[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]




PATIENTS FIRST: A 21ST CENTURY PROMISE TO ENSURE QUALITY AND AFFORDABLE 
                            HEALTH COVERAGE

=======================================================================

                             JOINT HEARING

                               before the

                         SUBCOMMITTEE ON HEALTH

                                and the

              SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS

                                 of the

                    COMMITTEE ON ENERGY AND COMMERCE
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

                               __________

                             JUNE 28, 2001

                               __________

                           Serial No. 107-52

                               __________

       Printed for the use of the Committee on Energy and Commerce


 Available via the World Wide Web: http://www.access.gpo.gov/congress/
                                 house

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                    ------------------------------  





                    COMMITTEE ON ENERGY AND COMMERCE

               W.J. ``BILLY'' TAUZIN, Louisiana, Chairman

MICHAEL BILIRAKIS, Florida           JOHN D. DINGELL, Michigan
JOE BARTON, Texas                    HENRY A. WAXMAN, California
FRED UPTON, Michigan                 EDWARD J. MARKEY, Massachusetts
CLIFF STEARNS, Florida               RALPH M. HALL, Texas
PAUL E. GILLMOR, Ohio                RICK BOUCHER, Virginia
JAMES C. GREENWOOD, Pennsylvania     EDOLPHUS TOWNS, New York
CHRISTOPHER COX, California          FRANK PALLONE, Jr., New Jersey
NATHAN DEAL, Georgia                 SHERROD BROWN, Ohio
STEVE LARGENT, Oklahoma              BART GORDON, Tennessee
RICHARD BURR, North Carolina         PETER DEUTSCH, Florida
ED WHITFIELD, Kentucky               BOBBY L. RUSH, Illinois
GREG GANSKE, Iowa                    ANNA G. ESHOO, California
CHARLIE NORWOOD, Georgia             BART STUPAK, Michigan
BARBARA CUBIN, Wyoming               ELIOT L. ENGEL, New York
JOHN SHIMKUS, Illinois               TOM SAWYER, Ohio
HEATHER WILSON, New Mexico           ALBERT R. WYNN, Maryland
JOHN B. SHADEGG, Arizona             GENE GREEN, Texas
CHARLES ``CHIP'' PICKERING,          KAREN McCARTHY, Missouri
Mississippi                          TED STRICKLAND, Ohio
VITO FOSSELLA, New York              DIANA DeGETTE, Colorado
ROY BLUNT, Missouri                  THOMAS M. BARRETT, Wisconsin
TOM DAVIS, Virginia                  BILL LUTHER, Minnesota
ED BRYANT, Tennessee                 LOIS CAPPS, California
ROBERT L. EHRLICH, Jr., Maryland     MICHAEL F. DOYLE, Pennsylvania
STEVE BUYER, Indiana                 CHRISTOPHER JOHN, Louisiana
GEORGE RADANOVICH, California        JANE HARMAN, California
CHARLES F. BASS, New Hampshire
JOSEPH R. PITTS, Pennsylvania
MARY BONO, California
GREG WALDEN, Oregon
LEE TERRY, Nebraska

                  David V. Marventano, Staff Director

                   James D. Barnette, General Counsel

      Reid P.F. Stuntz, Minority Staff Director and Chief Counsel

                                 ______

                         Subcommittee on Health

                  MICHAEL BILIRAKIS, Florida, Chairman

JOE BARTON, Texas                    SHERROD BROWN, Ohio
FRED UPTON, Michigan                 HENRY A. WAXMAN, California
JAMES C. GREENWOOD, Pennsylvania     TED STRICKLAND, Ohio
NATHAN DEAL, Georgia                 THOMAS M. BARRETT, Wisconsin
RICHARD BURR, North Carolina         LOIS CAPPS, California
ED WHITFIELD, Kentucky               RALPH M. HALL, Texas
GREG GANSKE, Iowa                    EDOLPHUS TOWNS, New York
CHARLIE NORWOOD, Georgia             FRANK PALLONE, Jr., New Jersey
  Vice Chairman                      PETER DEUTSCH, Florida
BARBARA CUBIN, Wyoming               ANNA G. ESHOO, California
HEATHER WILSON, New Mexico           BART STUPAK, Michigan
JOHN B. SHADEGG, Arizona             ELIOT L. ENGEL, New York
CHARLES ``CHIP'' PICKERING,          ALBERT R. WYNN, Maryland
Mississippi                          GENE GREEN, Texas
ED BRYANT, Tennessee                 JOHN D. DINGELL, Michigan,
ROBERT L. EHRLICH, Jr., Maryland       (Ex Officio)
STEVE BUYER, Indiana
JOSEPH R. PITTS, Pennsylvania
W.J. ``BILLY'' TAUZIN, Louisiana
  (Ex Officio)

                                  (ii)

              Subcommittee on Oversight and Investigations

               JAMES C. GREENWOOD, Pennsylvania, Chairman

MICHAEL BILIRAKIS, Florida           PETER DEUTSCH, Florida
CLIFF STEARNS, Florida               BART STUPAK, Michigan
PAUL E. GILLMOR, Ohio                TED STRICKLAND, Ohio
STEVE LARGENT, Oklahoma              DIANA DeGETTE, Colorado
RICHARD BURR, North Carolina         CHRISTOPHER JOHN, Louisiana
ED WHITFIELD, Kentucky               BOBBY L. RUSH, Illinois
  Vice Chairman                      JOHN D. DINGELL, Michigan,
CHARLES F. BASS, New Hampshire         (Ex Officio)
W.J. ``BILLY'' TAUZIN, Louisiana
  (Ex Officio)

                                 (iii)





                            C O N T E N T S

                               __________
                                                                   Page

Testimony of:
    Aronovitz, Leslie G., Director, Health Care Issues, U.S. 
      General Accounting Office..................................    21
    Chiplin, Alfred J., Managing Attorney, Health Care Rights 
      Project, Center for Medicare Advocacy, Inc.................    53
    Cullen, Timothy F., Chairman, United Government Services, LLC    51
    Mangano, Michael F., Acting Inspector General, Department of 
      Health and Human Services..................................    12
    Serota, Scott P., Acting President and CEO, Blue Cross and 
      Blue Shield Association....................................    44
    Scully, Thomas, Administrator, Center for Medicare and 
      Medicaid Services..........................................     4
Material submitted for the record by:
    American Dental Association, prepared statement of...........    66
    Aronovitz, Leslie G., Director, Health Care Issues, U.S. 
      General Accounting Office, letter dated August 17, 2001, 
      enclosing response for the record..........................    70
    Mangano, Michael F., Acting Inspector General, Department of 
      Health and Human Services, letter dated August 15, 2001, 
      enclosing response for the record..........................    82
    Medical Device Manufacturers Association, prepared statement 
      of.........................................................    67

                                  (v)

  

 
PATIENTS FIRST: A 21ST CENTURY PROMISE TO ENSURE QUALITY AND AFFORDABLE 
                            HEALTH COVERAGE

                              ----------                              


                        THURSDAY, JUNE 28, 2001

              House of Representatives,    
              Committee on Energy and Commerce,    
                               Subcommittees on Health,    
                          and Oversight and Investigations,
                                                    Washington, DC.
    The subcommittees met, pursuant to notice, at 10 a.m., in 
room 2123, Rayburn House Office Building, Hon. Michael 
Bilirakis (chairman) presiding.
    Members present Subcommittee on Health: Representatives 
Bilirakis, Ganske, Norwood, Bryant, Brown, and Capps.
    Members present Subcommittee on Oversight and 
Investigations: Representatives Greenwood, Bilirakis, and 
DeGette.
    Staff present: Erin Kuhls, majority counsel; Julie 
Corcoran, majority counsel; Kristi Gillis, legislative clerk; 
Amy Hall, minority professional staff; Bridgett Taylor, 
minority professional staff; and Karen Folk, minority 
professional staff; and Chris Knaur, minority investigator.
    Mr. Bilirakis. This joint hearing of the Subcommittees on 
Health and Oversight and Investigations is the fourth in a 
series held jointly by the Subcommittees on Health and 
Oversight and Investigations this year as part of our 
initiative to improve Federal health care programs and to put 
patients first. To that end, we are continuing our review of 
the programs, policies and operations of the Centers for 
Medicare and Medicaid Services or as I like to refer to it, as 
C-M squared S--it's actually CMS--formerly known as the Health 
Care Financing Administration.
    Today we will examine Medicare's existing contracting 
authority and proposals to refine this authority with the goal 
of securing the efficient and responsive delivery of high 
quality services to Medicare beneficiaries.
    Medicare contractors play a critical role in the Medicare 
program. These contractors process and pay claims, identify 
potential fraud, respond to inquiries, and educate 
beneficiaries and providers. The relationship between Medicare 
and its contractors and the complexities of the current 
contracting system are important factors to consider when 
discussing ways to protect and strengthen the program for the 
future.
    Today's hearing presents a forum to discuss the current 
Medicare contracting environment and the various reform 
proposals expected to promote greater efficiency, enhance 
contractor performance, and improve services to beneficiaries.
    I am pleased to welcome our witnesses, and I want to thank 
them all for joining us today. Our first witness is Tom Scully, 
the Administrator of CMS, who will present the Administration's 
contracting reform proposal and explain the need for such 
reform.
    Michael Mangano, the Acting Inspector General of the 
Department of Health and Human Services, will testify about 
past contractor integrity issues and weaknesses in CMS' 
oversight and management of its contractors. He will be joined 
by Leslie Aronovitz, director of health care issues for the 
General Accounting Office, who will report on the merits and 
challenges of expanding Medicare's claims processing 
contracting authority.
    I would also like to welcome Scott Serota, the Acting 
President and CEO of the Blue Cross and Blue Shield 
Association, and Tim Cullen, the Chairman of United Government 
Services, LLC, one of Medicare's largest claims administration 
contractors.
    Finally, I am pleased to welcome Alfred Chiplin, the 
managing attorney of the Health Care Rights Project at the 
Center for Medicare Advocacy. Representing Medicare 
beneficiaries, Mr. Chiplin will testify about one of the most 
important contractor functions. That is the beneficiary 
outreach and education.
    I look forward to a productive hearing today, and I want to 
thank our witnesses for their participation. I am hopeful that 
this discussion will lead to improvements in the administration 
of the Medicare program and ultimately, and most importantly, 
to improvements in the quality of care provided to Medicare 
beneficiaries.
    I yield to Mr. Brown for his opening statement.
    Mr. Brown. Thank you, Mr. Chairman. I appreciate this 
hearing today. I would like to thank Tom Scully, and welcome 
him to our committee for the first time as the CMS, I guess, 
administrator. I remember he was sort of hiding inconspicuously 
until we mentioned it in the back of the room when we had the 
four former HCFA administrators. We all appreciate your being 
here for that and listening to some old hands at this to help 
you do your job now. We welcome you here.
    Medicare contractors perform core functions for the biggest 
insurance company, biggest insurance program in the country. 
Their resources are limited. Their responsibilities are 
considerable. Because of frequent statutory and regulatory 
changes, the program that they administer is ever-changing. We 
should appreciate the important role that Blue plans and other 
contractors have played in the program's 36-year success. That 
is not to say we should maintain the status quo. Contract 
reform is necessary and long overdue. But it would be unfair to 
ignore the contributions made by contractors, particularly 
given the immense challenges that they face.
    A couple of years ago, I worked with a provider in my 
district for nearly a year as that provider wrestled with its 
carrier over a post-payment audit. It was an eye-opening 
experience. The carrier lost records, used a new coverage 
standard to evaluate old claims. By the way, that new and 
significantly different coverage standard had never been 
approved by HCFA. Made sampling errors that inflated the 
overpayment by hundreds of thousands of dollars. It would take 
longer than my 5 minutes to recount all those frustrations. No 
provider should have to go through that.
    For the sake of providers and beneficiaries and the 
integrity of the Medicare program, contractors need to be held 
to higher standards. They need additional resources. They 
require more oversight. They should be held accountable not 
only for paying claims accurately and minimizing fraud and 
abuse, but for delivering high quality consumer service to 
beneficiaries and to providers. That means providing timely and 
accurate and consistent information. It means treating 
providers with respect and fairness. It means coordinating and 
maintaining open communications with CMS.
    CMS should be held accountable for making sure these goals 
are met, which means hiring the right contractors and working 
more closely with them to ensure that Medicare coverage is 
properly administered.
    Congress, we should be held accountable for giving CMS the 
authority, the flexibility, and the funding it needs to manage 
and pay contractors for Medicare properly. My guess, Mr. 
Chairman, is that even more than CMS oversight, improving 
contractor performance depends but increasing the resources we 
provide to these contractors. We cannot expect Medicare 
contractors to provide appropriate customer service unless we 
give them the resources they need to do the job. Fiscal 
intermediaries and carriers are Medicare's frontline. If CMS 
truly wants to improve its image, it should fight for those 
resources.
    I thank the chairman.
    Mr. Bilirakis. And I thank the gentleman, and I agree with 
him. If they truly want an increase in those resources, they 
should be presenting them and fighting for them. That is 
something that has not been taking place.
    The Chair is pleased to recognize the chairman of the 
Oversight and Investigations Subcommittee, who has done a 
terrific job on this issue, Mr. Greenwood.
    Mr. Greenwood. Thank you, Mr. Chairman. I don't have a 
formal statement, but would comment that when we first decided 
to go into the issue of HCFA reform, one of the first things 
that this committee did was to go to Baltimore to visit the 
HCFA, then HCFA facility. We met with the acting director and 
many of the senior staff. We sat around a table and said tell 
us what we should be looking at when it comes to trying to 
improve the way this organization provides services. I think 
the very first comment that was made was change the contractor 
system. That it is essentially a relic that goes back to the 
origins of Medicare, and reflected the political and the other 
realities of that time and not the current situation.
    So I am delighted that the Administration has submitted a 
plan, and that it seems to be so far at least, relatively 
uncontroversial. I look forward to working with you to enact 
it.
    Thank you, Mr. Chairman. I yield back.
    Mr. Bilirakis. The gentlelady from Colorado, Ms. DeGette.
    Ms. DeGette. Thank you, Mr. Chairman. I don't have a formal 
opening statement either. I would just like to welcome Mr. 
Scully and wish you godspeed on your challenges that lie ahead, 
and look forward to working with you.
    I yield back the balance of my time.
    Mr. Bilirakis. Thank you, gentlelady.
    The vice chairman of the subcommittee, the Health 
Subcommittee, Dr. Norwood.
    Mr. Norwood. Thank you very much, Mr. Chairman. I ask 
unanimous consent that my statement be placed in the record, 
and take this opportunity to thank both of the chairmen here 
for having this hearing. It is a subject of great interest to 
many Americans, particularly those that are patients and treat 
patients. We are right on the subject.
    I want to thank Mr. Scully. I think we have got a good man 
at the helm at times where we do need to make changes.
    I look forward to hearing your testimony this morning, Mr. 
Scully.
    Mr. Chairman, I yield back.
    Mr. Greenwood. I believe that concludes our opening 
statements.
    Mr. Scully, as you are aware, this is a hearing, it's a 
joint hearing between the Health and the Oversight and 
Investigations Subcommittee. It is the practice of the 
Oversight and Investigations Subcommittee to swear in its 
witnesses. Do you have any objections to testifying under oath?
    Mr. Scully. No.
    Mr. Greenwood. Okay. I should also inform you that you have 
the right to an attorney. Do you with to be represented by 
counsel?
    Mr. Scully. No, I do not.
    Mr. Greenwood. You do not? You are a brave man, Mr. Scully. 
In that case, if you will raise your right hand, I will give 
you the oath of office.
    [Witness sworn.]
    You are now under oath. We look forward to your testimony.

