrs. Johnson of Connecticut. I also want to dissent from a 
word that my friend used earlier, Mr. Stark, ``overwhelmed.'' 
I've never seen anyone carry such a load and not be 
overwhelmed. I appreciate not only what you've accomplished but 
also your endless openness to those of us who are out in the 
field to the problems that we see and to allowing them to have 
an effect in your department and the work that you're doing. So 
I think that's very helpful for all of us.
    I have three questions I want to try to get through and I 
know I have very little time. So let me just try to at least 
lay them all on the table with one other comment before that. I 
was very interested to read that the managed care plans are 
going to pay for the costs of clinical trials. And I think we 
need to at least do a demonstration project in Medicare so that 
we can find out whether this is going to raise our costs or 
lower our costs. I believe it will lower our costs. So I think 
we're being held back by a false estimate. Maybe we could work 
out some way to find out the truth in that matter before 
seniors are the only portion of the population not allowed to 
    Ms. DeParle. Well, as you know, I want to do that too. And 
we have a proposal and want to work with you on it.
    Mrs. Johnson of Connecticut. Good. In the budget, in the 
President's budget, there is a proposal to require all private 
insurance companies to provide Medicare second payer 
information to help HCFA coordinate benefits when Medicare is 
the secondary payer. It seems to me that this will be 
extraordinarily difficult for you to get in place, just the 
information management technology and the coordination with the 
private sector. Is this going to be possible to do this year?
    Ms. DeParle. I believe that that proposal would take effect 
some time in the spring after we've already accomplished our 
Y2K changes that we need to make.
    Mrs. Johnson of Connecticut. Well, they have no effective 
date. It does, however, have a $650 million fiscal impact, 
apparently over 5 years. So I wonder if we are going to be able 
to actually make the changes required to get that kind of money 
when we aren't even going to be able to do the updates this 
    Ms. DeParle. For this year, I think for Fiscal Year 2000, 
the actuary is estimated only about $10 million in savings from 
it and that's why we wouldn't be able to begin implementing 
that until after we finish all the Y2K changes that need to be 
made. And then I have an agenda of getting the home health 
prospective payment system done, out-patient, and all the other 
things that are in the queue. So I believe that these estimates 
are reasonable, but it is true that we won't be able to do it 
right away.
    Mrs. Johnson of Connecticut. Thank you. I also wanted to 
know if you still needed contractor reform legislation? As I 
think you are now aware, we've had terrible problems with a 
contractor in Connecticut. And, in fact, the hospitals are 
months behind in their Medicare reimbursements. And for 
institutions now that are under tremendous pressure, especially 
the small hospitals, this is a really serious situation. Do you 
still need contractor reform legislation and what kind of 
changes are you looking for?
    Ms. DeParle. Yes, I think we do need contractor reform 
legislation. And I want to thank you for bringing to my 
attention the problems up in Connecticut and urge other members 
to do the same thing when you're having problems because 
sometimes we don't hear about them unless you let us know. As 
I've said to other members who have asked about this, I think 
the Government needs more flexibility. We need a more 
competitive environment. We should not be limited to dealing 
with a set group of insurance companies or other entities. And 
I think that that part of the statute has been pretty much the 
same since 1965 while other Government contracting authorities 
have been reformed and revised to give the Government more 
flexibility and, frankly, a better price, more competition. So 
I look forward to working with the Committee on coming up with 
some sort of equitable solution to this problem.
    Mrs. Johnson of Connecticut. OK. And then let me just get 
on the table a very serious problem that is looming for the 
nursing homes. It's particularly, again, a particularly 
difficult problem for small nursing homes and that is the issue 
of medically complex patients. I am absolutely focused on 
dealing with the problem of nursing homes not being able to 
handle what we are not requiring them to handle or at least 
they think we're requiring them to handle in the way of 
transportation costs, ambulance costs, and prosthetic device 
costs. But a separate and very important problem is the issue 
of the medically complex patient. Things are changing so 
rapidly that there are hospitals re-categorizing beds so that 
they don't have to accept these patients because they can't 
afford to care for them. This would back them up into our small 
hospitals and finally have a terrible effect on the system.
    What are you doing, or are you doing anything, to develop 
an interim solution? Ultimately the PPS system hopefully will 
deal with this fairly but in between now and then, we really 
have problems.
    Ms. DeParle. Well, as you know, Mrs. Johnson, we 
implemented the skilled nursing facility prospective payment 
system last year on schedule. And one of the components of it 
are these resource utilization groups that attempt to capture 
the cost of providing care to different types of patients. The 
issue I think you're referring to is whether or not those, the 
RUGs system captures the acuity of patients. And we have spent 
a lot of time with many nursing facilities around the country 
talking about this, and, in fact, we've already contracted with 
Abt Associates to develop some better measures so that we can 
fine-tune the payments for more acutely ill patients. And we're 
working on that as quickly as we can.
    Mrs. Johnson of Connecticut. I would like to work with you 
further on this because those RUGs are based on 1995 data. And 
the treatments that nursing homes are carrying out now 3 years 
later are just very different and that old data really doesn't 
capture the kinds of patients that many of the nursing homes 
are dealing with now. So we have a disconnect, but it's serious 
enough that if a small home has a couple of bad experiences, 
they could be financially at risk. So I appreciate the 
opportunity to work with you on it.
    Ms. DeParle. Thank you.
    Mrs. Johnson of Connecticut. Thank you, Mr. Chairman.
    Chairman Thomas. Just to follow-up on that, I suppose it's 
a cardinal sin for us to say that we would welcome all of those 
complaints and concerns because that's our job to resolve them. 
But one of the things that I think would be very, very helpful 
is if you could indicate to us a willingness and a desire to, 
for want of a better term, maybe have a townhall meeting to get 
these folks in. Clearly, a procedure to sophisticate the RUG, 
some mitosis process to produce the sub-RUGS that grow up to be 
RUGs fairly quickly. I guess throw mats become area RUGs or 
whatever. [Laughter.]
    The appropriate analogy would be. It doesn't make a lot of 
sense to have them go through us. We hold you in a hearing. 
This stuff has to move fairly quickly and if you would indicate 
that it might be possible that you could have some open 
meetings for these folks to indicate their concern and then you 
could reflect back to them directly, that seems to me something 
that would be worthwhile. What's your comment on that?
    Ms. DeParle. Yes, I think so. That's something we've been 
doing, in fact, successfully on some other issues, and we would 
be happy to host a townhall meeting, either in Washington or 
Baltimore, to get as many of those folks in to make sure we 
understand the problem.
    Chairman Thomas. And let me end on this. One of the charges 
of the Medicare Reform Commission is to deal with solvency. And 
I've been thinking about this, and join with me in going 
through this thought process, especially focused on the 
President's most recent budget. When we say the Medicare 
Program is solvent, it's in reference to Part A.
    Ms. DeParle. Yes.
    Chairman Thomas. Which is a payroll tax because Part B was 
an add-on with physicians and it's the general fund. And the 
payroll tax was analogous to the Social Security payroll tax. 
But the HI Trust Fund is now different because in the early 
nineties, we lifted the lid. It is much more of a progressive 
tax, notwithstanding that it's on payroll.
    And that the old analogy, Greenspan, in front of the Full 
Committee, said it better than I ever heard anybody say, 
``These people have holdings which are appreciating at greater 
than market rates.'' They get three and four times the amount 
they paid in. That's still true of early retirees today. But if 
you project over the period that the Medicare Commission is 
supposed to be looking at this, those beneficiaries in 2020, 
2030, in terms of the amount that they're paying in, with no 
cap on their income, looks a whole lot more like an income tax, 
because that's what it is with no cap, but it's a limited, it's 
a particular category of an income tax.
    Then in 1997, to add additional years to the solvency of 
the HI Trust Fund, we transferred the fastest growing portion 
of Medicare, home health care, to Part B. Now, if we're still 
talking about solvency, and you just in response to a question 
of a member, and the President said, ``I can get you out to 
2020 if we take general revenue surplus and put it in the HI 
Trust Fund.'' I can create an infinite solvency test. Any time 
you're in trouble, transfer a program from Part A to the 
general fund or, in fact, do what we all think is appropriate, 
combine A and B.
    And all of these things are happening to the point that if 
we simply allow current law to affect itself over time, what 
was 50/50 with the initial switch of home health care becomes 
60/40 general fund and will ultimately become 70/30 general 
fund. I don't know that solvency makes any sense as a test any 
more, especially with the President's offer to get us to 2020. 
I can get us to 2626, or whatever that song was, by doing that 
same sort of thing. It doesn't mean anything any more.
    I think maybe, and this is what I've been trying to do, and 
I would appreciate your reaction, not now, but as we talk over 
the next several months, I think exposure is a term that's far 
more useful, exposure of the general fund, because if you still 
have a payroll tax and it is progressive, you're going to have 
people who are paying in who are payers, hopefully they become 
beneficiaries. So if you take a snapshot in time, you've got 
payers into the system, you have the beneficiaries, but you 
have the general fund.
    I do think it's a useful dynamic, for those paying in and 
those who are receiving, to have the ability to negotiate 
between them what an appropriate rate of payment versus 
beneficiary reciprocation is. But if you have a general fund 
that's available at any time to continue to add to it, using 
the old solvency test, it is the general fund that will be the 
bag that holds all concerns of both the payers not wanting 
their rate to go up or the beneficiaries not wanting their 
benefits to diminish.
    So one of the difficulties in the Commission now is how, 
given this dynamic, do we deal with what is an appropriate 
substitute for solvency since solvency isn't a problem because 
you can buy it away? And you buy it away with the general fund, 
either through a transfer programmatically or simply dumping 
cash into it. Think about it. Exposure to the general fund I 
think is something that--how much is the general fund going to 
carry of this program, notwithstanding the fact that you have 
payers in the payroll tax and that you have a package of 
benefits that will change over time, the people who are 
receiving them?
    We haven't talked about this, but I think we need to think 
about it.
    Ms. DeParle. I see the issue and I'll be happy to spend 
some time thinking about it.
    Chairman Thomas. Thank you very much. And thank you once 
    The Committee would now ask--if there are no further 
questions? Quick one?
    Mrs. Johnson of Connecticut. I just want to ask one brief 
question? I notice you've hired a lot of physicians and 
gerontologists. That's a very good thing. Have you hired anyone 
who has had experience within managed care?
    Ms. DeParle. Yes.
    Mrs. Johnson of Connecticut. Making protocols work, managed 
care actually work?
    Ms. DeParle. Yes, in fact, the geriatrician, who's the 
chief clinical officer for HCFA now, Dr. Jeff Kang, was the 
medical director of a managed care plan up in Boston. And Dr. 
Berenson, who is the head of the Center for Health Plans and 
Providers, ran a PPO, in fact, here on Capitol Hill and so has 
had that experience as well.
    Mrs. Johnson of Connecticut. Thank you.
    Ms. DeParle. I think most of our physicians have had 
experience in managed care.
    Mrs. Johnson of Connecticut. Thank you.
    Chairman Thomas. Thank you again.
    The Chair would now ask Dr. Scanlon to come forward as the 
Director of the Health Financing and Public Health Issues, 
Health Education and Human Services Division of the U.S. 
General Accounting Office. He has always assisted us in a 
systematic examination of the operation of HCFA, and we welcome 
you once again. Your written testimony would be made a part of 
the record, without objection, and we invite you to inform in 
any way you see fit. Welcome, doctor.


    Mr. Scanlon. Thank you very much, Mr. Chairman, and Members 
of the Subcommittee. With me today is Leslie Aronovitz who is 
an Associate Director in the Health Financing and Public Health 
group at GAO and who has been very heavily involved in our 
review of HCFA for this hearing today.
    In 1996 and 1997, Congress passed the Health Insurance 
Portability and Accountability Act as well as the Balanced 
Budget Act to help HCFA combat fraud and abuse and constrain 
Medicare spending growth. However, implementing these laws 
added substantially to HCFA's ongoing responsibilities to 
manage both Medicare and Medicaid.
    Last year, you asked us to assess HCFA's capacity for this 
Subcommittee, because you were concerned that the HCFA was not 
prepared to shoulder all these responsibilities. Then we 
reported that the HCFA's tasks appeared to be outstripping its 
ability to manage its workload. This year, you have asked us 
again for such an assessment. Today, our message is a bit more 
complicated. HCFA has made great strides in addressing many of 
its immediate priorities. These include readying critical 
computer systems for the year 2000 problem and implementing 
many provisions of HIPAA and the BBA. But the number and the 
complexity of BBA requirements and the urgency of the computer 
system changes, coupled with a backlog of decades-old problems 
with HCFA's routine operations, make it clear that much more 
needs to be accomplished. Its capacity, while greater than last 
year, also needs further strengthening for the agency to 
successfully fulfill its mission.
    The immediacy of the threat, the amount of work, and the 
resources needed to meet the Y2K challenge, coupled with the 
Agency's late start, have put a tremendous burden on HCFA this 
past year. It has pushed hard to catch up, and, as you have 
heard, it has made considerable progress. The GAO has been 
monitoring this progress closely, and Joel Willemssen from our 
Information Resources Issue area is scheduled to provide our 
assessment at a hearing of the Full Committee on February 24.
    Unfortunately, the rush to complete the Y2K renovation 
affected the timing and quality of the Agency's work on many 
other projects. For example, this delayed needed computer 
systems modernization. As a result, the Agency has been forced 
to spend millions to renovate certain systems for Y2K readiness 
that it then plans to replace soon after the year 2000. 
Similarly, HCFA has had to delay the implementation of new 
prospective payment systems intended to slow program growth for 
services such as home health and hospital outpatient care.
    There has also been less managerial time and attention 
available to oversee ongoing operations. HCFA's financial 
management and oversight of Medicare's fee-for-service claims 
administration contractors are longstanding problems needing 
more attention as is assurance of the quality of care provided 
in nursing homes and by home health agencies.
    HCFA has made strides in improving the fiscal integrity of 
the Medicare Program. This year, it promptly distributed the 
Medicare Integrity Program funds to contractors so that they 
could work to reduce fraud and abuse. It has developed a 
strategic plan to better focus its activities for program 
integrity, but many of these initiatives are just starting.
    While there has been progress made in putting in place many 
of the HIPAA and BBA requirements, we believe that important 
refinements are still needed. To give you just one example, we 
are concerned that the design for the new Prospective Payment 
System for skilled nursing facilities does not fully eliminate 
payment for unnecessary services and that there is not 
sufficient oversight planned to ensure that providers do not 
game the system. In addition, we are aware of the concern that 
Mrs. Johnson raised in talking with Administrator DeParle about 
the adequacy of rates for medically complex cases and are, for 
this Subcommittee, looking into that issue as well.
    Compared to last year, HCFA's capacity is greater. Many of 
the transitional problems of the reorganization are history. 
Additional staff with needed skills have been hired, and some 
of the losses due to attrition have abated. On the other hand, 
in focus groups we conducted, HCFA managers and staff discussed 
issues that continue to hamper effective agency operations. 
Some of the communication and decisionmaking difficulties 
associated with the reorganization still persist.
    At times, the Agency's decisionmaking process has been 
slowed considerably. For example, travel funds were not 
allocated well into the middle of last fiscal year. Managers 
also stated that the performance and awards systems do not 
motivate or hold their staffs accountable for achieving program 
    HCFA still faces the challenges of an aging work force. In 
fact, almost a quarter of its staff, most with management and 
technical expertise, will be eligible to retire in the next 5 
    In conclusion, I would note that HCFA's senior officials 
have taken concrete steps to improve agency management this 
year. But the Agency's continuing challenges are taxing. After 
the dusts settles from Y2K, HCFA will need to overhaul its 
antiquated computer systems. In addition, it will need to 
improve its financial management, its oversight of Medicare 
contractors, and its effort to assure the quality of 
beneficiary care. Strong leadership and management, more 
effective planning, acquisition of staff with needed skills, 
and better accountability are keys to addressing these 
challenges. A true measure of HCFA's success will be its 
ability to maintain its current momentum as it enters the 21st 
    Thank you very much, Mr. Chairman. I would be happy to 
answer any questions you or the Members of the Subcommittee may 
    [The prepared statement follows:]

Statement of William J. Scanlon, Ph.D., Director, Health Financing and 
Public Health Issues, Health, Education, and Human Services Division, 
U.S. General Accounting Office

    Mr. Chairman and Members of the Subcommittee, we are 
pleased to be here today to discuss the Health Care Financing 
Administration's (HCFA) ability to meet its new and growing 
responsibilities. HCFA pays for health care coverage for nearly 
a quarter of the population. Two of the programs HCFA 
administers cost federal and state taxpayers about $370 billion 
in fiscal year 1998--$193 billion for Medicare and $177 billion 
for Medicaid--and represent an ever growing proportion of the 
federal budget--currently about 18 percent. Because of the size 
and complexity of its programs, we have been reviewing HCFA's 
operations since the agency was created more than 20 years ago. 
Over the years, we have reported on problems in HCFA's 
management that weakened the fiscal integrity of these 
programs--leading to increased monetary loss from fraud, abuse, 
and erroneous payments. We have also reported on management 
problems that have led to poor-quality care provided to 
vulnerable beneficiaries. In 1990, we developed a list of 
agencies and programs that were ``high risk'' because of their 
vulnerability to waste, fraud, abuse, and mismanagement. We 
included Medicare on our original list, and it remains on the 
list to this day.
    The long-term financial condition of Medicare is now one of 
the nation's most pressing problems. Recent legislation gave 
HCFA substantial new authorities and responsibilities for 
reforming Medicare in order to extend the solvency of 
Medicare's Hospital Insurance Trust Fund beyond 2008. This 
legislation also established the Bipartisan Commission on the 
Future of Medicare to develop more long-term solutions for 
further ensuring Medicare's integrity and solvency. Because of 
your concern about HCFA's preparedness to implement these new 
authorities and administer its programs, you asked us to review 
HCFA's management capacity and to testify before this 
Subcommittee last January. You asked us to report today on our 
updated assessment of HCFA's progress--focusing on the agency's 
ability to meet its increasing workload in the short term. 
Specifically, you asked us to review HCFA's progress in (1) 
addressing its most immediate priorities and (2) strengthening 
its internal management to effectively discharge its major 
implementation and oversight responsibilities.
    We relied on our substantial body of past and ongoing work 
to assess HCFA's performance in meeting its current 
responsibilities.\1\ We supplemented this work by interviewing 
28 agency managers and officials, including the Administrator 
and Deputy Administrator. In addition, we conducted small focus 
groups attended by 46 senior and midlevel managers and 20 
staff, and reviewed agency documents.
    \1\ See Related GAO Products at the end of this statement.
    In summary, HCFA is facing an unprecedented set of 
challenges. The Balanced Budget Act of 1997 (BBA) and the 
Health Insurance Portability and Accountability Act of 1996 
(HIPAA) were designed, with considerable input from the 
administration, to strengthen HCFA's ability to prevent fraud 
and abuse and constrain spending growth in the Medicare 
program. These laws added substantial new authorities and 
programmatic responsibilities to HCFA's ongoing management of 
Medicare and Medicaid. In response to these mandates and 
program responsibilities, HCFA's accomplishments have been 
impressive. However, measured against the magnitude of 
challenges it faces, HCFA's progress seems more modest. The 
immediacy and resource demands associated with meeting the Year 
2000 computer system challenges--coupled with HCFA's late start 
in addressing them--have put a tremendous burden on the agency 
this past year and have affected the timing and quality of its 
work on many other projects. For example, it has delayed needed 
systems modernization and computer changes that implement new 
payment systems intended to slow program cost growth. It has 
also slowed efforts to improve the oversight of ongoing 
operations, such as financial management and Medicare fee-for-
service claims administration, which desperately need 
attention. Even where HCFA has made progress--such as in 
implementing a number of the mandated HIPAA and BBA 
requirements--we believe that more work, and many refinements, 
are still needed.
    HCFA must meet these challenges with an aging workforce. In 
fact, almost one quarter of its staff--most with managerial and 
technical experience--will be eligible to retire in the next 5 
years. HCFA has taken a number of steps internally to 
capitalize on its staff's strengths to deal with a rapidly 
changing health care marketplace and growing responsibilities. 
For example, HCFA has developed a strategic plan that better 
articulates its future direction, has progressed in its 
customer-focused reorganization by moving staff to their new 
organizational units, and has hired more staff with needed 
skills. On the other hand, in focus groups we conducted, HCFA 
managers and staff discussed issues that continue to hamper 
effective agency operations. For example, HCFA's reorganization 
slowed the agency's decision-making process so that even travel 
funds were not allocated until well into the middle of the 
fiscal year. Managers also stated that the performance and 
awards systems neither motivate staff nor hold staff 
accountable for achieving program results.
    To further strengthen HCFA's ability to effectively manage 
its employees and programs, the administration has proposed new 
authorities for contracting and new flexibility in hiring in 
the President's budget for fiscal year 2000. It also proposes 
new mechanisms to enhance agency accountability, with biannual 
reports to the Congress and an advisory board to help the 
agency streamline internal and program management. HCFA senior 
officials have taken concrete steps to improve agency 
management this year but will need to maintain the momentum 
over the next several years to overcome the agency's current 
and future challenges. This will be especially difficult in an 
agency that for years has been plagued by external pressures 
and management problems.


    HCFA, an agency within the Department of Health and Human 
Services (HHS), is responsible for administering much of the 
federal government's multibillion-dollar investment in health 
care--primarily the Medicare and Medicaid programs. Rapid 
increases in Medicare program costs, coupled with increasing 
concern about fraud and abuse in the program, led the Congress 
to enact legislation--HIPAA and the BBA--to strengthen 
Medicare. HIPAA established the Medicare Integrity Program, 
which ensures increased funding for Medicare program safeguard 
efforts and authorizes HCFA to hire specialized antifraud 
contractors. The BBA made the most significant changes to 
Medicare in decades, designed to reduce the growth of Medicare 
spending. The law requires HCFA to implement new payment 
methodologies, expand managed care options, and strengthen 
program integrity activities. At the same time, these laws also 
added entirely new responsibilities--such as oversight of 
private health insurance and implementation of a new state 
children's health insurance program--to HCFA's historic mission 
to administer Medicare and Medicaid.
    Medicare is the nation's largest health insurance program, 
covering about 39 million elderly and disabled beneficiaries at 
a cost of more than $193 billion. Most of these beneficiaries 
receive health care on a fee-for-service basis, in which 
providers are reimbursed for each covered service they deliver 
to beneficiaries. HCFA contracts with about 60 insurance 
companies to process the high volume of fee-for-service 
claims--numbering about 900 million in fiscal year 1997--
submitted by about a million health care providers for payment. 
Medicare's managed care program, the other principal component, 
covers the growing number of beneficiaries who have chosen to 
enroll in prepaid health plans, where a single monthly payment 
covers any needed services. About 6.8 million people--about 17 
percent of all Medicare beneficiaries--were enrolled in more 
than 450 managed care plans as of December 1, 1998.
    Medicaid, a $177 billion federal and state grant-in-aid 
entitlement program administered by states, finances health 
care for about 36 million low-income families and blind, 
disabled, and elderly people. At the state level, Medicaid 
operates as a health insurance program covering acute-care 
services for most recipients, financing long-term medical care 
and social services for elderly and disabled people, and 
funding programs for people with developmental disabilities and 
mental illnesses. In addition, the BBA created the state-
operated Children's Health Insurance Program, which provides 
federal grants to states to provide basic health insurance 
coverage for low-income, uninsured children. Through this 
program, states have a choice of either expanding their 
Medicaid programs or developing a separate program to insure 
    Under HIPAA, HCFA also has a completely new responsibility 
for ensuring that private health insurance plans comply with 
federal standards. In five states that did not pass legislation 
conforming to key provisions of HIPAA, HCFA has direct 
responsibility for enforcing HIPAA standards for individual and 
group insurance plans. In addition, HIPAA, along with the BBA, 
provides HCFA more opportunities to improve its fraud and abuse 
identification and prevention programs in Medicare.
    HCFA had about 4,100 staff as of October 1998. About 65 
percent were located in the central office and the remainder 
worked in the agency's 10 regional offices. In addition to its 
workforce, HCFA oversees Medicare claims administration 
contractors who employed an estimated 22,000 people in fiscal 
year 1997.

HCFA Has Made Some Progress Addressing its Highest Priorities, But Many 
                            Problems Remain

    Last year, we told you that substantial program growth and greater 
responsibilities appeared to be outstripping HCFA's capacity to manage 
its existing workload. Today, the message is a more complicated one. 
HCFA has made great strides in addressing many of its immediate 
priorities--including readying critical computer systems for the year 
2000 and implementing many provisions of HIPAA and the BBA. But the 
number and complexity of the BBA's requirements and the urgency of 
systems changes, coupled with a backlog of decades-old problems 
associated with HCFA's routine operations, make it clear that much more 
needs to be accomplished.

HCFA Made a Concerted Effort on Y2K, but Critical Tasks Are Incomplete

    Over the past year, HCFA has made a concerted effort to deal with 
its most pressing priority--the Year 2000 computer systems problem--
commonly referred to as Y2K.\2\ If uncorrected, Y2K problems could 
cause computer systems that run HCFA's programs to shut down or 
malfunction, resulting in serious disruptions to payments to Medicare 
providers and services to Medicare beneficiaries. Addressing Y2K is a 
formidable task for HCFA, because the Medicare program uses 6 standard 
claims processing systems, about 60 private contractors, and financial 
institutions nationwide to process about 900 million Medicare claims 
each year for about 1 million hospitals, physicians, and medical 
equipment suppliers.
    \2\ This problem stems from the use in many computer systems of a 
two-digit dating system for indicating the year. With this abbreviated 
format, the year 2000 is indistinguishable from 1900.
    In September 1998, we reported that time was running out for HCFA 
to modify Medicare systems to handle Y2K.\3\ HCFA was severely behind 
schedule in repairing and testing its systems and in developing 
contingency plans to handle system failures. Until 1997, HCFA was 
attempting to develop the Medicare Transaction System--which would be 
Y2K compliant--to replace its existing Medicare claims processing 
systems. But the project was halted because of design problems and cost 
overruns. This left HCFA with multiple, noncompliant Medicare claims 
processing systems that needed modernization. Compounding this 
difficult task was HCFA's failure to adequately direct and monitor its 
Y2K project. We recommended changes to better manage its Y2K efforts, 
and HCFA agreed to implement our recommendations as soon as possible.
    \3\ Medicare Computer Systems: Year 2000 Challenges Put Benefits 
and Services in Jeopardy (GAO/AIMD-98-284, Sept. 28, 1998).
    HCFA recently reported to HHS that as of December 31, 1998, it had 
completed renovating 5 of the 6 standard systems used by its 
contractors to pay claims and all 25 of its mission-critical internal 
systems. We are now monitoring HCFA's progress in implementing the 
recommendations in our September 1998 report, and we are reviewing the 
agency's progress in addressing the critical areas of Y2K testing and 
business continuity and contingency planning. We will testify on these 
issues to the Congress in the next few weeks. Furthermore, although 
HCFA is not directly responsible for state Medicaid enrollment and 
payment systems, agency officials said they are concerned that some 
state systems may fail. To help prevent this, the agency has begun to 
work with states on their Y2K problems.
    HCFA's progress on the Y2K front is tempered by one unfortunate 
reality: some of the systems HCFA is expending so much energy and 
resources to modify to achieve Y2K compliance are obsolete and will 
need to be replaced soon after the year 2000. Y2K presented an 
immediate problem with an inflexible end point, which has forced HCFA 
to shelve its efforts to consolidate its Medicare claims processing 
systems and modernize other systems. After the termination of the 
Medicare Transaction System, HCFA decided to consolidate the number of 
systems that pay claims to reduce systems maintenance costs and 
streamline efforts to implement required systems changes. But systems 
consolidation could not go forward while HCFA and its contractors were 
renovating and testing their systems for Y2K readiness. As a result, it 
is spending millions to renovate certain systems for Y2K readiness that 
it plans to stop using soon after 2000.

HCFA Has Made Some Progress but Is Still Struggling With HIPAA and BBA 

    HCFA has completed many major tasks this past year and has 
implemented significant portions of HIPAA and the BBA, but progress 
remains slow. For example, HCFA has taken steps to allocate HIPAA 
funding and to implement authorities to combat waste and abuse in the 
Medicare program. HIPAA provided additional funds for HCFA's Medicare 
claims processing contractors to use to detect fraudulent and abusive 
billing practices. The claims administration contractors use these 
funds to hire and retain staff knowledgeable in conducting provider 
audits, claims reviews, and payment data analyses, among other 
activities. HCFA promptly issued the contractors' fiscal year 1999 
budget allocations, unlike the situation in fiscal year 1998, when HCFA 
did not provide this funding to the contractors until a third of the 
year had passed.
    As part of HIPAA, the Congress also gave HCFA the authority to 
contract with specialists to perform payment safeguard activities. HCFA 
is now reviewing the submissions it received in response to its 
September 1998 solicitation for bids to become a program safeguard 
contractor. Such a contract could be awarded by May 1999, but the scope 
will be limited and will not provide many of the benefits initially 
envisioned from using a specialty contractor.
    As part of its work on BBA-mandated Medicare+Choice, \4\ HCFA 
issued interim final regulations for health maintenance organizations 
and other types of managed care organizations (for example, preferred 
provider organizations and provider-sponsored organizations) to 
participate and took several steps toward implementing the new National 
Medicare Education Program last year. The regulations, published in 
June 1998, represented a massive undertaking accomplished within a very 
short time period. In rushing to reach the deadline, however, some of 
the provisions were developed without full consideration of their 
impact on managed care organizations. For example, the regulations 
required that managed care plans assess the health status of all new 
Medicare members within 90 days of enrollment, but this requirement 
would include existing plan members for whom the plan may already have 
comprehensive information. Similarly, the regulations require each 
managed care organization's chief executive officer to certify that the 
encounter data provided to HCFA are 100-percent accurate. To managed 
care plans, such a standard seems unreasonable because these data are 
generated from many sources not directly under their control, including 
contracting physicians, hospitals, and other providers. In addition, 
managed care plans are concerned that other requirements cannot 
realistically be accomplished in the required time frames, may be 
duplicative of existing accreditation and reporting requirements, and 
could create disincentives to work on more difficult quality 
improvement projects. HCFA has agreed to reconsider a number of items 
and is planning to change the standard for data accuracy so that plans' 
chief executive officers will certify to the best of their knowledge 
that the data provided to HCFA are accurate.
    \4\ Medicare+Choice widens beneficiary and health plan 
participation in Medicare managed care by (1) guaranteeing plans a 
minimum payment level, intended to encourage plans to locate in areas 
they had previously not served; (2) expanding the types of plans 
eligible to contract with Medicare to include--in addition to health 
maintenance organizations--preferred provider organizations and 
provider-sponsored organizations; and (3) informing beneficiaries of 
the plan choices in their area through a national information campaign.
    For the new National Medicare Education Program, HCFA established 
an eight-point plan for educating beneficiaries about their new managed 
care options; implemented an Internet site for providing comparative 
managed care plan information; and has begun phasing in its toll-free 
call center and its mail-out of a revised Medicare handbook to 
beneficiaries in five states, which foreshadowed the nationwide mail 
campaign planned for this fall. The effort to produce Medicare 
handbooks was more complicated than the agency originally expected. Of 
the 15 comparative handbooks mailed to beneficiaries in different 
geographic areas, 12 were inaccurate because HCFA published them before 
managed care plans finalized their Medicare participation decisions. 
The Congress' efforts to encourage the growth of Medicare managed care 
could be thwarted if plans refuse to participate and if beneficiaries 
are confused, instead of enlightened, about their many health care 
    HCFA officials acknowledge they were slow to realize that the 
complexity and magnitude of the Y2K problem would stall implementation 
of key BBA requirements. The BBA mandated the design and implementation 
of new payment methods called prospective payment systems (PPS), which 
pay providers--regardless of their costs--fixed, predetermined amounts 
that vary according to patient need. To meet BBA targets, HCFA has to 
design and implement four PPS systems:
     a skilled nursing facility (SNF) PPS by July 1, 1998;
     a home health agency PPS by October 1, 1999, which was 
delayed by later legislation until October 1, 2000;
     a hospital outpatient PPS by calendar year 1999; and
     an inpatient rehabilitation PPS by fiscal year 2001.
    The SNF PPS was implemented on July 1, 1998. However, to prevent 
additional complications during system renovation and testing for Y2K, 
the agency has missed deadlines to make systems changes needed for 
beginning the hospital outpatient and home health agency prospective 
payment systems. These delays could affect both budgetary savings and 
Medicare beneficiaries themselves. The Congressional Budget Office had 
estimated that new payment methods for home health and outpatient 
services would save Medicare about $23 billion between fiscal years 
1998 and 2002. In addition, the hospital outpatient PPS would have 
reduced the amounts elderly patients pay for such services. HHS 
estimated that between January 1999 and April 2000, senior citizens 
will have to pay an extra $570 million in higher copayments over what 
they would have paid if the hospital outpatient PPS had been 
implemented on time. While many Medicare beneficiaries have some sort 
of third-party coverage for costs that Medicare does not cover--
referred to as ``Medigap'' policies--they are likely to be indirectly 
affected because premiums for Medigap policies are increasing in line 
with rising Medicare costs.
    Although HCFA officials were tracking both BBA and Y2K 
implementation, top agency officials did not inform the Congress until 
July 1998 that the agency would be delayed in instituting the new 
payment methods. HCFA officials attributed their late awareness of this 
problem to communications breakdowns at three levels. First, they 
believe operations and policy staff at headquarters responsible for 
designing the program changes were not consulting with each other and 
with others who were responsible for implementing them in the field. 
Second, they stated that top agency officials did not immediately find 
out what lower-level HCFA managers knew--how long it would take to 
implement complex BBA changes and how that could complicate Y2K testing 
of the systems. Finally, officials believe that there was inadequate 
consultation with Medicare contractors responsible for making the 
actual programming changes to their systems.
    While some parts of the BBA implementation were put on hold, HCFA 
moved quickly to implement a new SNF PPS.\5\ However, we believe that 
the SNF PPS has design flaws, and coupled with a lack of adequate 
planned oversight, this may diminish the anticipated reduction in 
Medicare costs that prospective payment was supposed to create. Savings 
depend on developing an appropriate daily payment (per diem) rate to 
reflect patients' needs. The new daily payment rate is based on the 
average daily cost of providing all Medicare-covered skilled nursing 
services, adjusted to take into account the patient's condition and 
expected care needs. We are concerned that the new SNF PPS' design 
preserves the opportunity for providers to increase their compensation 
by supplying potentially unnecessary services, since the amounts paid 
still depend heavily on the number of therapy and other services 
patients receive. Furthermore, HCFA has not planned sufficient 
oversight to prevent fraud and abuse. For SNFs, a facility's own 
assessment of its patients will determine whether a patient is eligible 
for Medicare coverage and how much will be paid. When Texas implemented 
a similar payment method for Medicaid, its on-site reviewers found that 
nursing homes' assessments were often inflated. Despite Texas' 
experience, HCFA does not currently have plans to monitor facilities' 
assessments to ensure they are appropriate and accurate. Nor has it 
ensured that the Medicare contractors--who pay the facilities' claims--
will have timely information on patients to determine whether the rate 
to be paid is appropriate.
    \5\ The prior payment method reimbursed providers on the basis of 
their costs, with capital costs and ancillary services virtually 
unlimited. Because providing more services generally triggered higher 
payments, facilities had no incentive to provide only necessary 
services or to improve efficiency. Prospective payment is intended to 
slow spending growth by paying providers fixed, predetermined amounts 
that vary according to patient need, regardless of providers' actual 
    The last major BBA implementation challenge we want to highlight is 
the Children's Health Insurance Program--the largest health care 
investment in children since Medicaid was created in 1965. Although 
states are given broad flexibility in tailoring programs to meet their 
own circumstances, HCFA is responsible for approving each state's plan, 
providing technical assistance to the states, and ensuring that 
programs meet statutory requirements designed to guarantee meaningful 
health coverage. HCFA has initiated (1) a comprehensive effort with the 
states, private companies, advocacy organizations, the Health Resources 
and Services Administration, and others to promote this initiative and 
(2) an outreach effort to find those children who are eligible for 
health insurance under the Children's Health Insurance Program or 
Medicaid but are not enrolled. Since passage of the act, HCFA has 
approved 46 state plans, after providing extensive guidance and interim 
instructions to states. We are currently studying HCFA's and the 
states' efforts to implement the Children's Health Insurance Program 
and will report on the results later this year.

HCFA's Handling of Ongoing Responsibilities for Financial Management 
and Routine Oversight Raises Serious Concerns

    Over the last several years, HCFA has been lax in managing critical 
ongoing program responsibilities, such as financial management--
particularly by Medicare claims administration contractors--and 
oversight of nursing home compliance. For example, our work on high-
risk programs such as Medicare highlighted the need for major federal 
financial management reforms, which the Congress initially enacted in 
the 1990 Chief Financial Officers Act and later expanded in the 1994 
Government Management Reform Act. Under this legislation, the 24 major 
departments and agencies such as HCFA must now produce annual financial 
statements subject to independent audit, beginning with those for 
fiscal year 1996.
    Since 1996, in conjunction with its audit of HCFA's financial 
statements, the HHS Office of Inspector General (OIG) has estimated the 
error rate for improper payments made by Medicare claims administration 
contractors. For fiscal year 1998, the OIG estimated that about 7 
percent of Medicare fee-for-service payments for claims--$12.6 
billion--did not comply with Medicare laws and regulations. This 
represents an improvement over fiscal year 1997, when the OIG estimated 
that Medicare contractors made $20.3 billion in improper payments--
about 11 percent of all claims. However, the difference from 1997 to 
1998 was almost entirely attributable to better documentation provided 
to the auditors, rather than to a substantive reduction in improper 
payments in categories such as ``lack of medical necessity,'' 
``incorrect coding,'' and ``noncovered services.''
    HCFA has made progress in strengthening its financial oversight. 
Nevertheless, serious weaknesses remain for both Medicare and Medicaid. 
Many of the financial weaknesses in Medicare relate to its oversight of 
Medicare claims administration contractors, which process over $700 
million in Medicare fee-for-service claims each working day. In its 
audit of HCFA's 1997 financial statements, HHS' OIG found material 
weaknesses in managerial control over contractor operations, and, as a 
result, HCFA may not be collecting millions of dollars in overpayments 
from providers. The fiscal year 1997 audit identified one contractor 
transitioning out of the program that reported transferring $266 
million in accounts receivable to other contractors, but neither HCFA 
nor the auditors could determine whether these receivables had been 
transferred onto the new contractors' books. HCFA depends on 
contractors' financial reports to provide information for its financial 
statement because HCFA lacks an integrated accounting system that can 
capture financial information at the contractor level. Moreover, the 
OIG found indications that HCFA's central and regional office oversight 
of operational and financial management controls was inadequate to 
ensure that contractor-provided financial information was consistent 
and accurate.
    Similarly, the OIG found that security for contractor and HCFA 
information systems was inadequate, imperiling the confidentiality of 
Medicare beneficiary personal and medical data. While HCFA had 
corrected some weaknesses found during the audit for fiscal year 1996, 
it was still possible for an unauthorized user to gain access to HCFA's 
database and modify sensitive beneficiary files. HCFA has recognized 
the need to protect the security of its information systems and, 
starting in 1997, began revising security policy and guidance, and 
implementing corrective action plans. Because of the need to focus on 
Y2K modifications, however, HCFA probably will not address many of 
these weaknesses in the near term.
    Medicaid financial management also is in need of reform. The OIG's 
1997 audit revealed that HCFA had limited information on the federal 
portion of Medicaid accounts receivable and payable. In fiscal year 
1997, HCFA relied on survey information from the states to estimate the 
amounts to record in the financial statements, and because the survey 
data were so limited, the OIG could not verify their accuracy. In 
addition, the audit noted that HCFA regional offices were not providing 
sufficient oversight of states' Medicaid claims processing and 
reporting, including states' efforts to deter fraud and abuse and 
collect overpayments.
    HCFA's oversight of the quality of care Medicare and Medicaid 
beneficiaries receive also needs improvement. HCFA is responsible for 
defining requirements for certain providers, such as nursing homes and 
home health agencies, to participate in the Medicare and Medicaid 
programs and certify that their enforcement is adequate to protect the 
health and safety of Medicare and Medicaid beneficiaries. HCFA 
contracts with state agencies to review nursing homes and home health 
agencies for their adherence to these federal requirements. Our work 
has shown that HCFA's policies and oversight have been insufficient to 
ensure quality of care for nursing home residents or home health 
patients, and serious problems have resulted. One in nine nursing homes 
in the country were cited in both of the last two inspections for 
harming residents or putting residents' health and safety in immediate 
jeopardy--but such homes often faced no federal sanctions. In response, 
HCFA began taking actions to improve state inspection practices, revise 
state oversight activities, and strengthen enforcement for nursing 
homes. HCFA has also added requirements that home health agencies 
demonstrate experience and expertise in home care by serving a minimum 
number of patients before initially certifying them as Medicare 
providers. However, these steps may not go far enough to protect 
vulnerable beneficiaries. We are now reviewing HCFA's oversight of 
state nursing home complaint investigations and inspections and will 
report to the Congress on these issues this year.

HCFA Has Made Changes to Enhance its Management Capacity, But Problems 

    Because its mission has been rapidly growing and changing, 
HCFA officials have worked hard to strengthen the agency's 
management capabilities. Despite these efforts, problems remain 
that hamper effective agency operations. While HCFA has 
developed a new focus on planning, including publishing a 
strategic plan, it does not require units to develop detailed 
plans to carry out day-to-day operations. The agency has 
completed its reorganization, but the resulting structure has 
contributed to various communication and coordination problems. 
Last year, HCFA lacked sufficient trained staff with the skills 
to effectively implement its top priorities. It hired more 
staff with needed skills in 1998, but it has not completed a 
long-term strategic approach to meet its future human resource 
needs. HCFA staff and managers are also concerned that its 
performance and award systems are not well linked to 
accomplishing its mission and that many managers are 
overburdened and lack managerial skills. These types of 
problems are found in other agencies, but HCFA still must be 
diligent in addressing them. The President's budget for fiscal 
year 2000 proposes a reform initiative for HCFA that is 
designed to increase its flexibility in the human resources 
area and to increase the agency's accountability.

Tactical Planning Is Limited

    In December 1998, HCFA published its strategic plan, which 
focused on the organization as a whole and communicated the 
agency's vision, mission, and broad approaches to realizing 
that vision. This plan was developed to help HHS respond to 
requirements in the Government Performance and Results Act of 
1993. In its strategic plan, HCFA clearly states that serving 
beneficiaries is its primary mission and, in doing so, the 
agency must be a prudent purchaser of health care. In addition 
to its overarching strategic plan, HCFA has also produced draft 
strategic plans for such significant areas as information 
technology and program integrity.
    Strategic plans are an important first step; to be useful, 
however, they must be implemented. Tactical plans, which 
identify specific, measurable, desired outcomes; time frames; 
and assignments of responsibilities for task completion, are 
critical. Last year, we reported that HCFA was not planning its 
activities on a tactical level. Although tactical planning has 
been used in some specific instances during the past year, such 
as to help track implementation of BBA requirements, HCFA has 
still not institutionalized this level of planning in its day-
to-day operations.
    In our interviews and focus groups, a pervasive theme was 
the need to work in a crisis mode, made worse by a lack of 
planning. For example, a staff member stated that she was being 
pulled from one ``hot project'' to another--which caused her to 
lose efficiency because she barely managed to master one 
subject before she was tasked with another. A manager told us 
that since the reorganization, little planning has taken place 
in his division, making even simple tasks harder. He said, as 
an example, that the divisions did not know how much travel 
money was available until the middle of the fiscal year and 
that routine trips had to be written up as emergencies to get 
approval. We heard similar concerns from managers and staff 
working on data systems and coverage policy.

Reorganization Has Created Coordination Problems

    HCFA's July 1997 reorganization established a totally new 
structure designed to better focus the agency as a 
``beneficiary-centered purchaser'' of health care. The 
reorganization created new centers that were intended to 
respond directly to HCFA's customers--the Center for 
Beneficiary Services, the Center for Health Plans and 
Providers, and the Center for Medicaid and State Operations--
and to provide additional resources to Medicare's growing 
managed care program.
    In our January 1998 testimony, we noted that the agency's 
staff had not yet moved to the actual location of their new 
organizational units, which tended to exacerbate problems with 
internal communication and coordination. Almost a year after 
the reorganization, between June and August 1998, HCFA 
completed the physical relocations, placing staff within their 
new organizational units. Relocation was a major undertaking 
because HCFA had made dramatic shifts of groups and people. An 
estimated 80 percent of HCFA central office staff, along with 
their computers, files, and shared office equipment, were 
relocated during the move. Managers told us that the physical 
move was implemented well, minimized work disruptions, and 
enhanced HCFA's operational efficiencies.
    The 1997 reorganization set out to eliminate HCFA's 
``stovepipes'' by placing policy and operations staff together 
in specific customer-focused centers to enable them to work 
more closely together. We found that HCFA is still in the 
process of learning how to make its new organization work. 
Several managers said that they believe the quality of 
decision-making will be enhanced because input from many 
individuals and groups is required. But other managers and 
staff reported substantial internal and external communication 
problems as a result of the reorganization. For example, they 
said that the organization's decision-making process has become 
slow and cumbersome because it is more difficult to identify 
the key decisionmakers and find meeting times that can fit 
their busy schedules. We also were told that even identifying 
appropriate points of contact is sometimes difficult because 
new organizational titles are confusing. Finally, some managers 
and staff were concerned that when accountability for issues 
was shared by more than one center or office, tasks could 
``fall through the cracks'' unless responsibilities were more 
clearly defined. Agency officials recognize that coordination 
is a problem and that there is sometimes a lack of 
accountability for decision-making. In response, they indicated 
that they are establishing teams on priority projects where key 
participants are identified and accountability for project 
completion is placed on one person.
    HCFA's reorganization and emerging role as a health care 
purchaser and beneficiary advocate have also led to changes in 
the way HCFA communicates with those outside the agency. Some 
changes, such as those brought on by the Medicare +Choice 
program and the availability of Medicare and Medicaid 
information on the Internet, have increased interaction with 
providers, provider groups, and beneficiaries, according to 
several HCFA employees. Some staff we spoke with expressed 
concern about this increased workload and their inability to 
readily refer people to appropriate HCFA entities because the 
new organizational lines of responsibility are still unclear. 
Also, we found that although the Internet means that HCFA is 
``open 24 hours a day'' and can communicate differently through 
this new medium, neither senior staff nor agency plans have 
fully addressed the impact of the Internet on HCFA's workload 
and how managers might need to reallocate responsibilities.

Maintaining Experienced and Appropriate Staff Will Continue to 
Be a Long-Term Need

    Last year, we reported that HCFA lacked sufficient staff 
with needed skills to effectively implement top-priority tasks. 
Today, managers are somewhat less concerned about staffing 
shortages because, during the year, HCFA hired more than 400 
new employees--a net gain of more than 250 after accounting for 
attrition. Of the new staff, a little over one-half were hired 
as GS-7s through GS-12s and about one-third were health 
insurance specialists. Senior agency officials told us that the 
new staff, with skills in areas such as managed care, private 
insurance, and market research, should help HCFA meet its new 
and growing responsibilities.
    We believe that HCFA's focus on attracting new employees 
needs to be long term and continuous because it will continue 
to lose staff whose expertise must be replaced or supplemented. 
Over the next 5 years, almost a quarter of HCFA's staff--who 
make up a large part of the agency's management and technical 
expertise--will be eligible to retire. In addition, managers 
say HCFA will need staff with ``real world'' expertise in 
private industry, including those who know how to purchase care 
competitively. While HCFA has not fully assessed its long-term 
human resource needs, senior officials told us that the agency 
is taking initial steps toward developing a long-term plan for 
investing in its human resources. HCFA currently has a draft 
human resources plan that covers the years 1999 through 2003.

Performance System, Awards Program, and Flexible Work Hours 
Affect Agency Productivity

    HCFA managers and staff discussed a variety of factors that 
hamper agency operations and limit effective management. 
Although we believe that HCFA is not unique in experiencing 
these problems, mitigating them could improve agency 
performance. These include a pass/fail performance rating 
system where virtually all staff pass, an awards program that 
does not necessarily reward superior performance, and flexible 
work schedules and locations that limit staff availability. 
Participants in our focus groups believed that HCFA's 
performance appraisal system for nonexecutive staff does not 
allow managers to meaningfully assess and report on staff 
performance because virtually everyone receives a passing 
grade. Staff believed that the pass/fail system is demoralizing 
to hard workers because no adverse action is taken for 
unsatisfactory performance. Similarly, according to managers 
and staff, the performance appraisal system does not give staff 
a sense of satisfaction when they perform well because it fails 
to recognize outstanding efforts. Some cited the prior 
performance system as preferable because exceptional performers 
could benefit by receiving more rapid pay increases.
    The Administrator found that the performance appraisal 
system for executives was also not useful in holding managers 
accountable and made changes this year to better differentiate 
senior managers' performance. The executive appraisal system 
has changed to a system with five levels of performance. Each 
executive manager has a performance agreement that is linked to 
performance goals for his or her set of responsibilities.
    Many managers and staff members also told us that the 
current awards program is not working. Although the program is 
intended to motivate staff, the opinions we gathered suggest 
that it may have just the opposite effect. Each unit 
establishes its own panel that makes award decisions and 
controls award amounts. Panels consist of an equal number of 
union-appointed and management-appointed representatives. Each 
panel sets its own criteria for making awards and determining 
the portion of its awards budget to give to managers for ``on-
the-spot'' awards, which are awarded directly to staff for 
performance on specific projects throughout the year. Managers 
told us that they would like to be able to distinguish among 
the accomplishments of staff members and reward them 
accordingly, but both managers and staff perceive the awards 
process as lacking equity and integrity. Any staff member can 
nominate another for an award, and we were told that staff 
members sometimes nominate themselves and friends nominate each 
other. Managers also told us that sometimes almost all nominees 
in a unit receive awards because panels find it difficult to 
distinguish among nominees' performance. One manager who served 
as a panel member said that during the last fiscal year, about 
250 employees were nominated for an award in his center--about 
two-thirds of all that center's employees. He said that only 
five of the nominees did not get an award. Last fiscal year, 
panels awarded about $678,000 to about 2,200 employees in 
grades 1 through 15--an average of about $300 per awardee. 
Managers also directly awarded about $213,000 through on-the-
spot awards that can range from $50 to $250.
    While staff were highly critical of the performance 
appraisal and awards processes, they approved of the 
flexibility to set their own work hours and work locations. 
HCFA's personnel rules provide for flextime--in which employees 
may arrive at work at different times each day within core 
periods or work longer hours in a day and earn time off--and 
flexiplace--which allows employees to work at alternative 
locations. Under these rules, however, staff who work in the 
office only 4 days a week may be off when their managers need 
them to be in the office. Managers also told us that more time 
can be taken up with administrative matters as a result of more 
flexible work arrangements. They said that managing staff is 
more complicated, noting that planning the work, managing 
resources, and scheduling meetings is difficult, for instance, 
when all of the staff are only required to be in the office 
during a core period from Tuesday through Thursday--3 days a 
week. Employees need special approval to begin flexiplace, and 
a senior manager told us that they are now only approving about 
half of such applications.

Managers and Staff Express Concerns About Management Capacity 
and Training

    Some managers and staff discussed their concerns about 
supervisors' span of control and the lack of adequate training. 
They said that they believe some managers are responsible for 
supervising too many employees and do not have enough time to 
work with people who could benefit from on-the-job training. 
They also stated that some managers are not skilled at managing 
people, which they attribute largely to HCFA's tradition of 
promoting staff with excellent technical skills to the 
managerial level, and not rewarding them for developing their 
staff. Some also cited the lack of training provided to 
managers to improve their supervisory skills.
    Many managers and staff agreed that HCFA does not provide 
enough training opportunities to help them do their work. We 
were told that new staff get little orientation to the agency's 
organization, programs, goals, and mission. Focus group 
participants added that limited training and travel funds 
prevented them from attending seminars and receiving training. 
Each HCFA staff member received an average of 8 hours of 
training last year. New staff, who generally were hired within 
the last year, averaged even fewer hours.
    HCFA's senior management has identified management and 
other training as an area where HCFA must improve. The agency 
is developing a ``model management initiative,'' which focuses 
on matching a manager's competencies with the specific skills 
that a manager needs for a given position. If approved by the 
Administrator, this model will be tested in the Office of the 
Chief of Operations. Then, if the initiative proves effective, 
it will be implemented in other parts of HCFA. HCFA is 
identifying better approaches to providing technical training 
and has doubled its training budget for next year--from about 
$800,000 in fiscal year 1998 to about $1.6 million in 1999.
HCFA Has New Proposals to Strengthen Management

    To strengthen HCFA's ability to meet growing 
responsibilities, the President's fiscal year 2000 budget 
proposes several reform initiatives. The budget seeks more 
personnel and pay flexibility to allow HCFA to recruit high-
level staff with specific, needed skills, such as physicians 
and executives with managed care plan operational experience. 
Coupled with such flexibility, HCFA is seeking authority to 
selectively offer buy-outs to some staff members. In addition, 
HCFA is seeking new authority that would allow it to contract 
competitively for its Medicare claims administration 
contractors. To improve agency performance, HCFA is proposing 
to add an advisory board of corporate executives and management 
experts for advice on improving its business practices. 
Finally, HCFA wants to increase its accountability to the 
Congress by providing biannual reports on its progress.


    As HCFA moves into the 21st century, its challenges will continue 
to become more numerous and complex. Once it has finished preparing for 
Y2K, HCFA must face tasks it has had to put aside or has not fully 
addressed. Several immediate challenges lie ahead. HCFA must finish and 
then refine program changes to fully realize the benefits expected from 
the BBA. It also needs to renovate antiquated, and streamline 
redundant, computer systems. Furthermore, it needs to strengthen its 
financial management and efforts to preserve program integrity.
    Added to these responsibilities will be potential additional 
challenges associated with any restructuring of Medicare that follows 
the deliberations of the Bipartisan Commission on the Future of 
Medicare. Even if no major changes are introduced, HCFA's continuing 
challenges are taxing--strong leadership and management will be 
required to meet them. More effective planning, new staff with needed 
skills, and better accountability could help HCFA address these 
challenges and better ensure quality health care for the elderly, poor, 
and disabled. A true measure of HCFA's success will be its ability to 
maintain current momentum as it enters the 21st century.
    Mr. Chairman, this concludes my statement. I will be happy to 
answer any questions you or other Members of the Subcommittee may have.

                          Related GAO Products

Major Management Challenges and Program Risks: Department of Health and 
    Human Services (GAO/OCG-99-7, Jan. 1999).
High-Risk Series: An Update (GAO/HR-99-1, Jan. 1999).
Medicare Computer Systems: Year 2000 Challenges Put Benefits and 
    Services in Jeopardy (GAO/AIMD-98-284, Sept. 28, 1998).
California Nursing Homes: Care Problems Persist Despite Federal and 
    State Oversight (GAO/HEHS-98-202, July 27, 1998).
Balanced Budget Act: Implementation of Key Medicare Mandates Must 
    Evolve to Fulfill Congressional Objectives (GAO/T-HEHS-98-214, July 
    16, 1998).
Medicare: HCFA's Use of Anti-Fraud-and-Abuse Funding and Authorities 
    (GAO/HEHS-98-160, June 1, 1998).
Medicare Managed Care: Information Standards Would Help Beneficiaries 
    Make More Informed Health Plan Choices (GAO/T-HEHS-98-162, May 6, 
Financial Audit: 1997 Consolidated Financial Statements of the United 
    States Government (GAO/AIMD-98-127, Mar. 31, 1998).
Medicaid: Demographics of Nonenrolled Children Suggest State Outreach 
    Strategies (GAO/HEHS-98-93, Mar. 20, 1998).
Medicare: HCFA Faces Multiple Challenges to Prepare for the 21st 
    Century (GAO/T-HEHS-98-85, Jan. 29, 1998).
Medicare Home Health Agencies: Certification Process Ineffective in 
    Excluding Problem Agencies (GAO/HEHS-98-29, Dec. 16, 1997).
Medicare: Effective Implementation of New Legislation Is Key to 
    Reducing Fraud and Abuse (GAO/HEHS-98-59R, Dec. 3, 1997).
Medicare Home Health: Success of Balanced Budget Act Cost Controls 
    Depends on Effective and Timely Implementation (GAO/T-HEHS-98-41, 
    Oct. 29, 1997).