 TESTIMONY OF THOMAS SCULLY, ADMINISTRATOR, CENTER FOR MEDICARE 
                     AND MEDICAID SERVICES

    Mr. Scully. Thank you, Mr. Chairman, and Chairman 
Bilirakis, Mr. Brown, and Ms. DeGette, and Mr. Norwood. I hope 
this is the first of many cooperative and friendly reform 
appearances before the committee. I have worked with the 
committee a lot in the past, and I look forward to working on a 
lot of issues. As you mentioned, I think this is one of the 
highest priority ones.
    First, I would say that I have an agreement with the 
Secretary that I have to pay him a buck every time I mention 
HCFA, so maybe if I do that by accident, which I know it's 
tough, during the hearing, I will pass around a collection 
plate at the end.
    I do have a written statement for the record. I would like 
to give an abbreviated version of that. Let me start by in my 
written statement I have a quote from a former deputy 
administrator of what was then HCFA, now is CMS, who once said 
there is substantial evidence that the Medicare cost-based 
contracts do not contain sufficient incentives for efficient, 
innovative, and cost-effective operations. Since contractors 
are reimbursed for whatever reasonable costs they incur, they 
have no financial motivation to be innovative and attempting to 
improve service to beneficiaries or in saving money. In other 
areas of the Federal procurement of this magnitude, contractors 
are required to compete for the business, and are rarely 
reimbursed under the kind of no risk, cost-based contracts 
which are used in Medicare.
    Those are not my words, but from 1980, from Earl Collier, 
who was the deputy HCFA administrator, deputy to Leonard 
Schaeffer, I think, at the time, who some of you know. My point 
there is that really nothing has changed in 21 years.
    Twelve years ago, when I was at OMB, I pushed contractor 
reform. I think we had 72 contractors then. We are down now to 
49. But these issues have been around for a long time, through 
Democratic administrations, Republican administrations. There 
has been a consistent belief in management circles that the 
right thing to do is reform the contractor process. It has 
never happened. I think the reason for that is it has always 
been a relatively low priority for various administrations. It 
ended up just kind of dwindling in the lower end of what was 
important, and never happened.
    In this administration, it is absolutely the opposite. 
Secretary Thompson, as you know, also spent a week at HCFA, 
excuse me, CMS. There is the first buck.
    Mr. Greenwood. It was HCFA then. That doesn't count.
    Mr. Scully. Thank you. He spent a week at the then HCFA, 
now CMS, and learned a lot of things, and I think went from 
being quite a skeptic about CMS to being very supportive of 
lots of our efforts. But the one thing that really hit him as 
pretty outrageous was the way the contractor system worked. He 
has prodded me virtually every day since to make this a top 
priority. It is a top priority for him as well, to get this 
fixed. I think that as all the members of this committee have 
talked to him, and I think all of them have, realize, it's hard 
to talk to him for more than 5 minutes without CMS contractor 
reform coming up.
    So it is a very big personal issue for the Secretary, for 
this administration. I hope we can work cooperatively with all 
of our contractors to get this done this year. I will refer 
later to some of the other testimonies, but I think in reading 
Scott's testimony and some of the other testimony from GAO, 
there may be a lot more common ground than there has been in 
the past, and I think that is terrific.
    As you mentioned, Mr. Chairman, the design of the program 
is really from 1965. It just doesn't work, doesn't make a lot 
of sense. Our contractors do a great job. I won't get into 
reevaluating our budget request this year, but they do have a 
huge workload. Arguably in some cases, they do heroic jobs, and 
there are many concerns and many complaints, some Blue Cross 
complaints in their testimony this morning about change orders. 
They are very legitimate. We will do our best to work some of 
those out.
    But the existing contracting system gives CMS very little 
flexibility, allows us to have very little ways to encourage 
innovation or accountability from the contractors. I think in 
any rational evaluation of it would say that it is very ripe 
for reform.
    I think the angle we all have is to have higher quality 
customer service for our beneficiaries and for providers, to 
make sure that the 40 million people on Medicare get better 
quality services. That is what we are trying to do today, every 
day at CMS, is to find every way we can to fix the systems.
    Just to run through the basic ideas in our bill, which in 
fact was I believe submitted to Congress formally this morning, 
is first I think we believe the Secretary needs to have the 
ability to find and select the best qualified contractors to do 
the job through a full and open contracting process. Today on 
the Part A side, for instance, and this has been going on 
forever, from the beginning of the program, the hospitals have 
the ability to pick their fiscal intermediaries. As many of you 
know, I used to be in the hospital business, and I used to 
lobby myself to keep that every year. I always thought it was 
pretty wild we got away with that, to be perfectly honest. I 
don't think that there's really any rational reason why 
hospitals in the current environment should be allowed to 
nominate individually their providers. It is a vestige of the 
1965 law, and I just don't think that there really is a real 
substantive reason for that to still occur.
    Blue Cross Blue Shield Association is the prime contractor 
for fiscal intermediaries. Out of the 28 fiscal intermediaries 
who process Medicare claims, we only have direct contracts with 
three. Twenty five of them are subcontractors through the Blue 
Cross Blue Shield Association. I think we have a very good 
relationship with them, but the structure of the existing 
contract to go through the association just doesn't make sense.
    We can't contract directly, for instance, with one of your 
other companies on the panel today, is United Wisconsin. Blue 
Cross of Wisconsin, United Government Services, who is one of 
our bigger contractors, we contract with them through the 
National Blue Cross Blue Shield plan, which I don't think makes 
much sense.
    We need to have the freedom to contract more open and more 
sensibly. We would like very much to work with the Blues to 
pull this off. I think it is going to take a number of years. 
It is going to have to be phased in. I read Scott Serota's 
testimony last night. I think that a lot of his ideas I agree 
with. We don't want this to be CMS trying to come in and push 
the Blues out of the program. If we got to our eventual goal of 
18 to 20 contractors in 5 years, I think we could do that very 
cooperatively.
    If you took our existing 49 contractors and consolidated 
them in the overlaps of Part A and Part B, as you can see in 
those charts, we would already be at 30. So our real goal here 
is to find the 18 to 20 best contractors over the next 5 years, 
and get from the 30 contractors we currently have overlapping 
down to a little less than 20, and be able to pick them a 
little more sensibly, and incentivize them a little more 
sensibly. We would like to do that in partnership with the 
Blues and the other carriers and FIs, and do it in a 
cooperative way. So I hope that no one perceives this as an 
adversarial process, but hopefully a cooperative process.
    As I said, there are 28 fiscal intermediaries and 20 
carriers. Part A is fiscal intermediaries, Part B is carriers 
to process current fee-for-service Medicare claims. In 1989, 
when I first got involved, we had 72, so there has been some 
contraction. On average in the last 10 years, we have lost--we 
have had four contractors a year pull out of the program. So 
there is a natural contraction and consolidation going on in 
the program anyway. What we would like to do is structure a 
little more rationally, push maybe a little quicker 
consolidation, and cooperatively work with our contractors to 
get to a more rational program.
    We would also like, as a second step, to have legal 
authority to contract on an incentive basis rather than a cost 
basis. I don't think there are many cost-based systems left in 
the government. There certainly aren't many left in Medicare. 
On the payment side, we have gone to DRGs, PPS, virtually 
everything, and gotten away from cost-plus contracts. I think 
the evidence in Medicare is abundant that cost-plus contracts 
aren't rational and don't work. Whether you go through 
hospitals, outpatient clinics, virtually every sector of 
Medicare, we can go into perspective payment or some type of 
bundled payment. I believe we should do virtually the same type 
of thing on the contractor side.
    We need to start looking at contractors, the contracts 
based on performance, whether they are cost-plus which is what 
a lot of people, including some of our contractors suggested, 
whether we start to look at more fixed price per member per 
month contracts. I think we need to start working with our 
contractors to be more innovative and come up with new ideas.
    I am planning to start some demonstration programs this 
fall, hopefully with the agreement of the committee, to start 
looking at some of these ways to come up with new, more 
innovative contracts, to make them better. I hope we will do 
that with you and your staff's support.
    The only one agreement I would point out with some of the 
other testimony you are going to hear later this morning is I 
do think that whether we have a merged Part A or Part B in the 
program payments, it doesn't make much sense on the 
contractor's side to have different payments for fiscal 
intermediaries and carriers. I do think that even though it 
should probably be done gradually and gently, it is rational to 
merge the carrier NFI process to come up with a merged Part A 
and Part B contractors payment system.
    So in summary, let me just say that I think having read 
last night the GAO testimony and the Blue Cross testimony, 
which are the ones I had, I think our differences here are not 
that great. I think the issue is we need change. Change is long 
overdue. It probably needs to be phased in to make sure it 
comes off in a rational, productive way. I do think we need one 
system that is 15 to 20 contractors, with Part A and Part B 
merged.
    Many of the complaints that Blue Cross has about change 
orders and helter skelter direction from the agency at CMS, I 
am determined to fix. I think a lot of those complaints are 
legitimate, and we will do the best we can to make the system 
work better. We would like to have a friendly transition with 
our partners and ease into a more rational system. We can find 
the best performance-based contractors, provide them with some 
risk and reward to be better contractors for our beneficiaries 
and our providers, and come up with a long-term, more rational, 
more incentive-based partnership.
    So I was very happy to read the Blue Cross testimony and 
the GAO testimony that you will hear later. I think there is a 
lot of common ground to work with, and I hope we can work 
closely with our contractors, GAO, the inspector general, and 
the committees to make this a more rational system, hopefully 
this year, so I won't have to come back 12 years from now and 
give the same talk.
    Thank you very much, Mr. Chairman.
    [The prepared statement of Thomas Scully follows:]
    Prepared Statement of Thomas Scully, Administrator, Centers for 
                     Medicare and Medicaid Services
    Chairman Bilirakis, Chairman Greenwood, Congressman Brown, 
Congressman Deutsch, distinguished subcommittee members, thank you for 
inviting me here to testify about Medicare contracting reform.
    A former Deputy Administrator in the Health Care Financing 
Administration, now known as the Centers for Medicare and Medicaid 
Services (CMS), once said, ``There is substantial evidence that the 
Medicare cost-based contracts do not contain sufficient incentives for 
efficient, innovative and cost-effective operations. Since contractors 
are reimbursed for whatever ``reasonable costs'' they incur, they have 
no financial motivation to be innovative in attempting to improve 
service to beneficiaries or in saving money. In other areas of federal 
procurement of this magnitude, contractors are required to compete for 
the business and are rarely reimbursed under the kind of no-risk, cost 
based contracts which are used in Medicare.'' These are not my words, 
but words that were spoken in 1980 by Deputy Administrator Earl Collier 
at a Ways and Means Health Subcommittee hearing on fee-for-service 
contractors. My point is that contracting reform has been needed for 
decades, but nothing has changed.
    Efforts to reform Medicare's contracting arrangements have been 
around for years. When I was at the Office of Management and Budget 
from 1989 to 1993, I pushed it without success. Let me assure you, 
however, that no Administration, Secretary, or Administrator, has been 
nearly as committed to fixing this situation than this one.
    When Secretary Thompson went to CMS (then HCFA) for a week in May, 
he was briefed in depth on a wide variety of issues. He was already 
pretty worked up about our outdated computer and accounting systems 
before that week. The single issue that outraged him most during his 
intense week of Medicare and Medicaid briefings was the crazy and 
antiquated way that the Medicare contracting system works. He has been 
talking about the issue daily since, and he has been prodding me since, 
almost daily, to fix it. I am not always a slow learner--so this is at 
the top of the CMS reform list. In the past this has been low on the 
reform lists of prior administrations, from Carter and Reagan to Bush 
and Clinton. That is no longer the case. A strong Medicare demands a 
rational contracting system. The Secretary's intense interest can be a 
strong spur to drive this long overdue change--and we are excited to 
work with you, and our contractors, to fix the system.
    Today, the Administration is proposing legislation to reform the 
current system, and I am pleased to discuss the details of that 
proposal. I look forward to working with the Committee in the coming 
months to achieve this important objective.
                               background
    Since Medicare was created in 1965, the government has used private 
health insurance company contractors to process Medicare claims and 
perform related administrative services for beneficiaries and health 
care providers. Today, CMS uses 49 contractors, across the country, 
including the contract with the Blue Cross Blue Shield Association of 
America, to process nearly a billion claims each year, from over one 
million health care providers, and provide customer services to 33 
million Medicare beneficiaries. These contractors employ over 21,000 
people. This year, Medicare contractors will pay out more than $175 
billion for beneficiary health care services, the vast majority of 
these transactions occurring electronically.
    The fee-for-service contractors are governed by Medicare laws that 
impose outdated requirements and diverge from general federal 
acquisition laws in several respects. The current Medicare statute 
restricts the Secretary from competing the fee-for-service claim 
processing contracts to the most qualified entities. Rather, 
institutional providers, such as hospitals and nursing facilities, 
nominate the contractor, or fiscal intermediary, that processes and 
pays their Medicare Part A claims. While the statute does not require 
the Secretary to accept the nominations, it effectively ties the 
Secretary's hands because it also does not allow the Secretary to 
contract outside the nomination process. In 1965, the American Hospital 
Association nominated the Blue Cross Blue Shield Association of America 
to be the fiscal intermediary contractor, who subcontracts with local 
Blue Cross plans. That arrangement continues today. At the time, some 
providers nominated other commercial insurers to serve as their fiscal 
intermediaries. Mutual of Omaha is the only major commercial insurer 
among that original group that continues as an intermediary today. The 
statute was amended in 1977 to allow the Secretary to designate 
regional or national intermediaries for administering home health 
claims. These intermediaries, referred to as Regional Home Health 
Intermediaries (RHHIs), must already be fiscal intermediaries in order 
to participate.
    For most Part B claims processing, the law is more prescriptive and 
requires that the Secretary select and use health insurers, referred to 
as carriers, to process claims and make payments to physicians, 
ambulance companies, and other suppliers. Similar to the RHHIs, the 
statute was amended in 1987 to permit the Secretary to designate 
regional carriers to process claims for durable medical equipment, 
prosthetics, orthotics, and supplies. These durable medical equipment 
regional carriers, or DMERCs, also must be health insurers.
                     current contractor environment
    Today, there are 28 fiscal intermediaries and 20 carriers 
processing Medicare fee-for-service claims. Twenty-six of the fiscal 
intermediaries are Blue Cross plans and two are commercial insurance 
companies. On the Part B side, fifteen of the current carriers are Blue 
Shield plans and the remaining five are commercial insurance companies.
    As you can see in Chart 1, some contractors, such as Nebraska Blue 
Cross, serve only one State. By contrast, many contractors serve 
multiple and sometimes non-contiguous states, resulting in a patchwork 
of coverage and service across the country. For example, on the Part A 
side, Wisconsin Blue Cross (known outside Wisconsin as United 
Government Services) serves Wisconsin and Michigan, as well as 
California and Nevada. The same holds true on the Part B side of 
Medicare as indicated in Chart 2. Some contractors are both fiscal 
intermediaries and carriers, for example, South Carolina Blue Cross/
Blue Shield, also known as Palmetto, is a fiscal intermediary, carrier, 
DMERC and RHHI. This patchwork of coverage is a result of the large 
number of transitions by insurers out of the Medicare program. Since 
1994, an average of four contractors has left the program each year 
(Chart 3).
    Medicare's fee-for-service contractors are responsible for a wide 
range of Medicare program activities. The fiscal intermediaries and 
carriers receive and control Medicare claims from hospitals and other 
providers, as well as perform edits on these claims to determine 
whether the claims are complete and should be paid. In addition, the 
fiscal intermediaries and carriers calculate Medicare payment amounts 
and remit these payments to the appropriate party.
    The role of the intermediaries and carriers goes beyond claims 
processing. For example, they conduct reviews and hold hearings on 
appeals of claims from physicians and providers; they respond to 
beneficiary inquiries; they make coverage decisions for new procedures 
and devices in local areas; and they conduct a variety of different 
provider services, such as enrolling new providers in the program, and 
educating them on Medicare's rules and regulations and billing 
procedures. The fiscal intermediaries and carriers also staff 
Medicare's provider toll-free lines across the country to answer a 
wide-range of provider questions. In addition, the fiscal 
intermediaries and carriers perform a variety of functions to ensure 
the financial integrity of the Medicare program. Currently, all fee-
for-service contractors--the fiscal intermediaries and the carriers 
``are governed by cost reimbursement contracts. By broadening the type 
of contracts available for use in Medicare contracting and taking 
greater advantage of competition and other contracting principles in 
the Federal Acquisition Regulation, the Secretary would be allowed to 
maximize incentives to encourage more efficient, innovative, and cost-
effective contractor operations.
                          managing for results
    CMS has taken a variety of steps over the last several years to 
improve oversight and management of Medicare's fee-for-service 
contractors. One of the first, and among the most important, steps we 
took was to restructure and consolidate CMS's management of the 
contractors. One individual, the Deputy Director for Medicare 
Contractor Management, now is directly responsible for all Medicare 
contractor management activities within the Agency. When the Agency 
restructuring plan I announced earlier this month is fully implemented, 
this position will be located in the Center for Medicare Management. We 
have created direct lines of communication between the contractors and 
the Deputy Director through our Consortium Contractor Management 
Officers. These groups are located in each of our four regional 
consortia and serve as the ``eyes and ears'' of the Agency for the 
contractors. Our goal is to be more consistent in our management of 
fee-for-service contractor performance and to open the lines of 
communication between our Agency and our contractor partners.
    The groups regularly monitor the contractors' performance; provide 
management and guidance; work with technical experts in the Agency to 
approve budgets, establish Corrective Action Plans; and help to 
eliminate Agency obstacles in obtaining answers, feedback, and guidance 
from CMS's central office and the regions. Furthermore, the Medicare 
Contractor Oversight Board provides executive leadership and 
establishes guiding principles for CMSs oversight of the Medicare fee-
for-service contractor network.
    We also have made substantial improvements to our contractor 
evaluation processes. In 1999, we revamped our Contractor Performance 
Evaluation process to ensure greater consistency and objectivity in our 
review of the contractors. We have incorporated specific, objective 
standards on a wide-range of contractor functions into our annual 
review plan. These standards help provide consistent guidance to 
contractors as to what is expected of them and what improvements are 
needed. Through accountability and leadership at the senior level of 
the Agency, we have developed nationally based review protocols and 
created national review teams for monitoring and reviewing contractor 
performance. These national review teams, which include experts in 
Agency business functions, come from every region and the central 
office. They help to ensure that performance reviews are consistent 
from region to region and contractor to contractor. In establishing our 
review of the contractors' performance, we use risk assessment tools to 
help focus our monitoring and target our resources most appropriately. 
In addition, in an effort to ensure consistency in our review process, 
we have increased our educational training and sponsored several 
national conferences for our reviewers. Our current evaluations are 
focused on the greatest risk--financial integrity. In the future, we 
plan to focus our reviews more on customer service. This will include 
feedback from providers and beneficiaries. Without contractor reform, 
however, our ability to provide strong incentives to reward 
improvements in performance is quite limited.
                       looking towards the future
    In conjunction with this new approach to contractor management and 
oversight, we are developing a long-term business strategy for Medicare 
fee-for-service contractor operations, taking into account both our 
past experience and current factors, including the changing business 
environment. There are several key factors driving the need for this 
strategic business plan. Our primary concerns are the need to prepare 
the Medicare program for the future, to ensure that the Medicare fee-
for-service program and its contractors are both responsive to 
providers and, above all, contribute to providing high-value services 
for beneficiaries; and to protect the trust funds from needless error 
and waste while also remaining accountable to taxpayers.
    Our strategic business plan will provide us with a framework for 
decision-making and articulating our business vision to our 
contractors. It also will assist us in improving our management and 
oversight and stabilizing our business relationships with them. Our 
goal is to promote organizational learning and innovation within the 
Agency as well as with our contractors. We know, for example, that 
there is a growing need for flexibility in administering the fee-for-
service program. And we have learned a great deal about the need to 
respond quickly and think in innovative ways to adapt to changes 
following the passage of the Balanced Budget Act, Balanced Budget 
Refinement Act, and subsequent legislation. Our business plan will help 
ensure that our contractor systems have the operational capacity to 
respond to these complex and multiple programmatic changes, such as 
modifications to Medicare coverage or the addition of new and complex 
payment systems, and to meet future programmatic challenges.
    Our business plan also is focused on our continuing to meet the 
needs of our beneficiary, provider, and contractor stakeholders. This 
includes the transition of claims processing work from a contractor 
leaving the program to one assuming additional work with minimal 
disruption to providers and beneficiaries, improving educational 
services provided to beneficiaries and providers by our contractors, 
and compensating contractors appropriately for the work they do. At the 
same time, we must strive to improve the financial management of the 
Medicare program by minimizing the potential for abuse and errors, 
considering cost-effective ways to implement program and system 
changes, and improving the integrity of the provider enrollment 
process.
                           contracting reform
    We must continue to manage the Medicare program efficiently and 
effectively and to fully implement our business strategy. To do that, 
we must fundamentally change our relationship with the Medicare fee-
for-service contractors. I firmly believe that the Medicare fee-for-
service contracting work should be awarded competitively to the best-
qualified entities, using performance-based service contracts that 
include appropriate payment methodologies. This is something that 
current law will not allow.
    I believe these contracts should result in contractors receiving 
payment when they deliver something of value, and profit only when they 
perform at or above the satisfactory level. We must be able to maximize 
economies of scale and improve the level of service to our 
beneficiaries and providers. We would like to work cooperatively with 
our existing contractors to get to this goal, but these changes require 
legislative action. As I mentioned, today we are proposing legislation 
to address these differences and we want to work with this Committee 
and the Congress on a viable, sensible solution.
    Through these legislative changes, CMS hopes to accomplish the 
following:

 Provide flexibility to CMS and its contractors to work 
        together more effectively and better adapt to changes in the 
        Medicare Program.
 Promote competition, leading to more efficiency and greater 
        accountability.
 Establish better coordination and communication between CMS, 
        contractors and providers.
 Promote CMS's ability to negotiate incentives to reward 
        Medicare contractors that perform well.
    These changes will enhance the Agency's ability to more effectively 
manage claims processing for the Medicare program in the future, and 
ensure that the future changes to the Medicare program's operating 
structure are free from unnecessary constraints.
    We are continuing to proceed with the implementation of our long-
range business strategy. To capture the benefits of integrated data 
processing, we have begun to consolidate our claims processing workload 
among our existing contractors, and are moving to consolidate and 
standardize contractor claims systems. Our goal is to have one system 
for intermediary claims, one for carrier claims, and one for durable 
medical equipment claims. And we will continue to establish more direct 
control of our data centers, which should reduce costs and improve 
efficiency. This consolidation will allow us to make changes 
efficiently and consistently, and help streamline our information 
technology infrastructure. Over time, based on the results of ongoing 
risk and cost benefit analysis, we anticipate expanding our current 
pool of contractors to include those who can perform specific 
functions, such as program integrity and coordination of benefits. In 
addition, we will continue to build the systems interfaces needed to 
ensure the full integration of Medicare's contractor operations with 
the new integrated general ledger accounting system initiative to 
enhance the contractors' financial management, and protect the Medicare 
trust funds for the future.
                               conclusion
    I appreciate the opportunity to appear before you today and share 
our vision for reforming the Centers for Medicare and Medicaid 
Services' administration of Medicare's fee-for-service claims 
processing contractors. Together, we can take aggressive action to 
reform Medicare's current contracting arrangement. We must build on the 
strengths of our current contracting relationships and foster a 
environment of accountability, innovation, and flexibility. We already 
have a strong business strategy in place. Through the implementation of 
this plan, and the realization of our contracting reform objectives as 
set forth in our legislative proposal, I am confident the Medicare 
program will be strengthened and better prepared to meet future 
challenges. I look forward to working with this Committee and the 
Congress on a bipartisan basis to enact this critical reform 
legislation. Thank you and I am happy to answer your questions.

    Mr. Greenwood. Thank you, Mr. Scully. It is my 
understanding that you will stay with us.
    Mr. Scully. Yes.
    Mr. Greenwood. We will have the next two witnesses give 
their testimony. Then the three of you will take questions as a 
panel. So we call forward Mr. Michael Mangano, who the Acting 
Inspector General, Department of Health and Human Services, and 
Ms. Leslie Aronovitz.
    Did I say that right, Aronovitz?
    Ms. Aronovitz. That's okay.
    Mr. Greenwood. You are both aware that the Oversight and 
Investigations Subcommittee has the practice of having its 
witnesses give their testimony under oath. Do either of you 
object to testifying under oath? Under the rules of the 
committee and the House, you are entitled to counsel. Do either 
of you wish to be advised by counsel today? In that case, if 
you will raise your right hand.
    [Witnesses sworn.]
    You are both under oath. We will hear first from Mr. 
Mangano.

   TESTIMONY OF MICHAEL F. MANGANO, ACTING INSPECTOR GENERAL, 
    DEPARTMENT OF HEALTH AND HUMAN SERVICES; AND LESLIE G. 
     ARONOVITZ, DIRECTOR, HEALTH CARE ISSUES, U.S. GENERAL 
                       ACCOUNTING OFFICE

    Mr. Mangano. Thank you very much, Mr. Chairman, and members 
of the subcommittee. I really appreciate this opportunity to 
testify before you this morning on the Medicare program, and on 
the importance of the Medicare contractors who actually operate 
this particular program.
    As we all know, these Medicare contractors function well 
when providers are promptly paid, beneficiaries receive the 
health care services that they are entitled to, and the trust 
funds are protected against wasteful spending. When they don't, 
the entire program is in jeopardy.
    Since the inception of the Medicare program, numerous 
legislative changes have been made and amendments added to the 
Social Security Act, which have led to substantial changes.
    Mr. Bilirakis. Why don't you pull that mike closer, please, 
sir?
    Mr. Mangano. Yet the way the Centers for Medicare and 
Medicaid Services, CMS, actually has decided to select its 
contractors and organize its contractors has really remained 
much the same over the years, primarily due to the laws.
    CMS needs to be given greater flexibility in the methods it 
uses to select, organize, and supervise its Medicare 
contractors. With this, we believe that it needs to have 
authorities to use entities other than insurance companies, 
select them competitively, pay them on an other than cost 
basis, organize them according to the function and benefit 
areas, and hold them accountable for performance.
    Over the years, we have identified numerous problems with 
contractor operations. Perhaps most troubling of all has 
involved lapses in the contractor's own integrity and 
involvement in such things as misusing government funds while 
concealing their actions, altering documents and falsifying 
statements of specific work that was performed, preparing bogus 
documents to falsely demonstrate superior performance, which 
then led to bonuses being paid by the Medicare program or 
additional contracts being given to that particular contractor, 
and adjusting their claims processing so that systems edits, 
designed to prevent inappropriate payments were turned off, 
thus resulting in misspent Medicare trust fund dollars. Since 
1993, we have entered into civil settlements with 14 Medicare 
contractors, resulting in total settlements in excess of $350 
million.
    We have also encountered problems associated with financial 
management and accounting procedures. For several years, we 
have reported serious errors in contractor reporting of 
accounts receivable that resulted from weak financial controls. 
It is quite clear that the root cause of these problems has 
been the lack of an integrated dual entry accounting system, 
less than adequate oversight and internal controls that would 
have prevented these problems from occurring in the first 
place.
    CMS also relies on extensive electronic data processing 
operations to administer the Medicare program and to process 
and account for Medicare expenditures. Here we found numerous 
general control weaknesses, primarily with Medicare 
contractors. About 80 percent of the 124 problems that we found 
in our review of the last financial statement of the Medicare 
program identified three general types of controls that we felt 
were insufficient, namely, access controls, entry-wide security 
programs and systems software controls.
    The ability to prevent or correct the problems just 
described stem at least in part from the way that CMS is 
required to contract with its claims administrators. The 
Medicare statute places substantial limits on how CMS can 
obtain contractor assistance to administer the Medicare 
program, including limiting CMS to choosing only certain types 
of companies to process claims and restricting them to a cost-
based reimbursement method.
    Although most of government contracts require competitive 
bidding, using full and open competition with very few 
prohibitions on who can be awarded the government contract, CMS 
typically contracts with fiscal intermediaries and carriers 
without using full and open competition restricted to health 
care companies sometimes selected by health care providers, and 
is required to use cost reimbursed contracts where the 
government assumes all the risk.
    To promote innovations and efficiencies from the private 
sector, legislation is needed that would increase their 
flexibility in how it contracts by allowing it to contract 
competitively and with entities that are not necessarily 
insurance companies, allow it to contract with one entity to 
perform both contractor and intermediary functions, permit the 
Secretary to follow normal government procurement regulations, 
and reimburse contractors on a fixed-fee basis when needed. 
These changes would provide CMS with greater flexibility, 
promote competition, increase CMS' ability to negotiate 
incentives, and improve their contractor performance evaluation 
process.
    We believe these common sense approaches are long overdue 
and have consistently testified in their support. CMS needs to 
have sufficient flexibility in its authorities to contract with 
companies best able to carry out the needed functions, hold 
these companies accountable when they fall short, and reward 
them when they perform well. Beneficiaries and providers will 
be better served when that happens, and CMS will get a better 
value for the contracting dollar.
    Thank you very much, Mr. Chairman. I will look forward to 
answering your questions at the appropriate time.
    [The prepared statement of Michael F. Mangano follows:]
  Prepared Statement of Michael F. Mangano, Acting Inspector General, 
              U.S. Department of Health and Human Services
    Good morning Mr. Chairmen and members of the Subcommittees. I 
appreciate the invitation to testify today on the important issue of 
improving Medicare contractor operations.
    Medicare contractors are the heart of the Medicare program. When 
they function well, providers are paid promptly, beneficiaries receive 
the health care services they need, and the Trust Fund is protected 
against wasteful spending. When they don't function properly, the 
entire program is jeopardized--those who benefit from it, those who 
provide care, and those who pay for it all suffer the consequences.
    Since the inception of Medicare, numerous legislative changes have 
been made and amendments added to the Social Security Act which have 
led to substantial changes in the Medicare program.
    For example, the way Medicare pays for health care has changed 
through time, from primarily cost/charge based payment systems to new 
fee-schedule and prospective based arrangements. While the Medicare 
program as a whole has seen significant change, the way that the 
Centers for Medicare and Medicaid Services (CMS) is allowed to select 
and organize its contractors has remained much the same as it has since 
the inception of the program.
    CMS needs to be given greater flexibility in the methods it uses to 
select, organize, and supervise the contractors who handle the day-to-
day operations of the Medicare program. This includes authorities to 
use entities other than insurance companies, select them competitively, 
pay them on other than a cost basis, organize them according to 
functions or benefits areas, and hold them accountable for performance.
                               background
    The Medicare program provides health insurance for 39.5 million 
elderly and disabled Americans at a cost of over $220 billion in fiscal 
year 2001. Although beneficiaries have a growing number of options 
under the Medicare+Choice program, the majority of beneficiaries are 
still covered by traditional fee-for-service Medicare. The fee-for-
service program is administered by the CMS with the help of 
approximately 50 contractors that handle claims processing and 
administration.
    Since the Medicare program was created, the government has 
contracted with private health insurance companies for claims 
processing and related administrative services. There are two primary 
types of contractors. Fiscal intermediaries (FIs) process claims filed 
under Part A of the Medicare program by institutions, such as hospitals 
and skilled nursing facilities. Carriers process claims under Part B of 
the program filed by other health care providers such as physicians and 
medical equipment suppliers. In addition to these two types, Durable 
Medical Equipment Regional Carriers (DMERCs) pay suppliers of durable 
medical equipment, prosthetics, and orthotics; and, Regional Home 
Health Intermediaries (RHHIs) process home health claims.
    Contractor tasks for the Medicare program fall into 5 functional 
areas: 1) claims processing, 2) payment safeguards, 3) fiscal 
responsibility, 4) beneficiary services, and 5) administrative 
activities. Claims processing involves receiving claims, promptly 
paying those that are appropriate, taking necessary action to identify 
inappropriate or potentially fraudulent claims and either withholding 
payment or recovering overpayments. Payment safeguard activities 
require additional actions to further safeguard the integrity of the 
Medicare program and protect against fraudulent and abusive billing. 
Safeguard activities include medical review to determine the medical 
necessity of procedures and services, Medicare Secondary Payer (MSP) 
review 1, audits, and investigations by fraud units. Fiscal 
responsibilities by the contractors include all actions to ensure a 
full and accurate reporting of Medicare accounts receivable and 
financial reconciliations.
---------------------------------------------------------------------------
    \1\ Medicare Secondary Payer activities identify other sources of 
payment, such as employer-sponsored insurance or other third-party 
payer that may cover health claims for Medicare beneficiaries. These 
payers are primary and Medicare is secondary with respect to 
responsibility for paying a claim.
---------------------------------------------------------------------------
    In 1996, the Health Insurance Portability and Accountability Act 
(HIPAA) enacted the Medicare Integrity Program, which provided CMS with 
new authorities to contract with entities beyond, but also including, 
current carriers and fiscal intermediaries to perform specific payment 
safeguard functions. Such contractors can take on some, all, or any 
subset of the work associated with current contractor payment safeguard 
functions including medical and utilization review, cost report audits 
and provider education.
    Unfortunately, we have identified numerous problems in contractor 
operations over the last few years. I will highlight some of these 
problems for you now.
                           integrity problems
    Perhaps the most troubling of all the problems that the Office of 
the Inspector General (OIG) has observed has involved lapses in 
contractors' own integrity--misusing government funds and actively 
trying to conceal their actions, or altering documents and falsifying 
statements that specific work was performed. In some cases, contractors 
prepared bogus documents to falsely demonstrate superior performance 
for which Medicare rewarded them with bonuses and additional contracts. 
In other examples, contractors adjusted their claims processing so that 
system edits designed to prevent inappropriate payments were turned 
off, resulting in misspent Medicare Trust Fund dollars.
    Since 1993, a number of criminal and civil actions have been taken 
against carriers and intermediaries in connection with their 
performance under CMS contracts, and we have entered into civil 
settlements with 14 Medicare contractors with total settlements 
exceeding $350 million. OIG has imposed 8 corporate integrity 
agreements in connection with these settlements. Corporate integrity 
agreements are mandatory compliance and reporting requirements agreed 
to by the contractor to avoid exclusion or debarment. In addition, two 
contractors have entered into guilty pleas to the charge of obstruction 
of a federal audit.
    The following examples illustrate the egregiousness of the problems 
which can occur and the consequent exposure to financial losses. 
Unfortunately, they are not isolated cases. At any given time, several 
contractors may be under investigation by our office. Presently, we 
have 24 former or current contractors actively under investigation.
Health Care Service Corporation
    In July of 1998, Health Care Service Corporation, the Medicare 
carrier for Illinois and Michigan, agreed to pay $140 million to 
resolve its civil liability under the Civil False Claims Act and the 
Civil Monetary Penalties Law. On an annual basis, CMS evaluates the 
performance of its carriers, relying, in large part, on information, 
data and certifications provided by the carriers. Carriers that 
demonstrate poor performance on these annual reviews are subject to 
contract termination or other adverse action by CMS. Between 1985 and 
1997, Health Care Service Corporation altered documents and manipulated 
data in order to improve its score on these annual reviews. During our 
investigation, we found the following problems: improper processing of 
Medicare Secondary Payer claims, bypassing the system generated audits 
and edits during the processing of Part B claims, and improper deletion 
of claims from the system.
    In addition to the civil settlement, the corporation pleaded guilty 
to obstructing a federal audit, conspiracy to obstruct a federal audit 
and six counts of making false statements to CMS. Health Care Service 
Corporation paid a $4 million criminal fine in connection with these 
charges. Two of the corporation's managers pleaded guilty and five 
others were indicted on various criminal charges related to this 
scheme. CMS terminated the Medicare contracts with Health Care Service 
Corporation as of September 30, 1998. This case resulted in the largest 
civil fraud settlement against a Medicare contractor to date.
XACT Medicare Services of Pennsylvania
    In August of 1998, a Medicare carrier located in Pennsylvania 
agreed to pay $38.5 million to resolve its liability for misconduct in 
its performance as a carrier. A joint investigation by the OIG and 
other Federal agencies found that during the years 1988 through 1996, 
the carrier engaged in the following misconduct: failing to properly 
process or take appropriate action to recover improper payments related 
to Medicare secondary payer claims; obstructing the carrier performance 
evaluation program by rigging samples for CMS audits; failing to 
recover overpayments; failing to monitor End Stage Renal Disease 
laboratory claims; and overriding payment safeguards to by-pass 
electronic audits or edits when processing Part B claims. As part of 
the settlement, the carrier agreed to enter into an extensive corporate 
integrity program to ensure proper training for its employees and 
external reviews of its performance under its contract with Medicare.
Blue Cross/Blue Shield of Michigan
    On January 10, 1995, Blue Cross/Blue Shield of Michigan, a Medicare 
carrier, agreed to pay $27.6 million to settle a qui tam suit under the 
False Claims Act initiated by a former employee. At the time that the 
suit was filed, in June 1993, Blue Cross/Blue Shield of Michigan was 
also the fiscal intermediary for the Medicare Part A program in 
Michigan and was the carrier for the Medicare Part B program. As of 
September 30, 1994, CMS terminated both contracts and Blue Cross/Blue 
Shield of Michigan no longer serves as intermediary or carrier. As the 
intermediary, Blue Cross/Blue Shield of Michigan was responsible for 
auditing participating hospitals' cost reports to ensure accuracy. An 
Office of Inspector General (OIG) investigation showed that they 
performed inadequate, cursory audits in which they disregarded 
significant overpayments. They later gave CMS fraudulent work papers in 
an attempt to show that complete and accurate audits were performed. 
The precise amount of loss to the Government could not be determined 
because it would have required auditing more than 200 hospitals. As 
part of the settlement, the Blue Cross/Blue Shield of Michigan agreed 
to repay the entire amount CMS had paid to perform audits over a 4 year 
time period, approximately $13 million.
    Blue Cross/Blue Shield of Michigan also agreed to pay an additional 
$24 million to settle charges of violating Medicare secondary payer 
laws. Under these laws, private insurers are required to act as the 
primary benefits payer under certain circumstances when an individual 
has medical insurance under both Medicare and an employer health plan. 
An OIG audit determined that in its capacity as the Medicare contractor 
in Michigan, Blue Cross/Blue Shield of Michigan paid thousands of dual 
coverage claims from Medicare trust funds rather than from its own 
funds in cases where there was overlapping coverage.
Anthem Blue Cross and Blue Shield of Connecticut
    In December of 1999, Anthem Blue Cross and Blue Shield of 
Connecticut (Anthem), Connecticut's former Medicare fiscal 
intermediary, agreed to pay the Government $74.3 million to resolve 
allegations of wrongdoing by its predecessor corporation. The company 
allegedly falsified hospital cost reports to meet Government 
performance standards as a Medicare fiscal intermediary. The company's 
misconduct led several Connecticut hospitals to improperly receive 
Medicare overpayments and enabled the company to obtain a better 
performance evaluation from CMS than it would have otherwise received. 
This settlement represents the largest civil settlement in a health 
care fraud case in the State and the second largest Medicare contractor 
settlement nationwide. As part of the settlement, the company, which is 
no longer an intermediary, agreed to the imposition of a corporate 
integrity agreement for 5 years for its Medicare+Choice health 
maintenance organization contract, which it still operates.
                         fraud unit performance
    As part of their payment safeguard activities, Medicare contractors 
are required to have Fraud Units which are designed to detect and deal 
with problems of fraud and abuse within the provider community. The 
types of problems detected range from individual cases of suspected 
fraud, to patterns of fraud or questionable activity which may 
represent a broader program vulnerability.
    As we work closely with these units, we in the OIG are keenly 
interested in their operations and effectiveness. In 1996, we reviewed 
the functions of the carrier fraud units, and in 1998 we reviewed the 
fiscal intermediary fraud units. Overall, we found that their 
effectiveness varies considerably and often their performance is not 
directly related to the size of the unit or the total number of 
resources allocated. Total case loads among the Fraud Units varied 
considerably, from zero to over 600 for the intermediaries. In 
reviewing carrier case files, we also found that some allegations of 
fraud were being lost during the overpayment adjustment process and 
were not properly developed as potential fraud cases. In addition to 
complaints received, Fraud Units are encouraged to proactively develop 
their own cases for potential referral to our office. Unfortunately, we 
found that less than one-half were actively engaged in developing their 
own cases. Similarly, less than one-half of the fraud units were active 
in identifying program vulnerabilities.
    A key factor is a contractor management's commitment and attention 
to fraud matters overall. The most successful Fraud Units are those 
given significant prominence in the contractor's organizational 
structure, reporting to the highest levels of corporate management. 
Overall, however, effectiveness of the Fraud Units has been hampered by 
staff turnover, lack of proper background and training, and an overall 
lack of uniformity and understanding of key fraud terms and 
definitions.
    As mentioned earlier, HIPPA provided CMS with new authorities to 
contract with entities separate from current carriers and fiscal 
intermediaries to perform specific program integrity functions. These 
new Program Safeguard Contractors will supplement, and in some cases 
replace, the work of fiscal intermediary and carrier fraud units. It is 
too early to evaluate the performance of these safeguard contractors; 
however, as I will discuss in more detail later, their structure 
provides a model on which to base broader contractor reforms.
                     financial management problems
    We have also encountered problems associated with financial 
management and accounting procedures and longstanding weaknesses in 
internal controls, including deficiencies related to the receivable 
amounts reported in CMS' financial statements and electronic data 
processing.
Financial Systems and Processes
    Along with its Medicare contractors, CMS is responsible for 
managing and collecting many billions of accounts receivable each year. 
Medicare accounts receivable are primarily overpayments made to health 
care providers by contractors that must be repaid to Medicare, and 
funds due from other entities when Medicare is the secondary payer. For 
FY 2000, the contractors reported about $30 billion in accounts 
receivable activity which resulted in an ending gross balance of 
approximately $7.1 billion--over 87 percent of CMS' total receivable 
balance.
    For several years, we have reported serious errors in contractor 
reporting of accounts receivable that resulted from weak financial 
controls. Control weaknesses were noted again in our FY 2000 audit. 
Because the claim processing systems used by the contractors lacked 
general ledger capabilities, obtaining and analyzing financial data was 
a labor-intensive exercise requiring significant manual input and 
reconciliations between various systems and ad hoc spreadsheet 
applications. This situation increases the risk that contractors could 
report inconsistent, incomplete, or erroneous information.
    To address previously identified problems in documenting and 
reporting accounts receivable and to accurately determine receivable 
balances, CMS began contracting with independent public accountants in 
FY 1999. This year, the accountants noted significant improvement in 
the CMS central office's analysis of information included in its 
financial statements, along with the improvement in contractors' 
processing and reporting of receivables. Over the 2-year period, 
however, the independent public accountants identified about $590 
million in non-Medicare Secondary Payer recorded debt that the Medicare 
contractors could not document. While all of these receivables were 
written off because of the lack of documentation, some may have 
represented actually debt due to Medicare that should have been 
collected.
    Although it is quite clear that the root cause of the accounts 
receivable problem is the lack of an integrated, dual-entry accounting 
system, better oversight or implementation of compensating internal 
controls could ensure that the receivables will be properly accounted 
for and reflected in their future financial reports. For instance, had 
CMS regional offices been required to conduct reviews similar to those 
conducted by the independent public accountants, many problems could 
have been detected earlier or prevented and the need to hire outside 
accountants would have been obviated. Similarly, stronger regional 
office oversight of the contractors would have helped to ensure that 
essential controls, such as reconciliations, were in place to prepare 
accurate and complete financial reports. Of the 10 contractors in our 
sample, 9 did not reconcile the monthly expenditures reported to CMS to 
the actual paid claims tape as CMS requires. Failing to conduct this 
reconciliation increases the risk of material misstatements in the 
financial statements.
    To address its systems problem, CMS plans to develop a state-of-
the-art Integrated General Ledger Accounting System. However, the 
system will not be fully operational until 2007. Until then, stronger 
internal controls and oversight of the Medicare contractors are 
critically needed.
Electronic Data Processing
    The CMS relies on extensive electronic data processing (EDP) 
operations at both its central office and Medicare contractors to 
administer the Medicare program and to process and account for Medicare 
expenditures. Internal controls over these operations are essential to 
ensure the integrity, confidentiality, and reliability of critical data 
and sensitive information while reducing the risk of improper Medicare 
payments disruption of critical operations, and malicious changes that 
could interrupt data processing or destroy data files.
    However, we again found numerous EDP general control weaknesses, 
primarily at the Medicare contractors. About 80 percent of the 124 
weaknesses that we noted involved three types of controls:

 Access controls ensure that critical systems assets are 
        physically safeguarded, that logical (e.g. electronic) access 
        to sensitive computer programs and data is granted only when 
        authorized and appropriate, and that only authorized staff and 
        computer processes access sensitive data in an appropriate 
        manner. Weaknesses in these controls represented the largest 
        problem area. At several contractors, for example, programmers 
        had inappropriate access to beneficiary history files, and 
        passwords were not properly administered.
 Entry-wide security programs ensure that security threats are 
        identified, risks are assessed, control techniques are 
        developed, and management oversight is applied to ensure the 
        overall effectiveness of security measures. At several sites, 
        we found that contractors lacked fully documented, 
        comprehensive entity-wide security plans.
 Systems software controls help to prevent unauthorized 
        individuals from using software to read, modify, or delete 
        critical information and programs. We noted problems in 
        managing routine changes to systems software to ensure their 
        appropriate implementation and in configuring operating system 
        controls to ensure their effectiveness.
    In addition, the prior control weaknesses concerning the Medicare 
data centers' access to the software program coding of the ``shared'' 
system used by certain Medicare contractors remains unresolved. This 
weakness has been expanded to include the Common Working File system, 
which all shared systems use to obtain authorization to pay claims and 
to coordinate Medicare Parts A and B. Access to source code renders the 
Medicare claim processing system vulnerable to abuse, such as the 
implementation of unauthorized programs.
           current structural basis for medicare contracting
    The ability to prevent or correct the problems just described stem 
in part from the way CMS is required to contract with its claims 
administrators. The Medicare statute places substantial limits on how 
CMS may obtain contractor assistance to administer the Medicare 
program, including limiting CMS to choosing only certain types of 
companies to process claims and restricting them to a cost-based 
reimbursement method.
    I will describe how Medicare currently contracts with its carriers 
and fiscal intermediaries and contrast that with the flexibility in 
contracting authority already available to most other government 
agencies.
Medicare Contracting Entities
    Carrier, Fiscal Intermediary, DMERC and RHHI Contracts. The 
legislative authorities under which CMS contracts with carriers and 
fiscal intermediaries are found in Title 42 of the United States Code 
(U.S.C.).2 Currently, these contracts are governed by laws 
that are more restrictive than general federal contract laws. These 
contracts are not subject to the general government contracting 
authorities which are found in Title 41 of the United States Code, nor 
are they subject to the Federal Acquisition Regulation (FAR).
---------------------------------------------------------------------------
    \2\ Social Security Act, Sections 1842 (42 U.S.C. 1395u) and 1816 
(42 U.S.C. 1395h).
---------------------------------------------------------------------------
    Program Safeguard Contracts. Contracts with program safeguard 
contractors are subject to FAR and Title 41 of the U.S.C. 3 
The contracts must be awarded using full and open competition with few 
prohibitions on who can hold these contracts. These contracts can be 
entered into for up to 5 years and can be reimbursed using either fixed 
price or cost-reimbursement methodologies. In addition, the program 
safeguard contracts can be terminated at the Government's 
``convenience.''
---------------------------------------------------------------------------
    \3\ Social Security Act, Section 1893, 42 U.S.C.1395ddd.
---------------------------------------------------------------------------
Awarding the Contract
    Although most government contracts require competitive bidding 
using full and open competition with very few prohibitions on who can 
be awarded a government contract, CMS is limited as to which entities 
it may contract with. Under Part A, the statute allows for a process 
under which hospitals and certain other institutional providers 
nominate an organization to serve as a representative for its members. 
Currently, the National Blue Cross/Blue Shield Association, designated 
by the providers, serves as the prime contractor with CMS. As such, it 
subcontracts with its local member plans to perform as fiscal 
intermediaries. Presently, all fiscal intermediaries are insurance 
companies. For home health and hospice providers, CMS has designated a 
small number of FIs to serve as Regional Home Health Intermediaries 
(RHHIs), based on its current authority to designate an intermediary to 
serve a class of providers.
    Carriers are defined by statute to be non-governmental 
organizations engaged in ``providing, paying for, or reimbursing the 
cost of health services under group insurance policies or contracts,'' 
or other such group arrangements. This requirement has effectively 
limited such contracts to insurance companies. By statute, carrier 
contracts may be entered into without competition. CMS contracts with 
DMERCs under a separate authority and uses a competitive bidding 
process to award these contracts. (See Table 1 for a comparison of how 
and to whom contracts are normally awarded.)

                         Table 1--Contract Award
------------------------------------------------------------------------


------------------------------------------------------------------------
General Government Contracts....  Competitive.......  Any organization
Program Safeguard Contractors...  Competitive.......  Any organization
Fiscal Intermediaries...........  Non-competitive...  Insurance co.
                                                       nominated by a
                                                       provider group
RHHI............................  Non-competitive...  Fiscal
                                                       intermediary
                                                       designated by CMS
Carriers........................  Non-competitive...  Company with
                                                       health insurance
                                                       experience
DMERC...........................  Competitive.......  Company with
                                                       health insurance
                                                       experience
------------------------------------------------------------------------

Contract Type
    Generally, government contracts can be either fixed-price contracts 
or cost-reimbursement contracts. In a fixed-price contract, the 
contractor has the full responsibility for the performance costs and 
resulting profit or loss. Fixed-price contracts are preferred since the 
contractor guarantees performance of the work as a condition of getting 
paid. In a cost-based contract, the government assumes the risk for all 
allowable costs. The contractor is liable for delivering only its best 
effort, not successful performance. General government contracts can be 
up to 5 years.
    On the other hand, Medicare's fiscal intermediary, carrier, RHHI 
and DMERC contracts are generally limited to cost-reimbursement 
contracts. For these contracts, CMS and the contractor negotiate an 
overall amount for the contract based on standards established by CMS. 
These contracts are only made for a year.

                         Table 2--Contract Types
------------------------------------------------------------------------


------------------------------------------------------------------------
General Government Contract.....  Fixed-price or      Up to 5 years
                                   cost-
                                   reimbursement.
Program Safeguard Contractors...  Fixed-price or      Up to 5 years
                                   cost-
                                   reimbursement.
Fiscal Intermediaries...........  Cost-reimbursement  1 year
RHHI............................  Cost-reimbursement  1 year
Carriers........................  Cost-reimbursement  1 year
DMERC...........................  Cost-reimbursement  1 year
------------------------------------------------------------------------

Contract Renewal and Termination
    In general, government contracts can be renewed as long as the 
contractor meets or exceeds the performance requirements established in 
the current contract. Most contracts may be terminated by the 
government at any time for default of the contract or for the 
convenience of the government. If the government terminates the 
contract for its convenience, then the government must compensate the 
contractor for any preparations and for any completed and accepted 
work.
    The CMS contracts with carriers and fiscal intermediaries, 
including RHHI and DMERC contracts, have automatic renewal clauses. As 
long as the contractors meet or exceed the standards that CMS publishes 
annually, the contracts are renewed. If CMS terminates the contract 
upon a determination that the contractor has failed to properly carry 
out its contracted duties or is not operating in an efficient and 
effective manner, the contractor has a right to a hearing. Because 
contracts with fiscal intermediaries and carriers are generally only 
one year in duration, these contracts are rarely terminated. Instead, 
CMS simply does not renew the contract at the end of the one year 
period. The contractor, on the other hand, can terminate at any time 
upon written notice to the government. Under CMS' prime contract with 
the National Blue Cross Association, when one of the local Blue plans 
does not renew its contract, the Association may choose the replacement 
contractor, thus further limiting CMS' choice of future contractors.

                Table 3--Contract Renewal and Termination
------------------------------------------------------------------------

------------------------------------------------------------------------
General Government Contract.....  May renew.........  No hearing
Program Safeguard Contractors...  May renew.........  No hearing
Fiscal Intermediaries...........  Automatic renewal.  Hearing
RHHI............................  Automatic renewal.  Hearing
Carriers........................  Automatic renewal.  Hearing
DMERC...........................  Automatic renewal.  Hearing
------------------------------------------------------------------------

                      models for contractor reform
    As noted earlier, under the Health Insurance Portability and 
Accountability Act of 1996, CMS was granted new authority and 
flexibility in contracting separately for program integrity functions. 
It may enter into contracts or work orders for specific program 
safeguard functions, such as medical review, fraud detection, cost 
report audits, and reviews to identify primary payers to whom Medicare 
is the secondary payer.
    To date, CMS has awarded 19 contracts to Program Safeguard 
Contractors (PSCs) to carry out a wide range of activities. These tasks 
include supplemental activities, such as an analysis of Y2K issues, 
which have not replaced regular contractor functions. Other tasks in 
part or in whole replace safeguard functions currently being done by 
contractors. For example one PSC is performing program integrity 
activities to target vulnerabilities in therapy services. Another PSC 
is tasked with conducting postpayment medical review fraud detection 
and data analysis for 12 Western states.
    It is too soon to fully evaluate the success of this model; 
however, preliminary results are encouraging. We support this new 
authority and look forward to continued improvements in program 
operation and oversight that are taking place under the Medicare 
Integrity Program.
    Another promising development is the designation of specialty 
contractors such as the Durable Medical Equipment Regional Carriers. 
They review and pay all claims for medical equipment and supplies. 
There are only four of them, which appropriately concentrates their 
expertise in this complex area. They are bolstered by a data analysis 
unit, staffed by one of these carriers but supporting all four. This 
enables them to analyze payment and usage patterns which may suggest 
possible improper or questionable conduct. They are also able to 
effectively collaborate on the formulation of national coverage 
policies and payment control systems.
    A recent OIG evaluation found that these entities are effective. We 
believe that specialty contractors, with a supporting analytic unit, 
would make sense for problematic areas and recommend that they be more 
widely used.
                          proposed legislation
    To promote innovations and efficiencies from the private sector, 
legislation is currently being developed that would increase CMS' 
flexibility in how it contracts with Medicare fiscal intermediaries and 
carriers by allowing it to award work competitively and use performance 
based contracts. Through this legislation, CMS hopes to accomplish the 
following:

 Provide flexibility to CMS and its contractors to better adapt 
        to changes in the Medicare program.
 Promote competition, leading to more flexible efficiency and 
        accountability.
 Establish better coordination and communication between CMS, 
        its contractors and health care providers.
 Promote CMS' ability to negotiate incentives for Medicare 
        contractors to perform well.
 Improve CMS' contractor performance evaluation processes, 
        while maximizing objectivity in contractor evaluation.
 Stabilize and guide CMS' business relationship with its 
        contractors.
    CMS has proposed such broad and more flexible contracting authority 
in the past, and we have consistently testified in support. For 
instance, we have supported past proposals to allow CMS to enter into 
contracts with one entity to perform both carrier and intermediary 
functions, allow the Secretary to follow Federal Acquisition 
Regulations, and to reimburse contractors on a fixed price basis when 
needed. We believe such common sense approaches are long overdue. In 
fact, in recent work we found that Medicare's claims processing system 
did not prevent duplicate payments by multiple carriers for any of the 
242 services in our audit sample. An ability to consolidate the number 
of contractors would help to prevent such types of duplicate payments 
from occurring.
    More flexibility and specialization will, we believe, bring greater 
expertise and efficiency to contractor operations. This will, in turn, 
improve their relations with providers and facilitate provider 
education and understanding of Medicare rules and regulations. Further, 
the ability to pay contractors on a fixed-cost basis would offer the 
flexibility to award contracts for the best possible value.
                               conclusion
    Through our investigations, financial audits, and evaluations of 
management practices, we continue to identify problems at the Medicare 
contractors which run the gamut from operational inefficiencies to 
deliberate defrauding of the Medicare program. Taken as a whole, these 
problems underscore the critical need for immediate contracting 
reforms.
    CMS needs to have sufficient flexibility in its authorities to 
contract with the companies best able to carry out the needed 
functions, to hold these companies accountable when they fall short, 
and to reward them when they perform well. Beneficiaries and providers 
will be better served, and CMS will get better value for its 
contracting dollars.
    We fully support the need for Medicare contracting reform 
legislation. We also support a reduction in the number of private 
health insurance companies that process claims to a more manageable 
number. We look forward to the changes in Medicare contracting that are 
already taking place under the new Medicare Integrity Program and look 
forward to changes brought about by more global contracting reforms as 
well.

    Mr. Greenwood. Thank you for your testimony.
    Ms. Aronovitz, you are recognized for 5 minutes.