    Chairman Thomas. Thank you, Bill.
    One of the things that I think is becoming useful is that 
this isn't a one-shot process. Our assumption is on your 
second-time around, there was a little more interaction and 
they were a little more comfortable and, perhaps, a little more 
insightful and willing to talk about certain situations.
    You will be followed by a panel of contractors, and my 
concern is that some of the testimony from the contractors 
concerns me. The idea and the discussion between the Ranking 
Member and 
Ms. DeParle can be a launching point. It is always argued that 
HCFA has extremely low management percentages--2 percent, 3 
percent. Testimony from Mr. Boston indicates that he believes 
that to a certain extent contractors subsidize HCFA in terms of 
those kinds of costs.
    In addition to that, they are concerned about changes that 
are occurring in the way in which in attempting to follow the 
law they have the money for termination, either for profit or 
termination. But if you deny both, you simply can't function, 
and there seems to be from the panel that is coming--and that 
is why it is always difficult when you have this sequentially--
an attitude that, perhaps, there is some malaise or discontent 
among the contractors.
    In talking to HCFA, did you get some feeling--what does it 
seem to be in terms of the HCFA contractor relationship put in 
the context of last year, this year, tomorrow?
    Mr. Scanlon. I believe that we did encounter tension 
between HCFA and the contractors, but not just over the last 
year. This is something I think that has been----
    Chairman Thomas. Building----
    Mr. Scanlon [continuing]. Building over time. It partly 
reflects the fact that the administrative budget of HCFA has 
diminished relative to the workload that is being dealt with by 
the contractors and HCFA. HCFA's increased workload, in part, 
is compensated for by the automation that has occurred over the 
last decade. We have expressed concerns many times that so 
little program integrity activity today is being conducted 
relative to what was being conducted a decade ago. This limited 
activity is tied to the loss of program dollars to fraud and 
    We are also concerned that HCFA needs to be able to hold 
contractors accountable for being as efficient as possible with 
existing dollars, and we have been critical of HCFA for not 
being able to accomplish this. For example, HCFA has not been 
able to take best practices from some contractors and have 
these practices become the norm for all contractors. As you 
heard from Ms. DeParle, negotiating with contractors on the Y2K 
problem turned out to be a difficult chore. So, there 
definitely is a tension between HCFA and its contractors. It is 
partly an issue of a change that has occurred as the workload 
has increased. It is also, potentially, an issue of the 
structure of the relationship between HCFA and its contractors 
and the leverage that is on both sides.
    Chairman Thomas. We also hear a lot about how many new 
burdens or work requirements were placed on HCFA by BBA. I 
think the record needs to show also that we did provide 
additional moneys for BBA especially in the fraud and abuse 
area, and, as I recall, we were the ones who kicked off the 
user fee structure, because we provided some user fees in BBA. 
My guess is the Administration says, ``Gee, let us go ahead and 
ask for them.'' It has not been successful in the areas they 
wanted to ask for them, because I think it made sense in the 
area of Medicare Plus Choice to help in the recruitment of 
patients of which the contractors would benefit. But there were 
additional resources.
    Just a word or two on your reaction as to whether or not 
HCFA is getting its money's worth in terms of the way it has 
employed the new resources that were provided in the Balanced 
Budget Act of 1997.
    Mr. Scanlon. We have not looked at this issue in enough 
detail to answer globally. We have looked at many specific 
areas, and we have noted the considerable progress HCFA has 
made in implementing both BBA procedures as well as moving 
forward on some program operation activities. We have also 
identified some of the areas where we think HCFA could have 
done a better job. However, I don't have, at this point, the 
ability to give you a score on how I would evaluate HCFA's net 
use of funds.
    The BBA's requirements defined a new vision for the 
Medicare Program. It is a challenging task to change the 
program to conform to that vision. Although HCFA has made some 
progress, our concern is that progress needs to continue to be 
made for that vision to be accomplished, and there can be 
absolutely no let-up if that is going to happen.
    Chairman Thomas. Notwithstanding the fact that they are 
trying to ride bareback the Y2K bug at the same time, and we 
understand and appreciate that, but had they not gone off on 
the other tracking program; had they not had a one-shot silver 
bullet solution; had they not been as naive as they have been, 
perhaps the Y2K problem would have been addressed earlier. Is 
that a fair statement?
    Mr. Scanlon. I think that is very fair. We were very 
hopeful that something like the Medicare Transaction System 
would be available, because, frankly, HCFA's computer systems 
need upgrading. HCFA needs better management information to 
operate this program. To be able to also solve Y2K would have 
been icing on the cake, so to speak. But we were also concerned 
that the Medicare Transaction System was not well planned, and, 
therefore, its demise was not unexpected.
    Chairman Thomas. And what bothers me is that we are 
spending an awful lot of money to get by the year 2000 on some 
wheezy stuff that is going to have to be replaced immediately 
after that, and it is probably not the highest and best use of 
limited resources, but necessary, nevertheless.
    Mr. Scanlon. Right.
    Chairman Thomas. Thank the gentleman.
    Mr. Scanlon. Thank you.
    Chairman Thomas. Gentleman from California--Louisiana--
tried to recruit you.
    Mr. McCrery. Yes, thanks. Just one question: Are you as 
comfortable as Ms. DeParle says she is with the Agency's--with 
HCFA's readiness for the Y2K eventuality?
    Mr. Scanlon. In general, we have been pleased with the 
progress that HCFA has reported. We have been looking at its 
efforts to make a critical, external assessment of its 
progress. Mr. Willemssen will be testifying on this issue 
before the Full Committee later this month.
    There are three areas we are looking at closely and which 
you will be hearing about then. First, we are looking at 
testing to ensure that systems can perform under varying 
    The second issue is when these systems are put together and 
operate simultaneously, do they work effectively?
    And third is an area that Ms. DeParle mentioned, which is 
the contingency planning. What happens when one component or 
another is not working--whether it is a regional, a provider, 
or an intermediary component--what do you do then? And how do 
you make sure that the system functions well in terms of 
continuing the payment-for-services?
    Mr. McCrery. I guess I will just wait till later this month 
    Mr. Scanlon. Right. They didn't fill us in either.
    Mr. McCrery. OK, thanks.
    Chairman Thomas. Does the gentlewoman from Florida wish to 
    Ms. Thurman. It is amazing how quickly you become Ranking 
Member in these Committees. [Laughter.]
    Chairman Thomas. As long as it stops there, I am 
comfortable. [Laughter.]
    Ms. Thurman. I kind of like that, Mr. Chairman.
    Actually, I just want to ask a couple of questions, because 
in some of your remarks or in our booklet here, you talked 
about some of the issues that the President has put in his 
budget that you think might strengthen. Have you looked at 
those, and can you comment on any of those issues?
    Mr. Scanlon. We have looked at what I would call the 
outlines of these proposals, because the details are not there. 
In many ways, the proposals address some of the issues that we 
have encountered in our interviews at HCFA and also in our work 
on other portions of HCFA's activities over the year.
    Getting this agency to be more flexible, to be more 
accountable, to focus on productivity, are things that are very 
important. We think that the proposals relative to personnel 
and to bringing in outside management experts to provide them 
with advice are aimed in that direction.
    HCFA's relationship with its contractors has been 
problematic, and there is the potential that, with the right 
set of reforms, this relationship could improve. Therefore, the 
idea of contractor reform is something generically we may 
support; the devil would be in the details.
    The idea of HCFA focusing on the management of the program 
may relate to its relationship to the Department. HCFA has 
often engaged a major portion of its time on policy initiatives 
versus program management. It really needs a focus on program 
management for the program to work effectively, and we are 
hoping that this foucs is something else that emerges from 
these reform proposals.
    Ms. Thurman. You mentioned that they needed maybe to bring 
in some outside management. Is that where this issue of 
potential higher salaries is coming from? I am not----
    Mr. Scanlon. Well, it is, I think, in two ways: one is the 
issue of potential higher salaries, because, frankly, HCFA 
would like to attract individuals with operations expertise, 
particularly from the managed care area, who could assist them 
in doing things like designing the Medicare Plus Choice 
requirements and being able to take into account truly what it 
is like to operate a managed care organization. Frankly, those 
individuals are valuable in the private sector, so to woo them 
away for government may take additional dollars.
    The second activity is bringing in an advisory panel made 
up, perhaps, of CEOs of private companies--insurance companies 
as well as, perhaps, some other kinds of service companies--
that could talk about the way they structured their successful 
organizations and what lessons might be applicable to 
government. That activity, if it is going to be useful, will 
have to take into account the unique aspects of a governmental 
agency as opposed to a private sector company.
    Ms. Thurman. OK, thank you.
    Mr. Scanlon. Thank you.
    Chairman Thomas. Any additional questions? Thank you very 
    Mr. Scanlon. Thank you.
    Chairman Thomas. Same time next year. [Laughter.]
    Could we now ask for the third panel consisting of Barbara 
Gagel, chairman of the Anthem Alliance in Indianapolis, Indiana 
on behalf of the Blues; Ned Boston, from the Wisconsin 
Physicians Service Insurance Corp., and David Bryan, vice 
president of EDS Health Care Senior Markets in Plano, TX.
    Thank you very much. The written testimony that you have 
provided us with will be made a part of the record, without 
objection. Ms. Gagel, we will just start with you; we will move 
across the panel, and thank you very much for coming, and we 
look forward to your testimony.


    Ms. Gagel. Thank you very much for inviting us. I am 
pleased to be here today. For more than 30 years, Blue Cross 
Blue Shield plans have partnered with the Government to handle 
the day-to-day work of paying Medicare claims accurately and 
timely. We are extremely proud of our role as Medicare 
    Contractors have several traits: one is that they are cost-
effective, operating on administrative budgets that today 
represent only approximately 1 percent of Medicare benefit 
payments; contractors are efficient, having a track record of 
quickly and accurately implementing major programmatic changes 
under extremely tight timeframes, and, importantly, Medicare 
contractors very aggressively pursue Medicare fraud and abuse. 
As you have heard this afternoon, the extra funds provided by 
this Committee for the Medicare Integrity Program are having 
excellent results. Yesterday, the HHS Inspector General did 
report a 45-percent reduction in overpayments since 1996.
    Mr. Chairman, I would like to especially thank you for 
allowing us the resources so that we can improve our 
performance in this area.
    My testimony today will focus on three areas: first, is our 
progress in assuring that the year 2000 computer adjustments 
are made correctly and timely; second, why new Medicare 
contracting legislation is unwise and could jeopardize our 
efforts to fight fraud and abuse, and, third, the critical need 
for stable and adequate funding for Medicare contractor 
    Let me speak first to Y2K readiness. It is a top priority 
of Medicare contractors. We are making, as Mr. DeParle 
indicated, excellent progress to ensure that Medicare payments 
are renovated and tested for millennium compliance. We are 
working closely with HCFA in this regard and have for at least 
the last 12 months now. In my written testimony, I talk to you 
about the activities that are under way at Anthem to assure 
that this will happen in our four States. There is an immense 
amount of work that remains to be done with regard to Y2K, 
although Medicare contractors, the majority of them, did 
certify to the adequacy of their systems at the end of December 
of this year. It is very important to understand that 
tremendous testing will continue to need to be done, as Mr. 
Scanlon indicated, throughout 1999 to assure that claims will 
be paid correctly in the year 2000.
    Contractor reform we think is unnecessary and unwise at 
this point in time. HCFA is again proposing legislation that 
would dramatically restructure the Medicare contracting 
process. This legislation would permit HCFA to fragment the 
functions of current contractors. We do not think we should be 
doing this at this point in time. All Medicare contractor 
functions--and the primary functions are claims processing, 
customer service, and fraud and abuse activities--are linked 
and need to be integrated to be successful. Separating the 
functions as HCFA intends to do, represents trouble for 
Medicare contractor operations and particularly for the fraud 
and abuse activities. Contractor functions are not autonomous, 
and moving forward with contractor reform and the split-off of 
these functions needs to be done very, very, very carefully to 
protect services for Medicare beneficiaries going forward in 
the future.
    Finally, let me point to the need for stable and adequate 
funding. It is absolutely critical to the performance of 
Medicare contractors. While the additional Medicare Integrity 
Program funding is helping us to strengthen our efforts to 
fight fraud and abuse, the large majority of contractor 
operations remains subject to the annual appropriation process 
and the tight budget limits that apply to those funds.
    So, we have a very, very, very short time line always that 
we are dealing with. We don't have the opportunity as Medicare 
contractors--and HCFA, of course, doesn't have the 
opportunity--to really think and plan long range and make the 
kinds of investments in the program that are necessary for it 
to be a top notch program. So, we do need stable funding, and 
we look forward to working with this Committee in ways to 
assure that there is stable funding in the future. Thank you.
    [The prepared statement follows:]

Statement of Barbara Gagel, Chairman, Anthem Alliance Health Insurance 
Company, Anthem Blue Cross and Blue Shield, Indianapolis, Indiana, and 
Blue Cross and Blue Shield Association

    Mr. Chairman and members of the committee, I am Barbara 
Gagel, Chairman of Anthem Alliance Health Insurance Company, a 
subsidiary of Anthem Blue Cross and Blue Shield. I am 
testifying on behalf of the Blue Cross and Blue Shield 
Association, the organization representing 52 independent Blue 
Cross and Blue Shield Plans throughout the nation.
    As a former contract officer at the Health Care Financing 
Administration (HCFA), I am pleased to see that the agency has 
made improvements in managing the Medicare program. I 
appreciate the opportunity to testify before you today on this 
important issue.
    The Medicare program is administered through a successful 
partnership between the private industry and HCFA. Since 1965, 
Blue Cross and Blue Shield Plans have played a leading role in 
administering the program. They have contracted with the 
federal government to handle much of the day-to-day work of 
paying Medicare claims accurately and in a timely manner.
    Nationally, Blue Cross and Blue Shield Plans process over 
90 percent of Medicare Part A claims and about 67 percent of 
all Part B claims. At Anthem, we process about 18 million Part 
A claims and 37 million Part B claims each year.

                Responsibilities of Medicare Contractors

    Medicare Contractors have four major areas of responsibility:
    1. Paying claims. Medicare contractors process all the bills for 
the traditional Medicare fee-for-service program. In FY 2000, it is 
estimated that contractors will process over 900 million claims, more 
than 3.5 million every working day.
    2. Providing Beneficiary and Provider Customer Services. 
Contractors are the main point of routine contact with the Medicare 
program for both beneficiaries and providers. Contractors educate 
beneficiaries and providers about Medicare and respond to about 40 
million inquiries annually.
    3. Handling Appeals for Payment. Contractors handled more than 7 
million hearings and appeals for reconsideration of initial 
determinations last year. In FY 2000, HCFA expects the cost to process 
appeals and hearings to rise by ten percent.
    4. Fighting Medicare fraud, waste and abuse. Contractors saved $8 
billion in 1997, yielding $17 in Medicare savings for every $1 invested 
from activities to review claims, to assure services are medically 
necessary, and to detect possible fraud and abuse.
    Medicare contractors successfully have met many significant 
challenges during this thirty-four year partnership. These include:
     Handling a dramatic increase in workload that has grown 
from 61 million claims in 1970 to an estimated 935 million in 1999.
     Quickly implementing major programmatic changes under 
extremely tight timeframes, such as the institution and refinement of 
the Medicare prospective payment system for hospitals, the physician 
resource-based relative value payment system, and several payment 
system changes required by the Balanced Budget Act of 1997.
    We are very proud of our role as Medicare administrators and our 
record of efficiency and cost effectiveness for the federal government. 
In 1998, contractors' administrative costs represented less than 1 
percent of total Medicare benefits. While workloads have increased 
dramatically, operating costs--on a unit cost basis--have declined 
about two-thirds from 1975 to 1998.
    My testimony today focuses on three areas:
    I. Progress on our current major challenge: assuring that Year 2000 
computer adjustments are timely and accurate;
    II. Why new contracting legislation is unnecessary; and
    III. The critical need for stable and adequate funding to assure 
the efficient administration of Medicare.

          I. Progress on Efforts to Assure Year 2000 Readiness

    Year 2000 readiness is a top priority for Medicare 
contractors. Medicare contractors are making excellent progress 
to ensure Medicare payment systems are renovated and tested for 
millenium compliance. HCFA has reported that as of December 31, 
1998, 57 of the 78 contractors and shared systems self-
certified without significant qualifications. Most of the 
remaining contractors are on target to self-certify by March 
31, 1999, without significant qualifications.
    Contractors are now working to complete their testing and 
to finalize contingency plans. In addition, contractors are 
focusing on readiness preparation of the provider communities.
    Although there is still much to be done, significant and 
steady progress has been made. We are confident that 
contractors will be ready and that claims will be paid properly 
on January 1, 2000.
    Let me describe for you the efforts my company has made to 
become ready: We began planning for Y2K renovation in 1996 with 
the goal of paying or denying Medicare claims correctly on and 
after January 1, 2000. By December 31, 1998, we had inventoried 
software and hardware, reviewed the LAN and WAN environments, 
assessed millions of lines of code, renovated code, retired 
modules, upgraded hardware to make it Y2K compliant, tested 
each module, and established a simulated production 
    We then ran test cases--test claims--through the entire 
claims processing system to ensure that the system processes 
the claims, with the same result, both before and after the Y2K 
renovation. This is a full simulation of production. We want to 
be sure that all steps in the process are capable of supporting 
business after 2000. We tested 11,403 claims using eight 
different dates that spanned late December 1999 to early 
January 2000, and February 28 through March 1, 2000. Based on 
the results of these tests, we were able to certify Y2K 
compliance to HCFA as of December 31, 1998.
    Even with this certification, much remains to be done in 
1999. We will continue our integration testing, and plan to 
test 50,000 claims and recertify compliance to HCFA by November 
1, 1999. It is critically important that all changes from HCFA 
be completely tested. We will engage providers who submit bills 
electronically in ``end to end testing,'' to assure that 
providers can submit claims to us, and that we can receive them 
and provide a remittance advice. And, importantly, although we 
don't expect failure, we are developing and testing contingency 
plans for all mission critical applications and business 
    We have 25 people devoted full-time to the Y2K project. An 
additional 50 people supported Y2K testing in 1998 on a part-
time basis. These numbers will increase to 145 people as 
recertification testing and contingency planning testing and 
rehearsals reach intense levels in mid-1999.

BCBSA Efforts with HCFA to Ensure Compliance

    BCBSA and Medicare contractors have been working closely 
with HCFA on compliance issues. Last year, BCBSA worked with 
HCFA to find an agreeable contract amendment related to Year 
2000 compliance. In addition, we worked with HCFA to develop a 
formal process to assure regular communication on Y2K issues. 
In response to a BCBSA recommendation, HCFA established a 
steering committee chaired by HCFA's chief information officer 
and vice-chaired by BCBSA.
    I serve on this steering committee. Let me briefly describe 
the significant areas that are being addressed by the 
    1. Progress Measurement--Monitors the progress of 
individual contractors and contractors as a whole.
    2. Critical Path--Identifies necessary activities, risk 
points, and key assumptions for Year 2000 compliance.
    3. Provider Relations--Informs providers about Year 2000 
issues and provides training.
    4. Common Testing Protocols--Develops testing procedures.
    5. Contingency Planning--Determines processes and time 
frames for paying providers if mission critical systems are not 
Year 2000 compliant.
    6. Resource Allocation--Defines standard definitions for 
Year 2000 activities and estimates costs.
    Very good progress is being made. As an example, the 
Contingency Planning group has developed a protocol that is 
supported by a comprehensive planning template applicable to 
any mission critical risk a Medicare contractor might identify 
in its operations. While contractors are already developing 
contingency plans, the work group's combined input into 
development of this protocol has produced a tool that can add 
significant value to this process and produce uniform planning 
    Beyond the specific products, operation of the steering 
committee has facilitated very constructive and useful dialogue 
between contractors and HCFA about Year 2000 compliance. The 
committee has met with the HCFA administrator and meets monthly 
with many of the agency's key directors and other top 
management staff. We look forward to continuing these 
cooperative efforts with HCFA.
    In reviewing the issues related to Year 2000 compliance, 
the committee should be aware of three additional issues that 
have made Year 2000 readiness activities even more challenging:
     Significant Change in Direction. Originally, many 
of the system changes that were necessary for readiness would 
have been accomplished by the conversion of all Medicare 
contractors to the Medicare Transaction System (MTS). As you 
know, the MTS initiative was dropped in 1997. As a result, 
contractors have been required to make significant changes 
that, in the absence of the MTS initiative, they would have 
been working on for a long time.
     Transition to New Standard Systems. Instead of 
converting to the MTS system, HCFA had directed contractors to 
transition to a single Part A and a single Part B system. In 
some cases, this conversion to different systems would have 
diluted experienced contract and HCFA staff from focusing on 
critical millenium readiness activities. As a result, HCFA 
approved a request by several contractors to delay transition 
requirements so they could focus on Year 2000 issues.
     Numerous and Broad Programmatic Demands. HCFA 
already has said that it will not be able to implement all of 
the BBA requirements because of the need to concentrate on Year 
2000 efforts. We continue to recommend to HCFA that as many 
non-Year 2000 system changes as possible should be removed from 
contractor workloads so that experienced technical resources 
can be devoted to assuring Year 2000 readiness.

                 II. Contractor Reform is not Necessary

    HCFA's FY 2000 budget once again includes a legislative 
proposal to dramatically restructure the Medicare contracting 
process. This effort to make broad changes in contract 
authority is not a new initiative. For several years, HCFA has 
been seeking contractor reform legislation that would give HCFA 
broad authority to fragment the functions of current 
contractors. While we have not yet seen the details of this 
current proposal, our understanding is that it is similar to 
previous legislation.
    We believe that contractor reform provisions are unwise and 
unnecessary for the following reasons:
    1. It could jeopardize services to beneficiaries and 
providers. HCFA's proposal would eliminate the requirement that 
Medicare contractors have experience working with the Medicare 
program and would not even require that entities be familiar 
with health claims processing. Allowing HCFA to contract with 
organizations unfamiliar with Medicare's intricate payment 
methodologies could reduce payment accuracy, delay payments to 
providers, and reduce the quality of service providers and 
beneficiaries expect.
    2. It could undermine HCFA's efforts to administer its 
other initiatives effectively. Potentially, HCFA would have to 
manage many new contracts for claims processing services with 
entities unfamiliar with Medicare. These new contracts would 
require strict management by HCFA at a time when HCFA has many 
other new responsibilities, including BBA and HIPAA. With these 
other large workloads, we believe the agency does not have the 
resources, staff, or expertise to implement this type of new 
procurement activity.
    3. It is based on the flawed Medicare Integrity Program. 
HCFA has just begun to implement the new contracting provisions 
for the Medicare Integrity Program (MIP). As of yet, no 
contracts have been awarded. Further authority for HCFA to 
significantly revise contracting relationships is premature. 
Moreover, we believe that HCFA's strategy to split the MIP 
functions from the Program Management (PM) functions in 
Medicare is flawed. Due to the historical and functional 
integration of claims processing, customer service, and fraud 
and abuse activities, separating PM and MIP functions 
represents potential trouble for future fraud and abuse 
detection. PM and MIP are not autonomous services, and require 
constant coordination and communication in a rapidly changing 
Medicare program.
    4. It would place Medicare contractors under legislative 
constraints that exceed other government contractors. The 
legislation eliminates the requirement that HCFA pay 
termination costs to contractors that leave the Medicare 
program. This provision would make Medicare contracts different 
than any other type of government contract, including defense 
contracts. The Federal Acquisition Regulations (FAR) require 
that the government pay contractors reasonable termination 
costs. There is no basis to treat Medicare contractors 
    5. HCFA's proposals could impede contractors' progress to 
become Y2K ready. At this point, HCFA's proposal would not 
improve the Year 2000 problem, and, in fact, could make it much 
worse. Contractors unfamiliar with the Medicare program would 
have the added burden of having to learn its extremely complex 
rules and regulations while simultaneously working to achieve 
millenium readiness. Moreover, the testing requirements for 
contractor certification are extremely complex given the number 
of links contractors have with external systems (e.g., HCFA, 
banks, providers, etc.). It is highly unlikely that HCFA would 
be able to identify a new contractor that could meet the 
certification requirements.
    Finally, contractor reform is unnecessary to ensure the 
quality of Medicare contractors. HCFA currently has the 
authority to replace or terminate contractors for poor 
    HCFA has marketed this proposal as increasing cost 
effectiveness of contractor operations. However, this 
legislation has no positive effect on the budget. It does not 
reduce expenditures for Medicare contractors. More importantly, 
inexperienced contractors could potentially harm the trust 
funds by increasing improper payments.
    Success in Medicare claims administration requires that 
HCFA and the contractors work together toward their mutual goal 
of accurate and timely claims payment. This partnership should 
extend to planning the future of Medicare contract 
administration. We believe the most effective manner to proceed 
in strengthening Medicare administration is to raise 
performance standards, aggressively enforce them, and terminate 
the contracts of those not performing at the required level.

              III. Stable and Adequate Funding is Critical

    As Medicare's first line of defense against fraud and abuse, 
Medicare contractors require adequate funding in order to meet the 
demands of the program and to effectively combat fraud and abuse.
    The President's FY 2000 budget proposes $1.27 billion for Medicare 
contractors, virtually the same funding level as 1999. Of this total 
level, $93 million is dependent on proposed new user fees from 
providers, which have previously been rejected by this Subcommittee.
    In addition, the President's budget requests $150 million for HCFA 
millenium readiness. It is unclear, at this point, how much of these 
proposed funds would be made available for Medicare contractors' Y2K 
    We strongly support HCFA's efforts to secure additional funding for 
Year 2000 activities. However, we are extremely concerned that HCFA's 
budget once again puts the effective administration of Medicare at risk 
by relying on proposed user fees to fund contractor activities.
    Moreover, additional funds will be needed to cover a significantly 
greater workload next year, including:
     Implementing BBA provisions, including new prospective 
payment systems for inpatient rehabilitation facilities and outpatient 
hospital care.
     Implementing HIPAA administrative simplification 
provisions, including the national payer identifier initiative and the 
development of transaction and security standards for electronic 
processing of claims.
    Adequate funding is critical to maintain anti-fraud efforts and to 
prevent further service reductions to beneficiaries and providers. An 
independent study commissioned by BCBSA last year indicates that 
contractor funding will be significantly strained by the increased 
anti-fraud and abuse detection efforts under the newly enacted MIP. The 
report shows that every 10 percent increase in MIP funding will result 
in a $13 million increase in contractor costs due to increased appeals, 
inquiries, and hearings.
    Additionally, a letter published in a recent Health Affairs 
journal, signed by 14 health policy experts, stressed the need for more 
Medicare administrative funding. Specifically, the letter stated that 
``HCFA's ability to provide assistance to beneficiaries, monitor the 
quality of provider services, and protect against fraud and abuse has 
been increasingly compromised by the failure to provide the agency with 
adequate administrative resources.''
    We believe that finding a reliable and stable funding source for 
Medicare contractors is critical. In the President's budget, HCFA 
indicated a willingness to explore alternative funding options for 
Medicare administrative activities. We support HCFA's efforts and would 
like to work with HCFA and Congress to move toward a stable and 
reliable funding source.


    Let me reiterate that Medicare contractors are working 
diligently to become millenium ready. This is a monumental 
task, and we will face a number of challenges along the way. 
Medicare contractors are committed to meeting these challenges 
just as they have done in the past.
    Congress should reject HCFA's request to legislate far-
reaching changes to the Medicare contractor program. Contractor 
reform raises fundamental issues and implications for the 
Medicare program. In fact, contractor reform would introduce 
change, confusion, and diversion of resources at a time when 
experience and focus is important. Alternatively, HCFA should 
tell contractors exactly what standards they want contractors 
to meet. Let contractors meet these standards; otherwise, HCFA 
can terminate our contracts.
    Finally, given the importance of Medicare to its 
beneficiaries, providers, and the nations' economy, it is 
critical that the administrative resources necessary to manage 
the program effectively be provided.


    Chairman Thomas. Thank you very much. Mr. Boston, I thank 
you for what I consider to be unusually candid written 
testimony provided for this Subcommittee and look forward to 
your oral testimony.


    Mr. Boston. Thank you, Mr. Chairman. My name is Ned Boston. 
I am vice president for Medicare with Wisconsin Physicians 
Service Insurance Corp. in Madison, Wisconsin. WPS is the 
Medicare Part B carrier for the States of Wisconsin, Michigan, 
and Illinois.
    At the moment, WPS is Medicare's largest carrier and will 
process approximately 70 million claims this year. To give you 
a prospective on that, WPS will process this each minute of 
each working day this year over 500 health care claims, and 
that ties to what Ms. Gagel was talking about a little bit ago 
about the intricate and interrelated nature of the kinds of 
systems that we administer.
    I am appearing today on behalf of the nine commercial 
insurance companies that comprise the Medicare Administration 
Committee. Our members serve Medicare as carriers, 
intermediaries, and regional durable medical equipment 
carriers. In fiscal year 1998, our members processed 258 
million Medicare claims. My testimony will focus on a few 
limited areas and amplify some things that were in my written 
    My first and foremost concern I want to express to the 
Subcommittee is in the area of year 2000 readiness. If we, as 
contractors, and HCFA fail to achieve Y2K readiness, the 
orderly processing of 900 million claims on behalf of Medicare 
beneficiaries could grind to a halt. Both the Agency and its 
contractors are and have been hard at work on the modifications 
and testing that will assure that we are ready for the 
millennium. The professional staff at our carriers and 
intermediaries have been devoting thousands of hours of 
overtime to getting the job done while pursuing all of their 
regular job functions processing Medicare claims.
    HCFA has pushed its contractors very hard to modify and 
successfully test their systems. We are confident that if the 
current rate of progress continues, there will be few, if any, 
Y2K problems in the Medicare Program itself. We are, however, 
vitally concerned about the progress we see from those health 
care organizations who are billing the Medicare Program.
    Contractors first brought Y2K concerns to HCFA's attention 
more than 4 years ago, but the problem had to compete with 
other priorities and, as you have heard earlier, with the 
thought that the Medicare Transaction System might solve all 
these issues. As continued analysis of the scope and 
implications of Y2K has heightened everyone's understanding and 
the immensity of the problem, HCFA has accorded it the highest 
priority in its management of its multiple responsibilities. 
From the perspective of carriers and intermediaries, the 
greatest problems have been finding and retaining expert staff 
to do the kind of work necessary to fix the systems. We are 
very pleased that in this effort there has been sufficient 
financial support from the Congress and from HCFA that have 
allowed us to do this.
    Despite an occasional frustration we have experienced with 
HCFA over some of the details, we are going to be ready. 
However, just because we have certified that we are ready for 
Y2K as of this date, doesn't mean that we do not have a very 
busy year in front of us in 1999. We must spend this year 
completing our contingency planning for what happens if 
something is not available. What happens if the electrical 
power doesn't work? What happens if major health care delivery 
systems are not able to submit bills? There are many factors 
that could affect us.
    My message to you would be that what we need in 1999 is a 
stable Medicare Program with very few changes that we need to 
implement so that we can concentrate on recertifying, 
retesting, and testing again to make sure that we are prepared 
for the millennium. If we try to implement a great rate of 
change in this calendar year, we could jeopardize our 
    Let me spend just a minute talking about the Medicare 
Integrity Program. Our Committee supports the cautious and 
incremental approach that HCFA is taking in its Medicare 
implementation program strategy. If carried forward, this 
program would involve transitioning huge workloads to new 
contractors. Although HCFA has some experience with these 
transitions, they have not always been successful. Some of the 
new contractors may not have had prior Medicare experience. We 
believe it is wise to start on a small scale and incorporate 
the experience gained in each successive expansion of the 
program. The incremental approach may be the largest lesson 
that we have learned from the Medicare transaction system; 
sometimes, the big bang theory simply doesn't work.
    It is important to note that the contractors are continuing 
to perform fraud and abuse activities while this new program is 
getting ready, and despite the intended stable funding for 
these activities, some contractors, including WPS, received 
less this year for fraud and abuse activities than we received 
in the last fiscal year. We are trying to do everything we can 
within those funds to make sure that we complete our 
obligations to the program.
    And, finally, addressing for a moment contractor reform--
and the work reform is one that we find difficult. We believe 
what HCFA is seeking is simply a different way of contracting 
for the administration of the program. Reform to me indicates a 
need for a change; we believe HCFA wants a change. We believe 
HCFA has a great many powers that they have not necessarily 
used in the area of competitive procurements and on other than 
cost reimbursement basis. We would certainly be willing to work 
with HCFA on those things, but we caution, again, that a slow 
incremental approach be used. We are processing 900 million 
claims on behalf of almost 40 million beneficiaries. Any change 
to the system needs to be very, very carefully considered.
    Mr. Chairman, that concludes my oral testimony, and I would 
be delighted to answer any questions the Committee may have.
    [The prepared statement of Mr. Boston follows:]

Statement of Ned Boston, Vice President for Medicare, Wisconsin 
Physicians Service Insurance Corporation, and Medicare Administration 

    Mr. Chairman, members of the Subcommittee, I am Ned Boston, 
Vice President for Medicare of Wisconsin Physicians Service 
Insurance Corporation. My company is the Medicare Part B 
carrier for the states of Wisconsin, Michigan and Illinois. At 
the moment WPS is Medicare's largest carrier. This Fiscal Year 
we expect to process approximately 70 million claims for the 
    I am appearing today on behalf of the nine insurance 
companies that comprise the Medicare Administration Committee. 
Our members serve Medicare as carriers, and/or intermediaries. 
Two of our members are also regional durable medical equipment 
carriers (DMERCs). In Fiscal Year 1998, our members processed 
258 million Medicare claims.
    We appreciate your invitation to appear today to discuss 
the management of the Medicare Program.
    My testimony will focus on five topics.
     Medicare Contractor readiness for the Year 2000;
     The Medicare Integrity Program;
     Proposals to restructure or ``reform'' the 
administration of Medicare;
     Funding of Medicare contractor operations; and
     Why some Medicare carriers and intermediaries are 
leaving the program.
    The past decade has been a difficult one for the Health 
Care Financing Administration and for its Medicare contractors. 
While the agency has been formulating strategies for the future 
of Medicare, the fee for service claims workload has grown 
steadily. However, the funding, measured on a per claim basis, 
has declined. In addition, Congress has legislated numerous 
complex changes in both Part A and Part B that have required 
considerable additional effort beyond the ongoing energy and 
resources that go into processing over 3 million Medicare 
claims each working day. While the growth of the Medicare + 
Choice portion of Medicare may someday reduce the workloads of 
those of us involved in the fee-for-service segment of the 
program, we have yet to see that happen. Based upon the 
constantly increasing number of seniors and the limited number 
who have elected managed care, we believe that the traditional 
Medicare fee-for-service program will exist for many more 

                          Year 2000 Readiness

    The fact that most computer systems in place in both 
government and the private sector allow only two digits to be 
used to indicate a year means that computers are not able to 
distinguish between dates in the 20th and 21st century. This 
simple problem has amazingly complex and calamitous 
implications that, world-wide, are costing billions of dollars 
to avoid. Equipment must be modernized, millions of lines of 
computer programming must be thoroughly studied, the linkages 
with other program segments must be traced, and corrections 
designed and implemented in order to assure the smooth 
transition of business and government to the next century.
    For HCFA, the number of contractors and the number of 
electronic data processing (EDP) systems affected by the Y2K 
problem constitute a major management challenge. If we and HCFA 
fail to achieve Y2K readiness, the orderly processing of 900 
million claims by more than 65 contractors on behalf of 
Medicare could grind to a halt. Both the agency and its 
contractors are hard at work on the modifications and testing 
that will assure that Medicare is Y2K ready. While becoming Y2K 
ready is an expensive process, it should be noted that 
professional staff at carriers and intermediaries have been 
devoting thousands of hours of overtime to getting the job 
done, while also pursuing their ongoing Medicare duties.
    HCFA pushed its contractors very hard to modify and 
successfully test their systems for Y2K by the end of 1998. The 
vast majority of contractors did meet the December 31, 1998, 
deadline with regard to their mission-critical information 
processing systems. The few that were not able to document 
their full compliance with HCFA's guidelines at the end of last 
year are expected to be fully ready by the end of March, which 
is the government-wide deadline for achieving that status. The 
cooperative effort between HCFA and its contractors has 
achieved an immense amount of progress over the past six 
months. We are confident that if the current rate of progress 
continues, there will be few if any Y2K problems in the 
Medicare program, itself. We are, however, vitally concerned 
about the progress we see from those health care organizations 
billing the Medicare program.
    Looking back, it is fair to say that HCFA and its 
contractors got off to a slow start on Y2K. Contractors first 
brought their Y2K concerns to HCFA's attention more than four 
years ago, but the problem had to compete for priority with 
many other important projects for which HCFA is also 
responsible. As continued analysis of the scope and 
implications of Y2K has heightened everyone's understanding of 
the immensity of the problem, HCFA has accorded it the highest 
priority in the management of its multiple responsibilities.
    The initial response from HCFA concerning Y2K was that 
virtually all Medicare EDP systems would be replaced by the 
Medicare Transaction System (MTS) which was then under 
development. The MTS would be Y2K compliant, and, since it 
would be in place before the end of the century, it would take 
care of the Y2K problems that concerned contractors.
    In late 1996, HCFA came to the realization that it would 
not be possible to replace all existing systems in one massive 
transition to MTS. It abandoned the ``big bang'' approach and 
instead adopted an incremental strategy for modernizing 
Medicare's claims processing and data management functions. 
Later, when HCFA acknowledged that the MTS initiative had 
failed to progress as hoped and shut the project down, it 
decided to move all carriers and intermediaries to standard 
core EDP systems, one each for Part A, Part B and durable 
medical equipment, as a transitional step toward realizing some 
of the goals of MTS.
    HCFA planned to move its carriers and intermediaries to the 
standard claims processing systems incrementally over a two 
year period. However, for nearly all contractors, the standard 
systems conversions required the efforts of the same expert 
personnel that were needed for Y2K. It took awhile for HCFA to 
accept that both jobs could not be accomplished simultaneously 
within the time frames they had set. Once they became 
convinced, they modified their standard systems conversion 
schedules to give precedence to Y2K. They also cut back on the 
issuance of routine system updates that tended to interfere 
with Y2K work, although those updates still have not been 
entirely eliminated.
    Despite some initial uncertainty about financing, getting 
the money to pay for Y2K renovations and testing has not proven 
to be a big problem. From the perspective of carriers and 
intermediaries, the greatest problems have been finding and 
retaining scarce expert staff to do the work, and getting the 
necessary guidance and approval from HCFA that is required for 
work to proceed within an increasingly tight time frame. 
Despite the occasional frustrations we have experienced with 
HCFA over some details of the Y2K effort and over trying to 
conform with detailed agency guidelines that keep changing, we 
believe that the agency deserves a lot of credit for planning 
and defining the complex work to be done and for its 
coordination of the efforts of so many contractors. HCFA has 
achieved a great deal of progress in a short period of time.
    We realize that, in giving singular priority to making 
Medicare Y2K ready, HCFA has postponed a number of other very 
important projects mandated by Congress. While we contractors 
do not wish to second guess the agency's judgments about which 
projects should proceed and which should be postponed, we do 
support the Administrator's decision to make Y2K readiness 
HCFA's singular top priority. The chaos produced by a collapse 
of Medicare's information, claims processing and payment 
systems surely would be far more damaging to the Medicare 
program's beneficiaries and partners than the delay that Y2K 
has caused in other HCFA projects from which the program will 
eventually benefit.

                       Medicare Integrity Program

    Despite all of the attention being devoted to Y2K, HCFA is 
proceeding in a deliberate manner toward implementation of the 
Medicare Integrity Program (MIP) mandated by the Health 
Insurance Portability and Accountability Act (HIPAA). It has 
received and is now evaluating bids received from potential 
program safeguard contractors and has just issued an RFP for a 
coordination of benefits contractor. An RFP has not yet been 
issued for a statistical analysis contractor.
    Under HCFA's strategy, the work performed by MIP 
contractors will be integrated with that performed by carriers 
and intermediaries employing the standard Part A, B and DME 
systems that I mentioned earlier. While HCFA intends to 
implement the MIP program incrementally, eventually it will 
greatly reduce the number of contractors performing audits, 
medical reviews, and fraud investigations.
    Our committee supports the cautious, incremental approach 
that HCFA is taking in its MIP implementation strategy. The 
evolution of this program will involve the transitioning of 
huge workloads to new contractors. HCFA has gained considerable 
experience in contractor transitions, but they have not always 
gone smoothly. Since some of the new MIP program safeguard 
contractors HCFA selects may not have prior Medicare 
experience, we believe it is wise to start on a small scale and 
incorporate the experience gained in each successive expansion 
of the program. This may be one of the major lessons learned 
from the MTS initiative.
    Many current carriers and intermediaries decided not to bid 
for the role of MIP program safeguard prime contractor--though 
some did and several others may serve as subcontractors. All 
contractors, whether they decided to bid or not, had several 
concerns with the procurement.
    First, despite a great deal of detail provided by the RFP, 
it left many questions unanswered. For example, it did not 
specify the scope of the workload to be awarded or the 
geographic areas to be served. Some potential bidders were 
reluctant to enter a commitment lacking that information.
    Second, the commitment of the government to indemnify MIP 
contractors for lawsuits resulting from their fraud and abuse 
activities offers less protection than is currently afforded to 
carriers and intermediaries under their existing contracts. 
This was a significant factor in evaluating the economic risk 
of being an MIP contractor--particularly so for contractors who 
have experienced the disruption and expense of litigation with 
parties being diligently investigated for fraud and abuse.
    Third, the MIP contracts will not guarantee contractors 
termination costs. This is a point discussed in more detail a 
little later in this statement.
    Fourth, many companies that were approached as potential 
MIP partners were reluctant to get involved because of their 
need to devote all of their available resources to getting 
ready for the Year 2000.
    Fifth, the trend of funding for overall Medicare operations 
during the past decade caused some potential bidders to doubt 
that the MIP initiative will be funded at a level sufficient to 
produce the quality and quantity of work that needs to be done.
    On this last point, it is worth noting that while the MIP 
contracting program is getting underway, carriers and 
intermediaries are still performing program safeguard 
activities. Despite the intended stable funding for those 
activities specified in HIPAA, some contractors have 
experienced significant cuts in the program safeguard segment 
of their budgets. In addition to conducting their own program 
safeguard activities with lower funding, they are also having 
to devote a very substantial portion of their limited capacity 
to providing support for investigations being conducted by the 
Office of the Inspector General and the Federal Bureau of 
    Many carriers and intermediaries are concerned that in the 
end it will be difficult to prove whether the restructuring of 
Medicare administration under MIP will really enhance the fight 
against fraud and abuse. The gradual implementation of MIP 
could provide an opportunity for an ongoing comparative 
evaluation between the performance of the MIP model and an 
adequately funded and better-tuned version of program 
safeguards as they are now conducted by carriers and 
    As a final comment on the Medicare Integrity Program, we 
would like to recommend to the Subcommittee, and everyone 
interested in controlling health care fraud, a research brief 
just released by the National Institute of Justice, U.S. 
Department of Justice. Entitled ``Fraud Control in the Health 
Care Industry: Assessing the State of the Art,'' this 
thoughtful review of fraud controls suggests to us the need for 
rethinking the MIP strategy. This is not to say that MIP should 
be discontinued, but rather that its heavy reliance on highly 
automated, large volume, EDP techniques to effectively control 
fraud is likely to produce disappointing results. A more 
balanced approach may be advisable.

                           Contractor Reform

    For several years the Administration has been recommending 
that Congress enact its ``contractor reform'' proposal--an 
amendment to the Medicare law that would allow it to 
restructure its contracting process and drastically reconfigure 
the administrative structure of the program. Among the changes 
proposed are:
     opening the carrier and intermediary functions to 
non-insurance companies and awarding all contracts on a 
competitive basis, but not fully complying with the Federal 
Acquisition Regulations that other agencies must use;
     removing all statutory restrictions on how various 
functions now conducted by carriers and intermediaries are 
     abandoning the cost-reimbursement method of 
contracting; and
     removing the present law requirement that 
contractors that leave the Medicare program shall be reimbursed 
for their termination costs.
    The ``Contractor Reform'' contemplated by this proposal is 
really just a different way of contracting. The argument that 
contracting reforms are urgently needed in order to permit 
Medicare to be restructured to meet the challenges of the 21st 
century, is, to us, something of a red herring.
    In the administration of the Medicare program, HCFA already 
has the power to conduct competitive procurements, but has 
seldom chosen to exercise that power. It also has authority to 
contract on an other-than-cost-reimbursement basis, but has 
been very tentative about doing so.
    It is true that when Congress enacted Medicare, it 
specified that the carrier and intermediary roles were to be 
performed by health insurance companies. We understand that 
this was a political decision made in 1965 to satisfy concerns 
expressed by providers of care and the public about having 
their health care administered directly by the government. 
Health insurers were specified because they represented an 
experienced, qualified buffer between the government and the 
health care system.
    In fact, the health insurer requirement is not much of a 
barrier to competition. An entity that wants to be a carrier or 
intermediary merely needs to set up a health insurance 
subsidiary, or acquire one. Medicare currently has contractors 
that have followed that route. Having said that, the members of 
our Committee really have no fundamental objection to opening 
Medicare to non-insurers, provided the competition is conducted 
fairly, based upon the demonstrated capacity of bidders to 
perform the work required.
    In general, carriers and intermediaries want to work for 
Medicare on a for-profit basis. However, we are concerned 
whether HCFA and its contractors are ready to deal with a 
fixed-price contract environment in which every substantial 
operational change would require the negotiation of a contract 
amendment or formal change order that has to be paid for.
    With respect to breaking up the many functions now 
performed by each carrier and intermediary and packaging them 
differently with other entities, it should be noted that that 
is exactly what Congress has authorized for program safeguard 
activities under the Medicare Integrity Program. We suggest 
that it would be prudent to wait and evaluate the results of 
MIP before granting HCFA similar latitude with regard to 
contractor program management functions.
    Under current law, Medicare carriers and intermediaries are 
entitled to recover their termination costs if they cease to be 
carriers or intermediaries. The rationale for this provision is 
that under their cost-reimbursement contracts carriers and 
intermediaries do not make a profit, nor are they allowed to 
fund a reserve for the eventual cost of terminated employees. 
Should they terminate their Medicare contracts and lay off 
employees, they would be expected to treat those employees the 
same as if they worked in other divisions of their companies. 
Yet, those other corporate divisions, which are not limited by 
government cost-reimbursement contracts, can fund reserves for 
termination costs as an ongoing expense of doing business. In 
order to correct this disadvantage under long-term cost-
reimbursement contracts, the law provides for Medicare carriers 
and intermediaries to recover their termination costs.
    As I mentioned previously, carriers and intermediaries, 
generally, would like to operate under for-profit contracts. If 
they had been operating under for-profit contracts for the past 
three decades, there would be no need for special treatment of 
termination costs.

             Funding of Carrier and Intermediary Operations

    Medicare carriers and intermediaries are proud of their 
record of steadily increasing productivity. Next fiscal year, 
they will process more than 900 million claims, provide 
customer service to over 35 million Medicare beneficiaries and 
hundreds of thousands of providers of care, support numerous IG 
and FBI investigations, and handle an increased workload of 
appeals, inquiries and hearings being generated by our own 
intensified campaign against fraud and abuse. Once the Y2K 
crisis is past, we will also be involved in the implementation 
of numerous provisions of the Balanced Budget Act of 1997.
    In its funding request for the current fiscal year, the 
Administration took the unusual step of stating that, after 
several years of rising workloads and decreased funding, 
Medicare contractor operations cannot be reduced further 
without jeopardizing the best interests of beneficiaries as 
well a providers and suppliers of care. Yet, in its proposal 
for the Year 2000, the Administration has reduced the claims 
processing budget by 8 percent, based upon a projected 1.1 
percent reduction in workload.
    Frankly, we are skeptical of the Administration's claim 
that Medicare's fee-for-service claims workload will decrease 
in 2000 due to growth in the Medicare + Choice program. We also 
doubt that the proposed overall increase of one third of one 
percent in the contractor operations budget will provide 
adequate funding for contractor operations.
    The January issue of Health Affairs features an ``Open 
Letter to Congress and the Executive'' which addresses the need 
to provide HCFA with adequate resources to carry out its 
responsibilities. Speaking of the overall HCFA administrative 
budget, of which contractor operations is a significant part, 
it states:

          The latest report of the Medicare trustees points out that 
        HCFA's administrative expenses represented only 1 percent of 
        the outlays of the Hospital Insurance trust fund and less than 
        2 percent of the Supplementary Medical Insurance trust fund. In 
        part, these low percentages reflect the rapid growth of the 
        denominator--Medicare expenditures. But, even accounting for 
        Medicare's growth, no private insurer, after subtracting its 
        marketing costs and profit, would ever attempt to manage such 
        large and complex insurance programs with so small an 
        administrative budget.

    Finally, we are concerned that the Administration has 
predicated part of the funding of contractor operations upon 
collecting $93 million in user fees from providers of care who 
submit paper claims or duplicate claims. These user fees were 
proposed in the President's Budget for the current fiscal year, 
but were not approved by the Congress. Unfortunately, their 
inclusion in the FY 2000 proposal may only serve to confuse the 
prospects for adequate funding of contractor operations, as it 
did last year.

                  Why Contractors Are Leaving Medicare

    At present, there are more than 65 Medicare carriers and 
intermediaries. We understand that HCFA estimates that only 
about 15 are committed to remain over the next few years. We 
have no idea whether HCFA's estimate will prove true, but we do 
know that unless the Medicare contracting environment improves 
significantly , more contractors are sure to leave. The task of 
finding replacement contractors and transferring workload to 
them without disruptions in service to beneficiaries and 
providers will present HCFA with significant management 
    HCFA has made no secret of the fact that it wants fewer 
contractors. Those who want to stay in the program will have to 
expand. Those who do not regard Medicare as a promising line of 
business will leave.
    Medicare offers no opportunity for contractors to make a 
profit on their work. The one financial benefit it does offer 
is that it helps pay its share of corporate overhead. If work 
is transferred away from contractors, Medicare's contribution 
to overhead is reduced. Eventually, the decreasing corporate 
financial benefit derived from participating in Medicare may be 
outweighed by the many challenges and risks that go with being 
a contractor.
    Some contractors have found that Medicare reimbursement of 
their operating costs is so inadequate that, even with the 
program's contribution to corporate overhead, they are 
subsidizing Medicare operations. Once a thorough analysis of 
corporate finances reveals this imbalance, a corporation must 
decide whether it can balance the books by achieving economies 
of scale or whether there is some benefit to being a Medicare 
contractor that makes it worth paying the government for the 
    Some contractor companies have elected to expand their 
insurance business to include Medicare managed care products. 
Rather than attempt to mitigate potential conflicts of interest 
between the two lines of business--as provided for under the 
Federal Acquisition Regulations--a few of these companies have 
elected to terminate their carrier or intermediary contracts 
with HCFA.
    There are two factors that may tend to delay a decision to 
quit the program. The most important is loyalty to employees. 
Some departing contractors have been able to spin off their 
entire Medicare operation to other ownership without any damage 
to their employees. Others have been able to absorb their 
Medicare employees elsewhere in the corporation. Until they 
were able to make these arrangements, they endured the losses 
from doing business with Medicare.
    A second factor is losing the prestige that contractors may 
derive from being associated with a worthwhile federal social 
program. However, after years of struggling with increasing 
Medicare workloads and decreasing resources, that factor, for 
some contractors, has lost much of its appeal.
    Finally, the recent imposition of civil and criminal 
penalties upon a few contractors has emphasized not only the 
need for effective internal programs to prevent fraud and 
abuse, but also the substantial financial risk associated with 
being a Medicare contractor.
    Contractors have all instituted vigorous compliance 
programs designed to help prevent fraud and abuse from 
occurring within their Medicare operations. However, should 
these programs reveal some fraudulent activity, they offer no 
guarantee against penalties being imposed.
    Earlier, I mentioned the issue of contractors recovering 
their termination costs if they leave Medicare. If legislation 
that would eliminate that right of contractors begins to move 
toward enactment, we would expect that action to trigger the 
rapid departure of a number of contractors.
    Mr. Chairman, members of the subcommittee, this concludes 
my prepared remarks on behalf of the Medicare Administration 
Committee. Thank you for inviting us to appear today and share 
with you our concerns about the future of Medicare 
administration. I will be glad to try to answer any questions 
you may have.


    Chairman Thomas. Thank you very much, Mr. Boston. Mr. 

                  SENIOR MARKETS, PLANO, TEXAS

    Mr. Bryan. Mr. Chairman and Members of the Committee, I am 
Dave Bryan, vice president for EDS Health Care Services for 
Senior Markets as well as for our subsidiary, NHIC, which is a 
Medicare carrier. I thank you for your invitation to testify 
    EDS has served the Medicare and Medicaid Program for over 
30 years, nearly since their inception. In 1999, we will 
process in excess of 100 million Part B claims; provide 
customer service and outreach services to 2.4 million 
beneficiaries and 77,000 providers. We will provide data center 
services processing in excess of 170 million Part B claims, and 
we will support HCFA's standard Part B system which operates 
today in 22 States and the District of Columbia.
    We believe there are three management and contracting 
principles that can help meet Medicare's growing administrative 
demands which will improve service and create better taxpayer 
value. They are, No. 1, leveraging the Medicare Program's 
administrative resources to reduce the number of prime 
contractors to one-tenth the number that exists today; No. 2, 
value purchasing for Medicare Program management and 
administrative services must replace a low-cost purchasing 
decision, and, No. 3, measurable accountability based on 
objective performance criteria for both contractors and 
oversight entities.
    HCFA has communicated an administrative vision of 
consolidating Medicare operations onto shared standard systems 
at fewer sites conducted by a lower number of contractors. We 
concur with HCFA's strategy and believe it is vitally important 
for the agency to achieve this vision in order to continue its 
efforts to improve management of the Medicare Program in a 
dynamic health care industry and for an unprecedented growth in 
the Medicare population.
    EDS' software was competitively selected to process all 
Medicare Part B claims as one of these shared systems. We 
strongly encourage a resumption of the agency's transition to 
its standard systems. In conjunction with the consolidation of 
system software, we are also strongly encouraging the 
consolidation of the number of prime contractors and data 
centers used to support the Medicare Program taking advantage 
of existing technology and market capabilities, the Medicare 
Program can lower its cost, improve the consistency of service, 
and reduce risk to the program by reducing both the number of 
prime contractors and data processing centers to one-tenth of 
that number existing today.
    I am not speaking about a brave new world of tomorrow. This 
environment can exist today with current market capabilities 
that are ready to be leveraged to the benefit of the Medicare 
Program. These reductions should be based on objective, 
quantifiable measures of performance for program managements 
tasks. It is essential that HCFA define mission-driven, 
quantifiable performance measures that reflect its strategy and 
operational goals for the administration of the Medicare 
Program. Such measures will ensure the agency maximizes the 
value from its contracting arrangements and will increase the 
agency's confidence in the accountability of its contractors 
based on expected results and not best efforts.
    Clear expectations for contractors facilitate price 
competition, increase innovation, and foster improvements 
within and among contractors. HCFA's purchasing strategies 
should capitalize on these market incentives by moving away 
from cost-based contracting to providing partners the financial 
incentives to bring the best market innovations to bear on 
Medicare's needs. In the competitive private sector, best-in-
class corporations are motivated by being recognized and 
rewarded for the value they bring to their clients and not on 
how much overhead expense we can allocate to a single contract.
    Mr. Chairman, we, at EDS, understand and have keenly 
experienced the challenge posed by the upcoming millennium 
change. Preparing systems for the year 2000 has consumed an 
enormous amount of time and resources and, quite honestly, 
slowed progress toward realizing HCFA's information technology 
goals. However, a consolidated administrative environment will 
improve the agency's stance with regard to the year 2000 and 
reduce the risk to the program. It is imperative that HCFA 
assess and identify in the first quarter of 1999 which of its 
partners will or will not be prepared to meet the 
responsibilities of the new millennium. Early identification 
will allow those partners that are able to support HCFA to have 
adequate time to effectively increase their assistance to the 
agency. We believe this approach will attract the right 
partners to support the Medicare Program and strengthen the 
program for beneficiaries and taxpayers as it meets its 
future's challenges.
    Thank you again for the opportunity to testify before this 
Subcommittee and share these perspectives. I look forward to 
answering any questions the Subcommittee may have.
    [The prepared statement follows:]

Statement of David M. Bryan, Vice President, Health Care Senior 
Markets, EDS, Plano, Texas

    Mr. Chairman, members of the committee, I am Dave Bryan, 
Vice President for EDS Health Care Senior Markets, including 
its subsidiary NHIC, a Medicare carrier. Thank you for your 
invitation to testify today and participate in the Health 
subcommittee's pursuit of a more effectively administered 
Medicare program. We appreciate the opportunity to share our 
ideas for meeting Medicare's expanding challenges in such a 
dynamic health care and technological environment.
    EDS has served the Medicare and Medicaid programs for over 
30 years, nearly since their inception. EDS's corporate 
experience currently encompasses a broad range of program 
management, information technology, and professional services. 
We deliver these services directly to the Health Care Financing 
Administration (HCFA), to a wide array of the agency's 
partners, including other Medicare contractors and States, and 
to the beneficiaries and providers served by the program. In 
1999, as a Medicare Part B Carrier, NHIC will process over 100 
million Part B claims, as well as providing customer service 
and outreach services to 2.4 million beneficiaries and 77,000 
providers. EDS will provide data center services for over 170 
million Part B claims and will support HCFA's Standard Part B 
system, which is currently installed and supporting Medicare 
beneficiaries and providers in 22 states and the District of 
Columbia. We understand the essential challenge facing the 
stakeholders in the Medicare program: to improve services and 
outcomes within limited resources.
    HCFA requires contracting partners that understand and 
share the vision for Medicare's future as expressed by Congress 
and the agency. These partners must be capable of delivering on 
dynamic future needs and able to objectively demonstrate the 
attainment of defined goals. In today's technological 
environment, the current cost-based contracting arrangements 
impede the Medicare program and its contractors from optimizing 
capabilities and flexibility to best serve beneficiaries and 
taxpayers. We believe three management and contracting 
principles can help meet Medicare's growing administrative 
demands, with improved service, yet at a better value for the 
taxpayer financed program. They are:
    1. Leveraging the Medicare program's administrative 
resources to reduce the number of prime contractors to one-
tenth of today's number;
    2. Value purchasing for Medicare program management and 
administrative services replacing ``low cost'' purchasing 
decisions; and
    3. Measurable accountability based on objective performance 
criteria for both contractors and oversight entities.