                TESTIMONY OF LESLIE G. ARONOVITZ

    Ms. Aronovitz. Thank you, Chairman Bilirakis, Chairman 
Greenwood, and members of the subcommittees. I am pleased to be 
here today as you consider how Medicare might be improved 
through contracting reform. What you will hear from us is a lot 
of agreement about the need for new contract authorities. How 
CMS ultimately plans and implements their use will be key. That 
is what we really want to talk about.
    The original Medicare statute, along with subsequent 
regulations and practices, limits how the program contracts for 
claims administration services. As Mr. Scully and Mr. Mangano 
have already indicated, there is no full and open competition 
for these contracts. The agency is limited to choosing from a 
small pool of health insurers. Contracts generally cover all 
claims-related activities. Contractors are paid for costs, but 
do not earn profits. The agency is limited in its ability to 
terminate contracts. Most Federal programs do not face these 
restrictions. There has been concern that these policies may 
impede effective program management.
    Today, I am focusing on how contracting reform might help 
to address these concerns, but especially on the challenges CMS 
faces in implementing contractor reform. First, Medicare could 
benefit from contracting reform legislation that authorized 
full and open competition for claims administration contracts, 
and provided greater flexibility in how contracts are 
structured. Full and open competition would allow CMS to select 
contractors on a competitive basis, which could help promote 
better performance and greater accountability, as you have 
heard from the other witnesses.
    We also agree that it would allow CMS to select from a 
broader array of entities, capable of performing needed tasks 
and not just from among the dwindling number of health insurers 
interested in obtaining these contracts. Providing greater 
flexibility in how contracts are structured could also have 
benefits. It would allow CMS to issue contracts for discrete 
program functions, and that could improve performance through 
specialization. Although CMS has not stated what functions it 
might separately contract for, we know that there is wide 
variation in how different contractors inform providers about 
program policy changes and respond to provider concerns. So, 
for example, having special contractors handle those 
responsibilities could lead to more consistency and better 
relations between the program and providers.
    Allowing contractors to earn a profit would let CMS craft 
incentives to reward contractors for high quality performance. 
Bringing contractor termination procedures into line with those 
of other Federal programs could make it easier for CMS to 
terminate poor performers.
    While Medicare could benefit from contracting reforms, 
freeing the program from current contracting restrictions would 
only be a first step in realizing the potential benefits. For 
example, CMS would need to carefully define the scope of work 
in any new contract--that is not an easy thing to do--and 
develop sound contractor selection criteria. Transition to full 
and open competition for all contractors would need to be 
phased in to ensure effective coordination among all 
contractors, and avoid disruption in service to beneficiaries 
and providers, especially in the claims processing stream.
    Adequate performance goals and measures would need to be 
developed to evaluate how well contract specifications were 
met, and whether any financial incentives had been earned. The 
recent experience in hiring special contractors for program 
safeguard activities provides useful lessons about the 
challenges that would need to be addressed. It took CMS 
officials about 3 years to determine how best to implement the 
authority to hire program safeguard contractors, develop the 
contract specifications, issue proposed regulations governing 
those contractors, develop selection criteria, review 
proposals, and select contractors. It then took additional time 
for these contractors to hire staff, develop systems, and to 
begin performing their duties.
    We expect it will also take time to fully utilize these new 
authorities. We think it would be prudent for CMS to take an 
incremental approach as it proceeds.
    Accordingly, removing Medicare's contracting limitations to 
promote full and open competition and increase flexibility, 
could lead to more efficient and effective management. However, 
reform will not yield immediate results. We believe that there 
is a need for careful and deliberate implementation of any 
reforms that may be enacted.
    This concludes my oral comments. I would be happy to answer 
any questions you may have.
    [The prepared statement of Leslie G. Aronovitz follows:]
   Prepared Statement of Leslie G. Aronovitz, Director, Health Care--
           Program, Administration and Integrity Issues, GAO
    Messrs. Chairmen and Members of the Subcommittees: I am pleased to 
be here today as you continue to consider how the Medicare program 
might be modified. Discussions about how to reform and modernize 
Medicare have, in part, focused on whether the structure that was 
adopted in 1965 is optimal today. In that context, questions have been 
raised about whether the program could benefit from changes to the way 
Medicare's claims processing contractors are selected and the functions 
they perform.
    The original Medicare statute, along with subsequent regulations 
and practices, limits how the program may contract for these services 
in ways that differ from most federal contracts. There is no full and 
open competition for the contracts; the agency is limited to choosing 
among health insurers; contracts generally must cover the full range of 
claims processing and related activities; and the agency is limited in 
its ability to terminate contracts. The Health Care Financing 
Administration (HCFA), recently renamed the Centers for Medicare and 
Medicaid Services (CMS), has, since 1993, repeatedly proposed 
legislation to lift current contracting restrictions in order to 
increase competition for these contracts and provide more flexibility 
in how they are structured.1 This year, the agency again 
plans to seek such changes in order to improve program management.
---------------------------------------------------------------------------
    \1\ Our statement will continue to refer to HCFA where our findings 
apply to the organizational structure and operations associated with 
that name.
---------------------------------------------------------------------------
    To assist the Subcommittees as they consider ways to strengthen 
Medicare's program administration, my remarks today focus on our 
analysis of contracting reform issues. Specifically, I will discuss (1) 
how reform might help to address concerns that current contracting 
policy may impede effective program management, and (2) challenges in 
implementing reform. My comments are based on our prior and ongoing 
work related to strengthening Medicare operations.
    In summary, Medicare could benefit from full and open competition 
and its relative flexibility to promote better performance and 
accountability. If legislation removes the current limits on Medicare 
contracting authority, CMS could (1) select contractors on a 
competitive basis from a broader array of entities capable of 
performing needed program activities; (2) issue contracts for discrete 
program functions to improve contractor performance through 
specialization; (3) pay contractors based on how well they perform 
rather than simply reimbursing them for their costs; and (4) terminate 
poor performers more efficiently.
    Freeing Medicare from current contracting limitations is only the 
first step in realizing potential benefits. Recent experiences with 
special contractors for Medicare program safeguard activities provide 
useful lessons that the agency could draw upon if it were free to use 
full and open competition. These experiences also presage the 
challenges in achieving the potential benefits of more flexible 
contracting authority. For example, CMS would need to marshal its 
expertise to effectively use competitive bidding authority and 
increased flexibility. It would need to carefully define the scope of 
work in any new contracts and develop sound contractor selection 
criteria. Transition to full and open competition for all contractors 
would need to be phased in to ensure effective coordination of 
functions among all contractors and to avoid disruption in service to 
beneficiaries and providers. And, if contracts with financial 
incentives for high-quality performance were used, CMS would need to 
develop adequate performance goals and reliable measures to monitor and 
evaluate the extent to which contract specifications were being met and 
awards earned.
                               background
    Medicare is a federal health insurance program designed to assist 
elderly and disabled beneficiaries. Hospital insurance, or part A, 
covers inpatient hospital, skilled nursing facility, hospice care, and 
certain home health services. Supplemental medical insurance, or part 
B, covers physician and outpatient hospital services, laboratory and 
other services. Claims are paid by a network of 49 claims 
administration contractors called intermediaries and carriers. 
Intermediaries process claims from hospitals and other institutional 
providers under part A while carriers process part B claims. The 
intermediaries' and carriers' responsibilities include: reviewing and 
paying claims; maintaining program safeguards to prevent inappropriate 
payment; and educating and responding to provider and beneficiary 
concerns.
    Medicare contracting for intermediaries and carriers differs from 
that of most federal programs. Most federal agencies, under the 
Competition in Contracting Act and its implementing regulations known 
as the Federal Acquisition Regulation (FAR), 2 generally may 
contract with any qualified entity for any authorized purpose so long 
as that entity is not debarred from government contracting and the 
contract is not for what is essentially a government function. Agencies 
are to use contractors that have a track record of successful past 
performance or that demonstrate a current superior ability to perform. 
The FAR generally requires agencies to conduct full and open 
competition for contracts and allows contractors to earn profits.
---------------------------------------------------------------------------
    \2\ 48 CFR, Chapter 1.
---------------------------------------------------------------------------
    Medicare, however, is authorized to deviate from the FAR under 
provisions of the Social Security Act enacted in 1965.3 For 
example, there is no full and open competition for intermediary or 
carrier contracts. Rather, intermediaries are selected in a process 
called nomination by provider associations, such as the American 
Hospital Association. This provision was intended at the time of 
Medicare's creation to encourage hospitals to participate by giving 
them some choice in their claims processor. Currently, there are three 
intermediary contracts, including the national Blue Cross Blue Shield 
Association, which serves as the prime contractor for 26 local member 
plan subcontractors. When one of the local Blue plans declines to renew 
its subcontract, the Association nominates the replacement contractor. 
Carriers are chosen by the Secretary of Health and Human Services from 
a small pool of health insurers, and the number of such companies 
seeking Medicare claims-processing work has been dwindling in recent 
years.
---------------------------------------------------------------------------
    \3\ Section 1816 addresses fiscal intermediaries and section 1842 
addresses carriers.
---------------------------------------------------------------------------
    The Social Security Act also generally calls for the use of cost-
based reimbursement contracts under which contractors are reimbursed 
for necessary and proper costs of carrying out Medicare activities but 
does not expressly provide for profit.4 Further, Medicare 
contractors cannot be terminated from the program unless they are first 
provided with an opportunity for a public hearing--a process not 
afforded under the FAR.
---------------------------------------------------------------------------
    \4\ CMS has some limited authority to build financial incentives 
into intermediary and carrier contracts. This authority was granted 
under section 2326(a) of the Deficit Reduction Act of 1984 and made 
permanent by section 159 of the Social Security Act Amendments of 1994.
---------------------------------------------------------------------------
 medicare could benefit from open competition and increased flexibility
    Medicare could benefit from various contracting reforms. Freeing 
the program to directly choose contractors on a competitive basis from 
a broader array of entities able to perform needed tasks would enable 
Medicare to benefit from efficiency and performance improvements 
related to competition. It also could address concerns about the 
dwindling number of insurers with which the program now contracts. 
Allowing Medicare to have contractors specialize in specific functions 
rather than assume virtually all claims-related activities, as is the 
case now, also could lead to greater efficiency and better performance. 
Authorizing Medicare to pay contractors based on how well they perform 
rather than simply reimbursing them for their costs, as well as 
allowing the program to terminate contracts more efficiently when 
program needs change or performance is inadequate, could also result in 
better program management.
Ability to Contract With a Broader Array of Entities Would Expand CMS 
        Options
    Since Medicare was implemented in 1966, the program has used health 
insurers to process and pay claims. Before Medicare's enactment, 
providers feared that the program would give the government too much 
control over health care. To win acceptance, the program was designed 
to be administered by health insurers like Blue Cross and Blue Shield. 
Subsequent regulations and decades of the agency's own practices have 
further limited how the program contracts for claims administration 
services. The result is that agency officials believe they must 
contract with health insurers to handle all aspects of administering 
Medicare claims, even though the number of such companies willing to 
serve as Medicare contractors has declined and the number of other 
entities capable of doing the work has increased.
    While using only health insurers for claims administration may have 
made sense when Medicare was created, that may be much less so today. 
The explosion in information technology has increased the potential for 
Medicare to use new types of business entities to administer its claims 
processing and related functions. Additionally, the need to broaden the 
pool of entities allowed to be contractors also has increased in light 
of contractor attrition. Since 1980, the number of contractors has 
dropped by more than half, as many have decided to concentrate on other 
lines of business. This has left the program with fewer choices when 
one contractor withdraws, or is terminated, and another must be chosen 
to replace it.
    Since 1993, the agency has repeatedly submitted legislative 
proposals to repeal the provider nomination authority and make explicit 
its authority to contract for claims administration with entities other 
than health insurers. Just this month, the Secretary of Health and 
Human Services told the Senate Finance Committee that CMS should be 
able to competitively award contracts to the entities best qualified to 
perform these functions and stated that such changes would require 
legislative action. With such changes, when a contractor leaves the 
program, CMS could award its workload on a competitive basis to any 
qualified company or combination of companies--including those outside 
the existing contractor pool, such as data processing firms.
Contracting for Specific Functions Could Strengthen Service to 
        Beneficiaries and Providers
    Allowing Medicare to have separate contractors for specific claims 
administration activities--also called functional contracting--could 
further improve program management. Functional contracting would enable 
CMS to select contractors that are more skilled at certain tasks and 
allow these contractors to concentrate on those tasks, potentially 
resulting in better program service. For example, the agency could 
establish specific contractors to improve and bring uniformity to 
efforts to educate and respond to providers and beneficiaries, efforts 
that now vary widely among existing contractors.
    Currently, CMS interprets the Social Security Act and the 
regulations implementing it as constraining the agency from awarding 
separate contracts for individual claims administration activities, 
such as handling beneficiary inquiries or educating providers about 
program policies. Current regulations stipulate that, to qualify as an 
intermediary or carrier, the contracting organization must perform all 
of the Medicare claims administration functions. Thus, agency officials 
feel precluded from consolidating one or more functions into a single 
contract or a few regional contracts to achieve economies of scale and 
allow specialization to enhance performance.
    CMS has had some experience with functional contracting under 
authority granted in 1996 to hire entities other than health insurers 
to focus on program safeguards.5 CMS has contracted with 12 
program safeguard contractors (PSC) who compete among themselves to 
perform task-specific contracts called task orders. These entities 
represent a mix of health insurers, including some with prior 
experience as Medicare contractors, along with consulting 
organizations, and other types of firms. The experience with PSCs, 
however, makes clear that functional contracting has challenges of its 
own, which are discussed later in this testimony.
---------------------------------------------------------------------------
    \5\ This authority was granted under section 1893 of the Social 
Security Act as amended. Program safeguard activities are intended to 
prevent and detect fraudulent and abusive activities of providers and 
beneficiaries. These activities include (1) medical review of claims to 
determine if they are for covered, medically necessary and reasonable 
services, (2) reviews to identify other primary sources of payment, (3) 
audits of cost reports submitted by institutional providers to 
determine if costs are allowable and reasonable, (4) identification and 
investigation of possible fraud cases, and (5) provider education and 
training related to Medicare coverage policies and appropriate billing 
practices.
---------------------------------------------------------------------------
Offering Contractors Payment Incentives Could Result in Greater 
        Efficiencies
    Allowing Medicare to offer financial incentives to contractors for 
high-quality performance also may have benefits. According to CMS, the 
Social Security Act now precludes the program from offering such 
incentives because it generally stipulates that payments be based on 
costs. Contractors are paid for necessary and proper costs of carrying 
out Medicare activities but do not make a profit. Repeal of cost-based 
restrictions would free CMS to award different types of contracts--
including those that provide contractors with financial incentives and 
permit them to earn profits. CMS could test different payment options 
to determine which work best. If effective in encouraging contractor 
performance, such contracts could lead to improved program operations 
and, potentially, to lower administrative costs. Again, implementing 
performance-based contracting will not be without significant 
challenges.
CMS Needs to be Able to Terminate Poor Performers More Efficiently
    Allowing Medicare to terminate contractors more efficiently may 
also promote better program management. The Social Security Act now 
limits Medicare's ability to terminate intermediaries and carriers, and 
the provisions are one-sided. Intermediaries and carriers may terminate 
their contracts without cause simply by providing CMS with 180 days 
notice. CMS, on the other hand, must demonstrate, that (1) the 
contractor has failed substantially to carry out its contract or that 
(2) continuation of the contract is disadvantageous or inconsistent 
with the effective administration of Medicare. CMS must provide the 
contractor with an opportunity for a public hearing prior to 
termination. Furthermore, CMS may not terminate a contractor without 
cause as can most federal agencies under the FAR.
    In past years, the agency has requested statutory authority to 
eliminate the public hearing requirement and the ability of contractors 
to unilaterally initiate contract termination. Such changes would bring 
Medicare claims administration contractors under the same legal 
framework as other government contractors and provide greater 
flexibility to more quickly terminate poor performers. Eliminating 
contractors' ability to unilaterally terminate contracts also may help 
address challenges the agency faces in finding replacement contractors 
on short notice.
          contracting reform poses many implementation issues
    While Medicare could benefit from greater contracting flexibility, 
time and care would be needed to implement changes to effectively 
promote better performance and accountability and avoid disrupting 
program services. Competitive contracting with new entities for 
specific claims administration services in particular will pose new 
challenges to CMS--challenges that will likely take significant time to 
fully address. These include preparing clear statements of work and 
contractor selection criteria, efficiently integrating the new 
contractors into Medicare's claims processing operations, and 
developing sound evaluation criteria for assessing performance. Because 
these challenges are so significant, CMS would be wise to adopt an 
experimental, incremental approach. The experience with authority 
granted in 1996 to hire special contractors for specific tasks related 
to program integrity can provide valuable lessons for CMS officials if 
new contracting authorities are granted.
Contracting With New Entities Will Take Time and Require Careful 
        Planning
    If given authority to contract competitively with new entities, CMS 
would need time to accomplish several tasks. First among these would be 
development of clear statements of work and associated requests for 
proposals detailing work to be performed and how performance will be 
assessed. CMS has relatively little experience in this area for 
Medicare claims administration because current contracts instead 
incorporate by reference all regulations and general instructions 
issued by the Secretary of Health and Human Services to define 
contractor responsibilities. CMS has experience with competitive 
contracting from hiring PSCs. It did take 3 years to determine how best 
to implement the new authority through its broad umbrella contract, 
develop the statement of work, issue the proposed regulations governing 
the PSCs, develop selection criteria, review proposals, and select 
contractors.6 Program officials have told us they are 
optimistic about their ability to act more quickly if contracting 
reform legislation were enacted, given the lessons they have learned. 
However, we expect that it would take CMS a significant amount of time 
to develop its implementation strategy and undertake all the necessary 
steps to take full advantage of any changes in its contracting 
authority. CMS took an incremental approach to awarding its PSC task 
orders, and the same would be prudent for implementing any changes in 
Medicare's claims administration contracting authorities.
---------------------------------------------------------------------------
    \6\ CMS developed an indefinite-delivery/indefinite-quantity 
contract that allowed it to select contractors and outline in broad 
terms the activities to be performed. Each task order identifies a 
specific function to be performed. For example, one task order involves 
conducting unannounced site visits to selected community mental health 
centers to determine whether they are complying with Medicare 
regulations.
---------------------------------------------------------------------------
    Even after new contractors are hired, CMS should not expect 
immediate results. The PSC experience demonstrates that it will take 
time for them to begin performing their duties. PSCs had to hire staff, 
obtain operating space and equipment, and develop the systems needed to 
ultimately fulfill contract requirements--activities that often took 
many months to complete. Without sufficient start-up time, new 
contractors might not operate effectively and services to beneficiaries 
or providers could be disrupted.
Coordination Is Critical for Functional Contractors
    Developing a strategy for how to incorporate functional contractors 
into the program and coordinate their activities is key. While there 
may be benefits from specialization, having multiple companies 
performing different claims administration tasks could easily create 
coordination difficulties for the contractors, providers, and CMS 
staff. For example, between 1997 and 2000, HCFA contracted with a 
claims administration contractor that subcontracted with another 
company for the review of the medical necessity of claims before they 
were paid.7 The agency found that having two different 
contractors perform these functions posed logistical challenges that 
could make it difficult to complete prepayment reviews without creating 
a backlog of unprocessed claims.
---------------------------------------------------------------------------
    \7\ According to a CMS contracting official, a claims 
administration contractor has the flexibility to subcontract under 
section 1842 of the Social Security Act.
---------------------------------------------------------------------------
    The need for effective coordination was also seen in the PSC 
experience. PSCs and the claims administration contractors need to 
coordinate their activities in cases where the PSCs assumed 
responsibility for some or all of the program safeguard functions 
previously performed by the contractors. In these situations, HCFA 
officials had to ensure that active claims did not get lost or ignored 
while in the processing stream.
    Coordination is also necessary to ensure that new efficiencies in 
one program area do not adversely affect another area. For example, 
better review of the medical necessity of claims before they are paid 
could lead to more accurate payment. This would clearly be beneficial, 
but could also lead to an increase in the number of appeals for claims 
denials. Careful planning would be required to ensure adequate 
resources were in place to adjudicate those appeals and prevent a 
backlog.
    CMS has not stated how claims administration activities might be 
divided if the agency could do functional contracting. It would be wise 
for CMS to develop a strategy for testing different options on a 
limited scale. In our report on CMS' contracting for PSC services, we 
recommended, and the agency generally agreed, that it should adopt such 
a plan because CMS was not in a position to identify how best to use 
the PSCs to promote program integrity in the long term.8
---------------------------------------------------------------------------
    \8\ Medicare: Opportunities and Challenges in Contracting for 
Program Safeguards (GAO-01-616, May 18, 2001).
---------------------------------------------------------------------------
Experience Is Needed to Develop Effective Evaluation Criteria
    Taking advantage of benefits from competition and performance-based 
contracting hinges on being able to identify goals and objectives and 
to measure progress in achieving them. Specific and appropriate 
evaluation criteria would be needed to effectively manage any new 
arrangements under contracting reform. Effective evaluations are 
dependent, in part, upon clear statements of expected outcomes tied to 
quantifiable measures and standards. Because it has not developed such 
criteria for most of its PSC task orders, we reported 9 that 
CMS is not in a position to effectively evaluate its PSCs' performance 
even though 8 of the 15 task orders had been ongoing for at least a 
year as of April 2001. If CMS begins using full and open competition to 
hire new entities for other specific functions, it should attempt to 
move quickly to develop effective outcomes, measures, and standards for 
evaluating such entities.
---------------------------------------------------------------------------
    \9\ GAO-01-616, May 18, 2001.
---------------------------------------------------------------------------
    Effective criteria are also critical if financial incentives are to 
be offered to contractors. Prior experiments with financial incentives 
for Medicare claims administration contractors generally have not been 
successful. This experience raises concerns about the possibility for 
success of any immediate implementation of such authority without 
further testing. For example, between 1977 and 1986, HCFA established 
eight competitive fixed-price-plus-incentive-fee contracts designed to 
consolidate the workload of two or more small contractors on an 
experimental basis. Contractors could benefit financially by achieving 
performance goals in certain areas at the potential detriment of 
performance in other activities. In 1986, we reported that two of the 
contracts generated administrative savings estimated at $48 million to 
$50 million.10 However, the two contractors' activities also 
resulted in $130 million in benefit payment errors (both overpayments 
and underpayments) that may have offset the estimated savings. One of 
these contractors subsequently agreed to pay over $140 million in civil 
and criminal fines for its failure to safeguard Medicare funds.
---------------------------------------------------------------------------
    \10\ Medicare: Existing Contracting Authority Can Provide for 
Effective Program Administration (GAO/HRD-86-48, Apr. 22, 1986).
---------------------------------------------------------------------------
                        concluding observations
    Removing the contracting limitations imposed at Medicare's 
inception to promote full and open competition and increase flexibility 
could help to modernize the program and lead to more efficient and 
effective management. However, change will not yield immediate results, 
and lessons learned from the experience with PSC contractors underscore 
the need for careful and deliberate implementation of any reforms that 
may be enacted.
    This concludes my statement. I would be happy to answer any 
questions that either Subcommittee chairman or Members may have.
GAO Contact and Staff Acknowledgments
    For further information regarding this testimony, please contact me 
at (312) 220-7600. Sheila Avruch, Bonnie Brown, Paul Cotton, and Robert 
Dee also made key contributions to this statement.

                          Related GAO Products

    Medicare Management: Current and Future Challenges (GAO-01-878T, 
June 19, 2001).
    Medicare: Opportunities and Challenges in Contracting for Program 
Safeguards (GAO-01-616, May 18, 2001).
    Major Management Challenges and Program Risks: Department of Health 
and Human Services (GAO-01-247, Jan. 2001).
    High Risk: An Update (GAO-01-263, Jan. 2001).
    Medicare: 21st Century Challenges Prompt Fresh Thinking About 
Program's Administrative Structure (GAO/T-HEHS-00-108, May 4, 2000).
    Medicare Contractors: Further Improvement Needed in Headquarters 
and Regional Office Oversight (GAO/HEHS-00-46, Mar. 23, 2000).
    Medicare: Program Safeguard Activities Expand, but Results 
Difficult to Measure (GAO/HEHS-99-165, Aug. 4, 1999).
    Medicare Contractors: Despite Its Efforts, HCFA Cannot Ensure Their 
Effectiveness or Integrity (GAO/HEHS-99-115, July 14, 1999).
    HCFA Management: Agency Faces Multiple Challenges in Managing Its 
Transition to the 21st Century (GAO/T-HEHS-99-58, Feb. 11, 1999).
    Medicare: HCFA Faces Multiple Challenges to Prepare for the 21st 
Century (GAO/T-HEHS-98-85, Jan. 29, 1998).