             Leveraging Medicare's Administrative Resources

    The administrative structure of the Medicare program has 
evolved over the past three decades, a time of immense change 
in the health care industry, the information technology 
environment, and the programmatic framework of the Medicare 
program itself. Given the magnitude of these changes, the 
administrative infrastructure of the Medicare program must be 
revisited to leverage what already exists in the private 
sector. The administrative foundation for operating this large, 
complex, and vital program should not be based on outdated 
assumptions or left to historical circumstance. Instead, the 
program's infrastructure should be rationalized, and future 
partners determined by the quality of their performance and 
demonstrable contributions to the program's efficiency.
    HCFA has crafted an Information Technology Architecture 
(ITA) vision for the agency and its programs. An Information 
Technology Architecture ensures that technology supports and 
enhances business (operational) needs and processes. HCFA's ITA 
vision includes:
     consolidation of replicated functions;
     ``maneuverability'' through greater modularity and 
standardized interfaces;
     greater focus on information, rather than data, to 
facilitate interactive program analysis; and
     decision support based on reliable and consistent 
    EDS concurs with HCFA's ITA vision and is assisting the 
agency in defining a path to achieving its broad goals. To the 
extent possible within an environment of significant 
legislative change and preparing for the new millennium, the 
agency has taken strides in achieving this vision and continues 
to pursue elements of this framework. We believe it is vitally 
important to achieve this vision in order to improve the 
agency's capacity to meet the challenges of an increasingly 
dynamic health care industry and to be responsive to the 
program's stakeholders.
    In 1994, HCFA undertook a revision of the Medicare 
program's administrative environment through its Medicare 
Transaction System initiative. This initiative sought to build 
a single claims processing system for all Medicare claims, 
operating in a significantly consolidated number of facilities. 
In November 1995, EDS testified in support of the agency's 
basic vision, while arguing for a flexible, phased approach, 
based on the principles of risk management and return on 
investment for the program. The agency eventually segmented its 
approach to the project, much in line with EDS's testimony, due 
to a host of challenges. However, the drive to achieve the 
agency's ultimate goal of consolidation was sidetracked for a 
number of reasons, including preparing Medicare systems for the 
millennium change. It remains imperative that HCFA return to 
its vision of consolidation for all the same reasons the agency 
initially deemed this necessary to the sound administration of 
the Medicare program.
    Part of HCFA's segmented approach to consolidating 
Medicare's administrative infrastructure is the transition to 
standard, shared claims processing systems. EDS's claims 
processing software was competitively selected to process all 
Medicare Part B claims as one of these standard, shared 
systems. We strongly encourage a resumption of the agency's 
transition to its selected shared systems. In conjunction with 
the consolidation of system software, we also strongly 
encourage the consolidation of the number of data centers used 
to support the Medicare program. Taking advantage of existing 
technology and market capabilities, the Medicare program could 
realize lower costs, greater operational efficiencies and 
consistency, and reduced risk by using one-tenth of the data 
centers currently being funded by the agency. Additionally, 
existing technology, knowledge, and capabilities would allow 
HCFA to reduce the number of Medicare Part B contractors to 
one-tenth of what is being used today, creating even greater 
cost reductions, operational efficiencies, and consistency in 
program administration. What I am speaking of is not a ``brave 
new world.'' In fact, the environment I refer to exists today 
and is ready to be leveraged to benefit the Medicare program, 
reduce risk for the program, and improve the service we provide 
to beneficiaries and other stakeholders across the nation.
    Mr. Chairman, we understand and have keenly felt the 
challenge posed by the upcoming millennium change. Preparing 
systems for the Year 2000 has consumed an enormous amount of 
time and resources and slowed progress toward realizing HCFA's 
information technology goals. However, a consolidated 
administrative environment with well-prepared, committed 
partners will improve the agency's stance with regard to the 
Year 2000 and reduce the risks to the program. It is imperative 
that HCFA assess and identify in the first quarter of 1999 
which if its partners will or will not be prepared to meet the 
responsibilities of the new millennium. Early identification 
will allow those partners that can help HCFA achieve a smooth 
transition into the new millennium ample time to provide the 
agency this assistance.
    There is no doubt that the health care and technology 
environments have changed fundamentally over the past three 
decades, thereby demanding that a new and revised skill set for 
managing the Medicare program be established. Legislative and 
regulatory changes along with these industry trends have only 
increased the necessity for more flexibility and agility in 
meeting Medicare's administrative needs. HCFA can capture 
economies of scale and access new sources of innovation and 
expertise by redefining its contracting partnerships. But 
partnerships for the new millennium must be based on specific 
capabilities and objective performance that meet evolving 
program needs. It is incumbent upon HCFA to continue to: 
identify these needs; seek assistance from industry leaders in 
developing fair performance criteria for meeting these needs; 
objectively measure performance among all its contracting 
partners; and foster open communication among all partners to 
share successes and improve service across the Medicare 

                            Value Purchasing

    Another essential principle in improving Medicare's 
administrative effectiveness involves purchasing decisions 
based on value rather than the short-term allure of low cost. 
Low cost administrative purchasing practices can often create a 
higher total cost to taxpayers and reduce the quality of 
services provided to beneficiaries and other program 
stakeholders. Medicare's program management expenditures must 
be treated as public investments aimed at achieving clearly 
defined operational standards and outcomes. Administrative 
value must be defined by the quality of service delivery and 
the level of protection provided to the Medicare Trust Funds, 
as well as by the unit cost of services. Cost-effectiveness is 
not driven solely by price or unit costs, but also accounts for 
the efficacy of purchased services in accomplishing desired 
program outcomes. When the balance between cost and outcomes is 
not attained, both the results and cost of the program lose 
taxpayer confidence. When the balance is achieved, the program 
operates at the highest level of efficiency.
    We support HCFA's stated goal to be a prudent purchaser of 
health care services on behalf of the public. In the 
administrative area, prudent purchasing demands a clear, 
objective expression of expectations and operational standards 
so that program goals can be mutually understood and met by 
contractors. The application of standards and measures must be 
consistent across time and geographic areas. Without such 
clarity and consistency, program management funds might be 
ineffectively prioritized and misallocated toward competing 
needs, wasted in pursuit of undesired ends, or overspent 
towards ends that are already met and exceeded but left 
    Clear expectations for contractors facilitate price 
competition, increase innovation, and foster improvements 
within and among contractors. The incentive for contractors to 
expand their participation in the Medicare program drives them 
to meet and surpass defined goals. Everyone involved with the 
program benefits from such competition to grow business through 
better service and program savings. HCFA's purchasing 
strategies should capitalize on these market incentives to 
improve service, increase efficiency, and expand program 
participation by moving away from cost-based contracts to 
providing partners the financial incentives to bring the best 
market innovations to bear on Medicare's needs. In a cost-based 
contracting environment, only the government is motivated to 
find cost reductions. Cost-based contracting insulates the 
Medicare program from the best technology and professional 
services that industry has to offer in pursuit of higher 
productivity and higher rates of return. In the competitive 
private sector, best-in-class corporations are motivated by 
being recognized and rewarded for the value they bring their 
customers and not how much overhead expense can be allocated to 
a single contract.
    We are aware that Federal budget rules treat discretionary 
administrative and entitlement benefit dollars differently. But 
the total amount of tax dollars available to fund benefits can 
be significantly increased by providing adequate resources to 
purchase the best administration of Trust Fund benefit dollars. 
Given the magnitude of the public resources at stake in the 
Medicare program, and the relatively small percentage paid for 
administration, the Congress and HCFA could extend Trust Fund 
resources and capture savings if they treated administrative 
expenditures as investments. Value to program beneficiaries and 
taxpayers is not realized when outlays are incurred, but rather 
when high quality services are delivered and desired program 
outcomes are achieved.

                       Measurable Accountability

    All Federal agencies have begun to shift focus toward 
measurable outcomes in pursuit of the statutory requirements in 
the Government Performance and Results Act of 1993. We believe 
that HCFA will better achieve its own Annual Performance Plan 
goals to the extent it projects this framework into its 
contracting arrangements and partnerships.
    It is essential that HCFA define mission-driven, 
quantifiable measures that reflect its strategic and 
operational goals for the administration of the Medicare 
program. EDS's work with other federal agencies has proven the 
power of this approach. Such measures will ensure that HCFA 
derives maximum value from its contracting arrangement and will 
increase the agency's confidence that its partnerships are 
centered around shared understandings and expected results, as 
opposed to best efforts.
    Several ongoing, operational benefits will also accrue from 
defining objective, quantifiable measures, in addition to 
reaching desired program outcomes. The process of developing 
and monitoring performance measures will structure and 
facilitate open and clear communication among HCFA and its 
partners. Improved communication will increase the extent to 
which different entities understand the challenges and risks 
facing each other. In addition, such an environment will 
identify areas where HCFA perceives conflicts of interest 
within and among its partners. With better identification, such 
areas can be mitigated or corrected more rapidly. Similarly, 
with the ever-increasing emphasis on assuring the integrity of 
the Medicare program and its administrative structure, these 
performance measures will clarify the roles and 
responsibilities of all parties involved. We believe strongly 
that a program as large and complex as Medicare can only 
achieve the efficiency, effectiveness, and integrity necessary 
to sustain the trust of its beneficiaries and the taxpayers 
when roles, responsibilities, and expectations are clearly 
defined and measured.
    In conclusion, as the infrastructure of Medicare is 
revisited in light of new priorities and a new environment, it 
is essential that the oversight focus of Medicare operations 
rest on the content and quality of program management tasks and 
performance. Many diverse skills and capabilities make up the 
pool of expertise necessary to effectively administer the 
Medicare program and this array of needs will continue to 
evolve. Building the capacity to define specific outcomes, 
measure results, and allocate resources most effectively is of 
primary importance towards these ends. We believe this approach 
will attract the right partners to support the Medicare program 
and strengthen the program for beneficiaries and taxpayers as 
it meets its future challenges.
    Thank you again for the opportunity to testify before the 
subcommittee and share these perspectives. I look forward to 
answering any questions the subcommittee may have.


    Chairman Thomas. Thank you very much, Mr. Bryan, for your 
testimony. The gentlewoman from Connecticut wish to inquire?
    Ms. Johnson of Connecticut. Yes, Mr. Bryan, I find your 
testimony very interesting, and I will read it at more detail 
in the future, but I am concerned by your belief that it can 
all be so clearly defined. In the past, we have had to use best 
effort, because often the regulations were not out; it wasn't 
clear what the law was; we were operating by letters of 
direction; those letters often change; they sometimes even 
reverse themselves. So, I think you have to be careful about 
believing that, in essence, we can blame it on the contractors, 
particularly in this sort of brave new world of the Inspector 
General and audit resources. You saw what happened when the 
Inspector General came in using inappropriate, outmoded, 
inaccurate standards in the medical schools of the country and 
made medical schools look like criminals for doing what they 
had been specifically instructed to do. So, I am worried about 
    The second thing that I find very concerning about your 
testimony is this idea of having a few very big ones. Well, we 
went through that in Connecticut, and we went from Connecticut-
controlled to Maine, and I will tell you, it wasn't easy; it 
hasn't been easy; it never has been easy. And we are having 
problems with a Connecticut contractor now, but we want another 
Connecticut contractor. I don't know that--I understand that 
information management cuts costs and the bigger the better, 
but there are also complicated systems, the regional 
variations, and reimbursement rates and all those things, and I 
think we run a tremendous risk of trying to have too few 
centers, and I would rather get things running smoothly and not 
have Maine try to remember all of the variations that happen in 
Connecticut and all the variations that happen in other States. 
So, I am concerned about those two aspects of your testimony, 
and if you have a brief comment, I do have a question also for 
Mr. Boston.
    Mr. Bryan. I believe that as we look at the consolidation 
of contractors, to the extent that data can be consolidated, 
consistency can be created in the programs and into the 
processes. Consistency creates a better view for the Medicare 
beneficiaries and the providers to work with the programs.
    Consolidation does not necessarily mean that you wouldn't 
have support centers in each of the States or at a local area 
that would assist for the local needs of the beneficiaries and 
understanding what that community has to offer.
    At the same time, we believe that what technology can bring 
and create--what we would call--peak performance in terms of 
the number of claims processed creating maximum efficiencies, 
that the economies of scale that it would bring to the program 
in administrative funds as well as reducing the number of 
oversight individuals required by the agency to oversee such a 
large number of contractors, this would free up resources 
financially as well as HCFA staff to move to other areas of the 
program such as the Balanced Budget Act or HIPAA.
    Ms. Johnson of Connecticut. See, I really disagree 
profoundly with that point of view. Rate setting now and 
oversight of rate paying varies so much from one little 
hospital to the next little hospital; a little tiny nursing 
home to a bigger nursing home. I mean, this is not easy, and 
there is a big advantage to having your payer know the 
territory and know the variations, and there is no way a 
regional administrator can know this; they just literally 
can't. And when we have something go wrong, it goes wrong all 
over the place.
    So, I personally think--I have not yet seen--let us put it 
this way--I have not yet seen a technology system in HCFA 
function well enough to want it to be spread across the region, 
and I would have no confidence in a regional center. So, maybe 
down the road apiece, but I say let us get the thing operating 
right; let us get the reforms made; let us get the regulations 
written, but don't jump to bigness.
    Look at what is happening in all the mergers in managed 
care; they are having trouble. Why? Because health care is very 
local, and I think--I had one big provider say to me, ``We will 
big provide certain kinds of things, but in every area there 
are going to be small plans, because you can't do it from the 
bigness. You can do certain things; you can't do others.'' We 
are always going to have fee-for-service medicine in rural 
areas, because you can't do managed care everywhere.
    So, I am not at all comfortable with the position you are 
taking, but I don't want to belabor that point.
    I do want to ask Mr. Boston a specific question: HCFA has 
made some efforts to reach out to hospitals and doctors and 
medical equipment providers and press them on being prepared 
for Y2K--there are 1.25 million providers. Do you see their 
efforts as being successful? Are they doing enough? Should they 
be doing more? Are they concentrating too much on the big 
providers and not enough on the little guys out in the sticks 
that really need help or at least reminders?
    Mr. Boston. Mrs. Johnson, I believe that HCFA and its 
contractors are working very closely together to try to 
accomplish that 
notification. Where HCFA may be meeting with the national 
organizations, we as contractors are meeting with many of the 
organizations and the local organizations to try to get the 
word out, and I think it is a very concerted effort of both 
parties to try to get the word out. We are very worried that 
people understand the complexity, and we find that, 
particularly the smaller medical care providers, don't 
understand the problem and need our help.
    Ms. Johnson of Connecticut. Right. Well, I am glad to hear 
that you are meeting with them. I mean, it is a better effort 
than we have been making. Are you prepared, though, to handle 
paper claims if there are problems with Y2K?
    Mr. Boston. We believe that we are prepared to handle an 
increase in paper claims, although I don't believe that that is 
what we are going to see. Most doctors' offices, clinics, other 
kinds of providers these days use computers in generating their 
records and their claims. My belief is if that computer system 
is not millennium-ready, it won't be able to generate a paper 
claim, electronic claim or anything else. And what a more 
likely scenario will be is that the provider simply won't be 
able to bill the Medicare Program for some period of time. Now, 
with HCFA, we are working on strategies to prepare for a 
probability of some providers not being able to bill, but, 
again, I don't believe that we are going to see a tremendous 
increase in paper.
    Ms. Johnson of Connecticut. Interesting, thank you. Thank 
you, Mr. Chairman.
    Chairman Thomas. Certainly. Does the gentlewoman from 
Florida wish to inquire?
    Ms. Thurman. Thank you, Mr. Chairman. Ms. Gagel, let me ask 
you a couple of questions, because I noted in your testimony 
that you said that we don't need any contractor reform. But let 
me ask you this, because you have been on both sides: What 
could you offer to this Committee that would give us an 
indication or that would help HCFA evaluate these contractors, 
better than what we are doing today? I am just curious.
    Ms. Gagel. I think that--and I found the questioning of the 
Committee members to the administrator very insightful--I think 
the most important thing that we all need to do is understand 
what is going to be needed in Medicare administration in the 
future. We know the program will change. When the program 
changes, presumably, the administration of the program needs to 
change, and it seems to me that the first thing we need to do 
is to understand what that administration needs to look like 
and act like and feel like. I think, probably, most people 
would suggest it doesn't need to look like what it looks like 
now which is what it has looked like, in one way or another, 
for 30 years, but to move to specific proposals in the absence 
of a dialog and a clear articulation of goals and a strategy 
for Medicare administration, is actually what is concerning, I 
think, probably more than anything else.
    There is some agreement on some of the tactical things, 
standard systems, for example, and the fact that that does 
improve program administration in terms of making it certainly 
more reliable; reducing error rates; making it more efficient, 
more economical. There is general agreement on that kind of 
thing, but if the focus is going to be on improving services to 
the elderly population in this country which is clearly one of 
the goals that the Health Care Financing Administration is 
articulating, you aren't going to want that customer service to 
look like what Medicare contractors do today, but we haven't 
really articulated what it does need to look like and who needs 
to be providing that service.
    Ms. Thurman. But also in your testimony you say that HCFA 
has this authority to replace or not renew their contract on 
poor performance. The problem is--and I guess where I am trying 
to figure out--is how do we figure out what that poor 
performance is? And, for example, in the Inspector General they 
said, ``Nine of the eleven contractors with audited financial 
ledgers could not support the accounts receivable. There is 
little assurance that amounts eventually paid to providers 
through the final cost report settlement process meet Medicare 
guidelines for reasonableness and appropriateness.''
    So, it seems to me, there are two things going on here, 
then. I mean, in one sentence we are talking about we could 
just let them go for poor performance, whatever that means--and 
I am trying to figure out how we put a standard to that--but at 
the same time, I understand the direction issue of the kind of 
direction that we need to be given, but there seems to me that 
there ought to be some way to pull those two things together. 
Because contractors need to know what is going on out there in 
their lives too, so if you do contractor reform and you have a 
working relationship and you know what your job is and you know 
what we are expecting from you and you know what potentially 
puts you in a situation of not having a renewable, I mean, 
somehow there has got to be a way to work through this, and it 
sounds to me, from what I can gather, the system today is not 
happening that way.
    Ms. Gagel. The standards have--the expectations, if you 
will--with the exception of Y2K, where HCFA is very clear in 
its expectations--have I think, indeed, become more murky over 
the years. We know, for example, that we have to be very 
efficient; that efficiency becomes a negotiating tool.
    But we have a hard time understanding with the exception of 
``do a lot of it'' what the expectation of the Health Care 
Financing Administration really is. We have a hard time talking 
about understanding results, and that is the dialog I think 
that needs to take place.
    Ms. Thurman. Some of that is not just HCFA. I mean, some of 
that is just us, too, changing things constantly around and 
trying to put in new rules, and, obviously, we have gone 
through a very difficult time, because we have tried to balance 
the budget and we have, but the fact of the matter is, I mean, 
there are things we are doing as well. So, we couldn't just----
    Ms. Gagel. One of the things that we are working on in 
other parts of our program--and, indeed, we are working with 
this with the Medicare contractor also--is establishing a very 
tight system of metric, so that we can understand what we need 
to do to be successful in health care compared to all of our 
competitors. There isn't any reason why we wouldn't want to do 
that; why HCFA wouldn't want to do that for Medicare 
contractors also--establish the metrics; measure yourselves 
against both the private sector and in our case other Medicare 
contractors so that expectations become very clear. There is a 
tremendous discipline involved in doing that, and it provides 
tremendous focus for the people involved in it.
    Ms. Thurman. Actually, that sounds like a little bit of 
reform there to me. Thank you.
    Chairman Thomas. My understanding is the gentlewoman from 
Connecticut has another question that she really wants to ask.
    Ms. Johnson of Connecticut. I appreciate your experience in 
the system. I try to keep extremely close touch with the system 
out in the real world, and I just wondered if, from your 
perspective, do you think the system can tolerate the cuts in 
spending in the President's budget?
    Ms. Gagel. In the budget for the year 2000? We are still 
analyzing the budget and have not yet taken a position on that. 
We are concerned, of course, about the user fees, and I know 
that we testified to the Committee about that last year and 
were pleased that they did not go forward.
    Again, I think it depends on expectations. As Mr. Boston 
said, I think, with regard to the year 2000, funding is 
adequate unless contingency planning, testing, becomes--
particularly with regard to working with providers--end to end 
testing becomes a much greater expectation than we expect it to 
be right now.
    I think if you really want Medicare beneficiaries in this 
country to understand the Medicare Program--how to access the 
benefit; how you use the benefit wisely, are we funding that in 
this country? I think not now. I suspect in years to come we 
will, because the demographics of the population will kind of 
require it, I suspect, but--so, again, it depends on what your 
expectations are.
    Ms. Johnson of Connecticut. Mr. Boston.
    Mr. Boston. Yes, if I can respond on behalf of the Medicare 
Administration Committee, we are very concerned about what we 
think is in the budget for the year 2000 and some of the cuts 
that are there if, in fact, the operational requirements remain 
as they are today. We are----
    Ms. Johnson of Connecticut. You mean, if they don't get 
bigger or if they stay the same? You wouldn't be concerned if 
they got less?
    Mr. Boston. Well, if the requirements put on us are in line 
with the money available, then it is not a concern.
    Ms. Johnson of Connecticut. Is that true now?
    Mr. Boston. It is always a very difficult goal to hit 
HCFA's targets. We did a great many changes throughout the 
year, and most of them say do it within your current budget; we 
are all quite used to that.
    Ms. Johnson of Connecticut. Well, you have some formidable 
challenges ahead of you, some of the very biggest with BBS for 
home health and outpatient and stuff, and, frankly, the 
resources aren't that much greater, so I would assume the 
answer to my question is really, no, that the resources don't 
appear to be adequate.
    Mr. Boston. We are going to be very interested in seeing 
how that budget progresses and what changes are made. We are 
very concerned as it is presented that it might not have 
sufficient resources, but we also know that the initial budget 
presentation, the final budget, there is a great deal of work 
in between and an opportunity to make our concerns known.
    Mr. Bryan. I would like to echo one item presented by Ms. 
Gagel and that is that we are concerned about the level of 
funding for communication and outreach to the beneficiaries. 
With such rapid change, we have only seen decreases in those 
areas, and we think that that is an area that should be 
increasing, because beneficiaries have many questions. It is 
not easy to understand the new Medicare information and there 
is going to be a greater demand on our resources as someone 
mentioned earlier to spend time on the phone with the 
beneficiaries and to go out into their communities and to put 
on seminars.
    The other component that we are concerned about is as we 
move toward the Program Safeguard Independent Contractor, in 
MIP, we will see an increase in the number of appeals and 
requests for reviews on those programs, and so we are concerned 
about that level of funding. All of this I would center around 
the communications and the interaction with the beneficiary 
    Ms. Johnson of Connecticut. Well, I would urge you as you 
analyze the budget to assume that the fees won't be passed; 
that is just a new tax source for what should be administrative 
costs. I think you should look back at the past when the fees 
were not pressed by either--members from either side of the 
aisle, and I would say that if other members are seeing what I 
am seeing out there, and what I have talked to MEDPAC about, 
the case for cutting reimbursement to hospitals can't be made.
    So, I would say there are lot of cuts in that--I don't see 
any so far that are going to survive, and if that is the case, 
then we have a big budget problem, because, of course, those 
savings were used to fund new spending elsewhere in the budget. 
So, we are in very serious circumstances; many, many promises 
have been made, and it is unfortunate that some of them have 
been made on the basis of savings that can't be realized, and 
we look to your help to be as realistic as you can with us but 
also to be willing to stand and say this can't be done. Thank 
    Chairman Thomas. Well, thank you for your testimony. Both 
the Ranking Member and I have written HCFA with concerns about 
the suggested shift toward MIC. I have a hunch that maybe it 
will be about as successful as the user fees in other areas. It 
just, at the current time, does not seem like an approach that 
makes a lot of sense.
    Part of the tension that I hear in terms of this discussion 
is that you are talking about wanting to try to deal in a 
market-based world with an administered price animal, and that 
is always going to be conflicting. And that is one of the 
reasons, of course, the Medicare Reform Commission is looking 
at trying to make some changes which would provide 
beneficiaries the kinds of services in a world in which many of 
these decisions that are now made laboriously through a 
bureaucracy with administered prices in a box called market, 
because we find out it works very well and there are 
compensations that take place.
    Mr. Boston, I said that your testimony was interesting, 
and, Mr. Bryan, I would like a reaction to it, because you 
described the way in which some of the carriers and contractors 
got started, because they had to be licensed insurers as though 
that is some kind of a hurdle or a requirement that produces 
some level of competency or certifiability. How hard is it to 
get over the hurdle of being a licensed insurer, and does it 
mean anything anymore? Anybody?
    Mr. Bryan. I would say for us----
    Chairman Thomas. Well, I know you have got a whole bunch of 
contracts, and I understand you are trying to be a licensed 
insurer in California.
    Mr. Bryan. NHIC is actually approved by the California 
Insurance Commission to administer the Medicare program in 
    Chairman Thomas. So, you were a shopper; you are now a 
buyer, so you are a--did you buy an insurance company?
    Mr. Bryan. No, we actually had one that we had never 
utilized before in the Medicare Program. We only utilized the 
insurance subsidiary to help with our Medicaid contracts.
    Chairman Thomas. How did that make you a better contractor?
    Mr. Bryan. Quite honestly, I don't think it did. What I 
think did make us a contractor was the picking up of the staff 
and the knowledge capabilities from the workload that we 
assumed, and we pulled forward a very knowledgeable work force. 
What we brought into place were different management practices 
to create the efficiencies we thought we could bring to the 
    Chairman Thomas. And that is the kind of market-based, 
bottom-up structure changes that I think simply have to take 
place instead of the discussion that took place previously.
    Mr. Boston, you made some fairly provocative statements as 
far as I am concerned, and I alluded to them earlier where 
invariably in one of these hearings with whoever the 
administrator happens to be to extol the virtues of the 
administrative cost structure of HCFA versus the outside 
world--and that somehow they are always half of what goes on in 
the private sector--but you indicated that you thought that 
there was and has been a degree of subsidy going on among 
contractors. Now, the big bucks, I assume, are over with the 
Blues, and maybe I am wrong; you are kind of representing the 
non-Blues--whatever the rest of the color spectrum is, it is 
not blue. Has anybody ever looked at attempting to quantify 
this or is it such a variable over time or in certain 
circumstances that you know you do it, but it is difficult to 
show? Or by the time people show they are out of it because 
they realize they were doing it and couldn't stay in business 
because they did?
    Mr. Boston. I think it has been far more anecdotal, Mr. 
Chairman, than studies. We have heard from people who, in some 
cases, have pulled out of the program that the amount of money 
HCFA was willing to give them to perform the administrative 
services was no longer covering their costs, and in some cases 
they had elected to use corporate funds to make up that 
difference. How a company chooses to do that is certainly a 
business decision they make. I can tell you that the board of 
directors I report to at WPS have given me a very clear 
indication that we will never subsidize the program. We will 
certainly do it at a very efficient cost, but we won't 
contribute private subscriber funds to do that. But some have; 
some have gotten out; some may continue to.
    Chairman Thomas. Ms. Gagel, I saved you for last, because 
clearly the pitch--and I really do appreciate the testimony; we 
are going to bring you back as we begin to look at some of the 
administration's suggested changes when they firm up and we 
have the ability to have a programmatic discussion--but you are 
interesting to me, because, as the gentlewoman from Florida 
said, you have been in the structure and you are now outside 
the structure, and you were in a responsible position. The 
whole MTS situation, as comfortable as you are or to the best 
of your ability, how in the world--I mean, when I first took 
over, I was wheeled over to Baltimore, and they brought out all 
these charts to show me the solution for tomorrow and that all 
of the problems that I was concerned about and others were 
concerned about, including indigestion---- [Laughter.]
    Chairman Thomas [continuing]. Were all going to disappear 
once this MTS was put in place. And then like 4 months later I 
find out that at the time that they were informing me about 
this wonderful new change, they were pulling the rug out from 
under it as well or they were coming to the realization that it 
just wasn't going to work. What happened?
    Ms. Gagel. I could only, I think, probably, speculate on 
what happened. I was involved in the very early planning, the 
conceptualization, of what turned out to be MTS, and the 
conceptualization of that was, indeed, some of the things that 
were talked about earlier: the need for HCFA to have systems 
that it controls that are predictive of payment. That was 
essentially what MTS was all about; to have HCFA control the 
claims processing operation rather than have 10 or however many 
systems around the country do that. That was a very important 
thing. The other thing we were looking at was looking forward 
to the day that the Medicare Program would change. The systems 
in Baltimore are fairly antiquated. If indeed as you are now 
going to Medicare Plus Choice and will not only have a fee-for-
service option but beneficiaries might also have PPO options 
and HMO options, we felt that the systems at HCFA could not in 
any kind of an efficient way recognize all those options and be 
able to pay claims.
    The other thing the systems cannot do today and that we as 
Medicare contractors cannot do--and the CFO, the Inspector 
General, study that was released yesterday points this out very 
well--we can still not aggregate data so that we are looking at 
data from the beneficiaries' point of view. If you look at what 
the Inspector General study does, it looks at claims paid for a 
beneficiary over a 3-month period of time, and in hindsight we 
can all do a real good job of deciding what was necessary and 
what was not and knowing that you don't pay an outpatient bill 
if somebody is really in a skilled nursing facility and stuff 
like that. We could do a lot of that on the front end if we had 
the computer systems that permitted us to do that or simply the 
data warehouses that would collect the data, and that is really 
what MTS was all about. Obviously, there were management issues 
with it, and that was very unfortunate, but some of the 
conceptual design is, I think, probably still where HCFA needs 
to go and will probably end up going at sometime in the future.
    Chairman Thomas. But to me it is almost an example of what 
happens when you try to create a front-loaded resolution of an 
administered-price system. You just can't do it, and that is 
one of the beauties of the ability to adjust that in the 
marketplace and why the Medicare Commission is looking at a 
prospective payment system for that area of HCFA. Now, clearly, 
in the old-fashioned, if you will, fee-for-service which is 
still 85 percent of the folk, we have got to figure out ways to 
get some of the benefits changed like putting prescription 
drugs in, and that if we are going to have to live with 
administered prices, we are going to have to clean it up so 
that the decisions can be made more transparently.
    We all draw from our own analogies, and I just noted in the 
news the other day that a company in the automobile industry 
that is considered fairly efficient in management is the BMW 
company, and they acquired the so-called Rover Group from 
England, and they thought for particular amounts of money they 
could breathe life into it, and, as a matter of fact, the top 
management position at BMW bet his career on it. He recently 
resigned, because it did not do it in the timeframe and for the 
money they thought it was going to do.
    One of the real frustrations I have with our dealing with 
HCFA in the current system, to me, is that MTS in the health 
care area is analogous to the Rover Group with BMW. I know the 
administrator left; he got out of town. Inside that structure, 
there were obviously some folk in important administrative 
positions whose responsibility it was to make this happen and 
that it didn't, and it has caused all the problems that we are 
in now with Y2K and the rest. To your knowledge, are these 
folks still in their positions? Did any heads roll over this?
    Ms. Gagel. I have been away from HCFA too long, I think, to 
be able to make an assessment of, frankly, whose head should 
have rolled, and so I really can't respond.
    Chairman Thomas. I tell you, Ms. Gagel, we have 
investigated, and the fact of the matter is virtually no heads 
rolled and certainly the ones who should have rolled didn't. It 
is one of the frustrations with a bureaucratic structure with 
administered prices, and that you folks in the world that you, 
in interfacing with that world, have got to change.
    Ms. Thurman. Mr. Chairman.
    Chairman Thomas. And as we go through with these 
programmatic changes that are being offered by the 
administration, we are going to want your input to evaluate 
them vis-a-vis other models or options so that we can make the 
best decision possible in reforming the very needed reform area 
of the bureaucracy interfacing with contractors.
    The gentlewoman from Florida.
    Ms. Thurman. Are you--I am just asking because I don't 
know--so, none of the folks that were involved with this are--
they are all still there? Are these civil servants or were--I 
would imagine the civil servants could still be there, but were 
the top officials--I mean, at least one of those we know is 
gone. I mean what about the rest of them? Are they still 
    Chairman Thomas. I would love to visit with the gentlewoman 
on the scenario of what happened on something as fundamentally 
failing as the MTS system and the--first of all, why do you put 
something at the absolute core? You have got all of your eggs 
in that particular basket and then not have a fallback 
    Ms. Thurman. When did that happen?
    Chairman Thomas. That happened in----
    Mr. Bryan. It was toward the end of 1996 and early 1997.
    Chairman Thomas [continuing]. 1994, because it was just----
    Ms. Thurman. That was when the system was bought?
    Chairman Thomas. No, no, no. It was being developed. It was 
going to be--the rollout was eminent. When we became the 
majority, I went over there to get my information, and Bruce 
Lattick had everybody come in and talk to me about this new 
program when at the very time they knew that it wasn't going to 
work. January, 19----
    Ms. Thurman. But the development of this had been going on 
    Chairman Thomas. It had been going on for a long time. Ms. 
Gagel, can you help us on that?
    Ms. Gagel. Well, I left that part of the organization in 
1992, and it was in the late conceptual stages at that time, 
and we started a year or two before that.
    Ms. Thurman. So, it has been going on for a while, OK.
    Chairman Thomas. Oh, yes, it went on for a long time. They 
put all their eggs in that basket.
    Ms. Thurman. Thank you.
    Chairman Thomas. And, actually, maybe we will do a head 
    I want to thank you very much and look forward to your 
input. I hope it is as honest and frank as your written 
testimony was today.
    The Subcommittee stands adjourned.
    [Whereupon, at 5 p.m., the hearing was adjourned.]
    [Submissions for the record follow:]

Statement of the American Medical Association

    The American Medical Association (AMA) appreciates the 
opportunity to submit this written statement for consideration 
by the Ways and Means Subcommittee on Health and requests that 
it be included in the printed record.
    The American Medical Association believes that 
Congressional intervention is needed to correct management 
problems at the Health Care Financing Administration (HCFA). 
These problems have been building up for many years. An ill-
advised reorganization and a heavy workload from requirements 
of the Balanced Budget Act of 1997 (BBA) have overwhelmed the 
    Consider the following examples:
     Three primary care physicians in Idaho Falls, 
Idaho, recently felt compelled to stop treating Medicare 
patients altogether in the wake of an overzealous and overly 
punitive effort by the local Medicare carrier to recoup 
thousands of dollars in payments due to differences of opinion 
about appropriate coding and documentation. A number of the 
disputed claims were for laboratory tests, which is all the 
more outrageous because, at the same time the carrier was 
making its recoupment demands, HCFA was engaged in a negotiated 
rulemaking process to determine what rules should guide its 
administration of Medicare's lab test benefit. Rather than face 
the prospect of civil fines of up to $10,000 per clerical error 
or billing mistake in the future, prosecutorial zealotry, and 
the associated legal costs, the physicians simply decided to 
discontinue their involvement with the Medicare program.
     While 85% of Medicare beneficiaries remain in the 
fee-for-service program, conflicting HCFA priorities and a high 
attrition rate among experienced staff have led to serious 
problems. For example, in setting the Sustainable Growth Rate 
for physician services, as required by the Balanced Budget Act, 
HCFA significantly underestimated Gross Domestic Product growth 
for 1998 and enrollment for 1999. So far, HCFA has made no 
effort to revise its estimates to reflect more up-to-date 
information. Physician payments for 1999 have already been 
underfunded by about $645 million due to these projection 
errors, and HCFA's continued use of the erroneous estimates 
could lead to steep payment cuts as soon as next year.
     In testimony before this Committee in January 
1998, the General Accounting Office described numerous 
deficiencies in HCFA's oversight of its claims processing 
contractors, using as an example the region that formerly had 
six staff dedicated to contractor oversight but now has only 
two. This lack of oversight has allowed the Part B carriers to 
get away with establishing local coverage policies that 
parallel abuses of some managed care organizations:

           In some localities, claims for the physical 
        evaluation necessary to clear patients for anesthesia and 
        surgery are being denied as noncovered because ``Medicare does 
        not cover screening services.''
           Similarly, it is standard clinical practice in 
        urology to give a man who complains of lower urinary tract 
        symptoms a PSA test, but in many localities patients have no 
        idea if the test will be covered because carriers will not pay 
        for the test if the diagnosis turns out to be enlarged 
        prostate. When administered to diagnose lower urinary tract 
        problems, the PSA test is clearly not a screening test.
           Virtually no effort is made by the carriers to 
        inform or educate physicians about Medicare's coding, payment, 
        and coverage policies, nor are they provided with meaningful 
        appeal options once the carrier has decided a problem exists.
           Often, carriers themselves have little knowledge of 
        appropriate coding practices. In one case, a carrier attempted 
        to recoup more than $80,000 from a physician, but after the 
        physician persistently and relentlessly sought a reevaluation, 
        the amount owed was suddenly reduced to $2,000. In another 
        case, during the audit process, the carrier auditor made 
        written notes and verbal comments demonstrating he was unaware 
        of the existence of the ICD-9 code book.

    We believe that HCFA's problems will only get worse as the 
number of Medicare patients, claims, and health care delivery 
systems increase. To say that HCFA's current problems could 
lead to a crisis is an understatement.
    The AMA believes that a crisis exists, and that this crisis 
is beginning to spill over into the actual delivery of health 
care to our nation's Medicare patients.
    We believe that HCFA is currently traveling down the same 
road the Internal Revenue Service (IRS) was on before Congress 
heeded the demands of taxpayers and forced the IRS to 
restructure its policies. Just as the IRS is struggling to 
reinvent itself into a ``customer'' friendly agency, HCFA must, 
with a push from Congress and the Administration, reassess its 
role and relationships with medical professionals who care for 
Medicare patients.
    Further, there is a growing sense among Medicare experts 
that HCFA is ready to collapse under the sheer weight of its 
administrative duties. This sentiment was clearly stated in a 
January/February 1999 Health Affairs article co-written by 
several of the nation's leading health economists, including 
three former HCFA administrators: ``The mismatch between the 
agency's administrative capacity and its political mandate has 
grown enormously over the 1990s. . . . HCFA's ability to 
provide assistance to beneficiaries, monitor the quality of 
provider services, and protect against fraud and abuse has been 
increasingly compromised by the failure to provide the agency 
with adequate administrative resources.'' The AMA shares these 
sentiments and believes that HCFA needs additional resources to 
meet its continually expanding statutory requirements.
    The AMA commends Congress for holding hearings last year to 
assess HCFA's initial implementation of the Health Insurance 
Portability and Accountability Act of 1996 (HIPAA) (P.L. 104-
191), and the Balanced Budget Act of 1997 (BBA) (P.L. 105-33). 
However, many issues remain. We implore Congress, and 
particularly this committee, to hold additional oversight 
hearings to assess:
     the overly burdensome regulatory requirements 
placed on physicians, hospitals, and other health care 
     whether HCFA has remained within its statutory 
authority in the rulemaking process;
     HCFA's failure to distinguish inadvertent billing 
errors from intentional acts to defraud the government;
     HCFA's ongoing implementation of the 
Medicare+Choice program;
     the process HCFA utilizes to draft rules and 
     HCFA's process for considering and responding to 
public comments on its rules and regulations; and
     HCFA's oversight of Medicare carriers and other 
    Beyond the critique of HCFA that will be provided by the 
General Accounting Office, Congress should consider the many 
ways in which HCFA's regulations for administering Medicare and 
Medicaid affect virtually every physician, hospital, and other 
health care provider in this country and their ability to care 
for Medicare and Medicaid patients.
    The AMA also urges Congress to hold hearings to address the 
following critical issues:

                    Improving Medicare's SGR System

    HCFA's mismanagement has had a deleterious effect on the Medicare 
fee-for-service (FFS) program as well as the more frequently discussed 
Medicare+Choice program, and the Sustainable Growth Rate (SGR) provides 
a good example. The SGR is a target rate of spending growth. Cumulative 
actual spending is compared to cumulative target spending, and payment 
updates are determined by whether actual spending exceeds or falls 
short of the target amount. The target is based on annual changes in: 
inflation, Medicare FFS enrollment, real per capita GDP, and spending 
due to law and regulation.
    HCFA established a 1999 SGR of -0.3%, which became effective 
October 1, 1998 for fiscal year 1999. This negative growth target means 
that, unless total FFS physician spending is less in 1999 than it was 
in 1998, next year's physician payment update could actually result in 
a payment cut. A key HCFA assumption underlying the negative SGR is 
that the number of beneficiaries enrolling in Medicare+Choice plans 
will grow by 29% in fiscal 1999. With the recent HMO withdrawals from 
Medicare, this assumption seems seriously overstated and obviously 
erroneous. In fact, the rate of increase in managed care enrollment has 
been declining since July, and the most recent monthly data show an 
actual decline in managed care enrollment.
    HCFA has already made one significant error in setting the first 
SGR for 1998. In October 1997, HCFA projected 1998 GDP growth of 1.1%, 
but 1998 GDP growth is now estimated to have been at least 2.8%. When 
combined with other, smaller projection errors in the 1998 SGR, HCFA 
made a net underestimate in the 1998 SGR of 1.5%. With Medicare 
spending on physician services currently at about $43 billion annually, 
the projection errors led HCFA to set the payment update for 1999 about 
$645 million lower than it should have been.
    HCFA has acknowledged the projection error problem, stating that, 
``[w]hile we will use our best efforts to make estimates at the time 
the SGR is established, we are concerned that there will be differences 
compared to later estimates of some of the components of the SGR.'' In 
one regulation, HCFA also stated the errors would be corrected: 
``[d]ifferences between projected and actual real gross domestic 
product per capita growth will be adjusted for in subsequent years.'' 
But to date, HCFA has not revised its estimates to reflect the more 
accurate, updated information.
    Because the SGR system is cumulative, if left uncorrected, 
projection errors will be compounded with each year's payment update 
calculation. To have the cumulative SGR become merely an accumulation 
of erroneous HCFA estimates would defeat the whole purpose of the 
spending target system. The level of underfunding of Medicare physician 
services due to these errors could grow to the $1-2 billion range as 
early as next year.

                           Program Integrity

    The AMA is very concerned about HCFA's overly zealous 
implementation of its policies in addressing waste, fraud, and abuse. 
The Administration continually fails to distinguish between ``genuine'' 
fraud (knowing and willful) and legitimate billing issues, i.e., 
differences in medical judgment over one level of coding. There is a 
vast continuum of issues arising in Medicare claims (e.g., deficiencies 
in documentation, inadvertent coding and billing mistakes, intentional 
criminal fraud, etc.) that HCFA constantly lumps together in the 
catchall category of waste, fraud, and abuse. To date, HCFA has 
essentially taken a single approach in dealing with a whole range of 
    HCFA's sole response to a broad range of complex problems has been 
to address each one in an aggressive and punitive manner. The blurring 
of the lines between waste and fraud has tremendous implications for 
HCFA's policies and programs, not to mention for physicians trying to 
follow all the rules to comply with the program. In response to the 
current environment, carriers are forced to pursue aggressive tactics. 
In this ``gottcha'' environment, both patients and physicians suffer.
    Physicians want to provide quality care for their patients without 
running afoul of HCFA's labyrinth of complex and burdensome 
requirements. We have received numerous reports that carrier feedback 
is severely lacking. The AMA has repeatedly urged the Administration to 
increase its educational efforts to individual practicing physicians 
who may not be aware of their honest and inadvertent billing errors. We 
have argued strenuously to HCFA that when a carrier identifies that a 
physician has a billing problem, the carrier has an obligation to start 
a dialogue with the physician regarding the steps the physician can 
take to correct the problem.
    The AMA has critical concerns about HCFA's post-payment audits. 
These audit procedures lack fundamental fairness. In order to avoid a 
total disruption of their practice, as well as expensive legal bills, 
physicians are frequently forced into civil settlements without the 
ability to appeal. In many cases auditors extrapolate hefty fines from 
a small sample of claims. At the hands of aggressive auditors, 
overpayments can quickly mount. We recommend that the Administration 
temper its rhetoric and refine its program initiatives so that those 
physicians honestly participating in the Medicare program are not 
subjected to the federal government's overly aggressive and punitive 
approach. The AMA urges the Administration and Congress to target their 
efforts toward ferreting out true fraud rather than penalizing honest 
physicians whose primary goal is to provide quality care to their 

                           Regulatory Relief

    Physicians are voicing their growing concern about their Medicare 
and Medicaid patients access to quality health care services. Numerous 
unnecessary and unduly complicated administrative requirements 
interfere with the patient-physician relationship causing strain on 
both patients and physicians. These requirements increase the cost of 
care while reducing access for Medicare beneficiaries. If the Medicare 
program is to provide the nation's Medicare patients with greater 
access, greater choice and lower cost medical services, passage of 
regulatory relief legislation for physicians, hospitals, and other 
health care providers is a must. Examples include:
     Physician input should be considered in annual carrier 
performance reviews. In determining whether the Secretary of HHS will 
contract with a carrier to administer the Medicare program, the 
Secretary should consider physician input in evaluating whether to 
contract with that carrier.
     Physicians should have an opportunity to provide 
substantive input before any ``black box'' commercial off-the-shelf 
software (COTS) is implemented by HCFA for code editing/bundling. These 
``black box'' methods do not draw on physicians' expertise and 
practical knowledge of the services billed. Their use distorts the 
billing process, discourages correct coding, creates inefficiencies and 
often results in physicians being paid less than the physician's cost 
of providing the service.
     Carrier use of the extrapolation technique should be 
revised. The practice of determining Medicare's estimated overpayment 
to a physician based on a statistical sampling of a small number of 
disallowable claims is inequitable. Carriers should identify a problem 
and provide the physician with an opportunity for a telephone 
discussion or a face-to-face meeting, in which the carrier must 
adequately explain how to correct the billing problem in the future. If 
a physician's future billing activities are found in error, HCFA may 
recoup overcharges based on actual errors found.
     Carriers should be required to provide physicians, upon 
request and without charge, with carrier-generated information needed 
for the submission of claims. This information includes the identifier 
number or other code of a referring physician, a list of maximum 
allowable charges, and coding protocols needed by physicians to submit 
a claim for payment or to respond to a carrier inquiry.
     Carriers should compensate aggrieved individuals for 
violating Medicare policy. Any individual, including a physician, who 
is aggrieved by the failure of a carrier to carry out Medicare policy, 
and establishes that the individual has suffered damages aggregating at 
least $500 as a result of the failure, should be permitted a hearing 
before the Secretary of HHS. If the carrier were found to have such 
failure, it should be required to compensate the aggrieved individual 
for such failure.
     HCFA should develop and provide a Medicare compliance 
manual to all participating physicians without charge.
     Medicare should fund toll free lines used for the 
submission of electronic claims to the program. Payment for use of a 
telephone line to submit electronic claims to Medicare is de facto a 
user fee. Medicare formerly provided this service at no charge.
     Carrier medical review screens or associated parameters 
should be released before denial of physician claims.


    HCFA's ability to adequately manage the Medicare program is an 
issue of great importance to Medicare patients and the physicians who 
care for them. We implore the Committee to hold additional hearings to 
further assess the issues raised in our testimony, and encourage all 
Members of Congress to contact the AMA for further elaboration on 
issues addressed in our statement.


Statement of Christina Metzler, American Occupational Therapy 
Association, Inc., Bethesda, MD

    The American Occupational Therapy Association (AOTA) 
submits this statement for the record of the hearing on 
February 11, 1999. AOTA calls your attention to an issue 
critical to the health, well being and quality of life of 
Medicare beneficiaries.
    The change in the payment under Medicare for services in 
skilled nursing facilities (SNFs) from a cost-based system 
(with routine limits) to a fully prospective system (PPS) is 
causing tremendous upheaval in the occupational therapy 
profession. Practitioners are experiencing changes in their 
employment status, in their economic status, challenges to 
their professional standards and ethics, and, most importantly, 
limitations in their ability to provide adequate, appropriate, 
and required services to Medicare beneficiaries in these 

                             HCFA Oversight

    AOTA is concerned that the Health Care Financing 
Administration (HCFA) is not adequately or effectively 
monitoring the implementation of this massive change. To our 
knowledge, HCFA has provided no guidance to fiscal 
intermediaries about medical review or quality assurance 
criteria to assure patients are receiving the care that nursing 
facilities are being paid for. We are not aware of any 
information transmitted to fiscal intermediaries on how to 
monitor the provision of care in relation to the payment 
received. Nor are we aware of any efforts by HCFA to empower 
the intermediaries with methods to determine the accuracy of 
the SNF categorization of individuals into appropriate RUG 
categories. AOTA urges that efforts be undertaken to assure 
nursing homes are not minimizing care, either intentionally or 
because of inadequate payment levels.
    When Medicare payment to hospitals was changed to the 
prospective payment system in the 1980's, based on diagnosis-
related groups (DRGs), hospitals used many ways to adjust to 
the new payment system. Not all were sensitive to patient needs 
and desired outcomes. In that post-DRG environment, many 
changes were observed and reported and beneficiaries felt the 
consequences. Increased use of outpatient pre-admission 
services billed to Part B, decreases in length of stay, and 
movement to non-hospital post-acute care settings were common. 
Also common were problems for patients and beneficiaries: 
transfer to nursing facilities unable to treat the acute 
conditions patients had, discharges to home with subsequent 
readmissions for exacerbations of conditions, and shifting 
provision of care to other, perhaps less appropriate, sites.
    AOTA is concerned that similar negative consequences will 
accrue as the PPS is implemented by SNFs and that HCFA is 
neglecting critical oversight issues, which may jeopardize 
patient health and safety.
    AOTA urges you to use your authority to hold HCFA 
accountable for instituting the proper guidelines and 
procedures to prevent problems that are likely to occur and to 
monitor changes in patient care and outcomes that may result 
from the change in the payment system. Patients in skilled 
nursing facilities are too vulnerable to be left to suffer the 
vagaries of funding changes without some protection from the 
agency charged with that duty.

                  General Accounting Office Testimony

    AOTA is concerned about issues raised in the testimony of 
the General Accounting Office (GAO). First, we would like to 
support GAO's statement that ``the SNF PPS has design flaws'' 
and that this is ``coupled with a lack of adequate planned 
oversight'' by HCFA. While GAO merely raises the specter of 
less than expected savings from the combination of these two 
problems, AOTA is deeply concerned for patient welfare under a 
system that is ``flawed'' and, as GAO admits, the 
implementation of which is unfettered by appropriate oversight.
    GAO goes on to state that ``the new SNF PPS' design 
preserves the opportunity for providers to increase their 
compensation by supplying potentially unnecessary services, 
since the amounts paid still depend heavily on the number of 
therapy and other services patients receive.'' This statement 
has no connection to the reality our therapists and their 
patients are experiencing in SNFs and belies the experience and 
common sense understanding of capitated payment systems. GAO 
appears not to understand the other major problems with the PPS 
system: the incentives to under provide, under identify, and 
provide minimal care for patients.
    For instance, rules for using qualified professionals to 
provide therapy services are being skirted. Standards of 
supervision of aides and assistants, though covered by law in 
most states and reaffirmed in Medicare regulation, are a 
particular area of concern. If standards of care, including use 
of qualified personnel, are not upheld, patients will suffer 
loss of function and reduced health status and the purposes of 
the Medicare program will not be achieved.
    Indeed, if standards of care are not reaffirmed by HCFA 
direction and assured by HCFA oversight, patients' health care 
needs will increase, thus further limiting savings by increased 
hospitalization and other service utilization.
    AOTA urges the Committee to hold hearings on SNF quality 
and the PPS system. AOTA also supports the notion raised by 
Chairman Thomas during the hearing that perhaps a ``town hall'' 
meeting with HCFA, Congress, MedPAC, GAO and affected members 
of the public, including health professionals, would be useful 
to discuss problems with the RUGs system.

                           Specific Requests

    In addition we urge the Committee to question HCFA further 
on its lax oversight.
    When will HCFA issue medical review guidelines for fiscal 
intermediaries to assess correct and appropriate categorization 
of patients?
    When will HCFA put in place quality assurance mechanisms to 
assess any decreases in patient access to care and subsequent 
deterioration in patient status due to the move to PPS?
    When will HCFA institute guidelines and procedures to 
assure that nursing homes are not minimizing care, either 
intentionally or because of inadequate payment levels under 
    What plans and timetable does HCFA have to develop the 
medical review process required in the Balanced Budget Act, now 
Sec. 1888 (d)(1) of the Social Security Act?
    What immediate steps will HCFA undertake to assure quality 
services are adequately and appropriately provided with no 
negative impact on patients until such medical review criteria 
and processes are established?
    What steps will HCFA take to assure that patients, once 
classified into a Resource Utilization Group (RUG) will receive 
services appropriate to each individual's condition and not 
simply the minimum for classification into a category?
    What steps will HCFA take to monitor access to the 
appropriate clinical professionals to meet the full spectrum of 
patient needs as assessed by the Minimum Data Set process?

                          Legislative changes

    In addition, AOTA believes the Committee must look at 
legislative changes that will improve the functioning of the 
system, and prevent some potential abuses of payment and 
patient care.
    AOTA urges the Committee to consider a legislative change 
to allow facilities to move immediately to the full federal 
rate. The three-year transition period was intended to allow 
for a gradual absorption of the process changes and the funding 
reductions. However, when the rates for many facilities for 
some RUGs categories are reviewed, there can be a significant 
difference between the full federal rate and the combined, 
transitional rate. For instance, for one facility whose rates 
we have reviewed, the first year transitional rate for the 
ultra high rehabilitation category is $294.59 per day while the 
full federal rate is $409.29, for a difference of more than 
$110 per day. HCFA developed the federal RUGs rates based on 
resource requirements to meet the service needs identified for 
these categories. Yet the discrepancy is so significant, we 
question whether a facility would even choose to place a 
patient in this category, denying them access to needed 
therapeutic interventions and other services. Several 
categories of a lesser intensity have full federal rates and 
transitional rates that are more closely aligned providing an 
incentive to downgrade patients, providing fewer services. The 
Committee should request a report from HCFA on these 
discrepancies and identify which categories and facilities are 
more vulnerable to underpayment. AOTA urges Congress to allow 
facilities that identify such a discrepancy to request use of 
the full federal rate immediately. With proper HCFA oversight, 
this could serve to prevent three years of operation on 
terribly inadequate funding levels, with severe consequences 
for patients.
    Another issue in the RUGs categories is the lack of 
requirements for more than one type of therapy to be provided 
to patients who are in high and very high rehabilitation 
categories. Under the demonstration project which developed the 
RUGs, we understand that patients in the high and very high 
categories were required to receive more than one type of 
therapy. The rationale was that if a patient had needs complex 
and involved enough to require a significant number of minutes 
of therapy per week, then that patient logically needed more 
than one type of intervention. We also note that in the 
demonstration project these categories required a lower number 
of minutes; now the ultra high category is the only one 
requiring the use of more than one type of therapy. It was 
established for the PPS implementation. AOTA questions HCFA's 
change in this policy, especially as the high and very high 
categories may include more complex patients than in the 
demonstration. We urge the Committee to clarify and correct the 
requirements in the high and very high categories.
    AOTA also believes legislation should be considered to 
allow for a pass-through or exception process for high cost 
items such as durable medical equipment and orthotics/
prosthetics/supplies These items, according to anecdotal 
reports from our members, are not always being provided as part 
of a patient's treatment protocol under Part A. It is believed 
that patients may be forced to wait until Part B can be billed 
separately to provide such items as prosthetic legs. Proper 
fitting as well as training by therapists in the use and care 
of the prosthesis are required before the patient leaves the 
SNF, especially for safety of the patient when s/he returns 
home and to community life.
    The Committee should conduct an inquiry on this issue and 
consider legislation to allow these items and services, the 
costs of which are controlled by existing Medicare limits, to 
be billed separately to assure needed equipment and services 
are provided in a timely and appropriate manner. Patients 
should not have to wait until the end of their SNF stay to 
obtain a proper, well-fitting and functional prosthetic leg or 
arm. Yet the current payment amounts appear inadequate for 
facilities to be compelled to provide them as soon as possible.
    In addition, AOTA urges the Committee to investigate how an 
outlier system might be developed to assure that patients that 
do not fit into even the highest reimbursement categories are 
not deprived of necessary services.