    Mr. Greenwood. Thank you for your testimony.
    Mr. Scully, if you will return.
    The Chair recognizes himself for 5 minutes for questions.
    I would like to ask each of you how you see these proposed 
contract reforms affecting the average Medicare beneficiary, my 
mother, my father, other beneficiaries? How would they, if they 
would, notice or benefit from these changes?
    Let me start with you, Mr. Scully.
    Mr. Scully. I think hopefully, I mean we have some great 
contractors who do a terrific job. I used to represent a couple 
of them when I was a lawyer. We also have some that have not 
done such a great job, and our ability to identify the ones 
that have done the best job and been the most responsive to 
providers and beneficiaries is limited. To our ability to 
switch work flows from one place to another is very limited. So 
when we have a contractor who is the lowest rated and is the 
least responsive to providers and beneficiaries, it's tough to 
make a change. Our ability to switch work flows to another FI 
is very limited. It has to go through the Blue Cross Blue 
Shield Association.
    I represented Blue Cross of California when they were being 
pushed out of the program in the early 1990's. They fixed their 
problems and stayed in for a few more years. But I have been on 
the other side of it. I think there is a pretty substantial 
difference in the quality of contractors. But our ability to 
adjust our work flows, depending on who the best contractors 
are, is pretty limited. I don't think that is really good 
policy.
    I think if we could identify instead of 49 FIs and 
carriers, a more limited number of people who we could move the 
work flows around to, depending on their performance, we would 
have a much better situation.
    I also think some of the things that were referred to as 
far as local medical decisions and things like that with a more 
consolidated group of contractors, that we had probably a 
better, more rationally motivated relationship with, you would 
probably find more consistent decisionmaking as well.
    Mr. Greenwood. Mr. Mangano?
    Mr. Mangano. I think in this country we expect high 
quality. We expect high quality out of our health care system, 
out of our automobiles, and every other part of the economy 
that we deal with.
    If we have a system that allows CMS to find the best 
contractors that can operate most efficiently, and that 
efficiency enhances the effectiveness of their services to the 
beneficiaries, that is, when beneficiaries have problems and 
they want to call their Medicare contractor, if we have the 
contractors that perform best at doing those functions, then I 
think people are going to feel that they have responsive 
government on their hands, and they are going to be able to get 
their questions answered, and they are going to be able to get 
the services they are entitled to under the Medicare program.
    Ms. Aronovitz. We talk about full and open competition. One 
of the underpinnings for full and open competition is the 
principle of getting the best value for your product or 
service. That involves cost, but it also involves performance 
or quality and timeliness. I think what Mr. Scully and Mr. 
Mangano said is that CMS should be in a position to be able to 
have the flexibility to assure that its contractors are 
performing well and according to whatever measures have been 
set out.
    But an even more direct result of new authority could be in 
the area of functional contracting. I'm not sure that this 
would be the most feasible, but it is something CMS needs to 
consider. We know that there are some direct interactions that 
occur between contractors and the providers and the 
beneficiaries right now in terms of answering questions on the 
telephone, sending newsletters to the providers, and developing 
carrier and intermediary websites.
    In the process of looking at those mechanisms that create 
an environment for good provider and beneficiary relations, it 
is possible that a functional contract, where experts 
understanding how to communicate with beneficiaries and 
providers, might turn out to be a very good thing. So there are 
ways to immediately get some of the benefits from authorities 
if you could find a functional contract that could address some 
of the immediate problems that you have.
    Mr. Greenwood. The contractors sort of seems to need to 
serve three masters, at least. You have the obligation to the 
taxpayers to provide the service at a cost-efficient way. You 
have the obligation to interact with the beneficiaries in a way 
that is appropriate. Then you have the obligation to 
interrelate with the providers, who are often frustrated in 
their interactions with the providers.
    How, with the latitude of these reforms, how does CMS 
manage to weigh these three competing demands and make sure 
that in the interests of serving one of those masters, we don't 
begin to do a lesser job with the others? Any one of you want 
to try that? Tom?
    Mr. Scully. It is always a tough balance. Again, I don't 
want to complain about contractors. There are some very good 
ones. It is just our limited ability to find the ones who get 
that balance right the most. I think there's some like United 
Wisconsin, I guess is the United Government Services, which is 
Blue Cross Wisconsin, there are some Blues that have made a 
fundamental decision this is something they are in for the long 
haul and are very focused on. Pal Meadow in South Carolina is 
one. Wisconsin is another. There are others that do a pretty 
good job. I don't want to evaluate all of them right here. 
There are others that aren't as interested in it. Blue Cross of 
North Carolina, Mr. Burno dropped out about 2 weeks ago. They 
just made a decision this was not a core business strategy of 
theirs. I respect that, but some people are more focused on it 
than others, and some are more interested in this business. We 
want to identify with those people and become tighter, better 
partners, and make sure we get that balance right.
    Another point which I didn't make earlier is that right 
now, you have to be an insurance carrier. So for instance, EDS, 
which I would argue is one of the better information transfer 
agents, wanted to get into this business. They had to go out 
and buy a shell insurance company to do it. Other people we 
have looked at that are trying to get in this business, to 
maybe potentially be additional good contractors, credit card 
companies and others, can't do it under the existing statute.
    So our flexibility to find people that want to be in this 
business and want to establish long-term partnerships is 
limited by the statute that says you have to be an insurance 
carrier.
    Mr. Greenwood. Do either of the other of you wish to 
testify? My time is up, so please be brief.
    Mr. Mangano. Not really. It is just a question of, I think, 
making expectations clear, having contracts that are written 
clearly enough in terms of explaining what the requirements are 
in the provision of services to beneficiaries as well as to 
provide services to suppliers who are going to be billing the 
Medicare program.
    To the degree to which those specifications can be clear 
and that the contractors can be held responsible for delivering 
services on a performance basis, I think you are going to 
increase the opportunity to having more success with contractor 
operations.
    Mr. Greenwood. Okay. My time is expired.
    The Chair recognizes the gentleman from Ohio, Mr. Brown, 
for 5 minutes.
    Mr. Brown. Thank you, Mr. Greenwood, Mr. Chairman.
    Mr. Scully, I have regular Medicare meetings in my 
district, which many Members have, just to familiarize 
beneficiaries with various Medicare services and answer 
questions, all that. We may have 50 people there. We may have 
200 people there. We also have all these meetings. One of the 
presenters is from the Ohio State Health Insurance Counseling 
Assistance Program, OSHIP and Ohio SHIP, whatever, and in other 
States.
    They are important because they translate education 
outreach efforts to the State and local level. They also, as 
you know, are heavily reliant on volunteers. The SHIP programs, 
I believe, get about $15 million spread across the country, the 
50 State agencies. How will CMS ensure, as it is getting more 
and more difficult for them with this pretty small amount of 
money to do what they need to do? The services they give are 
obviously very important. How do you plan to ensure that these 
agencies have the sufficient resources and staff to respond to 
an increase in referrals generated by the 1-800 number and all 
that that entails?
    Mr. Scully. Well, I think the SHIPs do a great job. I think 
it's $13 million. It might be $15, but it is in that range, 
which is obviously a limited amount of money. Probably my No. 1 
priority tied with contractor reform is beneficiary education. 
As you may have seen, we have already announced that we are 
planning to spend $35 million this fall on I think an 
unprecedented level of beneficiary education.
    One of the biggest efforts in that, I think it's about $17, 
$18 million is substantially enhancing the 1-800 number. What 
happens now, if you call 1-800-MEDICARE from Ohio or from 
Philadelphia, is you generally get a very basic level of 
information and then you get transferred off to a SHIP, which 
are generally volunteers. They get an increasingly intense 
level of call-ins to our 1-800 number.
    One of the things that is going to happen starting October 
1, is when you call in, you are going to have an entire new 
tier of the Medicare 1-800 number that you will get a person on 
the phone who is familiar with your Ohio district or 
Philadelphia or Florida, whatever, that will give you a whole 
level of information about your Medicare, Medigap benefits, 
your Medicare benefits, your out-of-pocket costs. They won't 
pick a whole package for you, but they will give you a whole 
level of assistance parallel with what the SHIPs are doing.
    So I think one of the things that you are going to get, and 
it's also going to be 24 hours a day, 7 days a week, instead of 
the current 8 hours a day, 5 days a week. So one of the things 
that this will do is I think substantially reduce the referrals 
to the SHIPs. SHIPs do a great job. They do such a good job 
that we are basically trying to turn our 1-800 MEDICARE numbers 
into basically a massive SHIP service. The SHIPs are basically 
through the State insurance commissioners.
    Mr. Brown. Do you see placing, as some have suggested, a 
Medicare representative in every Social Security Office so 
people can have that one-on-one contact?
    Mr. Scully. You know, that used to be--that is a very 
complicated issue, because obviously CMS/the old name evolved 
out of Social Security. So for years, there was a Medicare 
person in each Social Security Office, which was helpful. As 
the budgets were squeezed at various departments over the 
years, the Social Security obviously--their No. 1 priority was 
not Medicare. Medicare people disappeared from that.
    We are intensely focused on beneficiary education. Whether 
the best way to do that is to put people back in Social 
Security offices or to do it through senior centers, or to do 
it through others ways are things that I am very open to and I 
have been looking at it. But we are very focused on beneficiary 
education. I think it is going to be pretty hard this fall for 
anybody in the United States to miss our beneficiary education 
campaign, hopefully.
    Mr. Brown. The last question, Mr. Chairman, along these 
lines, Medicare plus choice or its predecessor used to--managed 
care generally used to provide more money for various kinds of 
agency information. That has been cut over the years, what 
managed care has provided. Sort of two parts to the question. 
As you strive to increase the involvement of managed care in 
Medicare, whether you are successful in that or just the fact 
that we have provided managed care a good bit more money in 
this $11 billion last year and lots of dollars before that, do 
you plan to call on managed care, on Medicare plus choice 
participants to provide more education resources so that OSHIP 
and others complementarily, if you will, can provide better 
kind of service?
    Mr. Scully. Through the user fee package?
    Mr. Brown. Well, however you would use the power of this 
office to encourage managed care companies, to encourage 
Medicare plus choice to provide more agency information.
    Mr. Scully. Yes. We are clearly going to do that. How it's 
funded, I think the user fee was reduced last year in 
legislation, so there is some limited discretion over that.
    We are clearly going to put out a lot more information on 
our website and various other places about plans. Just to 
clarify, by the way, I am trying to knock the word managed care 
out of my vocabulary. Private health plans--I have been 
misquoted frequently as wanting to double managed care. My 
point, which was widely reported about the Medicare+Choice plan 
was that in 1997 when the bill passed, CBO had anticipated by 
2002 that you would have about 30 percent of people in 
Medicare+Choice. That number has now dropped to 15 percent. I 
have every indication more people are going to drop out this 
summer.
    What I have been saying is that I think a lot of seniors 
who have private health plan choices like the drug coverage, we 
tend to keep those people in, and then try to get back to what 
most people anticipated was the growth curve. But it is not 
that I am out there trying to pump managed care. We are very 
interested in making seniors know about other options, whether 
it's Medicare+Choice, Medicare Select, Medigap.
    One of the things when I came into this job I found was 
that our data and our polling show seniors really do not 
understand the benefits at all, even the base benefit. They 
don't understand the co-payments and the deductibles. So I am 
interested in educating them as thoroughly as we can, and 
whatever option they decide to pick is great, as long as they 
know what they are doing.
    Mr. Greenwood. The time of the gentleman has expired. The 
Chair recognizes the chairman of the Health Subcommittee, Mr. 
Bilirakis, for 5 minutes.
    Mr. Bilirakis. Thank you, Mr. Chairman. Last week we had a 
hearing, a young lady from HHS--I don't remember whether she 
was from CMS or not, C-M squared S, but she stayed in the 
audience. That was very impressive, that you had someone doing 
that. I would hope that you would have someone sitting in here 
taking notes when the next panel comes up. I think it is so 
very important. It makes people feel good too, that someone 
cares.
    Mr. Scully. It would probably be me, Mr. Chairman. I am 
still a staff person.
    Mr. Bilirakis. There is a June 28 letter from Secretary 
Thompson to Speaker Hastert regarding your recommendations on 
needed legislative changes to the law. Are you, Mr. Mangano or 
Ms. Aronovitz, familiar with that? Have you had a chance to 
look at it?
    Ms. Aronovitz. I think we received it this morning. But I 
think in some ways it is very similar to prior year proposals.
    Mr. Scully. Yes.
    Mr. Bilirakis. We have two mikes there. We ought to be able 
to use them.
    So you are familiar with it?
    Mr. Mangano. Yes. I had seen the bill a couple of days ago.
    Mr. Bilirakis. Okay. You have seen it before we have this 
morning.
    I am not asking about it now, but I would hope that you 
would submit to us any thoughts you have on these 
recommendations and your recommendations regarding them. That 
could be very, very helpful.
    Mr. Mangano. I would be happy to.
    Mr. Bilirakis. We would appreciate that very much.
    Mr. Scully, in your written testimony you state that ``Many 
contractors serve multiple and sometimes non-contiguous States, 
resulting in a patchwork''--underlined--``Patchwork of coverage 
in service across the country.'' We found out that that is one 
of the problems, that there is a patchwork, lack of 
consistency, if you will, a lack of contract authority, and 
what CMS aimed with expanded contract authority, would CMS aim 
to minimize this current patchwork? What benefits do you 
believe could be achieved from more regional contracts or 
single contracts?
    Look at the charts. There you see fiscal intermediaries, 
carriers. Is there a need to have separate fiscal 
intermediaries from carriers? If there is no need, would that 
be more efficient, result in better efficiency and less costs?
    Mr. Scully. I think eventually it would. I am not sure 
right now, as many people stated, I don't think you can do this 
over night. I think this is a multi-year phase in. I mean you 
definitely have completely different Part B and Part A 
deductibles and systems. In some of the States that overlap, 
like Blue Cross of Florida I think or Trail Blazer, as both 
contracts, which I think is actually I didn't realize until 
last night when I was reading, that that is actually part of 
Blue Cross of South Carolina as well.
    Mr. Bilirakis. But they are separate contracts.
    Mr. Scully. They have two contracts, but they have two 
different systems, two different groups of people.
    Mr. Bilirakis. Right.
    Mr. Scully. Arguably, if Trail Blazer is doing Texas in 
Part A and Part B, those functions could be merged. There has 
also been a lot of discussion, whether it happens or not, in 
Congress about eventually merging Part A and Part B in some 
form anyway. So I don't think whether that ever happens or not, 
the merging of the contractor systems to me intuitively makes a 
lot of sense. That there's not a great ability----
    Mr. Bilirakis. Even if Parts A and B are merged, so you 
would only have one carrier that would handle the fiscal as 
well as the rest of it, makes sense. Does it not?
    Mr. Scully. Yes.
    Mr. Bilirakis. It certainly sounds more efficient. It 
sounds like probably less costly.
    Mr. Scully. Well, I would hope so. At some point it should 
be. I also think fundamentally I am not a believer in cost-
based systems any place in Medicare. Whether you look at it for 
hospitals or any of our old cost-based systems, there is not 
immediate overnight savings. With the DRGs, there probably 
won't be immediate overnight savings when we go from rehab 
hospitals to PPS this year. But I think all the prospective 
payments systems show that if you incentivize people correctly, 
eventually there are cost savings and there are efficiencies. I 
think most of these companies will tell you that they would 
rather do rather than a cost-based contract is just the 
tradition. That they would much rather be incentivized.
    Mr. Bilirakis. You don't feel that you have the legal 
authority to make these changes now though? You would need 
changes made in the law?
    Mr. Scully. We believe we clearly don't.
    Mr. Bilirakis. Okay. If we go ahead and incorporate these 
as we contemplate doing in our ``Medicare Reform Modernizing'' 
or whatever we want to call it, prescription drug legislation, 
you would go right into trying to make some of these changes as 
rapidly as you reasonably can?
    Mr. Scully. Yes. I would not expect that we are going to 
get to 18 and 20 overnight, but I do think that we could 
identify in those charts the people who are our best partners, 
and generally start to move work toward them and start to find 
the best people who are doing the best services, and give them 
more work, and gradually phaseout the people that----
    Mr. Bilirakis. You know for years we have heard about 
problems like this. I can't recall any emphasis made on the 
part of the old HCFA people over the years. I am not referring 
to any particular administration coming up here and placing 
emphasis on these things. In fact, Mr. Brown keeps talking 
about additional resources. He means money, I guess. The point 
is, yes, if that is needed, there should be requests for it. 
But that certainly in and by itself never gives us the answer 
in and by itself. Nor do I recall much emphasis being placed on 
people coming up here basically demanding, at least explaining 
the need for that money.
    Mr. Scully. I think some form of this bill, I know all 4 
years of the first Bush Administration I was in, we set 
something up. But there always seemed to be other 
controversies, whether it was RBRBS back then or whatever. But 
in Nancy Eon's case, who is a good friend of mine or the most 
recent administrator, she had Y2K, BBA, lots of other things 
going on. I think this just fell down the priority list. But 
for whatever reason right now, it is a big priority for us and 
a huge one for the Secretary. So we are happy to explain what I 
think is a long overdue need.
    Mr. Bilirakis. Mr. Chairman, may I continue on? I realize I 
have gone past my time.
    Mr. Greenwood. Just this once.
    Mr. Bilirakis. Just this once. He's paying me back, is what 
he is doing.
    Mr. Mangano, we have talked before. The fraud provisions 
and what not, we have all placed emphasis on that. How much of 
the fraud claims that are taking place out there would you say 
is the result of lack of communication, lack of education? I 
would say on the part of providers as well on the part of the 
contractors in the old HCFA. It is a big problem, certainly in 
my congressional district, as you know. I am trying to get to 
the meat of that. I mean, you know, I just can't believe that 
all of these providers are bad guys. I just wonder how much of 
it might be due to lack of communication and what not. If that 
is much of the case, I would hope that Mr. Scully will be aware 
of it so that again, we can have uniformity of communications 
and adequate communications and that sort of thing. Not much of 
a question, but if you have any quick comment.
    Mr. Mangano. Well, each year that we have done our review 
of the payment claims, the improper payment report we call it 
in our office, we have seen dramatic improvements in terms of 
the reduction in improper payments. From the first year we did 
it, 1996, it was running at 14 percent or $23 billion, to the 
last year that we did it, where it was down to just under 7 
percent, at $11.9 billion.
    Each year we have done this review, we have made 
recommendations. HCFA has basically agreed that we have to 
increase the education component of the Medicare program. 
Providers have every right to know how to bill properly. When 
they bill properly, everybody succeeds.
    There have been efforts across the country and conferences 
have been held in local areas. Our staff goes out many, many 
times during the year to meet with local groups as well as 
professional groups to help explain the compliance rules from 
our perspective and the CMS perspective, et cetera.
    But we still need to do more of it. It is clear to us there 
is not the level of clarity that needs to be existing out there 
for everybody to be able to understand the rules and to bill 
properly.
    Mr. Bilirakis. Yes. From an image standpoint, they are 
guilty. They are guilty even if found innocent later on. It 
gets around the community and there goes their reputation and 
all of their hard work and education down the drain. So it is 
something we have got to emphasize.
    Thank you very much, Mr. Chairman. I appreciate your 
indulgence.
    Mr. Greenwood. The Chair recognizes the gentlelady from 
Colorado, Ms. DeGette, for 5 minutes.
    Ms. DeGette. Thank you, Mr. Chairman.
    In the next panel, Mr. Chiplin is going to testify, and we 
talked about this a few minutes ago, that the beneficiaries 
require a lot of information so that they can make an informed 
decision about their health care decisions. I guess I would ask 
you, Mr. Scully, how well CMS ensure that beneficiaries can get 
this information if the contractor functions are parceled out 
to two, three, or four different entities?
    I can see the rationale for that in a lot of contexts, but 
in the context of beneficiary information, won't they get 
confused trying to call one contractor to get benefit 
information, another to get eligibility information, and 
someone else to get the status of their claim?
    You testified earlier that it used to be that before the 
budget cuts, there would be more people in the Social Security 
offices and so on to give this information. How are we going to 
get that education to the beneficiaries?
    Mr. Scully. As far as I think the GAO testimony was that 
there is some merit in contracting our more and splintering our 
contracts further, which we are looking at. I have not quite 
reached that decision yet, for some of the reasons you 
suggested, which is I am worried about becoming too splintered. 
But we are in the process of evaluating that.
    I can tell you since the day I walked in the door, my No. 1 
focus, and I think the staff will tell you this, has been 
beneficiary education and putting together this major campaign 
to educate seniors and beneficiaries.
    I think a lot of that is done more through us than through 
the contractors. I think, for instance, if you look at our 
website, which doesn't get many hits. If you are a dialysis 
patient, there is no question in my mind if you go into Denver 
and pull up dialysis centers, there is very detailed 
information on quality on dialysis centers. People don't use 
it. They go when the nephrologist tells them to go.
    Similarly, the information on nursing homes is not I don't 
think quite objective enough, and we are working on that. But 
my goal is to basically provide a lot more quality, objective, 
fair information for people to make better decisions. That is 
going to be probably my No. 1 push, as long as I survive 3\1/2\ 
years.
    Ms. DeGette. I think that is an admirable goal. But don't 
you think that that particular component of beneficiary 
education would be made more difficult if contractor functions 
are parcelled out?
    Mr. Scully. Well, I think that is the balance to weigh. But 
I think what we are talking about here fundamentally to begin 
with is probably contraction of contractors, where you have 
more consistent contracting. Whether it is also a good idea, as 
we have done in some of the fraud abuse efforts, to subcontract 
out specific issues to subcontractors who are more focused on 
particular beneficiary education areas, we have not made that 
decision yet. I think it is being discussed. That is one of the 
recommendations GAO had, but I think the balance there is 
splintering it too much.
    Ms. DeGette. Ms. Aronovitz, would you comment on that?
    Ms. Aronovitz. I think there is a difference between having 
fewer contractors, but still having an interface and having 
oversight in management so that you would still have local 
connections. If somebody calls an 800 number, they don't 
necessarily know that they are getting a Blue Cross Blue Shield 
company in Alabama versus in North Dakota. There are a lot of 
ways to still maintain the local relationship between 
beneficiaries. We would not want CMS to ever consider any kind 
of functional contract that would break the relationship in 
that way. So it is a matter of figuring out how to be very 
specific about what you are asking for and then finding experts 
who could bid on these contracts that could provide that kind 
of quality.
    Ms. DeGette. I think that that is an important concept to 
keep in mind as you go through this.
    Let me follow up, Ms. Aronovitz, just about functional 
contracting. It seems to me that if it is going to work well, 
CMS is going to need to clearly lay out the scope of 
responsibilities and expectations for each contractor, and make 
sure that the contractors are not duplicating work or letting 
responsibilities fall through the cracks, some of the same 
problems that you are suggesting this to remedy.
    What steps will CMS need to take to administer Medicare 
properly if they use functional contracting?
    Ms. Aronovitz. I think functional contracting is a very, 
very good concept theoretically. But I think implementation-
wise, there are a lot of challenges. I think CMS is learning a 
lot from its contracting for program safeguard contracts. A lot 
of those are functional contracts. They are very specific.
    We issued a report about 2 or 3 months ago on the status of 
CMS' efforts to implement its PSC or MIP authority on these 
functional contracts. Basically there are two issues that CMS 
really has to be careful about. The first one is being very 
specific about defining or putting your arms around what that 
function would be. It is not that easy to do, but if you don't 
do a good job, then you are going to get somebody to bid on 
something less than what you are actually expecting.
    The second thing is that you have to have performance 
measures and standards in place because if you don't have 
performance measures articulated well upfront, you are not 
going to know whether you are getting what you are paying for. 
Those are the types of activities that become critical in any 
type of contracting, whether it is an invitation for bid or a 
request for proposal. In either case, you really need to 
understand what type of performance you are expecting. It's not 
easy.
    Ms. DeGette. Thank you.
    Mr. Greenwood. The time of the gentlelady has expired. The 
Chair recognizes for 5 minutes Dr. Norwood.
    Mr. Norwood. Thank you, Mr. Chairman.
    Mr. Mangano, you have been with HHS a long time. You have 
been working in the area of Medicare a long time. You have been 
involved in subcontracting area a long time. I think we all 
would agree that systems developed over 35 years ago probably 
at least need to be changed. If we were starting from scratch, 
they might not even recognize each other.
    Now do you ever sit around fantasizing what this really 
ought to be? How this system really should deal with 
subcontractors? Because you have a lot of experience and I 
value your thought.
    Mr. Mangano. Well, I would like to answer it this way. The 
Congress and the American people have every right to expect 
that the Medicare system be run efficiently and effectively.
    I would like to maybe use a little bit of imagination now 
and think that we have all just started up a new company. This 
company is going to do about $200 billion worth of business 
each year. We are going to have 40 million customers. We are 
going to have over a million different providers of service 
here. You are the board of directors, and you are interviewing 
potential candidates that are applying to be your chief 
executive officer. A young chap comes walking in the door and 
he says, ``I have got a great new business plan for you. Here 
is how we are going to run our company. First, we are not going 
to do any open or full competition for any of the contracts for 
the people who are actually going to manage our program on an 
every day basis . . .''
    Mr. Norwood. Mr. Mangano?
    Mr. Mangano. Yes, sir.
    Mr. Norwood. Forgive me. I did ask our witness the 
question. I want it in writing. You are in charge. You are king 
for the day. You start from scratch. Tell me how you would do 
the subcontractors. Give me your opinion at the same time on 
the changes that Mr. Scully brings to us today from the 
Administration that they would like to see in a bill.
    I would absolutely love to sit here and hear the answer, 
but we don't have time. So I take my question to you very 
seriously. I think you could bring a lot to the table for us to 
look at as this subcommittee tries to accommodate Mr. Scully, 
the Administration, and make some finally changes in Medicare.
    Mr. Serato states in his written testimony that at last 
count, Medicare contractors receive on average a new 
instruction from CMS every 5 hours of every day of the year. 
What happens, Tom, talk to me in terms of being a hospital man, 
not head of this agency. What happens when CMS sends these 
instructions down to the subcontractors? What do they do with 
those instructions? Do they send them to your hospital?
    Mr. Scully. I think they send them everywhere. That is part 
of the problem with the whole system. There are a lot of great 
people in CMS. I think the Secretary found that, and I have 
found that too. But there has been a mode over the years of 
just sending out random strafing runs from everybody. I am 
trying to change that.
    Mr. Norwood. Did you receive those in your hospitals? In 
other words, it isn't just the subcontractor who receives the 
new document or change order every 5 hours, it is also those on 
the other end that are providing the care?
    Mr. Scully. I think the change orders he is talking about 
are the ones that actually go to the FIs and the carriers. But 
separate and apart from that, HCFA puts out a lot of 
regulations and program memorandums that go directly to the 
providers outside of that everyday. One of the first steps--I 
am not sure you have seen our response yet to the committee, 
but the Secretary announced the regulatory reform effort last 
week which is a first step, and this is the regulatory side. 
Starting October 1, CMS is going to put out a compendium of all 
its regulations each quarter. There will be a menu of 
everything coming out that quarter. If it is not on there, it 
won't come out.
    Second, we are going to put out regulations and program 
memorandums 1 day a month. So that if you are a hospital or a 
physician or a provider, you will only have to look at the 
Federal Register 1 day a month. Now it is a self-imposed 
regulation. We are trying to simplify the process.
    Mr. Norwood. What you are saying is you are going to have 
less than one every 5 hours under your regime?
    Mr. Scully. I think that is to the carriers, what he is 
talking about. But the first step----
    Mr. Norwood. But the carrier passes it on down the line.
    Mr. Scully. Yes. No question. Well indirectly.
    Mr. Norwood. Not maybe every time, but frequently.
    Mr. Mangano, I wondered if you knew there was a change 
order every 5 hours? Did you know that before coming in here?
    Mr. Mangano. I did not know it was once every 5 hours, but 
I do know there are a lot of them.
    Mr. Norwood. Now could you somehow logically put together a 
relationship that that might have a lot to do with some of your 
investigations into what is called waste, fraud, and abuse, and 
there is where we save all our money?
    Mr. Scully. One thing I would argue, one argument for 
reform is that in a cost-based system, you send out a change 
order. They may be upset about it, but they just build it into 
their cost. If we went to a more rational contracting system, 
there would be a lot more push back all----
    Mr. Norwood. That hospital can't build it into its costs 
very readily.
    Mr. Scully. This is to the carriers.
    Mr. Norwood. I know. But they come from the carrier. I 
promise you, the carrier doesn't sit there with it. They tell 
us what to do because of what CMS told them what to do. I am 
asking for somebody to say they understand that perhaps some of 
this so-called waste, fraud, and abuse is being stimulated out 
of Baltimore, out of people who are honestly trying to do right 
in the system, who can't keep up with the change order every 5 
hours or even if there is one a week.
    Mr. Scully. I totally agree with you. One thing I have 
tried to bring, sometimes to the great pain of my staff in the 
3 weeks I have been there, is to have them view it from the 
local provider side, because in a lot of cases, they have the 
best of intentions, and they don't understand what happens to 
the docs and the hospitals at the other end of what they are 
doing. I think I have made a pretty big push already to make 
them understand that.
    Mr. Norwood. Thank you. I see the red light, Mr. Chairman. 
I'm sorry about it, but I see it.
    Mr. Greenwood. We noticed you care about this issue, Mr. 
Norwood.
    The gentlelady from California is recognized for 5 minutes.
    Ms. Capps. Thank you, Mr. Chairman. Thank you very much for 
the testimony of each of the three of you. I was sitting here 
thinking of a kind of theoretical, sort of sophisticated 
question, set of questions I could pose to you. Then I thought 
of a rural county that I represent in central California, San 
Luis Obispo.
    I am thinking of a provider, one in particular, who wrote 
me such a painful letter. I had a conversation with him it was 
so troubling to read his letter. The reimbursement rate is 
third lowest in the State, in that particular county, although 
I have worked hard, we got it raised 12 percent. It is because 
the cost of living doesn't match it in any way. It is an area 
where Medicare+Choice is pretty much vacated.
    But I am talking now about the provider, who when we had a 
change of carriers about a year ago, all of a sudden there was 
a delay in payment. Many of the providers took liens on their 
practices and mortgages on their houses and went into debt. 
Rural areas have their own peculiar challenges.
    This one, this doctor is--I hope he is still in practice, 
just a couple years from retirement, really not equipped to do 
anything else--so far in debt, not able to have enough other 
kinds of insurance patients and Medicare reimbursing so little 
anyway for the cost of service to provide, feeling a 
responsibility toward providing for his patients as providers 
leave. Then patients have to drive even further distances, and 
Medicare patients have challenges. Many of them are elderly.
    I was hard pressed to know how to respond to him. He said 
can't the system--the margin is so small anyway. When the 
carrier changes and all of a sudden there is a delay, we get 
really involved in our congressional office because they call 
us right away. ``What's wrong? I am not able to meet my 
expenses.''
    I just, I don't know how to pose the questions to you, but 
I don't know how to deal with this troubling, troubling 
situation in my community.
    Mr. Scully. Well, I am sorry to hear that. I hope you will 
call me if you have----
    Ms. Capps. I have called. Well, it was your predecessor.
    Mr. Scully. You have called me already?
    Ms. Capps. No, I haven't called you yet, but thank you for 
the offer.
    Mr. Scully. Because I already have to go to about seven, 
there are eight different States, and I would love to visit 
Santa Barbara as opposed to North Dakota.
    Ms. Capps. No, this is San Luis Obispo.
    Mr. Scully. I'm know. I'm kidding. And San Luis Obispo.
    Ms. Capps. Santa Barbara though is No. 4 lowest in 
reimbursement. That is considerably lower than next door 
neighbor county to the south.
    Mr. Scully. Yes. I am pretty familiar with your district. I 
obviously will try to help. I was not familiar with that 
change, and that there was a slowdown.
    As a general matter, I think it is United Government 
Services, my general experience with them is that they are one 
of the better contractors. So I am sorry to hear that. I think 
they have the whole State.
    Ms. Capps. I thought this one was Heritage, but I looked at 
your list and I didn't see that particular one.
    Mr. Scully. Heritage is EDS, I believe. Yes, Heritage is 
EDS. Must be HI, I guess.
    Ms. Capps. I am not trying to lay the finger on a 
particular carrier. But if this is what happens as changes are 
made, you just have to know that there are real-life 
consequences that are very, very painful.
    Now in terms of our beneficiaries, we have a wonderful 
program, pretty much volunteer, a voluntary program called 
HICAP. I think it is throughout the State of California, which 
they do a marvelous job of interpreting regulations and 
answering questions and referring patients, and explaining the 
services. But I have had tremendous challenges in meeting the 
requests for ``help us'' from both providers and also 
hospitals. So many are so close to going under, been in the red 
so long, and it is really troubling. Medicaid and Medicare, we 
call it Medi-Cal, are really their main sources of income.
    Mr. Scully. Well, in fairness to defend Medicare to some 
degree since I used to be in the hospital business until 3 
weeks ago, Medicare believe it or not, is generally the best 
and fastest, the fastest payer, far faster than most of the 
private because under statute we have to be.
    But if you have problems with your carriers--it is EDS, 
Heritage is their insurance company--if you have problems with 
them, I would be happy to get the men to sit down with you in 
our regional office in San Francisco, and try to make sure that 
we incentivize them to better performance.
    Ms. Capps. Is this part of what I guess, my question then 
to you and your testimony or I will take a response from anyone 
else. I don't want this to be a complaining session. But is the 
goal then of this time of organization to prevent these kinds 
of things from happening? I guess I am not quite----
    Mr. Scully. I guess I am surprised, because generally EDS, 
I thought was pretty good. I hope this is a unique problem. But 
my goal is basically to find the best contractors, exactly in 
your situation, find the 18 to 20 best Part A, Part B 
contractors together and gradually evolve to a system where we 
have got the best people who perform the best to pick up more 
and more volume so that the people who end up providing 
services in your county are our best contractors.
    Right now, our ability to shift workload to the best people 
is not very good. It is very limited. So my hope is in 5 or 6 
years, we can sit down as CMS and say everybody has got one of 
our top 20 performing contractors, and that they are 
incentivized. I personally just think cost-based contracting is 
crazy. Get into appropriate incentivized contracts, 
incentivized to perform better.
    Ms. Capps. I wondered when I first began hearing your 
testimony what is the incentive for anyone to want to volunteer 
to work with you. Then I am also of course very aware of your 2 
percent administrative costs. I mean who else does business 
like that?
    Ms. Aronovitz. I just want to add one thing. That is, that 
what I hear you saying does not have to do with ongoing 
performance of the contractor.
    Ms. Capps. No.
    Ms. Aronovitz. But when a contractor leaves.
    Ms. Capps. Changing.
    Ms. Aronovitz. Right. Transitions in HCFA have been 
notoriously challenging. It is a difficult thing to try to get 
a whole new contractor in place.
    Ms. Capps. I appreciate that.
    Ms. Aronovitz. I think that is a really important lesson. I 
think CMS has gotten much, much better in transition, in doing 
transitions than it did several years ago, where we were very 
concerned. But it is a lesson to keep in mind when you are 
going to be consolidating or using new authorities to 
consolidate your contractors because if you are not careful and 
you don't do it slow enough and do a lot of planing, then you 
might have these disruptions in service. One of the really 
critical challenges that the agency faces is to avoid those 
kinds of disruptions.
    Ms. Capps. I appreciate that. Thank you.
    Mr. Greenwood. The time of the gentlelady has expired. The 
Chair recognizes the gentleman, Mr. Ganske, for 5 minutes.
    Mr. Ganske. Thank you, Mr. Chairman.
    On June 6, I gave special orders on Medicare reform. I have 
a copy here which I will provide to you, Mr. Scully. I have 26 
recommendations for Medicare CMS reform. It is not meant to be 
exclusive. I am sure there are many other suggestions. Number 
26 says the efficient organization, performance, and oversight 
of Medicare fiscal intermediaries and carriers is hampered by 
legislative prohibitions against competition and financial 
incentives for good performance which should improve contractor 
performance by modernizing the legislative authorities, 
including the authority to compete for contracts and to 
financially reward good performance.
    I think those are principles that we need to look at, 
consistent with what this hearing is about. But the details are 
very important on this. So I guess I have a question in terms 
of how do you define or what are you thinking about when you 
are talking about functional contracting?
    Mr. Scully. Functional contracting, and it is something 
that has been debated in CMS since I got there, which is how 
good an idea it is. I mean the basic issue is do you want to 
take some of the functions that our carriers and FIs have done, 
such as reviewing claims patterns for upcoding, fraud and 
abuse, things like that, and break them out of existing 
contracts and give them to a separate subcontractor who is 
focused just on that as a functional contract. I think their 
argument is to have both ways. As Ms. DeGette suggested, I 
think finding people who are most effective at their subset of 
the world is a great idea. But to the point where we balkanize 
the system so that we have got too many overlapping 
contractors, I think that is a tension that we need to resolve 
in CMS, to what works best.
    We have broken some of it out already in the MIP program, 
the Medicare Integrity Program for subcontracting. Some of the 
contracts have come back and said look, we can do the same 
thing. You are reinventing the wheel, and you are wasting your 
time. I think that is just something we need to look further 
into and find the right balance as to what the carriers and 
FIs, hopefully consolidated together, can do best and can we 
really go out and find people who are focused on specific 
claims review can do for us a little better. But I am concerned 
about just balkanizing the whole program and having contractors 
crawling over each other, which is the worst of all worlds.
    Mr. Ganske. I share your concern on that. I think there are 
some elements in this proposal that tend to be both centripetal 
and centrifugal. In other words, there are some parts of the 
proposal I think tend to go toward fragmentation, parts tend to 
pull back in. For instance, the issue of executing combined 
Part A and Part B contracts. Tell me how you think that would 
work.
    Mr. Scully. I think it is a complex transition, but I think 
right now, my understanding, and I have only been there 3 weeks 
so I am still learning, is that we have totally separate Part B 
and Part A systems. So even if you are Trail Blazer or Blue 
Cross of Georgia, I think, or some of the others that have both 
halves of the contract, both parts of the contract, they really 
operate in separate worlds. There is a common working file that 
ties them together to some degree, but there is a limited 
amount of discussion between those two sides.
    I think to some degree a phasing in where you had overlap 
would be helpful in a whole variety of ways, including the fact 
even when you get to things like lifetime deductibles and 
outlays for Medicare, it is hard to track. So running a 
coordinated program, it seems for a variety of policy reasons 
as well as just functionally running the carriers better, in 
the long run, I don't think it can happen overnight, trying to 
develop our new systems toward an integrated Part A and B 
system. Whether Part A and B are together or separate, it just 
seems to me it would be a more rational way to deliver the 
services.
    Mr. Ganske. I think before heading in that direction, you 
need to answer the question. There are many reasons why Part A 
and Part B have been separate traditionally over the years. You 
need to decide whether in fact that is a way to go in the first 
place, and then if you decide that it would be, how well you 
could make it functionally work. I think Mr. Serota has some 
testimony that he will give us today on how complicated that 
actually could be.
    I don't think that we as a committee have come to any 
consensus on that issue over the combination of Part A and B. I 
certainly have not.
    Mr. Scully. I would hope that I could work with you. One of 
my ideas this fall is to find some of the places where Part A 
and B overlap, and there are a number of States, and to try to 
do some pilots and demos that are incentive-based, where you 
have an overlapping contract to see how well it works, and see 
what the problems are. Because clearly, we do not want to dive 
into this head first without knowing where we are going.
    Mr. Ganske. I would tend to agree with that because I think 
that rather than instituting a broad, overall change without 
first realizing what some of the consequences could be would be 
foolhardy.
    So anyway, I will get a copy of this to you. I would very 
much appreciate it if in some way, you could respond to each of 
these points that I make in my speech so I get some idea of 
what you are thinking about these issues.
    Mr. Scully. We have a new hopefully implemented policy 
responding to all congressional inquiries in 14 days. Twenty 
six questions might take a little longer, but hopefully we will 
be pretty quick.
    Mr. Ganske. Thank you. I yield.
    Mr. Greenwood. The time of the gentleman has expired. All 
of the members of the panel have had the opportunity to inquire 
of these witnesses. So there is a floor vote being called now. 
In fact, there are a series of them. So this panel is excused. 
We thank you for your testimony. I look forward to working with 
you in the future.
    We will recess until 12:30.
    [Brief recess.]
    Mr. Greenwood. The committee will come to order. The Chair 
would ask the third panel, consisting of Mr. Scott Serota, 
President and CEO of Blue Cross and Blue Shield Association, 
and Mr. Timothy Cullen, Chairman of United Government Services, 
Mr. Alfred Chiplin, Managing Attorney, Health Care Rights 
Project, Center for Medicare Advocacy, Inc. to come forward.
    Welcome, gentlemen. Thank you for indulging us while we had 
the series of votes. Appreciate your presence.
    You gentlemen are aware that this is a hearing, a joint 
hearing between the Health and the Oversight and Investigations 
Subcommittees. It is the practice of the Oversight and 
Investigations Subcommittee to take testimony under oath. Do 
any of you have any objections to giving your testimony under 
oath?
    Mr. Serota. No, sir.
    Mr. Greenwood. Pursuant to the rules of the committee and 
the House, you then have the right to be represented by 
counsel. Do any of you wish to be represented by counsel during 
your testimony?
    Mr. Serota. No, sir.
    Mr. Greenwood. Okay. In that case, if you will rise and 
raise your right hand I will give you the oath.
    [Witnesses sworn.]
    Mr. Greenwood. You are under oath.
    Mr. Serota, if you would begin by giving your testimony, 
you will be recognized for 5 minutes.