                Maintain Intent of OBRA; Conduct Studies

    The protection of the health and quality of life of nursing 
home patients has been frequently addressed by Congress. 
Congressional intent and expectations are clearly stated in the 
protections included in the 1987 Omnibus Budget Reconciliation 
Act which assure the public interest in patients maintaining 
highest possible function, being free of inappropriate 
restraints, and achieving optimum physical and mental health. 
AOTA believes that it is Congress' duty to assure that the 
changes it made in the Balanced Budget Act are not implemented 
in a way that is contrary to the important safeguards 
established in OBRA.
    Because our members are being laid off, are spending less 
time with patients because of cutbacks in hours, and are being 
asked to adhere only minimally to standards of appropriate 
practice, AOTA is concerned that there will be increases in 
health and other problems in nursing facilities. We believe the 
Committee should ask GAO to act on its concerns about SNFs 
under PPS and immediately undertake a monitoring effort to look 
at questions such as the following:
    Comparing charts of similar patients one or two years ago 
with post-PPS charts, are there changes in patient routines? 
(E.g., are patients in bed more and moving to activities less?)
    Is use of pharmaceutical or other restraints increasing 
because reduced hours of receiving therapy are causing 
cognitive or behavioral problems?
    Is there an increase in problems such as decubiti ulcers 
(bed sores), incontinence, pneumonia, and circulatory problems 
which can be linked to fewer hours spent receiving therapy, and 
loss of function and slower recovery due to receipt of less 
    Are there more feeding and hydration problems because 
occupational therapy or speech-language pathology services are 
not provided to address feeding or swallowing problems?
    Is nursing staff following different routines with patients 
because of increased burdens of care due to less access to 
    AOTA is aware that there are concerns about some therapy 
services provided to SNF patients in the past. Even if some 
therapy was improperly documented or not appropriately 
authorized, the reductions in the amount of therapy patients 
are and will be receiving based on the staff and contract cuts 
observed in the SNF sector are, in our view, disproportionate 
to reductions in payment and to any amount of possible 
overutilization. AOTA is very concerned for patient well being 
and protection under Medicare standards and the OBRA 
    AOTA urges the Committee to move forward with dispatch on 
its agenda to hold hearings on the implementation of the PPS 
and on quality issues. AOTA urges the Committee to pursue 
efforts to gather better data on the status of patients and the 
care they are receiving. AOTA urges the Committee to address 
the needed administrative and legislative changes that can 
improve the PPS system, enabling it to achieve cost savings 
without sacrificing patient health, safety and well-being.


Statement of Mark Knight, Association for Ambulatory Behavioral 
Healthcare, Alexandria, VA; Al Guida, National Mental Health 
Association, Alexandria, VA; and Pope Simmons, National Council for 
Community Behavioral Healthcare, Rockville, MD

To: A.L. Singleton, Chief of Staff

From: LMark Knight, Executive Director, Association for Ambulatory 
Behavioral Healthcare; Al Guida, Vice President, Government Affairs, 
National Mental Health Association; Pope Simmons, Vice President, 
Government Relations, National Council for Community Behavioral 

Re: LManagement of the Medicare Program Hearing on February 11, 1999 at 
2:30 pm

Date: February 24, 1999

    Thank you for the opportunity to share our perspective on the 
current problems impacting on the Medicare Partial Hospitalization 
Program and to suggest ideas on legislative and administrative 
    The findings in the October 1998 Office of the Inspector General 
report, Five State Review of Partial Hospitalization Programs at 
Community Mental Health Centers,'' address two separate issues, which 
understood together, are very troubling indeed. The first issue has to 
do with the definition(s) of Community Mental Health Centers as a venue 
for providing Partial Hospitalization Services, and the second, with 
concerns related to medical review of partial hospitalization claims. 
We will discuss each of these issues in turn and then explain how taken 
together, they have contributed to the serious problems identified in 
the OIG report. Finally, we will make some suggestions on legislative 
and administrative solutions.

1. Federal definition and State-by-State implementation of Community 
Mental Health Centers has been unclear and inconsistently interpreted 
from their inception, more than 30 years ago.

    In 1990, when Section 1861 (ff) of the Social Security Act was 
amended to permit community mental health centers to provide Medicare 
covered partial hospitalization services, there was a recognition that 
many Medicare recipients were individuals with serious and persistent 
mental illnesses who were being treated in community systems of care; 
and further that a level of care between inpatient and outpatient 
service would benefit the recipient and avoid costly and unnecessary 
inpatient hospitalization.
    However, the law was vague and created a loophole. It defined a 
community mental health center as an entity which (1) provides services 
described in section 1916 4 of the Public Health Service 
Act\1\, and (2) meets applicable licensure or certification 
requirements for community mental health centers in the State in which 
it is located. In order to receive a Medicare provider number under 
current law, a CMHC simply has to sign an attestation agreement that it 
meets these two requirements. Since the operational meaning of the 
Public Health Service definition has never been clearly defined (and 
has been differentially interpreted across time and place)--and nearly 
two/thirds of the states have no distinct CMHC licensure requirements, 
some individuals and newly created organizations took advantage of this 
loophole and got into this program for the wrong reasons.
    \1\ These services include: (1) outpatient services to children, 
the elderly, and the serious and persistent mentally ill, (2) day 
treatment, psychiatric rehabilitation, or partial hospitalization 
services, (3) 24 hours a day emergency care, and (4) screening for 
patients being considered for admission to a mental health facility.

2. The original authorizing language (Section 1861 (ff) of the Social 
Security Act) defining partial hospitalization and the physician 
certification requirement in Section 1835(a)(2)(F) has created 
contradictory language resulting in confusion as to the type of patient 
who is appropriate for partial hospitalization and the kinds of 
services that would be considered covered services under the Medicare 

    In Section 1861 (ff), partial hospitalization is defined ``as those 
services which are reasonable and necessary for the diagnosis or active 
treatment of the individual's condition, reasonably expected to improve 
or maintain the individual's condition and functional level and to 
prevent relapse or hospitalization.''
    In Section 1835(a)(2)(F), it states that as a condition for 
reimbursement, a physician must certify that ``the individual would 
require inpatient psychiatric care in the absence of partial 
hospitalization services.''
    According to the former, if the service simply prevented relapse 
and maintained the patient's level of functioning, such services would 
fall under the definition. In contrast, the physician certification 
requirement is explicit that the patient must be in an acute situation 
(i.e., in imminent need of hospitalization).

3. Taken together, these contradictions and vagaries of the law have 
made the Medicare PH program a very difficult program for HCFA to 
implement and for its contractors to adjudicate.

    When combined, the lack of clarity in the law, inconsistencies in 
interpretation, and wide variance in implementation of both Community 
Mental Health Center definitions and Partial Hospitalization Programs, 
create a double-edged sword for Community Mental Health Centers 
attempting to provide a legitimate, authorized venue and appropriate 
covered services to beneficiaries for whom partial hospitalization is 
medically necessary. Likewise, the absence of clear and consistent 
interpretation invites fraud and abuse in both CMHC and Hospital-based 
Partial Hospitalization Programs.

4. How has this played out in the implementation and adjudication of 
this program?

    There have been recent efforts to clarify both the Medicare 
definition of Community Mental Health Centers as a venue for the 
purpose of providing Partial Hospitalization Services, and the 
definition of the Partial Hospitalization Program itself. Both efforts 
have been wrought with significant challenges.
    (A) Efforts to clarify the definition of a CMHC.--Current efforts 
have underscored the conflicting current definitions of the Community 
Mental Health Center core services. Earlier this year, HCFA central 
office and its Southern Consortium (Regions 4 and 6) implemented a 
project to verify that CMHCs were providing the four core services to 
which they attested in their original agreement. Beginning in January 
1998 and ending on August 30, site visits were conducted at all current 
Medicare CMHCs and selected applicants in Florida, Texas, Georgia, 
Mississippi, Arkansas, Alabama, South Carolina, Tennessee, and 
Louisiana. This initiative was problematic because what was being 
verified was not clearly defined in measurable, operational terms, and 
in some cases, those conducting on-site visits had no psychiatric 
    Where this problem is most dramatic is in the interpretation of the 
core service defined as ``screening for patients being considered for 
admission to a state mental health facility.'' HCFA is interpreting 
this requirement to mean that the entity conducting the screening must 
also have the authority to admit the patient to a state mental health 
facility. While all CMHCs had the authority to admit patients to state 
mental health facilities following enactment of the Community Mental 
Health Center Act of 1963, since that time, the system has changed 
considerably. Currently, some CMHCs have a contract to do this and 
others do not, and some are simply not able to get such a contract 
because they are not considered part of the public system. Further, in 
some states, there is not a state mental health facility to which 
patients can be admitted. Finally, in some states, only the state 
mental health facility has the authority to admit a patient.
    (B) Efforts to clarify who is appropriate for Medicare PHP and 
which services are covered.--Medical review policy is at the discretion 
of individual fiscal intermediaries. HCFA's 1995 National Memorandum on 
Partial Hospitalization and the 1997 Model Local Medical Review policy 
have helped to clarify certain guidelines for medical review overall, 
but these are inconsistently interpreted and regarded by fiscal 
intermediaries at a local level. What constitutes a provider's 
compliance and results in payment under one fiscal intermediary, could 
easily fail to comply and result in denial of payment under a different 
fiscal intermediary. Increasing scrutiny of Partial Hospitalization 
will not be a useful tool unless we clarify, understand and achieve 
greater consistency of the fiscal intermediary local medical review 
policies against which programs are scrutinized. Therefore, aggregation 
of Partial Hospitalization denial rates across fiscal intermediaries is 
not a valid measure at present.

5. Recommendations.

    1. The law should be amended to clarify the definition of a CMHC 
and of partial hospitalization. In regard to the former, the four core 
service definition should be amended so that it accurately reflects how 
community mental health centers currently operate (See National Council 
for Community Behavioral Healthcare).
    In regard to the later, challenges with the Medicare partial 
hospitalization program present an opportunity to reconsider Medicare 
coverage of the continuum of mental healthcare. Because of gaps in 
coverage, in some cases, patients may be admitted to PH when they would 
benefit from a less intensive level of care. Thought should be given to 
building upon the demonstration program in H.R. 2640 which would permit 
CMHCs to provide a more flexible array of mental health services. In a 
similar vein, the 120 day intensive nonresidential treatment services 
benefit that was proposed in 1994 as part of the Democratic healthcare 
reform legislation should be dusted off!
    2. A formal rulemaking process should be initiated as soon as 
possible to develop clear and measurable certification standards with 
industry, clinician and patient input. HCFA should expedite a 
regulatory process for promulgating clear conditions of participation. 
This approach is consistent with that taken with other Medicare 


                                          Green Cross, Inc.
                                             Miami, Florida
                                                  February 24, 1999
A.L. Singleton, Chief of Staff,
Committee on Ways and Means
U.S. House of Representatives
1102 Longworth House Office Building
Washington, D.C. 20515

Re: Oversight of HCFA's Management of Medicare: For inclusion in the 
printed record for the hearing of Feb. 11, 1999.

To Whom It May Concern:

    HCFA has grossly mismanaged the Medicare Program as it relates to 
Mental Health Care. In the State of Florida HCFA failed to publish 
conditions of participation for Community Mental Health Centers. When 
this area blew up with several hundred centers, then HCFA proceeded to 
use Draconian methods to crack down and close programs without gauging 
the damage that this would do to patient care. Hence, we have a problem 
created by HCFA's poor management, giving out provider numbers freely 
to anyone who applies, then using a reckless approach to kill the 
    Mental Health Care in Florida has been underserved and underfunded 
for years. The Federal Government agreed to allow Mental Health Centers 
to provide Partial Hospitalization Services and have it reimbursed by 
Medicare. In Florida, there were no guidelines or licensure protocols 
for Community Mental Health Centers, and HCFA provided none. So, by 
1997 there were more programs in Florida than in any other state. 
Almost anyone could apply and receive a provider number for this 
service. Again, this could have been averted if HCFA would have issued 
guidelines or conditions for participation like they do in almost all 
other areas of health care.
    To further compound this problem Partial Hospital Benefits was 
placed under cost reimbursement. That is, programs are reimbursed on 
cost. The higher the cost, the greater your reimbursement. This again 
encouraged ever escalating cost on top of the ever escalating number of 
    By the end of 1997 it was clear that the industry had gotten out of 
hand. There were providers in every street corner and costs were 
growing exponentially. HCFA then decided to crack down using a three-
pronged approach: (1) Medical Review instructing the fiscal 
intermediary to implement a Medical Review of charts placing programs 
on a 100% and denying all charts based on not meeting admission 
criteria. (2) Provider Audit and Reimbursement Department (PARD) (3) 
Criteria for Community Mental Health Centers inquires of service.
    On the issue of Medical Review, Blue Cross and Blue Shield of 
Florida took a stance of denying almost all charts reviewed placing 
programs on 100% review, thereby shutting off all funding to the 
program. When confronted with these facts, Curtis Lord, President of 
First Coast Services made a statement ``There was a point by last March 
or April where we kicked a lot of people up to 100% without regard to 
all this. We made a concerted effort to bump the majority of providers 
up to 100% until we could get a handle on what was going on, and I 
don't think we did that by considering all individual cases. I think it 
was a pretty large movement of the community to a 100% review'' 
(exhibit A) at a meeting with representatives of the Florida 
Association of Community Mental Health Centers (FACMHC). A local 
contingent of Congressmen and women became involved and a letter was 
sent to Secretary Donna Shalala (exhibit B). After having a meeting in 
Atlanta in which Ms. Rose Crum-Johnson of HCFA's Atlanta Office agreed 
to accept a sampling of charts that had been denied by Blue Cross & 
Blue Shield, and to send them to an independent psychiatrist that HCFA 
would contract. As can be seen in the results reported to us by HCFA 
(exhibit C) ``sixteen of the eighteen patient for whom charts were 
submitted were eligible to receive PHP.'' This re-confirms the grossly 
inappropriate and unfounded decision to place programs on 100% medical 
review and deny all claims for the same issues--especially when those 
reviewing the claims were far less qualified than a psychiatrist. This 
pattern of poor management is further compounded by the action of the 
Provider Audit and Reimbursement Dept. (PARD).
    PARD typically takes two years to complete a desk review of a cost 
report, at which time they are able to deny listed expenses as non 
reimbursable. In many cases, these decisions are taken in an arbitrary 
manner. If an expense was incurred two years ago and hence continued in 
a program's budget through the present day then their adjustment will 
reverberate across three years into the current year. Hence, an 
adjustment to one year when multiplied by three can result in a 
devastating impact to a program. PARD does not issue clear guidelines 
on what it feels are reasonable costs and salaries. PARD never requests 
a proposed budget for the future for review which would aid in planning 
and management. Instead, their adjustments are retrospective when money 
has already been spent on patient care. If a cost report shows an 
amount payable back to the Medicare Program they want the money 
immediately. If it shows a receivable to the program then they hold on 
to the funds until they complete their desk review two years down the 
line. The issue of compensation for bad debts is also an area of great 
concern as far as PARD. In Florida, the Medicaid Program, which at the 
Federal level is administered by HCFA, refused to grant crossover 
provider numbers to many PHP programs early on. Hence, programs serving 
the poor were unable to collect the 20% co-payment and deductible from 
Medicaid. In filing cost reports, these are very real bad debts. 
However, it has been the policy to deny these bad debts as reimbursable 
costs because Medicaid should have covered it. Hence, programs are left 
in the untenable position of subsidizing the State's Medicaid Program. 
An example of this can be seen in (exhibit D), a letter from Steel 
Hector & David, LLP to the State of Florida's Attorney, Gordon Scott. 
Many of these issues still remain in contention without final 
resolution. If resolved unfavorably it can be devastating and shut down 
any program finding itself in this quandary.
    The third prong of this assault comes from the ``Core Areas of 
Service'' to qualify as a ``Community Mental Health Center.'' HCFA has 
never issued conditions of participation and has never been clear as to 
what constitutes compliance. In the last 18 months HCFA has been ever 
more nebulous and at the same time aggressive in trying to 
``decertify'' programs for not fulfilling the four core areas of 
service. Almost all programs have some compliance plan in place. 
However, since HCFA constantly changes its articulation of criteria 
they leave open the possibilities of ``pulling out the rug'' from under 
a program claiming it doesn't meet their latest, arbitrary and hazy 
interpretations (see attached exhibit E).
    A summary of how many of these issues can affect a program can be 
seen in the letter sent to Mr. Michael Hash, Deputy Administrator of 
HCFA, in reference to Green Cross, Inc., a Joint Commission accredited 
facility in South Florida (exhibit F). In conclusion, in the area of 
outpatient mental health services, HCFA has demonstrated extremely poor 
management of the Medicare Program. Without question, patients have 
been very much affected and have expressed great concern (exhibit G is 
a letter of concern from patients). Action needs to be taken so that 
HCFA and its contractors act in a professional manner and work with 
providers to care for the nation's sick and needy rather than 
persisting in an adversarial relationship. Whenever there is ``fraud 
and abuse,'' I suggest the main culprit is weak and poor management on 
the part of HCFA.
    Should you have any further questions or require any more 
information, please do not hesitate in contacting me.
                                  Miguel A. Nunez Jr., M.D.

    [Attachments are being retained in the Committee files.]


Statement of the Health Insurance Association of America

    The Health Insurance Association of America (``HIAA'') is 
pleased to present this written testimony to be added to the 
records of your hearing of February 11, 1999 on the 
``Management of the Medicare Program.'' As the preeminent 
health insurance trade association, HIAA is the principal voice 
of the broadest spectrum of the health insurance industry. HIAA 
represents over 265 members that include commercial insurers, 
health maintenance, preferred provider and managed care 
organizations and businesses that provide products and services 
to the health insurance industry. Together, HIAA members 
provide health, long-term care, supplemental, and disability 
income insurance coverage to more than 110 million Americans. 
Association members include companies currently serving as 
Medicare+Choice managed care contractors, companies who are 
considering offering new Medicare+Choice options, and companies 
that have recently withdrawn from the Medicare+Choice program, 
giving us a unique perspective on the issues under review by 
this Committee.
    I am pleased to have this opportunity to discuss the 
implementation of the Medicare+Choice program with you and to 
share a few of our principle concerns. We believe that the 
Medicare+Choice program represents an essential component in 
the government's effort to ensure the financial survival of the 
Medicare program and to meet the health care needs of the baby 
boom generation as we move into the 21st Century. HIAA applauds 
the Commerce Committee for its role in shaping these bold 
Medicare reforms through the Balanced Budget Act of 1997. 
Recent developments, however, suggest that the Committee's work 
is not yet done. To ensure the promise of the reform, and to 
facilitate beneficiary choice under the Medicare program, 
additional legislative and policy modifications must be made.

  Concerns About Low Anticipated Medicare+Choice Organization Payment 
                             Rate Increases

1. Limits on Annual Increases in Capitation Rates and Concerns 
Regarding the New Proposed Risk Adjustment Methodology Threaten 
the Continued Attractiveness of the Medicare+Choice Program to 
Beneficiaries and Providers

    a. Most Plans Will Experience Cost Increases From Medical 
Inflation That Exceed Payment Increases During the Coming 
Year.--Perhaps the greatest threat to the success of the 
Medicare+Choice program is the collective impact of changes in 
Medicare's payment methodology enacted by the BBA. In order to 
achieve a successful partnership between the federal government 
and Medicare+Choice organizations, program rules must: (1) 
allow payment rates that recognize and adjust for the actual 
costs of providing health care and permit necessary investment 
in clinical and operational improvements, and (2) incorporate 
financial incentives to reward those Medicare+Choice 
organizations that achieve the government's economic, clinical 
and operational objectives.
    As set forth in Section 1853(c) of the BBA, Medicare+Choice 
organizations will be paid the greater of:
    (a) a blended capitation rate, which is the sum of a 
percentage of the area-specific capitation rate and a 
percentage of the national Medicare+Choice capitation rate (the 
percentage balance will change over time until it reaches a 50/
50 blend in 2002); or
    (b) a minimum amount, which is $379.84 per enrollee per 
month in 1999; or
    (c) a minimum percentage increase for 1998 equal to an 
increase of 2 percent of the 1997 Adjusted Average Per Capita 
Cost (``AAPCC'') rate for the particular county, with increases 
of 2 percent in each subsequent year.
    Due to a budget neutrality requirement, the blended 
capitation rate was not available in 1998 or 1999. The Health 
Care Financing Administration (HCFA) anticipates, however, that 
the blend will apply for the first time in the year 2000. While 
the majority of counties will receive blended payments, it is 
HIAA's understanding that approximately 30 percent of counties 
will continue to receive the floor amount and 11 percent of 
counties will receive the minimum two percent increase.
    The practical result, based on actual Medicare+Choice 
enrollment, is that Medicare+Choice organizations serving a 
majority of Medicare beneficiaries enrolled in such 
organizations will receive rate increases of the minimum 2 
percent or only slightly more. For many--if not all--of these 
organizations, this increase would not be sufficient to cover 
the increased cost of providing mandated services, given 
projected medical inflation \1\. This, combined with the fact 
that many Medicare+Choice organizations experienced significant 
losses in 1998 (and anticipate additional losses in 1999), 
forecasts trouble for the program.
    \1\ The budget for fiscal year 2000 includes funding original fee-
for-service Medicare that reflects anticipated increases in medical 
costs over a five year period of 27% and an increase in the Federal 
Employee Health Benefit Program of about 50%. Estimates of the likely 
growth for Medicare+Choice plans in high paying counties for the same 
period is less than 10%.
    Indeed, inadequate reimbursement rates largely were responsible for 
the retrenchment of Medicare+Choice plans last Fall. At that time, some 
of the most respected Medicare+Choice organizations in the country 
withdrew from states and counties with low capitation rates. Other 
withdrawals occurred in low enrollment areas even though capitation 
rates were above average. As reported, 42 health plans decided to 
withdraw from the Medicare+Choice program and 53 plans decided to cut 
back their services. In all, about 400,000 Medicare beneficiaries were 
effected. To put this in perspective, HCFA averaged two Medicare risk 
contract cancellations per year from 1993 through 1997.
    The use of the blended rate for some Medicare+Choice plans for the 
first time in 2000 is clearly a step in the right direction in terms of 
ensuring fair and adequate reimbursement. However, HIAA strongly 
believes that additional adjustments are necessary to attract and 
maintain the number and diversity of Medicare+Choice organizations 
necessary to establish a sound and attractive market-based alternative 
to the traditional fee-for-service program.
    Accordingly, HIAA urges Congress to reconsider the artificial and 
arbitrary limits on capitation rate increases set forth in the BBA. 
Specifically, HIAA suggests that annual increases in Medicare+Choice 
payment rates be sufficient to fully cover medical inflation 
experienced in the local markets. Because local employer health plans 
and other commercial customers have a tremendous incentive to keep 
costs down, they will positively affect the inflation rate in each 
market. If the current reimbursement structure is not adjusted, more 
Medicare+Choice organizations are likely to withdraw from areas served 
and beneficiaries enrolled in the remaining plans will likely 
experience premium increases or reduced benefits. Finally, as 
Medicare+Choice plans leave the market, the original Medicare program 
(with its higher per capita costs) will have more beneficiaries and put 
additional strain on both the Part A Trust Fund and the budget.
    b. The New Risk Adjustment Methodology Will Substantially 
Reduce Payments to Medicare+Choice Organizations.--Change in 
the Medicare+Choice payment calculations is all the more 
necessary because the risk adjustment process which HCFA is 
implementing is expected to substantially reduce aggregate 
payments to Medicare+Choice plans while adding additional 
administrative requirements and expenses. According to 
preliminary HCFA estimates, total Medicare+Choice plan revenues 
for the year 2000 are projected to be $200 million less than 
they would have been under the Adjusted Average Per Capita Cost 
(``AAPCC'') payment method and $6.3 billion less in 2004. As a 
result, some plans will see even their minimum two percent 
increase eroded in 2000 as the risk adjustment methodology is 
phased in. Thus, what began as a straightforward effort to more 
accurately compensate plans for the health care costs of their 
particular members will, unexpectedly, result in an overall 
reduction in funds to Medicare+Choice organizations.
    This development runs counter to HIAA's understanding of 
Congressional intent, i.e., that the savings resulting from the 
percentage reduction\2\ in plan payments for years 1998 through 
2002 was intended to be in lieu of any net program savings from 
risk adjustment. (Indeed, the Congressional Budget Office did 
not score any projected savings in connection with the risk 
adjustment program under BBA 97). The new methodology, and huge 
projected revenue reductions, underscores HIAA's concerns 
regarding the inadequacy of plan payments under 
Medicare+Choice. To the extent that the proposed HCFA risk 
adjustment methodology translates into a significant overall 
decrease in payments for the Medicare+Choice program, it will 
undoubtedly be an additional deterrent to program 
participation. Accordingly, HIAA urges Congress to require HCFA 
to modify the risk adjustment methodology so that aggregate 
payments to Medicare+Choice plans for 2000 and beyond are based 
on aggregate BBA adjustments, making the risk adjustment 
process budget neutral.
    \2\ In addition to the 5 percent reduction in payment from fee-for-
service costs which existed prior to the BBA, the increase in payment 
to Medicare+Choice organizations under both the blended rate and the 
floor will not fully reflect anticipated medical inflation. A reduction 
of 0.8 percent was made in 1998 and reductions of 0.5 percent are to be 
included in 1999 through 2002. The cumulative effect of these 
reductions will be that even the blended rate adjustment will be 
inadequate. This, coupled with the insufficient increases in the 
minimum rate, will undermine Congressional intent to encourage growth 
of Medicare+Choice options for seniors in low cost areas.
    c. The User-Fee ``Tax'' on Medicare+Choice Organizations for 
Beneficiary Education is Inequitable and Reduces Even Further Payments 
to Medicare+Choice Organizations.--HIAA strongly supports educating and 
informing Medicare beneficiaries about all coverage options, including 
the Medicare+Choice program, and supplying beneficiaries with 
straightforward, unbiased information to help them choose appropriate 
coverage. That said, we are concerned that the BBA, to support 
beneficiary education activities for all 37 million beneficiaries, 
places a ``user fee tax'' on Medicare+Choice organizations only.\3\ The 
educational campaign is a benefit to all Medicare beneficiaries. 
Indeed, initial information suggests that the toll-free number HCFA 
established last year with funds from the $95 million dollar ``tax'' 
assessed upon Medicare+Choice organizations primarily fielded calls 
from beneficiaries seeking information about the fee-for-service 
program. Considerations of equity dictate that the educational 
program--which informs beneficiaries about basic program benefits and 
requirements--be funded from the Medicare trust fund, or another broad-
based source of revenue, as are other such essential program functions.
    \3\ Medicare+Choice organizations essentially pay a ``head tax'' 
(i.e., an amount based on the number of Medicare+Choice enrollees in 
their plan) to support the public information program.
    We note that this tax, which is .355% of the total monthly 
payments to each Medicare+Choice plan in 1999, further 
exacerbates the problems outlined above concerning inadequate 
reimbursement. Indeed, when the user fee tax is combined with 
potential large revenue reductions from risk adjustment, some 
existing Medicare+Choice plans will see little or no increase 
in their payment rates from 1999 to 2000 even though HCFA is 
using a phase-in of an interim risk-adjustment methodology.
    The cumulative effect of these three payment reductions 
will vary depending upon the relationship of the current 
payment, current benefits, and the number of beneficiaries 
    In your district, Chairman Thomas, there were 33,527 
beneficiaries enrolled in Medicare risk plans (or 29.1% percent 
of Medicare beneficiaries). We project\4\ that Medicare+Choice 
plans will receive only 53.3% percent of the increase per 
capita relative to Medicare fee-for-service increases. We also 
project an increase in the 65+ population from 103,296 in 1998 
to 117,030 in 2003. If Medicare+Choice options are withdrawn or 
have less perceived value by then, a reduction of 
Medicare+Choice enrollment to 75 percent of existing numbers 
would reduce the savings from BBA for 2003 by $14.6 million \5\ 
from your district alone.
    \4\ Our projections of the change from 1997 to 2003 utilize 
September 1998 enrollment figures, a 1998 Price Waterhouse report on 
Medicare Capitated Payments, and reflect HCFA's assumption for the 
average cost to Medicare+Choice organizations of risk adjustment.
    \5\ Lost savings, based on the difference in projected per capita 
payments to HCFA vs. Medicare+Choice, multiplied by the potential 
Medicare+Choice enrollment less 75 percent of current enrollment.
    In your district, Representative Stark, there were 137,276 
beneficiaries enrolled in Medicare risk plans (or 41.9% percent 
of Medicare beneficiaries). We project that Medicare+Choice 
plans will receive only 46.2% percent of the increase per 
capita relative to Medicare fee-for-service increases. We also 
project an increase in the 65+ population from 312,704 in 1998 
to 351,438 in 2003. If Medicare+Choice options are withdrawn or 
have less perceived value by then, a reduction of 
Medicare+Choice enrollment to 75 percent of existing numbers 
would reduce the savings from BBA for 2003 by $72.8 million 
from your district alone.
    Overall, the average increase per capita to Medicare+Choice 
plans will be 49.5% of the expected increase in the period 1997 
to 2003 per capita to the fee-for-service portion of Medicare. 
In some areas of the country, Medicare+Choice plans may get 
less than $50 more per month over this entire period to deal 
with medical inflation.

2. The May 1 Deadline for Filing ACRs Has Created Serious 
Problems in the Administration of the Medicare+Choice Program 
and Should Be Changed to November 1

    The BBA moved the deadline by which Medicare+Choice plans 
must submit their adjusted community rate (ACR) proposals from 
November 1 to May 1. This was done in order to allow HCFA 
sufficient time to approve rates and include this rate 
information in the materials to be distributed to beneficiaries 
as part of the educational campaign. The problem with this time 
frame is two-fold. First, by submitting proposals seven months 
in advance of the actual effective date (i.e., January 1), 
plans place themselves at substantial risk that health care 
costs will rise in unexpected ways in the latter half of the 
year and thus not be captured in the proposals. This is what 
occurred last year, contributing to the decision by many 
Medicare+Choice organizations to not renew their 
Medicare+Choice contracts for 1999, or to reduce their service 
areas. Also, proposals submitted by May 1st are based on 
relatively limited claims experience with the Medicare 
beneficiary population enrolled in the more rapidly growing 
plans and are thus less likely to be accurate predictors of 
costs than proposals based on a longer period of time. 
Accordingly, HIAA proposes moving the ACR deadline to November 
1 or as close to that date as operationally possible. \6\
    \6\ We recognize that HCFA may prefer a date earlier than November 
1 in order to collect information for the annual public information 
campaign. We believe that HCFA's public information objectives can be 
met while permitting Medicare+Choice organizations to submit ACRs on 
the old schedule. Working with third party publishers, including daily 
newspapers, HCFA could more than adequately distribute plan specific 
information to beneficiaries in a timely fashion.
    In regulations published earlier this month, HCFA 
``recognize[d] the difficulties inherent to estimating the cost 
of a benefit package for 2000 based on at most 4 months of 
experience under the 1999 benefit package,'' but indicated that 
it had no discretion in this matter due to the statutory 
mandate. The President's fiscal year 2000 budget includes a 
proposal that would extend the deadline for ACR submissions 
until July 1. HCFA strongly supports this proposal. Given the 
importance of this issue to Medicare+Choice organizations, and 
the concerns involved HIAA urges the Committee to take steps to 
put in place a permanent workable deadline for ACR submissions 
and suggests that an ACR date of November 1.

3. Congress Should Return to the Previous Policy Allowing 
Flexible Benefits and Premiums Within a Service Area

    Historically, Medicare risk contractors were able to offer 
different benefit or charge structures within a given 
contracted service area. For example, modified benefit packages 
were often developed and offered in a subset of the contracted 
service area. While Medicare beneficiaries residing in the 
segmented service area were offered a uniform array of benefits 
at a uniform price, uniformity was not required across the 
entire service area. This flexibility was important because it 
allowed contractors to adjust their benefit package and premium 
structure to take into account differences in capitated payment 
rates received, which varied by county.
    In the BBA, Congress mandated a new policy requiring that 
organizations offer uniform benefits and premiums throughout a 
service area, despite varying payment levels. Under the 
Medicare+Choice regulations, an organization may offer multiple 
plans and propose different services areas for each plan. (Were 
this not the case, organizations would be discouraged from 
expanding to outlying rural counties 
that typically offer lower reimbursement rates.) This 
regulatory policy allows Medicare+Choice organizations to 
achieve results similar to the original flexible benefit 
policy, but only at significant additional expense. Instead of 
one ACR being filed for a broad service area with benefits 
modified to reflect anticipated revenues, as used to be the 
case, multiple ACRs must be generated for separate 
Medicare+Choice plans by each organization, and reviewed and 
approved by HCFA. The Congressional mandate thus imposes 
significant administrative costs on the organizations and the 
agency, with absolutely no benefit to beneficiaries. Therefore, 
HIAA urges Congress to repeal the uniform benefits and premium 
provisions of the BBA.

 In Many Places the Regulations are Overly Rigid and Demanding so They 
      Become an Impediment to Small and/or Rural Medicare+Choice 

1. The Quality Assurance Approach is Misguided

    HIAA believes that some form of quality standards are 
important to any market-based approach to Medicare. Without 
quality standards, or some other performance measurement, the 
added costs of maintaining quality will be difficult to present 
fairly although over time, it will be obvious. That being said, 
HIAA has serious concerns about the breadth and depth of the 
onerous quality assessment, performance improvement and 
performance measurement standards developed by HCFA.
    a. Performance Measures Should Vary More by Type of Plan.--
As an initial matter, we believe that performance measures 
should be designed to fit the services offered by various types 
of plans. HCFA, however, has essentially embraced a ``one size 
fits all'' approach. As a result, it is unlikely that 
Medicare+Choice PPO plans that offer a broad choice of 
providers to beneficiaries (but are loosely ``managed'') will 
be able to meet the quality requirements. Similarly, the 
extensive quality-related requirements applied to MSA plans and 
private fee-for-service plans are likely to deter the necessary 
investment required before these types of plans can be offered. 
The bottom line is that the HCFA regulations are so inflexible 
that few options other than existing managed care arrangements 
with large numbers of beneficiaries can be developed. As a 
result, beneficiary choice will suffer, and a key goal of the 
Congress' work on BBA will have been defeated. In rural areas 
with no existing private health plan options, these regulations 
effectively preclude any chance that new choices will develop 
under most reasonable financial scenarios.
    b. The Extensive Data Collection Proposed Is Not 
Necessary.--Second, the extensive data collection and reporting 
efforts required under the regulations will add significant 
administrative costs to Medicare+Choice organization 
operations. We question whether these costs are justified or 
desirable, and whether the quality assurance goals might not be 
met just as well through alternative approaches. HIAA strongly 
believes that consumers, not government officials, should 
dictate through their plan choices the extent and nature of 
quality improvement, balanced against costs. Under this 
approach, organizations that are responsive to consumer 
preferences would be rewarded with greater market share. Fewer 
government resources would be required for oversight.
    HCFA could, however, play a central role in ensuring that 
minimum standards are met and encouraging quality initiatives 
through flexible, incentive-based standards established by 
contracts. HCFA is to be congratulated for posting beneficiary 
satisfaction survey results and other such information on the 
Medicare internet site (www.medicare.gov). In HIAA's view, this 
would be far superior to the current practice of setting 
detailed regulatory mandates which run the risk of leading to 
micromanaging and encouraging uniformity at the price of 
creative experimentation.
    In trying to determine the cost of the extensive data 
collection effort proposed, HIAA notes that many health care 
organizations, particularly those with loosely managed network-
style delivery systems (such as PPOs) do not currently have the 
capability to capture or report performance data at the level 
being proposed. The BBA's limitations on increases in 
capitation rates means that outside sources will be required to 
fund system upgrades. Even if financially possible, the time 
required for procurement, installation, training, and 
validation are not consistent with HCFA's scheduled 
implementation and reporting requirements for Medicare+Choice 
plans. As a result, these quality assessment requirements will 
be a significant deterrent to expanding senior's choices as 
potential new plans decide not to participate in the 
Medicare+Choice program. At the very least, HIAA believes that 
organizations making a good faith effort to meet the regulatory 
requirements should be provided a transition period where 
penalties would not be imposed. This is particularly important 
given plan efforts to address Year 2000 computer issues.
    c. The ``Deemed Status'' Program Should Be Implemented 
Immediately.--Most Medicare+Choice organizations already adhere 
to rigorous quality assurance review by nationally accredited 
health care organizations. HCFA has provided by regulation that 
Medicare+Choice organizations may be ``deemed'' to meet quality 
assessment and performance improvement requirements if judged 
to do so by a national accreditation organization approved by 
HCFA and applying HCFA's standards for assessing compliance. 
This approach has much merit. It would allow plans to work with 
reviewers who already are familiar with their operations, 
creating obvious efficiencies and potential cost-savings. HCFA 
has failed, however, to establish procedures to implement the 
``deemed status'' process. To date, HCFA has not designated any 
national accreditation organization for this purpose, nor has 
it issued policy guidance on how this process will work. HIAA 
urges Congress to direct HCFA to promptly institute a procedure 
for awarding deemed status since this process has the potential 
to reduce some of the substantial costs associated with HCFA's 
extensive quality assurance measures.

2. The Proposed Risk Adjustment Policy is Ill-Conceived

    On January 15, 1999, HCFA announced its methodology for 
implementing the risk adjustment mandate set forth in the BBA. 
While HIAA believes that improved risk adjustment is an 
appropriate and essential long-term goal for the program, we 
have serious concerns regarding the current HCFA proposal, 
which calls for the initial use of only inpatient hospital 
data. During the Administration's proposed 5-year phase-in 
period, plans would receive capitated payments based on a blend 
of payment amounts under the current demographic system and the 
interim (PIP-DCG) risk adjustment methodology. For the year 
2000, for instance, the HCFA plan calls for a separate 
capitated payment rate for each enrollee based 90 percent on 
the demographic method and 10 percent on the risk adjustment 
methodology. By 2004, payment rates would be based on 
comprehensive risk adjustment using full (i.e., inpatient and 
other) encounter data and the demographic method would not be 
used. HIAA's concerns with this proposal are both practical and 
    First, the practical. The time frame for implementation 
outlined by HCFA is simply far too short. Given the significant 
technological considerations involved, it is unreasonable for 
the agency to require that all Medicare+Choice organizations be 
able to provide physician, outpatient hospital, skilled nursing 
facility and home health data beginning as early as October 1, 
1999. (HCFA has not yet identified a specific date by which 
this information must be provided, creating additional 
uncertainty.) The collection, verification, transmission and 
analysis of ``representative'' encounter data is a complicated 
endeavor. Capturing this data in a valid, accurate and 
transferable manner will be a major challenge for most plans. 
Indeed, some HIAA member companies that currently contract with 
HCFA do not have the technical capability to capture and 
transmit encounter data other than inpatient encounters. Nor do 
our members with PPO and similar network-style delivery systems 
have the capability to do so. They are simply not organized in 
a manner that will allow them to collect this level of data.
    Even if the capital for such purposes can be arranged, 
HCFA's proposed time frame is insufficient to allow 
Medicare+Choice organizations to procure and install the 
required systems. Procuring systems that can accomplish these 
tasks requires very careful planning and assessment, review of 
the capabilities of competing technologies and vendors. Time is 
needed to install the systems, modify provider contracts if 
necessary to ensure adequate reporting to the Medicare+Choice 
plan, train the staff (both at the Medicare+Choice organization 
and provider locations) and verify and validate the data. All 
of these steps must be carefully executed or the system will 
fail. These obstacles to compliance cannot simply be wished 
away. Moreover, the imposition of these costs on all 
Medicare+Choice plans will make the development of rural plans 
even more difficult because they will continue to have fewer 
beneficiaries enrolled compared to plans in other areas.
    The process by which information is communicated to, and 
received by, HCFA is likely to present significant 
technological problems as well, if past experience is any 
guide. HIAA members have experienced, and continue to 
experience, problems in ensuring that accurate inpatient 
hospital data is transmitted via Medicare fiscal intermediaries 
to HCFA.
    Difficulties can also be expected as HCFA attempts to 
manipulate significant amounts of data for the first time using 
the proposed PIP-DCG risk adjustment model. The methodology 
developed by HCFA is complicated and requires numerous steps. 
The process is yet untested. HCFA faces a monumental task in 
getting the PIP-DCG system to work. We are awaiting the 
opportunity to review the plan-specific effects of the data 
collected to date. Moreover, as HCFA acknowledges, ``the PIP-
DCG model is [simply] an interim step towards implementation of 
a comprehensive risk adjustment model (i.e., one which uses 
diagnoses from all sites of service.)'' HIAA strongly believes 
that the ambitious time frame proposed by the agency rests on a 
flawed premise: namely, that all of the anticipated 
technological and methodological problems can be resolved in 
the five-year window.
    HIAA's doubts in this regard are heightened by the fact 
that planned implementation coincides, at least initially, with 
agency efforts to ensure Year 2000 readiness, both internally 
and in connection with Medicare+Choice organizations and other 
contractors. If HCFA transitions to risk adjustment before the 
necessary fixes are made and before reliable data are gathered 
and properly analyzed, the consequences could be catastrophic 
for individuals enrolled in Medicare+Choice plans, as well as 
the Medicare managed care program generally.
    As if all this were not reason enough to delay 
implementation, HIAA has significant programmatic concerns 
regarding the proposed risk adjustment model. First, HIAA is 
concerned that variations resulting from excessive payments 
under the original Medicare fee-for-service program have been 
incorporated into the risk adjustment calculation. Additional, 
unnecessary hospitalizations that have occurred within the 
original Medicare Part A fee-for-service program, despite 
HCFA's attempt to fight this, are still significant. As a 
result, Medicare+Choice organizations will receive lower 
payments through the proposed risk adjustment methodology. HCFA 
should not penalize the managed care portion of Medicare for 
the program's failure to limit false or fraudulent claims and 
medically unnecessary hospitalizations. One approach to avoid 
this, would be to limit the use of risk adjustment so that the 
total amount paid to all Medicare+Choice plans is not reduced 
but instead redistributed among Medicare+Choice plans only.
    Second, recognizing the fact that most federal agencies 
rely on sampling, HCFA's expectation of reported data on all 
individuals seems excessive. Given that even the more 
comprehensive risk adjuster will not be able to fully reflect 
all differences, HIAA believes that Congress should require 
HCFA to reexamine the use of plan-based sampling to reduce the 
administrative burden on the plans, reduce the potential for 
errors in the start-up phases, and increase the privacy of each 
individual's sensitive medical information.
    Third, HIAA strongly believes that it is poor public policy 
to base risk adjustment--even temporarily--on inpatient 
hospital data only. Such an approach, even with the adjustments 
that HCFA has made to its initial risk adjustment proposal, 
would reward Medicare+Choice plans with excessive hospital use, 
and penalize plans that have effectively reduced inpatient 
hospitalizations and focused on providing more care on an 
outpatient basis. The incentives created by a risk adjustment 
methodology based exclusively on inpatient hospital data could 
result in increased inappropriate hospital use, increased 
avoidable costs, and a set back in the effort to realize 
greater efficiency in the health care system. Beneficiaries 
enrolled in plans with a relatively high proportion of members 
who receive care for expensive chronic illnesses outside the 
hospital setting would be particularly harmed.
    For all these reasons, HIAA urges HCFA to delay the 
implementation date of risk adjustment beyond January 1, 2000. 
Since HCFA believes it does not have the authority to do this, 
Congress should revise the implementation date. While the 
effort to collect encounter data should proceed in a careful 
and deliberate manner, changes in payment methodology based on 
risk adjustment should not be implemented until complete and 
reliable encounter data are available. To ensure the validity 
of the data and a viable risk adjustment process, Congress 
should direct HCFA to (1) conduct a demonstration project aimed 
at validating the proposed methodology and (2) identify less 
costly and less data intensive ways of performing risk 

             Impact of BBA Implementation on Medigap Plans

    A number of HIAA members offer some or all of the Medigap 
standard plans. These members are concerned with the impact of 
the continuing implementation of BBA on the premium increases 
they must pass on to the many seniors trying to maintain this 
valuable protection.
    Seemingly socially responsible actions, allowing increased 
anti-selection when guaranteed issue opportunities are expanded 
beyond the first six months following attaining age 65 will 
require higher premiums. HIAA does not believe that only those 
seniors purchasing individual Medigap should have to bear this 
extra cost.
    Proposals to expand Medigap drug coverage, legislation to 
allow specialty providers to select their highest cost patients 
and pay only the average rate while receiving Medicare and 
Medigap payments on every single one of these insureds, and 
regulations seeking to expand the scope of guaranteed issue are 
examples of why HIAA opposes mandates. In the name of expanding 
access, they result in increased costs, leaving more people 
without insurance.
    Finally, the cost of Medicare supplement insurance, which 
covers more than 80 percent of Medicare beneficiaries, is 
increasing as a result of HCFA's delays in controlling the 
portion of hospital outpatient services which Medicare both 
doesn't cover and doesn't limit balanced-billing of the 
beneficiaries. Estimates of the cost of this delay are $570 
million to be bore by Medicare beneficiaries or their Medicare 
supplement coverage while HCFA uses its resources to rush 
implementation of risk adjustment designed to save the 
government only $200 million in 2000.

                         Summary and Conclusion

    If the Medicare program is to be sustained for the next 
generation of beneficiaries and beyond, it is crucial that the 
federal government employ every strategy appropriate to enhance 
quality health care options for beneficiaries and encourage the 
development of lower cost options rather than relying on 
punitive regulations which will reduce choice and funnel more 
people into the highest cost option--fee-for-service Medicare. 
The Medicare+Choice program already is at an early crossroad 
where improvements can allow it to flourish but neglect of 
necessary change will doom it to failure. It would be more 
wise, in the long run, for the government to employ market-
oriented strategies to ensure that there are Medicare+Choice 
options available to beneficiaries and to create incentives for 
private health insurers and providers to deliver value in the 
context of the Medicare program. Because it is a critical 
building block in this market-based strategy, Medicare+Choice 
must be successful.
    In summary, HIAA believes that the prospects for success 
will be greatly improved if the following steps are taken with 
respect to the Medicare+Choice program:
     Adjust the payment structure so that increases 
cover medical inflation;
     Issue revised regulations to reduce costly 
administrative burdens on small, rural and non-HMO plans;
     Change the due date of ACRs to November 1 to 
eliminate unnecessary risk;
     Delay and revise the proposed risk adjustment 
model to reduce the cost of reporting and system development; 
     Modify the role of risk adjustment so that overall 
revenues to the Medicare+Choice program are not reduced, but 
simply reallocated among plans based on the health status of 
    A final word of caution: Congress must act quickly to 
direct HCFA to change course in the manner outlined and to find 
ways to reduce the regulatory burden of participating in the 
Medicare+Choice program if it wants the program to succeed. The 
time frames for critical decisions relating, for instance, to 
system investments are very short, particularly given HCFA's 
anticipated risk adjustment schedule. Thus, if Congress is to 
make adjustments to the program, it should act now.


              Information Technology Association of America
                                        Arlington, Virginia
                                                  February 25, 1999
Chairman Willliam Thomas
Committee on Ways and Means
Subcommittee on Health
U.S House of Representatives
1102 Longworth HOB
Washington, D.C. 20515

    Dear Chairman Thomas:

    On behalf of the 11,000 direct and affiliate members of the 
Information Technology Association of America (ITAA), I would like to 
submit this statement for the printed record of the Subcommittee's 
February 11, 1999, hearing on the Management of the Medicare Program.
    Since 1965, the Health Care Financing Administration (HCFA) has 
been tasked with the ever-increasing workload of administering the 
Medicare program through a limited group of Health Insurance Providers. 
ITAA strongly believes that it is time to leverage the free-market 
benefits of competition and flexibility by opening the Medicare claims 
processing bidding to a broader group of service providers, 
specifically, the information technology sector. We believe competition 
would better serve the customer, the American public.
    In addition to their expertise in this area, the IT industry also 
builds and runs many of the systems and applications that HCFA's 
current contractors and their partners already utilize. The IT industry 
has extensive experience in the claims processing area in both the 
public and commercial sectors. An example, when Title 19 was enacted in 
1965, it gave authority to the states to run the Medicaid, Program. 
Many of the states turned to cutting edge information technology 
companies who could excel in innovative solutions and adapt technology 
to best serve the customer in a timely fashion. ITAA firmly believes 
Medicare recipients too would benefit greatly from competitive bidding 
on claims processing and increasing the number of potential vendors. 
The IT industry also is not subject to some potential provider/
contractor conflicts of interests.
    ITAA supports the requests of current HCFA Administrator Nancy-Ann 
Min DeParle and her predecessors who state that the best solution for 
the government, and ultimately the customer, is to open up the Medicare 
program to increased competition in order to obtain the best management 
possible. If my staff or I can provide you with additional information 
on this subject, please let me know.

                                           Harris N. Miller


Statement of Jack Pivar, President, National Association for the 
Support of Long Term Care (NASL), Alexandria, VA

    Chairman Thomas: On behalf of the National Association for the 
Support of Long Term Care (NASL), I am pleased to submit the following 
written testimony to you and members of the House Ways and Means Health 
Subcommittee. This testimony is provided in response to the hearing 
held by your Subcommittee on February 11, 1999 to examine the Health 
Care Financing Administration's (HCFA's) ability to administer the 
current Medicare program.
    NASL represents over 150 companies involved in the provision of 
services and supplies to the long term care industry and is the only 
organization at the national level concentrating its concerns and 
endeavors exclusively on legislative and regulatory matters regarding 
the ancillary service and product supply components to long term care 
facilities. NASL has worked closely with Congress and HCFA in 
developing the skilled nursing facility prospective payment system (SNF 
PPS) and in setting policy for (non-physician) Part B issues.
    We appreciate not only the opportunity to comment, but also your 
continuing efforts to monitor HCFA's Medicare program management 
challenges. We, like you, agree that our nation's seniors deserve a 
well managed Medicare program that meets their health needs.
    Essential to this examination, are the following principles:
     Beneficiary services should not be put at risk or 
disadvantaged by HCFA's computer systems problems.
     Clinical standards and program safeguards are being 
undermined by the inability of HCFA or its contractors to meet minimum 
performance standards.
     HCFA's administrative problems should not supersede the 
need to address real policy issues.
    Each principle is discussed in greater detail below.

 I. Beneficiary Services Should Not be Put at Risk or Disadvantaged by 
                    HCFA's Computer Systems Problems

     We are deeply concerned that HCFA has begun to cite Y2K 
issues as the primary reason for not moving forward on needed policy 
    The skilled nursing facility prospective payment system must be 
finalized. SNF PPS, perhaps the biggest change to the industry since 
the beginning of the Medicare program, is currently being implemented 
pursuant to an interim final rule. HCFA now projects the final rule 
will be released in May. By definition, an interim final rule lacks the 
level of certainty needed by providers who are in the process of making 
costly changes to their own systems. By the time the final rule is 
released, providers will have worked under this interim rule for almost 
a year.
     Non therapy ancillary services must be appropriately 
funded. Early research findings show the Resource Utilization Group III 
(RUG III) system under the skilled nursing facility prospective payment 
system (SNF PPS) fails to adequately account for the costs of certain 
non-therapy ancillary services. These non-therapy ancillary services 
include prescription drugs, respiratory therapy, laboratory and certain 
complex medical equipment. Without the implementation of an interim 
solution, elderly Medicare beneficiaries may not have access to these 
    As evidenced by Representative Johnson's comments during the 
hearing, this problem is real. Nevertheless, potential, interim 
solutions continue to be rejected or limited by HCFA's Y2K computer 
compliance problems. Policy decisions directly affecting beneficiaries' 
needs are being dictated by the status of HCFA's ``mission critical 
     Seniors must be afforded relief from the $1,500 therapy 
cap. Due to computer systems problems, HCFA has also been unable to 
fully implement the $1,500 on outpatient rehabilitation therapy 
services which has exacerbated the already inequitable impact of these 
financial limitations. The way HCFA has implemented the policy 
significantly impacts skilled nursing facility outpatient and 
rehabilitation facility patients, many of whom may exceed the cap. 
Nursing homes are put at risk to provide services without assurances 
such services will be reimbursed.
    NASL continues to oppose as bad health care policy, the 
implementation of any type of arbitrary financial limitations on 
medically necessary services. We believe beneficiary needs should 
dictate the provision of services.

 II. Clinical Standards and Program Safeguards are Being Undermined by 
 the Inability of HCFA and its Contractors to Meet Minimum Performance 

    We are concerned the integrity of the Medicare program is being 
compromised by management challenges within HCFA and its contractors. 
HCFA's lack of oversight of its contractors, coupled with inadequate 
training, has resulted in inconsistent and incorrect implementation 
    Criticisms have been leveled against HCFA, particularly by the 
Small Business Administration for HCFA's apparent disregard of the 
requirements under both the Administrative Procedures Act and the 
Regulatory Flexibility Act in promulgating regulations pursuant to the 
Balanced Budget Act of 1997.
    Informal directives in the form of program transmittals and HCFA 
web site guidances are being used as pseudo rulemaking vehicles. Many 
of these directives have been inconsistent or contrary to the language 
of the interim final rule. Systems crucial to the SNF PPS transition, 
including the Arkansas Shared System, continue to remain inoperable 
seven months after the effective date of SNF PPS.
    The following are just a few illustrative examples of management 
performance problems which are threatening to undermine services being 
provided under the Medicare program:
     Fiscal intermediaries under the Arkansas Shared System, 
have notified facilities they will be unable to pay claims pursuant to 
the physician fee schedule until ``approximately'' April. (See Mutual 
of Omaha notice attached.) According to the notice, Medicare claims 
will be temporarily paid under cost reimbursement methodology which 
will likely result in overpayments. These overpayments will in turn 
likely result in a future recovery of payments. In addition, the 
contractor predicts the coinsurance amounts calculated during the 
interim period will also be invalid.
     In a recent transmittal, HCFA instructed their 
contractors, as of April 5, 1999, to ``return as unprocessable'' all 
claims submitted by providers that are not Y2K compliant. At this time, 
a standard UB92 form capable of accepting that much data still does not 
     A provider's claims for outpatient services were recently 
rejected due to the inclusion of discipline specific modifiers on the 
claim. The provider was instructed by the fiscal intermediary to 
resubmit the claims, without the modifiers. A week later the claims 
were again rejected for not including discipline specific modifiers.
     A provider contacted their fiscal intermediary in an 
effort to obtain a copy of the physician fee schedules, and was told 
they would need to submit a Freedom of Information Act request to 
obtain the information.

 III. HCFA's Administrative Problems Should not Supersede the Need to 
                       Address Real Policy Issues

    As indicated in our February 22, 1999 letter to you (copy attached) 
we commend you and Representative Johnson for your leadership roles in 
addressing the crucial policy issues associated with the treatment of 
medically complex patients under the skilled nursing facility 
prospective payment system. We strongly support your recommendation 
that HCFA hold a Town Hall Meeting to discuss interim solutions to the 
problem and offer any assistance we may be able to provide in this 
    HCFA's ``short term'' management challenges, while administrative 
in nature, can and do have a direct and immediate impact upon policy 
and the quality of services provided to beneficiaries. We thank you, 
Mr. Chairman, for not allowing the debate on HCFA's administrative 
performance, to eclipse the need to address the real policy issues that 
continue to exist.
    We see the need for the following policy issues to be addressed:
    1. The skilled nursing facility prospective payment system 
structure is under-funded.--Estimates show the actual reduction in 
Medicare skilled nursing facility prospective payment system 
expenditures has far exceeded original savings projections. Some 
portion of those savings needs to be returned to ensure success of the 
system as well as access and quality of services for nursing home 
    2. An interim solution must be implemented to address the non-
therapy ancillary component of the skilled nursing facility prospective 
payment system.--The skilled nursing facility prospective payment 
system (SNF PPS) fails to adequately account for the costs of certain 
non-therapy ancillary services including Without the implementation of 
an interim solution, elderly Medicare beneficiaries may not have access 
to these services.
    3. The $1,500 therapy cap placed on outpatient rehabilitation 
services must be repealed or modified to ensure seniors receive 
medically necessary rehabilitative services based on their condition 
and health and not on arbitrary payment limits.--Senator Grassley is 
expected to introduce legislation which would exempt from the caps, 
Medicare beneficiaries meeting certain criteria. We encourage the 
introduction of a companion bill in the House.
    4. The merits of consolidating a number of services which 
historically have been infrequently delivered in nursing homes, must be 
re-evaluated.--Due to Y2K systems problems, HCFA has delayed ``until 
further notice'' consolidated billing requirements for residents in a 
Part B stay. HCFA should provide the industry with a minimum of six 
months notification once the determination has been made to fully 
implement SNF PPS consolidated billing requirements. We hope Congress 
will use this time to reconsider what obligations should be placed on 
nursing homes such as services provided under agreement with suppliers 
of x-ray, clinical lab and ambulance services. The law creates an 
overwhelming burden upon the nursing home, and an administrative 
catastrophe for the Program.
    5. HCFA needs to establish an appropriate site of service 
differential for non-physician services shifted to fee schedules by the 
Balanced Budget Act of 1997.--Establishing a site of service 
differential for services performed at a SNF or similar facility is 
needed to reflect the fact that different providers have different cost 
structures and that different costs arise in connection with the 
performance of similar services.


    Severe Balanced Budget Act of 1997 implementation problems continue 
to exist, particularly within the skilled nursing facility prospective 
payment system. Computer systems capabilities are dictating decisions 
being made regarding beneficiaries' access to services. Policy 
decisions which should be made in accordance with the Administrative 
Procedures Act, are being implemented by informal notices. Providers 
are struggling to comply with rules that seem to change daily, only to 
find out the claims systems are not capable of processing the claims. 
HCFA and its contractors must be required to meet the same standards to 
which providers continue to be held.
    Once again, Mr. Chairman, we appreciate your leadership and your 
continued attention on these matters. We request these comments be made 
part of the hearing record.

    [Attachments are being retained in the Committee files.]