 TESTIMONY OF SCOTT P. SEROTA, ACTING PRESIDENT AND CEO, BLUE 
CROSS AND BLUE SHIELD ASSOCIATION; TIMOTHY F. CULLEN, CHAIRMAN, 
 UNITED GOVERNMENT SERVICES, LLC; AND ALFRED J. CHIPLIN, JR., 
   MANAGING ATTORNEY, HEALTH CARE RIGHTS PROJECT, CENTER FOR 
                    MEDICARE ADVOCACY, INC.

    Mr. Serota. Thank you, Mr. Chairman, and members of the 
subcommittees. I am Scott Serota, President and Chief Executive 
Officer of Blue Cross Blue Shield Association. I appreciate the 
opportunity to testify today. I also appreciate your interest 
and leadership in identifying ways to improve the Medicare 
contractor program to enhance services for beneficiaries and 
providers.
    Many of our plans contract with the government to handle 
much of the day-to-day Medicare administrative activities. We 
pay claims, provide customer service, educate providers, and 
fight waste, fraud, and abuse. Our contractors are committed to 
achieving outstanding performance. Blue Cross Blue Shield plans 
are proud of their role as Medicare administrators. Even with 
soaring workloads we have remained cost-effective, keeping 
administrative costs to less than 1 percent of the total 
Medicare benefits.
    We also protect the trust fund by saving the government $17 
for every dollar invested in program safeguard activities. We 
support efforts to improve the ability of both contractors and 
the CMS to provide the highest level of service to Medicare 
beneficiaries.
    Before discussing our specific recommendations on 
contractor reform, I would like to provide you with a 
perspective on the challenges we face as contractors. First, 
inadequate funding, coupled with rising workloads impede 
contractors' ability to provide service levels beneficiaries 
and providers expect and frankly, deserve. Our contractors have 
been severely under-funded since the early 1990's, while claims 
volume have risen almost 70 percent.
    While the additional funding provided through a permanent 
appropriation in 1996 for dedicated fraud and abuse activities 
has helped, it has not solved the budget problems for the rest 
of the contractor budget, which are needed to pay claims, 
provide customer service, and educate providers. This is still 
subject to the annual appropriations process. We are pleased 
the Administration and many members of this committee have 
recognized the need for additional administrative resources. We 
would like to work with you to make this happen.
    Second, the Medicare program has grown more and more 
complex in recent years. Over the past few years, several new 
payment mechanisms were implemented and benefits added. In 
addition, HIPAA administrative simplification provisions and 
privacy rules must be implemented. Just as each of you have 
heard from providers about Medicare complexities, so do we as 
contractors hear these same complaints from the providers.
    Third, frequent changes in program direction challenges our 
contractors. At last count, Medicare contractors received an 
average of a new instruction from CMS every 5 hours of every 
day of the year. Finally, many legislative changes to Medicare 
are rarely accompanied by administrative funding or appropriate 
transition time for proper implementation.
    I will turn to our specific recommendations for contractor 
reform. These recommendations are based on the broad outline of 
CMS' proposal since we just this morning received specifics. In 
general, we agree with most of CMS' proposal. We agree that 
competition can be strengthened in the program. CMS should be 
able to contract with any qualified entity, not just health 
insurers. In doing this, CMS should focus on competitively 
bidding those contracts with those contractors which are 
voluntarily exiting the program or those contractors which 
perform poorly. This would allow the government to maintain 
those contractors that are providing quality service and 
meeting CMS' performance expectations.
    We also would support the elimination of provider 
nominations, so long as the provider community is in agreement. 
We strongly support modernizing current cost-based contracts. 
Currently, most contractors are paid cost up to a cap set by 
CMS. There is no opportunity for profit. We believe CMS should 
be allowed to use other payment options, such as cost-plus 
contracting.
    Our bottom line objective with any reform effort is to 
ensure that the services to beneficiaries and providers are not 
disrupted or made more complicated. We must improve the 
program, not make it more difficult. It is for this reason we 
would encourage the committee to establish a more businesslike 
contracting environment, with a clear and definitive statement 
of work, disciplined and controlled change orders, sufficient 
funding to accomplish the work in a timely and professional 
manner, with prompt responses to contractors' budget requests, 
and contracting officers that are fully empowered within CMS to 
manage the contractual relationship.
    There are two areas in which we differ with CMS. We do not 
agree that CMS should further fragment the program through 
functional contracting. Our understanding is that CMS wants to 
separately contract each function. For example, have one 
contractor pay claims, one provide beneficiary services, 
another for education. We just don't think this makes any 
sense.
    When a provider or beneficiary calls, they don't want 
answers, they want action. They want a problem solved. 
Functional contracting would diminish the current single point 
of accountability that our contractors represent. In addition, 
it disrupts effective management of the program, and has the 
potential to increase, not decrease costs, because each entity 
will have its own budget and coordination costs.
    We do not believe that A and B contractor operations should 
be merged. We believe the objective of approved care for 
beneficiaries and more uniform medical policies can easily be 
accomplished without having to change contractor operations. 
Data can be shared and combined, and local medical policies can 
be brought into agreement.
    I do have one final recommendation not included in the CMS 
proposal. That is, to provide stable and adequate funding. It 
is simply unrealistic to expect contractors to meet 
expectations without appropriate resources. To achieve this 
goal, we recommend a new funding methodology be developed for 
Medicare contractors. Congress should explore employing 
mechanisms similar to those used to fund Social Security 
administrative costs and Medicare peer review organizations.
    I urge the committee to increase the permanent MIP 
appropriation that is capped at $720 million in fiscal year 
2003 and beyond, despite the continued increase in claims 
volume. If fraud and abuse efforts are to be effective, MIP 
funding must keep pace with the increasing workloads.
    In summary, we are committed to achieving outstanding 
performance by providing high quality service to beneficiaries 
and providers. We believe more can and should be done to 
improve contractor operations and oversight. We look forward to 
working with the committee on these recommendations to improve 
the program. Thank you.
    [The prepared statement of Scott Serota follows:]
   Prepared Statement of Scott Serota, President and Chief Executive 
            Officer, Blue Cross and Blue Shield Association
    Mr. Chairmen and members of the Oversight and Investigations and 
Health Subcommittees, I am Scott Serota, President and Chief Executive 
Officer of the Blue Cross and Blue Shield Association. We represent 45 
independent, locally operated Blue Cross and Blue Shield Plans 
throughout the nation. I appreciate the opportunity to testify before 
the Subcommittees on Medicare contractor reform.
    Since 1965, Blue Cross and Blue Shield Plans have played a leading 
role in administering the Medicare 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 serve as Part A Fiscal Intermediaries (FIs) 
and/or Part B carriers and collectively process most Medicare claims.
    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 2001, 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 points 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 Hearings and Appeals: Beneficiaries and providers are 
        entitled by law to appeal the initial payment determination 
        made by carriers and FIs. These contractors handle over 7.4 
        million annual hearings and appeals.
4. Special Initiatives to Fight Medicare Fraud, Waste, and Abuse: All 
        contractors have separate fraud and abuse departments dedicated 
        to assuring that Medicare payments are made properly. According 
        to the Department of Health and Human Services (HHS), these 
        activities saved the government $9 billion in 1998.
    Medicare contractors operate under detailed instructions from the 
Center for Medicare and Medicaid Services (CMS), formerly known as the 
Health Care Financing Administration. As government contractors, 
Medicare contractors must comply with numerous federal statutes, 
regulations, and Executive Orders. In addition, contractors must follow 
extensive CMS-issued program guidelines and manual instructions. To 
monitor compliance with these guidelines, contractors are visited 
several times each year by their local CMS regional office staff for an 
assessment of their performance against CMS' requirements. These 
reviews, termed Contractor Performance Evaluations, are conducted 
across all aspects of contractor operations--claims processing 
timeliness and accuracy, customer service, fraud and abuse detection 
efforts--and culminate in a formal annual report called the Report of 
Contractor Performance. Also, CMS routinely contracts with private 
companies to review various critical aspects of contractors operations.
    Blue Cross and Blue Shield Medicare contractors are proud of their 
role as Medicare administrators. While workloads have soared, operating 
costs--on a unit cost basis--have declined about two-thirds from 1975 
to 2001. In fact, contractors' administrative costs represent less than 
1 percent of total Medicare benefits. Few government expenditures 
produce the documented, tangible savings of taxpayers' dollars 
generated by Medicare anti-fraud and abuse activities. For every $1 
spent fighting fraud and abuse, Medicare contractors save the 
government $17.
    Blue Cross and Blue Shield Medicare contractors are committed to 
achieving outstanding performance. We support efforts to improve the 
ability of both contractors and the CMS to cost-effectively provide the 
highest service levels to Medicare beneficiaries.
    With this as background, I would like to focus my testimony on the 
following two areas:

I. Current challenges facing Medicare contractors; and
II. BCBSA recommendations for contractor reform.
                    i. challenges facing contractors
    There are four key challenges currently facing Medicare 
contractors:

1. Inadequate funding levels with rising workloads;
2. Increased complexity of Medicare rules;
3. Frequent changes in program direction; and
4. Legislative mandates not accompanied by additional funding.
    Inadequate funding levels: Of utmost importance to attaining 
outstanding performance is an adequate budget.
    However, Medicare contractors have been severely underfunded since 
the early 1990's and are facing poor prospects of receiving adequate 
funding next year. During the early to mid-1990's, reductions in 
funding concurrent with increases in workload seriously eroded 
contractors' ability to fight fraud and abuse. Between 1989 and 2000, 
the number of Medicare claims climbed almost 70 percent to over 800 
million, while payment review resources grew less than 11 percent. As a 
result, the amount allocated to contractors to review claims shrank 
from 74 cents to 48 cents per claim. Because of the significant cost of 
reviewing claims, this decline in funding resulted in CMS' directions 
to contractors to reduce the percentage of claims that were scrutinized 
and investigated. Similarly, the percentage of cost reports audited 
declined--between 1991 and 1996, the chances that any institutional 
provider's cost report would be reviewed in detail fell from about 1 in 
6 to about 1 in 13.
    Throughout this period, contractors identified to CMS additional 
anti-fraud efforts they could undertake if awarded additional 
resources. BCBSA and Blue Plans urged both Congress and the 
Administration to allocate significantly more funds for critical anti-
fraud and abuse efforts. Finally, in 1996, Congress created the 
Medicare Integrity Program (MIP) in the Health Insurance Portability 
and Accountability Act. MIP provided a permanent, stable funding 
authority for the portion of the Medicare contractor budget that is 
explicitly designated as fraud and abuse detection activities. MIP 
funding was set at $500 million in 1998 and is authorized to rise to 
$720 million in 2002. After 2002, the permanent authorization is capped 
at $720 million despite continuing estimated increases in claims 
volumes.
    Thanks to this new funding mechanism, Medicare contractors have 
been able to improve their efforts to reduce the amount of fraud, 
waste, and abuse in the Medicare program. Contractors' enhanced anti-
fraud and abuse efforts due to MIP funding contributed to the 
significant decline in improper claims and documentation submission by 
providers. The OIG audit of FY 2000 claims estimated that improper 
Medicare payments had dropped to $11.9 billion, or about 6.8% of the 
$173.6 billion in Medicare payments. The improper payment rate declined 
by over 50% or $11 billion in five years.
    But, the creation of MIP did not solve the budget problems for the 
remainder of the contractor budget. The largest portion of the 
contractor budget--program management--is subject to the annual 
appropriations process and continues to face severe funding pressures. 
Program management activities include claims processing , beneficiary 
and provider communications, and hearings and appeals of claims 
initially denied. Under the appropriations process, contractors must 
compete for funding with high priority programs such as the National 
Institutes of Health and education.
    For example, between 1989 and 1998, funding for program management 
activities (adjusted for inflation) declined by 18 percent. During this 
period, the volume of Medicare claims increased by 84 percent; Medicare 
outlays (in real dollars), by 65 percent. Whenever possible, 
contractors responded to reduced funding by achieving significant 
efficiencies in claims processing, lowering program management costs 
per claim by 56 percent in real dollars over this period. But even 
these efficiencies have not been enough to keep pace with rising 
Medicare claims volume and diminishing funding levels. For example, 
this year, contractors have been instructed to cut back on customer 
service plans, responding to inquiries, provider training and other 
provider services in order to live within the 2001 budget.
    Inadequate budgets for program management also impact Medicare's 
fight against fraud and abuse. While many think of program management 
activities as simply paying claims, these activities are Medicare's 
first line of defense and are critically linked to MIP anti-fraud and 
abuse activities. As an example, many of the front-end computer edits 
(e.g., preventing duplicate payments and detecting suspicious claims) 
are funded through program management. Inadequate funding impacts 
different functions at different times, but always disrupts the 
integration of all the functional components needed to ``get things 
right the first time.'' It thus results in inefficiency and higher 
costs.
    We are pleased that Secretary Thompson and many Members of this 
Committee have recognized the need for additional administrative 
resources at CMS. However, we are concerned that the Administration's 
FY 2002 budget relies on $115 million in new user fees from doctors, 
hospitals, and other providers. Congress has consistently rejected user 
fees and BCBSA would recommend they be rejected again. We also strongly 
recommend Medicare contractor funding be increased to $1.567 billion in 
FY 2002 to ensure adequate resources are available to provide the high 
quality services beneficiaries and providers deserve.
    Increased Complexity of Medicare Rules: The Medicare program 
continues to grow more and more complex. It takes a great deal of time 
and resources to educate providers and beneficiaries about new laws and 
rules as well as answer questions. Contractors have been challenged 
over the years with enormous program changes such as:

 New payment mechanisms for outpatient departments, home health 
        agencies, and skilled nursing facilities.
 Changes to Medicare coverage rules: Balanced Budget Act (BBA), 
        Balanced Budget Refinement Act (BBRA), and the Beneficiary 
        Improvement and Protection Act (BIPA).
 Implementation of the administrative simplification provisions 
        of HIPAA.
    Just as Members of Congress are hearing from providers on the 
program's complexities, so too are contractors who must answer their 
questions and concerns.
    Frequent Changes in Direction: Medicare contractors are challenged 
by the very nature of the business. At last count, Medicare 
contractors, received on average a new instruction from CMS every five 
hours of every day of the year. This constant state of change requires 
contractors to be extremely flexible--both in terms of operations and 
budget. It has not been uncommon in the past for contractors to be 
forced to abandon projects or reallocate staff mid-year in order to 
adapt to CMS' suddenly revised priorities or modified funding levels.
    Medicare contractors operate under cost contracts, and CMS places 
budget caps, or limits, on the unit costs paid to contractors to 
process claims. By law, Medicare contractors are not allowed any 
profit. Under these contracts, Medicare contractors essentially do 
whatever work CMS requests, without ``change orders.'' There is not a 
clear statement of work at the beginning of the year, and contractors 
generally must comply with constant change orders from CMS without 
additional reimbursement. These demands make the Medicare contractor 
business extremely challenging.
    Legislative Mandates Without Funding: Legislative changes to 
Medicare are rarely accompanied by administrative funding or 
appropriate transition time for proper implementation. This is 
extremely cumbersome for contractors that are already strapped for 
resources.
    bcbsa recommendations to improve the medicare contractor program
    BCBSA agrees that revisions to the Medicare contractor program 
could strengthen contractors' ability to effectively and efficiently 
handle day-to-day administration of the Medicare program. Blue Cross 
and Blue Shield Medicare contractors are committed to achieving 
outstanding performance levels and providing superior service to 
Medicare beneficiaries and providers. We want to work with the Congress 
and CMS to attain this objective. While CMS has outlined a number of 
changes, we understand the specific proposal is still under 
development. Therefore, our comments reflect our best understanding of 
their proposal at this time.
    Competitive Contracting: We believe that Congress should explore 
revising Medicare contracts to allow qualified companies to compete 
based on a modified Federal Acquisition Rule (FAR)--the federal 
government's rules on competitive contracting. The FAR would instill at 
least two disciplines now missing in the program: a clear scope of 
work, and a professional contracting officer for each contract, through 
whom contract changes are made. Conducting such competitions under the 
FAR would ensure that contracts are awarded on the basis of fair 
competition, and it would give all contractors appropriate appeal 
rights and due process.
    HHS has indicated its intent to reduce the number of contractors to 
fewer than 20 by 2006. We would point out that such consolidation is 
already occurring without legislation. In fact, the number of FFS 
contractors has declined from nearly 50 in 1985 to 32 at the present 
time. We would caution the Congress and the Administration against 
moving precipitously with additional consolidation. It could have the 
potential of seriously disrupting program operations, which in turn 
could hinder provider services and beneficiary care. To ensure 
stability of the Medicare program, BCBSA recommends that CMS only put 
to competitive bid poor performing contractors or those that occur when 
a contractor is voluntarily exiting the program, rather than using an 
artificial and mandated timetable for consolidation. This would allow 
the government to maintain those contractors that are providing quality 
services and meeting CMS' performance expectations.
    Allowing Non-Health Insurers: BCBSA does not oppose the CMS 
proposal to allow non-health insurance entities as FFS contractors. In 
fact, we believe CMS already has this authority under current statute 
and would question whether CMS actually needs additional legislative 
authority to accomplish this. However, we strongly support the 
development of criteria to ensure that entities allowed to compete are 
well qualified to provide the full range of Medicare administrative 
services.
    Functional Contracting: We understand that CMS would like 
additional authority to further fragment current contractor functions. 
CMS already has considerable authority to contract separately for 
Medicare processing functions. For example, the MIP authority under 
HIPAA permits HHS to separately contract for payment safeguard 
functions and last year's Medicare legislation requires separate 
contracting for second level appeals.
    We believe it is unwise for CMS to further fragment Medicare 
functions because it would diminish the current single point of 
accountability that fiscal intermediaries and carriers represent to 
providers and beneficiaries. By breaking up contracting functions and 
spreading them among a large pool of new entities--many of whom would 
be inexperienced in Medicare--the claims payment process could be 
impaired, which is likely to disrupt effective management of the 
program. Costs would invariably increase because claims processing, 
customer service, and fraud and abuse activities are interconnected; 
for example, claims processing and fraud control efforts would still 
require coordination and extensive data sharing after these 
responsibilities are divided. At the very least, a comprehensive plan 
to ensure efficient coordination among the functional contractors and 
an infrastructure to support the coordination must be developed and 
implemented prior to adopting any provisions to further fragment 
program operations.
    Moreover, separating key functions to different contractors could 
hinder efforts to fight fraud and abuse and disrupt services to 
beneficiaries and providers for several reasons:

1. Fragmentation is likely to create competing, counterproductive 
        incentives.
2. Staffing resources required to implement and manage this type of new 
        contracting authority are so immense that they would undermine 
        CMS' efforts to administer its other initiatives effectively.
3. Contracts could be awarded to entities that have no experience 
        working with the Medicare program (a current program 
        requirement), or even entities that have no familiarity with 
        health claims processing.
4. Functional contracts are likely to increase, not decrease costs.
    Above all else, fragmenting the claims payment process would 
destroy the current single point of accountability now available to 
CMS, providers, and beneficiaries. I cannot emphasize enough the 
potential confusion and difficulty that may arise from managing a 
multitude of independent specialty contractors who share work but do 
not share accountability for the outcome (e.g., for a correctly and 
efficiently processed claim), and may even consider themselves 
competitors to each other. It is conceivable that under CMS's proposal 
an individual claim could be handled by three or more individual 
contractors before it is finally processed. This fragmentation could 
remove any accountability for processing a single claim properly--from 
beginning to end.
    Combine Part A and B Contractor Operations: The Medicare program is 
unique in that two distinct operations exist for Parts A and B, each 
having been designed separately. We do not believe that merging 
contractor operations would improve the program for beneficiaries. In 
fact, it could have the opposite effect, hindering operations and 
causing disruptions in services. Part A is geared toward interactions 
with hospitals and the provider community while Part B contractor 
operations are targeted toward interactions with beneficiaries.
    Because of the differing benefit structures, which led to separate 
Part A and Part B contractors, Medicare's information systems have not 
advanced the techniques for consolidated processing. In fact, since 
CMS's aborted attempt to construct a single processing platform in the 
early 1990s (the Medicare Transaction System or MTS), CMS has pursued a 
strategy of separate automated systems for Part A and Part B, and an 
additional automated claims processing system for its Durable Medical 
Equipment Regional Contractors. As the General Accounting Office 
testified recently before your Committee: ``HCFA lacks [the capacity to 
collect comprehensive information on services and payments in the 
aggregate and for individual beneficiaries] today, not because it has 
separate contractors for parts A and B, but because of deficiencies in 
its information systems.''
    We can appreciate the advantages of having a common database of 
beneficiary and claims information to promote customer service and 
medical review. Similarly, local medical policies should not differ 
between Part A and Part B in the same states or major metropolitan 
areas. These two concerns, however, are easily dealt with without 
having to change contractor operations: data can be shared and 
combined, and local medical policies can be brought into agreement.
    Eliminate Provider Nominations: Provider nomination was originally 
implemented to offer greater ease and simplicity of claims payment for 
institutional providers. This process has been important for provider 
chains that are able to choose one contractor to handle claims from 
their providers on a nationwide basis. As you consider this 
recommendation, we suggest consulting with the provider community on 
the impact of such a change. BCBSA would not oppose this, which would 
include elimination of our Prime Contract, so long as the provider 
community is in agreement.
    Drop special contractor termination provisions: CMS clearly has the 
authority to terminate current contractors if they are not meeting 
performance expectations. We understand that CMS is considering a 
proposal that would eliminate contractor's current termination rights, 
primarily the payment of phase-out costs. Continuing contractors should 
retain their existing termination rights.
    The original construction of Title XVIII intended contractors to be 
reimbursed at neither profit nor loss and permitted contractors 
termination rights and payment for phase-out costs. Had the statute 
envisioned today's typical FAR contracting rules, termination rights 
and reimbursements would be handled differently. If, in the future, 
Medicare FFS contracts are procured under the FAR, then interested 
parties will be able to consider those termination provisions in their 
bid proposals. Contractors that are not given the opportunity to rebid 
under different termination rules, should retain the current 
contractual rights.
    CMS authority to award other than cost reimbursement contracts: We 
agree with CMS that the current cost based contracting system should be 
modernized. Currently, most contractors are paid costs up to a cap set 
by CMS; there is virtually no opportunity for profit. We believe CMS 
should be allowed to use other payment options, such as cost plus 
contracts.
    We would like to again highlight that contractors have been 
extremely efficient. Unit costs have dropped two-thirds over the last 
25 years; administrative costs represent less than 1 percent of benefit 
payments. This has been achieved by the many technological advances 
employed by contractors.
    As previously stated, a major challenge over the past 10 years has 
been inadequate funding, coupled with rising workloads and legislative 
changes necessitating major payment systems revisions. The prospects 
for adequate funding for next year do not appear promising. Any change 
to how contractors are paid must be accompanied by sufficient overall 
funding.
    Stable and Adequate Funding is Necessary. While Blue Cross and Blue 
Shield Medicare contractors are committed to continually achieving 
greater efficiencies, it is simply not realistic to expect contractors 
to attain outstanding performance levels with greater workloads and 
tighter budgets.
    We urge Congress to provide adequate funding levels to assure that 
contractors can perform the range of functions necessary to safeguard 
program funds and support high quality service levels to beneficiaries 
and providers. As highlighted earlier, funding has not kept pace with 
programmatic needs--important functions are not being funded. We have 
two specific recommendations that are not included in the CMS package:

 First, we urge Congress and the Administration to assure 
        Medicare administrative funds keep pace with workload increases 
        and new legislative/regulatory requirements. Congress also may 
        wish to explore using a new methodology to develop Medicare 
        contractor budgets, such as those mechanisms used to fund 
        Social Security Administration administrative costs and 
        Medicare Peer Review Organizations.
 Second, we urge the Committee to increase the permanent MIP 
        appropriation, which is currently capped at $720 million in 
        2002 and beyond. If fraud and abuse efforts are to be 
        effective, MIP funding must keep pace with workload increases. 
        MIP has also had a positive effect on Medicare's financial 
        situation, lowering FFS inflation and extending Part A Trust 
        Fund solvency, according to the OIG and Medicare Trustees. 
        Therefore, it is critical this program be continued.
    BCBSA would like to work with Congress to assure adequate funding 
is available each year for high quality provider and beneficiary 
services.
                               conclusion
    Blue Cross and Blue Shield Medicare contractors are committed to 
achieving outstanding performance. We believe more can and should be 
done to improve Medicare contractor operations and CMS oversight. 
Success in Medicare claims administration requires that CMS and the 
contractors work together toward their mutual goal of providing high 
quality services to beneficiaries and providers, including accurate and 
timely claims payment.
    BCBSA look forward to working with this Committee and CMS to make 
these needed improvements.

    Mr. Greenwood. Thank you for your testimony.
    Mr. Cullen, you are recognized for 5 minutes.

                 TESTIMONY OF TIMOTHY F. CULLEN

    Mr. Cullen. Thank you, Mr. Chairman, and members of the 
subcommittees. My name is Tim Cullen. I am Chairman of the 
Board of United Government Services. We are the largest 
Medicare Part A intermediary. We process about 20 percent of 
all Part A claims. We employ 1,300 people in eight different 
States.
    We support the Medicare Contractor Reform proposals of the 
Secretary and CMS. We welcome and support more competition in 
Medicare contracting. We have competed for and won contracts in 
the Medicare program. In our private business side at Wisconsin 
Blue Cross, we compete for business every day.
    The Medicare contractor program needs to change and be 
administered within the context of free market competition. 
This is the clear and obvious direction of nearly every segment 
of our society. The program needs competition. It needs 
incentives. It needs reasonable limits on contractor liability.
    The current program of cost contracts, with no incentives 
to excel and unlimited liability, is essentially a program of 
all stick and no carrot. The current system of throwing out 
non-compliant contractors, but not rewarding good ones simply 
encourages mediocrity. That does not serve the senior citizens 
of America well.
    We support moving away from cost contracts. Cost contracts 
do not reward excellence. Cost contracts require CMS to 
micromanage contractors. We need to move to incentive-based 
contracts through the competitive bid process. I have no doubt 
that CMS can successfully manage the changes proposed by the 
Secretary and the administrator.
    Transitions of business to new contractors would occur with 
reform. There would be this movement of business to different 
contractors. This does not need to be disruptive to senior 
citizens or providers. Working closely with CMS, we at United 
Government Services have successfully completed large 
transitions in Michigan, Virginia, West Virginia, and 
California, all in the past 4 years. In addition to these 
States for the Part A side, we also assumed workloads for the 
federally qualified health centers in all 50 States, as well as 
regional home health intermediary for eight more western 
States.
    If you address the issues involving the employees currently 
doing the work, it is a key factor in that success. We also go 
out and meet with provider groups, meet with beneficiary groups 
in advance of the transition date so they know who the 
contractor and intermediary is going to be, and know how to get 
a hold of us. You can mitigate a lot of those transitional 
issues if you meet with people in advance.
    The Medicare contractor budget of over $1 billion does not 
go out for bid today really unless the contractor leaves 
voluntarily or involuntarily. As a matter of public policy, we 
do not think this is defensible, particularly for large 
contractors and intermediaries.
    We support the elimination of the provider nomination 
process, and therefore, the Blue Cross Association master 
contract with CMS. As a practical matter, on a day-to-day 
basis, we intermediaries interact with CMS daily, hourly, and 
not that often involving the association. So as a practical 
matter, the relationship is between us as intermediaries and 
with CMS.
    Regarding changes to termination agreements and costs, we 
must recognize and protect existing contracts with employees, 
such as our unionized employees in downtown Milwaukee. We are 
proud of our employment record on the new contracts we have 
been awarded, and are well aware that both the committee and 
CMS value continuity of services when intermediaries change.
    Contract incentives can be structured to be very beneficial 
to a senior citizen. Incentives can reward contractors for 
speed and accuracy, for example, in handling customer service 
phone calls. Have the incentives reward the kind of behavior 
that benefits the senior citizen.
    Competition and properly structured incentives will 
encourage excellence in Medicare contracting. This serves the 
senior citizens of America.
    I thank you for this opportunity to testify. I will be 
pleased to try to answer any questions of the subcommittees. 
Thank you.
    [The prepared statement of Timothy F. Cullen follows:]
 Prepared Statement of Timothy F. Cullen, Chairman, United Government 
                             Services, LLC
    Mr. Chairman and members of the Committee I am pleased to testify 
before you today. I am Chairman of the Board of United Government 
Services (UGS). As the largest Medicare Part A intermediary we process 
20% of all Part A claims. We employ 1,300 people in eight states.
    We support the Medicare Contractor Reform proposals of the 
Secretary and CMS.
    We welcome and support more competition in Medicare contracting. We 
have competed for and won contracts in the Medicare program and on our 
private business side, at Wisconsin Blue Cross, we compete for business 
everyday.
    The Medicare contractor program needs to change and be administered 
within the context of free market competition. This is the clear and 
obvious direction of nearly every segment of our society.
    The program needs competition, incentives and reasonable limits on 
contractor liability.
    The current program of cost contracts, with no incentives to excel 
and unlimited liability, is essentially a program of no carrot and all 
stick.
    The current system of throwing out non-compliant contractors but 
not rewarding the good ones encourages mediocrity and that does not 
serve the senior citizens of America well.
    We support moving away from cost contracts. Cost contracts do not 
reward excellence. Cost contracts require CMS to micromanage 
contractors. We need to move to incentive-based contracts through the 
competitive bid process.
    I have no doubt that CMS can successfully manage the changes 
proposed by the Secretary.
    Transitions of business to new contractors would occur with reform. 
This does not need to be disruptive to senior citizens or providers. 
Working closely with CMS, we at UGS have successfully completed large 
transitions in Michigan, Virginia, West Virginia and California all in 
the past four years. Addressing issues involving the employees 
currently doing the work is a key factor in this success.
    The Medicare contractor budget of over one billion dollars does not 
go out for bid unless a contractor leaves voluntarily or involuntarily. 
As a matter of public policy we do not think this is defensible for 
large contractors and intermediaries.
    We support the elimination of the provider nomination process and 
therefore the Blue Cross Association Master Contract with CMS. As a 
practical matter, on a day to day basis we intermediaries interact 
directly with CMS and only on a rare basis involve the Association.
    Regarding changes to termination agreements, we must recognize and 
protect existing contracts with employees such as our unionized 
employees in downtown Milwaukee. We are proud of our employment record 
on the new contracts we have been awarded and are well aware that both 
the Committee and CMS value continuity of services when intermediaries 
change.
    Contract incentives can be structured to be very beneficial to 
senior citizens. For example, incentives can reward contractors for 
speed and accuracy in handling customer service phone calls. Incentives 
can reward contractors for answering a high percentage of phone calls 
in a short period of time.
    Competition and properly structured incentives will encourage 
excellence in Medicare contracting and this serves well the senior 
citizens of America.
    Thank you for this opportunity to testimony and I will try to 
answer any questions from the Committee.

    Mr. Bilirakis. Thank you very much, Mr. Cullen. I apologize 
for this shifting around up here, but you have been up here 
enough to know what it is like.
    Mr. Chiplin, who is the Managing Attorney for the Health 
Care Rights Project, Center for Medicare Advocacy. Welcome, 
sir. Please proceed.

               TESTIMONY OF ALFRED J. CHIPLIN, JR.

    Mr. Chiplin. Thank you, Mr. Chairman, and subcommittee 
members. My name is Alfred Chiplin. I am the Managing Attorney 
in the Washington, DC based Health Care Rights Project at the 
Center for Medicare Advocacy.
    Thank you for this opportunity to testify on Medicare 
contractor issues affecting older and disabled Americans, 
particularly as the Center for Medicare and Medicaid Services, 
CMS, takes on new leadership and is in the midst of another of 
its all too frequent reorganizations.
    Beneficiaries need good information from carriers and 
intermediaries. One of the more critical functions of carriers 
and intermediaries is to educate people about Medicare options 
and about how to get medically necessary services. From our 
experience, we have learned that people with Medicare need to 
hear about their Medicare options from multiple sources 
multiple times. Unfortunately, CMS has cut carrier and 
intermediary funding to provide these important educational 
services. Other than the State health insurance assistance 
programs, which are substantially under-funded to meet 
community needs, the elderly and people with disabilities have 
few places to turn for good information.
    Beneficiaries need timely information about the 
Medicare+Choice program and its plans. Recent actions by the 
Secretary of HHS are likely to undercut significantly any 
legitimate CMS efforts to provide reliable and timely 
beneficiary information necessary to make decisions about 
choosing a Medicare+Choice plan.
    On May 25 of this year, the Secretary sent a letter to the 
American Association of Health Plans, summarily giving HMOs 
additional time in which to inform CMS of their proposed 
benefits and premiums for their 2002 Medicare plans, and 
whether they plan to participate in the Medicare program. A 
number of beneficiary organizations and individual 
beneficiaries have recently filed suit against the Secretary, 
complaining that this action is illegal. They allege that the 
delay in this important information deadline from July 1, 2001, 
to September 17, 2001, will prevent older and disabled 
Americans from receiving Medicare and You, the annual 
government mailing with comparative health plan information, in 
time to make an informed choice about services.
    The Secretary's decision also allows HMOs to mail out 
marketing materials with unapproved information as long as it 
includes a disclaimer explaining that the information is 
subject to final approval.
    We also note that the Secretary is doing a few things that 
we think are useful in this regard. He is taking the Medicare 
hotline, the 1-800 number, and moving that to a 24 hour a day, 
7 day a week service, which we think will be helpful. We also 
are pleased that in this whole movement, they are moving to 
extending the special enrollment period through the month of 
December. These actions we think will be helpful. But overall, 
it puts beneficiaries in a bad position with respect to being 
able to have good information both for the plans, for carriers, 
for intermediaries about making health plan choices. We think 
this will redown to much confusion, and will have a number of 
negative repercussions at all levels with respect to 
decisionmaking.
    In addition, beneficiaries need all types of information 
from their carriers and intermediaries. We also note that 
Medicare continues to be a program full of what I call 
bifurcations. What I mean by that is that intermediaries and 
carriers, carriers and their staff, generally rely on various 
Medicare manuals, program instructions, and other kinds of 
interpretations in making decisions about Medicare claims. In 
many instances, these instructions and interpretations are in 
fact inconsistent with the Medicare statute and implementing 
regulations. Much attention needs to be given to that.
    We are also concerned about issues of contractor oversight. 
We note that CMS responded to a letter of proposals by 
Congressman Stark and Congresswoman Johnson on June 14, saying 
that it is exploring incorporating the use of best practice 
standards from the private industry. We have no basic problem 
with this, although we caution that the adaptation and use of 
such practices is not a substitute for good statutory and 
regulatory enforcement and contract enforcement.
    Similarly, we have just learned of a durable medical 
equipment carrier making coverage decisions on the basis of a 
publication called Home Medical Equipment Answer Book. This of 
course is not an official Medicare manual, nor regulation, but 
rather an industry synthesis of Medicare law and practice. CMS 
should assure that carriers and intermediaries use such non-
Medicare tools in a fashion that does not compromise Medicare 
law. It is illegal to use screens in norms of treatment and 
treatment rules of thumbs to deny Medicare coverage without 
first providing a Medicare beneficiary with an opportunity for 
an individualized evaluation of his or her medical factual 
situation.
    We are also concerned that beneficiaries and carriers and 
intermediaries need to look at and address the whole question 
of managing the local coverage determination process known as 
LMRPs. In this system, carriers and intermediary functions to 
make, review and approve local coverage determinations about 
Medicare. In fact, 95 percent of all coverage policies are made 
on the local level, with 5 percent being made and developed on 
the national level. Currently there are some 8,000 LMRPs. The 
local carrier advisory committee develops these with input from 
State medical societies, medical directors, and advocacy 
groups.
    Mr. Bilirakis. Please summarize, Mr. Chiplin, if you would, 
please.
    Mr. Chiplin. The concern here is that you have all these 
carriers, all this information being developed by different 
people. There is no commonality of information. One 
intermediary in one area gives coverage for certain things, and 
one the next day doesn't give it. People are all over the 
place. There is no way to get these processes harmonized. It 
means beneficiaries go without coverage. That is the basic 
summary of that.
    The main thing that we would say in summary about this 
whole set of issues of carrier and intermediary contracting 
concerns is that they need to be adequately funded. They need 
to be funded specifically to address the question of 
beneficiary information in all of its forms.
    We also need to have them to address ways of getting at 
information. There is a lot of concern about whether the 
Internet is in fact a vehicle useful for older people. The 
geriatological research on that is rather mixed.
    So we strongly encourage more funding, careful analysis, 
and if you move to a different system of contractors, that 
there is ample experimentation and transition planning so that 
we don't have the kinds of problems that Congresswoman Capps 
identified in her comments earlier this morning.
    Thank you.
    [The prepared statement of Alfred J. Chiplin, Jr. follows:]
   Prepared Statement of Alfred J. Chiplin, Jr., Center for Medicare 
               Advocacy, Inc., Healthcare Rights Project
    Good morning, ladies and gentlemen. My name is Alfred J. Chiplin, 
Jr. I am the managing attorney in the Washington, DC-based Healthcare 
Rights Project of the Center for Medicare Advocacy, Inc., (the Center). 
The Center represents elders and people with disabilities who are 
unfairly denied Medicare and/or access to necessary healthcare.
    Thank you for this opportunity to testify on Medicare contractor 
issues affecting older and disabled Americans. This is an important and 
highly relevant topic, particularly as the Centers for Medicare and 
Medicaid Services (CMS), formerly known as the Health Care Financing 
Administration (HCFA), takes on new leadership and is in the midst of 
another of its all too frequent reorganizations.
About the Center for Medicare Advocacy, Inc.
    In addition to the Healthcare Rights Project, located here in 
Washington, DC., the Center for Medicare Advocacy has its headquarters 
in Connecticut, a data unit in Maine, and a consulting attorney in 
Tucson, AZ. The Center celebrated its 15th anniversary on March 1, 
2001.
    The Center for Medicare Advocacy, Inc., (the Center) is staffed by 
attorneys, paralegals, nurses, and technical assistants who provide 
legal advice, self-help materials, and representation to elders and 
people with disabilities. The Center operates a Medicare toll-free 
telephone hotline for Connecticut residents. This line responds to over 
a 1,500 calls per calendar quarter from persons seeking information 
about Medicare coverage and related issues.
    In addition to this state specific work, the Center is involved in 
national advocacy on behalf of improvements in Medicare coverage and 
appeals processes. Attorneys for the Center have participated in most 
of the major beneficiary-focused Medicare litigation that has been 
brought over the years--including issues of access to Medicare covered 
services for persons with chronic conditions, the lack of notice that 
comports with due process when skilled nursing facilities decide to 
terminate services for beneficiaries, and the problem of lack of notice 
or inadequate notice when managed care organizations decide to deny, 
reduce or terminate Medicare covered services. Similar litigation has 
been brought in the context of the home health benefit.
    The Center is called upon frequently to provide training for 
attorneys and other advocates who seek to represent Medicare 
beneficiaries. Center staff regularly provide Medicare training at 
national conferences and at state and local events. The Center has 
assisted organizations in establishing local Medicare education 
efforts, including brochures, pamphlets, and other writings of interest 
to those who represent beneficiaries. Our most recent effort in this 
regard is our Medicare Handbook, published in July 2000. An updated 
version of this text is at the printers for a re-issue date of August 
2001. In addition, we maintain an informational website at 
www.medicareadvocacy.org. The site was visited 28,000 times last 
quarter.
Beneficiaries need good information from carriers and intermediaries.
    Older and disabled Americans need access to meaningful and accurate 
information to make informed health care choices, to gain access to 
health care that is medically necessary, and to assure access to a 
health care system that responds to their needs and the needs of their 
community. Any changes to the Medicare carrier and intermediary 
contracting system should strive to realize these needs.
    One of the carriers' most critical functions is to educate people 
about Medicare options and how to get medically necessary services. I 
am sure you know from personal experience and experiences your 
constituents have shared with you how very difficult it is to make good 
health care choices. For the elderly and people with disabilities, 
these decisions are particularly hard because they tend to have low 
fixed incomes and a high likelihood of needing substantial health care 
services.
    From our experiences, we have learned that people with Medicare 
need to hear about their Medicare options from multiple sources, 
multiple times. Carriers, which have local offices throughout 
communities, provide education through face-to-face meetings, and are 
viewed as a trusted source by people with Medicare. Carriers have also 
instituted toll-free hotlines for consumers, have begun to provide more 
free information to providers, and have expanded their educational 
reach through their web sites.
    Unfortunately, CMS has cut carrier funding to provide these 
important educational services and, other than the State Health 
Insurance Assistance Programs which are substantially underfunded to 
meet community needs, the elderly and people with disabilities have few 
places to turn for good information.
Timely information about Medicare+Choice Plans.
    In addition to the lack of funding questions raised above, there is 
the problem of providing timely and accurate information necessary to 
make Medicare+Choice plan choices. Recent actions by the Secretary of 
the Department of Health and Human Services are likely to undercut 
significantly any legitimate CMS effort to provide reliable and timely 
beneficiary information necessary to make decisions about choosing a 
Medicare+Choice plan. In a May 25, 2001 letter to the American 
Association of Health Plans, Secretary Thompson summarily gives HMOs 
additional time in which to inform CMS of their proposed benefits and 
premiums for their 2002 Medicare plans and whether they plan to 
participate in the Medicare program.
    A number of beneficiary organizations and an individual Medicare 
beneficiary have recently filed suit in federal district court for the 
District of Columbia alleging that the Secretary's action is 
illegal.1 They allege that the delay in the deadline from 
July 1, 2001 to September 17, 2001 will prevent older and disabled 
Americans from receiving Medicare and You, the annual government 
mailing with comparative health plan information, in time to make an 
informed choice about their health care options.
---------------------------------------------------------------------------
    \1\ See, The Gray Panthers Project Fund, et al., v. Thompson, 
Secretary of Health and Human Services, Civil Action No. 1:01CV01374 
(HHK)(D. DC, filed June 22, 2001).
---------------------------------------------------------------------------
    Since Medicare+Choice was enacted in 1997, HMOs have been required 
by law to submit their Medicare plan information to HCFA, now CMS, 
which is responsible for reviewing and analyzing the data, putting it 
in a comparative format and sending it to the nearly 40 million peoplw 
with mMedicare 15 days before November 1, in time for Medicare's open 
enrollment period. This year, however, the Secretary authorized CMS to 
mail out Medicare and You 2002 without the comparative information on 
premiums, benefits, and cost-sharing for every Medicare HMO in the 
community.
    The Secretary's decision also allows HMOs to mail out marketing 
materials with unapproved information as long as it includes a 
disclaimer explaining that the information is subject to final 
approval. And, he is extending the time frame for the HMOs to mail out 
their own marketing materials, including information on benefit and 
premium changes.
    Consumer advocates are also concerned because beginning January 
2002, those enrolled in Medicare HMOs will be ``locked-in'' to their 
healthcare choices. They will only be permitted to make one change 
during the first six months of the year and later during the open 
enrollment period in the fall of the year.
    People who lose their HMO coverage can enroll in Original Medicare 
(fee-for-service) and may purchase a supplemental (Medigap) policy if 
they do so during a special time period that begins October 2, 2001 and 
ends March 4, 2002. About 27 percent of people with Medicare have one 
of the 10 different Medigap plans, the price for which varies depending 
on the amount of coverage one buys. Those interested in choosing 
another HMO option, if one exists in their community, are advised to 
research the cost of premiums, benefits and co-payments, what doctors 
and hospitals participate in a given plan, and prescription drug 
coverage available. Over the last three years, about 1.7 million older 
and disabled Americans had to find new healthcare coverage when their 
HMOs dropped out of the Medicare program.
    The results of this approach to information dissemination is likely 
to include many negative repercussions for carriers and intermediaries 
as they try to help people with questions and options in this uncertain 
environment. The law of unintended consequences, particularly of the 
``negative kind,'' is likely to be monstrously evident throughout this 
up-coming M+C plan election process.
Carrier and Intermediary Education about Medicare coverage.
    Medicare continues to be a program filled with unfortunate 
bifurcations. Intermediaries and carriers and their staffs generally 
rely on the various Medicare manuals and program instructions 
comprising the agency's interpretation of the statute they administer. 
In many instances these instructions and interpretations are in fact 
inconsistent with the Medicare statute and implementing regulations. 
Beneficiaries often have to continue through the administrative review 
process until they reach the Administrative Law Judge (ALJ) level of 
review before the applicable Medicare law and regulation is applied. 
This is wasteful and time-consuming for all parties concerned. More 
attention should be given to assuring that carrier and intermediary 
policies and practices conform to the law. In this regard, we caution 
that Congress not take the easy way out and simply ratchet down the 
ability of ALJs to go beyond carrier and intermediary interpretations 
of the law, but rather strive to assure that carrier and intermediary 
policy is in conformance with the Medicare statute and regulations.
    Reforms in this area should include a focus on assuring that 
carriers and intermediaries have been advised that their practices and 
pronouncements on a given issue are outside the statute and 
regulations. Moreover, carriers and intermediaries must be monitored to 
assure that once advised, corrective actions are taken. We have, for 
example, encountered many situations where carriers and intermediaries 
consistently misapply Medicare law and regulation with respect to 
granting Medicare coverage of services and procedures for persons with 
chronic conditions where skilled maintenance therapies are reasonable 
and necessary and have been prescribed by the patient's physician. This 
is particularly a problem in the area of Medicare covered home health 
services. It is long-settled that such coverage is appropriate under 
the Medicare program
Assuring contractor oversight.
    We note in CMS' June 14, 2001, response to Congressman Stark's and 
Congresswoman Johnson's proposals for administrative reform, that it is 
exploring incorporating the use of best-practice standards from the 
private industry. While we have no problem with this in the main, we 
caution that the adaptation and use of such practices is no substitute 
for statutory and regulatory enforcement or contract enforcement.
    We have just learned of a Durable Medical Equipment Review 
Contractor (DMERC) making coverage decisions on the basis of a 
publication called a Home Medical Equipment Answer Book. This, of 
course, is not an official Medicare manual or regulation, but rather an 
industry synthesis of Medicare law and practice. CMS should assure that 
carriers and intermediaries use such non-Medicare tools in a fashion 
that does not compromise Medicare law. It is illegal to use screens and 
norms of treatment, and treatment ``rules of thumb'' to deny Medicare 
coverage, without first providing a Medicare beneficiary with an 
opportunity for an individualized evaluation of his or her medical-
factual situation.
    Similarly, our experience is that CMS, formerly HCFA, rarely takes 
serious and significant enforcement steps against recalcitrant carriers 
and intermediaries. Best practice and continuous quality improvement 
approaches to quality must not be allowed to become an impediment to 
the use of more forceful sanctions where appropriate. We are not 
suggesting that only the severest of penalties be considered in all 
circumstances, but rather that there is established a culture and 
practice of the use of the full range of the agency's tools and 
resources to assure statutory, regulatory, and contractual compliance.
Managing the local coverage determinations process.
    Another important carrier and intermediary function is to make and/
or review and approve local coverage determinations, also called Local 
Medical Review Policies or LMRPs. Ninety-five percent of all coverage 
policies are made on the local level, with 5% being developed on a 
national level. Currently, there are approximately 8,000 LMRPs The 
local carrier advisory committee (CAC) develops these LMRPs, with input 
from state medical societies, medical director groups, and advocacy 
groups responding to consumers, and uses carrier data that indicates 
high utilization of a particular treatment or procedure.
    LMRPs in Medicare, until recently, have been a relatively hidden 
element of the Medicare coverage process. They reflect differences in 
local community medical practices and norms of treatment which in many 
ways belie the over all notion of Medicare as a uniform system of 
coverage and procedural rules for the operation of the federal Medicare 
program.
    Given the lengthy time it often takes for a national coverage 
decision to be approved, from six months to several years, local 
coverage determinations are in many cases viewed as practical or 
expedient. In many instances, LMRPs can be and are the first step in 
developing new national coverage determinations by proving the success 
of the treatment or procedure on a local level, which can then be 
subject to more stringent national review when national coverage 
determinations are made. Nonetheless, their proliferation, without 
uniform oversight and without notice and opportunity for beneficiary 
involvement, leads to program fragmentation and inconsistencies in 
coverage and to litigation in some instances.
    We note in CMS' June 14th letter of response to Representatives 
Pete Stark and Nancy Johnson's proposal of CMS administrative reforms, 
hat on the issues of LMRPs, that the agency acknowledges the problems 
of inconsistent policies and that standardization is necessary. We 
strongly encourage the agency to follow through on standardizing these 
policies. This is essential if the Medicare program is to be a national 
and uniform and reliable program of services and benefits.
Balancing local and national coverage determinations.
    Medicare needs to strike a good balance between national and local 
coverage determinations, as both have advantages. National 
determinations ensure that everyone with Medicare is given access to a 
particular service, no matter where they live. Local determinations 
ensure that people with Medicare can get access to serious, life-saving 
treatments in their community, even when no national coverage decision 
has been made. LMRPs have also proved helpful in extending coverage to 
people with Medicare for life-changing services outside of the area in 
which the LMRPs were implemented.
    For example, a Medicare HMO beneficiary in Pennsylvania was denied 
a treatment for severe back pain. She was wheelchair-bound because of 
her back problems. Over the years she had numerous back surgeries and 
underwent treatment at several pain management clinics. Her doctor 
requested that the HMO authorize a consultation with an out-of-network 
doctor in New York to see if she would be a candidate for Percutaneous 
Laser Disc Decompression (PLDD), a procedure that was covered by the 
Medicare carrier in New York, but not by the carrier in Pennsylvania.
    The HMO denied pre-authorization claiming that PLDD was without 
proven clinical efficacy, and that the HMO did not have to cover the 
procedure because it was not available in Pennsylvania. With the 
recommendation of her doctor who claimed that the HMO would cover the 
service, the beneficiary borrowed money from the bank, had the 
consultation and eventually the procedure. The surgery allowed her to 
dispense with her wheelchair, and resume many of her daily activities. 
After receiving multiple denials for coverage by the HMO, an 
administrative law judge overruled arguments that since PLDD was not 
covered in Pennsylvania, the carrier in Pennsylvania did not have to 
cover it and required the HMO to reimburse the beneficiary for the 
procedure.
    While there may be good reason to change the Medicare contracting 
system, any reforms should bear in mind the risk of losing the 
expertise of local carriers, making Medicare education less available, 
and possibly jeopardizing local coverage determinations. Carriers today 
are generally the only source for information about local coverage 
rules, although CMS has now contracted-out the cataloging and compiling 
of LMRPs on a website .
    We have found that even Medicare managed care plans, although 
required to cover the same services as original Medicare in their 
geographical area, often do not know what Medicare covers . A carrier 
responsible for a broader area such as an entire region would face the 
challenge of keeping updated information regarding the various local 
coverage determinations throughout the states under its jurisdiction.
    Carriers also serve as the critical link between CMS policymakers 
and local providers by sharing information about providers' experiences 
with the government, and educating providers about new government 
regulations or administrative directives. The local nature of the 
carriers also allows them to better represent to CMS the concerns of 
people with Medicare in their state.
    The Centers for Medicare and Medicaid Services (CMS) have announced 
a $35 million national Medicare education campaign to inform people 
about their Medicare options. A portion of this money should be 
allocated to carriers to reinforce their role as Medicare educators and 
to allow them to expand their hotline and counseling services. In short 
any contractor reform initiatives must appreciate that access to good 
information and good health care are the foundation of a strong 
Medicare program.
Conclusion.
    We appreciate the opportunity to testify on these important issues. 
We recognize the large and important task that confronting CMS as an 
agency and as a community of concerned and dedicated staff. Further, we 
recognize that CMS can not meet its many responsibilities to provide 
meaningful beneficiary education and services to Medicare beneficiaries 
through its carriers and intermediaries without adequate staffing and 
funding. We feel the agency has all too often been cobbled by the 
combined curse of under-funding, under-staffing, and seemingly 
rudderless change and reorganization. In this regard, CMS staff need 
the assurance of sound and reliable direction and authority so that 
they can work with carrier and intermediary staff with confidence in 
the laws, regulations, and instructions that govern the Medicare 
program and with confidence in the tools of oversight and enforcement 
extended them by the agency itself.
    Thank you very much.

    Mr. Bilirakis. Thank you. Thank you, Mr. Chiplin. I might 
add that particularly the areas that you mentioned are the same 
areas that we are concerned with.
    Mr. Greenwood, to inquire.
    Mr. Greenwood. Thank you, Mr. Chairman. Address a question 
to Mr. Serota, if I might.
    A for-profit private contractor is going to obviously have 
an obligation toward its bottomline, toward its profit, toward 
its stockholders if there are stockholders. It also has an 
obligation to the taxpayers, obviously. CMS will want to make 
sure that it gets the most efficient use of taxpayers dollars. 
It also has an obligation to the beneficiary to provide prompt, 
clear, usable information and so forth. Then finally, a very 
important obligation to the providers to make their life as 
manageable as possible.
    What are the ways that we can construct, that CMS can 
construct contracts so that the private for-profit contractor 
doesn't skimp on any of its other obligations in the name of 
maximizing its profit?
    Mr. Serota. Well, I think there are a number of ways. I 
think the first probably is to reform the methodology for 
reimbursement for contractors so that there is an opportunity 
for them to earn a margin on the business. I think if the 
statement of work is clearly statement, the accountability is 
clearly stated, and there are clear indications of the 
expectations, our contractors, our Blue contractors as well as 
others will be able to evaluate whether they can in fact meet 
all those obligations in a cost-effective fashion.
    That kind of statement of work put out to competitive bid 
would allow plans to make an assessment and participate in the 
program when they can meet all those obligations. They should 
be held to very high performance standards to ensure that they 
meet those obligations, principally to the beneficiaries and 
the providers. I think with a reasonable opportunity to earn a 
return, they will be able to satisfy their shareholders as 
well.
    Mr. Greenwood. Let me be more specific. If I am an 
optomologist and I have a patient, and I want to do a surgical 
procedure that has to do with lifting an eyelid for instance, 
and because that provides better eyesight. So it is covered--I 
am making this up, but it is covered if it is to improve the 
eyesight. It is not covered if it is cosmetic. So the physician 
makes whatever the term is, an application to have that 
procedure reimbursed. Do you have an obligation as a private 
contractor to try to make extra certain that you don't pay for 
something you shouldn't? You owe that to the taxpayers, you owe 
that to your bottomline. But the patient and the provider out 
there are frustrated because they are going through whatever 
paperwork, hoops you make them go through.
    So the question is how do we end up rewarding the 
contractor who manages to fulfill the obligations in terms of 
cost, but do it in a way that makes the providers stand up and 
cheer, and say that is what we have been waiting for, that kind 
of responsiveness, that kind of effectiveness.
    Mr. Serota. Well, I think by putting performance standards 
into the contract, which requires decisions to be made in a 
timely fashion upon receipt of information, I think is 
certainly one way to hold contractors accountable. I also think 
with a clear statement of expectation, that this is what is 
expected so that the providers, the beneficiaries, and the 
contractors all understand their expectations and their 
responsibilities on the front end, will also allow those kinds 
of things.
    Mr. Greenwood. How would you feel about a mechanism that 
allowed the providers to provide, to offer some input into how 
well those expectations are being met?
    Mr. Serota. I think that that is the best way to get 
feedback on whether you are satisfying your customers. Just ask 
them. Clearly providers and beneficiaries are our customers in 
this regard. We survey in our private business, providers and 
consumers all the time to be certain we are meeting their 
expectations. I think that that would be a reasonable way to 
ensure that we were meeting our expectations in the provider 
contracting area as well.
    Mr. Greenwood. Mr. Cullen, could you comment on those 
questions, please? You will need to pull one of the microphones 
toward you.
    Mr. Cullen. Well, I think that you would set standards for 
the contract that we would have to perform, if there was 
incentives in it. Then the marketplace will decide it. 
Businesses that don't want to get into this business, will look 
at the return, the risk and so on, and decide whether to get in 
or not. I think that can work.
    I also think that we as contractors or intermediaries have 
a function like most insurance companies, which is if you will, 
we are sort of the heavy. We are the one responsible for 
delivering the bad news, talking about costs on the commercial 
side, and here denying care based on regulations that we are 
meant to enforce. I think that is our job. I think to the 
extent this morning that Congresswoman Capps thought it was the 
Part B carrier's problem in California and her constituent 
thought it was the Part B carrier's problem, not Congresswoman 
Capps'. To this extent, I think the way the system is supposed 
to work. It is our job to please these customers. We would be 
incentivized to do it if we got past the cost contract 
environment.
    Mr. Greenwood. My time has expired. I thank the chairman.
    Mr. Bilirakis. Mr. Brown, to inquire.
    Mr. Brown. Thank you, Mr. Chairman.
    Mr. Chiplin, there is a study by Judith Hipper or Hibbard 
for AARP on the information that older consumers use to make 
health plan choices. I have looked at those materials sent out. 
I am pretty confused. I do health care a lot here. I have got 
to think that seniors are at least as confused by this sort of 
cascading of information that they receive.
    It is pretty clear from this study that seniors prefer one-
on-one support assistance, as I guess probably we all do. 
Sometimes it is not especially available. I am concerned that 
CMS' new education initiative doesn't place enough emphasis on 
getting seniors that one-on-one assistance. Do you tend to 
think that way also?
    Mr. Chiplin. Well, I do. The big concern right now and the 
primary vehicle for getting the one-on-one assistance is 
through the State health insurance counseling system, they call 
them SHIPs. In California, they call them HICAPs. They have 
different names. But they are very under-funded. Carriers and 
intermediaries also play a role in the beneficiary education 
side of it. But getting good information out through lots of 
venues is very important. Medicare information is inherently 
complicated. So I think the more vehicles you can use, the 
better, and that you keep the information in small bite-sized 
pieces, and have lots of different writings that target 
particular coverage issues.
    Mr. Brown. So funding SHIP is one we talked about that is 
funding I thought $15 million. The administrator earlier, Mr. 
Scully, said $13 million. Whatever it is, it is clearly--I know 
it is with Nationwide in Ohio, the carrier there, it is pretty 
clearly under-funded even with the reliance on volunteers the 
way that they do.
    What about the proposal to put a Medicare person in the 
Social Security offices? Does that make sense?
    Mr. Chiplin. I think it does. That would really be helpful 
because we often get questions about Medicare coverage and 
people say I have gone to my Social Security office and there 
wasn't anybody there that really could answer the question. So 
that would help.
    I think also with that you would probably need to have a 
number of people at the Social Security office who could act as 
what you might call an ombudsman or some other kind of person 
who could sit down and spend a little bit more time with an 
individual to look at coverage, both coverage issues, 
eligibility issues, access to service issues.
    Mr. Brown. Any other thoughts on what we should direct HCFA 
or direct CMS to do, what ways through which education program 
other than better funding for SHIPs, other than potentially 
putting a Medicare person in the Social Security offices?
    Mr. Chiplin. One other thing that comes to mind is to look 
inter-generationally. Older people rely often on their children 
and other young people or younger people in their lives and 
community. We find that when we do some pairing of older and 
younger around, understanding information, that that is also 
another and positive avenue of getting information out to 
people.
    Mr. Brown. Let me in my remaining time, Mr. Chairman, let 
me ask a different question, Mr. Chiplin. There was testimony 
earlier that we should consider consolidating the number of 
contractors. Our experience has been that contractors will make 
local coverage determinations, obviously based on local 
interests, local needs, local circumstances. Is there a 
contradiction there if we do more of this contractor kinds of 
consolidation that the uniqueness or the sort of home rule, if 
you will, or decisionmaking, local decisionmaking will suffer 
and that patients will not and Medicare beneficiaries will not 
have the kind of service that they might have otherwise?
    Mr. Chiplin. That is one of the most tangled area of 
Medicare practice I know of, of this whole business of local 
medical coverage, local medical practices, and you have 
national ones, and how all those things integrate. I think 
Medicare needs to re-look at that from beginning to end.
    I do think that under the current system, having some 
ability for coverage issues to bubble up, if you will, from the 
local area and local practice has some merit. But you do end up 
with a very bifurcated national program. That, as you see in my 
testimony, is a major problem where you have carrier A covering 
something and carrier B not covering it. This is supposedly a 
national program.
    So I think that you could put money into it and you could 
do some specialization with various carriers around coverage 
and coverage policy questions, but you still don't deal with 
the larger question of a uniform program.
    Mr. Brown. Mr. Serota, do you want to respond to that?
    Mr. Serota. Well, I think that it is important to recognize 
that healthcare is a local phenomenon. It is delivered locally. 
It is delivered in every community, and that we are trying in 
this environment to deliver a national program Medicare on a 
local basis. There needs to be some ability, and we have that 
through the--I will give you the wrong name, but the medical 
advisory groups and the Part B local medical groups to modify 
the practice to fit more appropriately with what is available 
in a local community. I think that that's important. That is 
the flavor of American health care. Frankly, that is one of the 
reasons the Blues have been as successful as they have been, 
because we are on the ground in every market.
    So I think you need to ensure that we don't get too uniform 
in an administration so that we can't take advantage of 
innovation and creativity, which happens in a local market, so 
we need to allow that flavor to continue to exist.
    Mr. Bilirakis. Do you agree with that, Mr. Cullen?
    Do you agree with that too, Mr. Chiplin?
    Mr. Cullen. This issue is already here, if nothing else 
that's been talked about today ever occurs. We are the Part A 
all the way in seven States from Virginia to Hawaii. So we are 
trying to be consistent across in several territories. We 
process claims through 12 time zones, way out into the Pacific. 
I think in the end, because it is a national program, Mr. 
Chiplin in any case, that a lot of these decisions have to be 
decided nationally because health care is delivered locally as 
Mr. Serota says, but local, is that all just all of Virginia, 
is that local? Or an area of Virginia or all of Wisconsin? It 
gets pretty broad right away, just with all the contractors, 
intermediaries we have today. I think it has to be decided 
nationally.
    I also would say that--I wasn't asked, but on the customer 
service, that putting somebody in every Social Security office 
would certainly be helpful, but of course there is not a Social 
Security office in every community. In my home county, there is 
one. But there are lots of people who wouldn't have access 
easily.
    The 1-800 number which you have funded, which is now toll-
free, has tremendously increased the number of phone calls we 
get because now senior citizens can call not on their own 
nickel. They can call an 800 number toll free and get questions 
answered. That, as you look to what needs to be funded, to fund 
the customer service area of our work so we can handle all 
those phone calls is one of the better ways in 2001 probably to 
serve senior citizens in terms of answering their questions.
    Mr. Bilirakis. Mr. Chiplin, do you have anything more you 
wanted to offer or have you explored that pretty deeply?
    Mr. Chiplin. I agree in part with Mr. Serota. I do think it 
is a lot of value of having coverage issues worked through 
locally, but I think we end up in the situation where we don't 
have any uniformity of standards, no dependability in the 
program with respect to coverage policy. That really hurts 
beneficiaries, especially since it takes so long to get things 
through the approval process.
    Mr. Bilirakis. We get a lot of complaints toward that end.
    When we first started on this path of patients first, 
taking a look at what was in HCFA, and taking a look at the 
need to make some changes, and to do it with them and not to 
basically shove it down their throats, we made the comments a 
number of times that we weren't attacking HCFA. This wasn't a 
witch hunt. But they don't have a very good image out there. I 
dare say that if the beneficiaries had a better knowledge of 
HCFA's performance over the last number of years, that image 
would probably be even worse. But certainly with the providers, 
I think you all have to agree the image is not a very good one.
    I guess the biggest complaint we ever get from any of these 
people over the years has been about HCFA. It hasn't been so 
much reimbursements or low reimbursements or anything of that 
nature. I have had doctors say all I have to do is tell me what 
I can charge and stick with it for a while and I'll charge it, 
whatever it is. I won't question it. But to not know, to not 
know and to basically be in fear of getting into trouble is 
just a terrible thing.
    We are looking at ways to try to make things a little more 
efficient, but we are an ivory tower. We don't really know it 
as well as we sometimes think we do.
    I guess I do not quite understand, now Trail Blazer in 
Texas is the carrier. Trail Blazer in Texas is also a fiscal 
intermediary, for the most part. Mutual of Omaha is in there. 
Are there any other smaller ones or any others?
    Mr. Serota. There may be. I am not sure.
    Mr. Bilirakis. There may be, but it would be a small 
percentage if there were, right?
    Trail Blazer is able to conduct both functions. But we are 
talking about two separate contracts, two separate groups of 
people? Take me through that. Why can't Trail Blazer under one 
contract do--they do both jobs in Texas. Whether it's the same 
people, who do it or not, I don't know. Can someone take me 
through that to try to explain that to me?
    Mr. Serota. I don't think I can take you in depth through 
the Trail Blazer. I can give it conceptually.
    Mr. Bilirakis. I am sure we can pick at Blue Cross.
    Mr. Serota. Well, Trail Blazer is Blue Cross. It is owned 
by Blue Cross of South Carolina.
    Mr. Bilirakis. Oh it is? See, that's what we know up here.
    Mr. Serota. There are functions in A and B that are 
designed differently. The Part A is primarily focused on 
dealing with the hospitals, and the providers to Part B, is 
primarily focused on dealing with beneficiaries.
    However, there are functions that overlap. In those 
instances where the functions overlap, they are combined when a 
single FI and carrier hold the contract. They are combined, and 
they do work together. But it is a small piece of the 
administrative function. Predominantly the functions are 
different. The two contracts are serving different purposes and 
different masters. But where those functions do overlap, they 
do combine and consolidate and take advantage of the 
efficiencies.
    Mr. Bilirakis. But even if the functions don't overlap, and 
I appreciate the distinction between Part A and Part B, 
although there is an awful lot of combining the two, as you 
know. But even if they weren't combined, why couldn't Trail 
Blazers under one contract basically handle both?
    Mr. Serota. Well, if they were in a competitively bid 
situation, the best to do both, then I think there isn't a 
reason why they couldn't. The issue that concerns us is to 
force contractors, which may not be the best in both to do 
both, rather than competitively bid them both.
    I think over time, you might get to a point where that 
makes sense, but given the current systems and structures that 
exist between A and B, you might end up with an inferior 
contractor in one A or B.
    Mr. Bilirakis. If we gave CMS the additional authority, the 
flexibility, they would be able to go in from a bidding 
standpoint to determine, right? Whereas now, we basically tell 
them what they have to do.
    Mr. Serota. But we don't think it should be forced. If the 
competitive marketplace causes it to happen, then certainly we 
are supportive of it. But what we don't think should happen is 
a forced scenario where A and B are forced together and bid 
together. We think that they are different enough that they 
should be bid separately and the best provider should be 
selected.
    Mr. Bilirakis. But if they are blended together, if A and 
B, it's based on what we are thinking up here--I still haven't 
decided in my own mind whether it is a good idea or not--then 
you are going to have to be forced, I guess.
    Mr. Serota. I guess my point is at this moment in time, I 
don't think that is the right course to take. I think that the 
programs are different enough today and the infrastructure 
doesn't exist yet at CMS to bring those two functions together. 
That would be my advice.
    Mr. Bilirakis. Yes. You have testified to that.
    Well, all right. Anything further?
    Mr. Brown. No.
    Mr. Bilirakis. Well, this is a tough subject. I don't 
really know what our timeline is up here. To be honest with 
you, we should know but we aren't sure. We may go back into 
contracting in a subsequent hearing and we may not. I don't 
know. But we definitely are intent, both sides, and the staffs 
have been working together on this issue of repairs, 
improvements to help the agency to do a better job for the 
people.
    We would always welcome, and we do welcome, suggestions 
from you toward that end. Please don't hesitate. I mean you 
only testified for a few minutes here. You waited a long time 
to do that. We apologize for the delays. But again, feel free. 
We will have questions to you, and we are requesting that you 
respond to those questions in a timely fashion. But again, we 
ask you to submit additional ideas and suggestions to us. You 
have an opportunity now. We are intent on making the changes.
    Mr. Brown. Mr. Chairman?
    Mr. Bilirakis. Yes, sir.
    Mr. Brown. I have a question from Mr. Strickland, if he 
could submit it in writing, actually to Mr. Scully, but any 
other questions that any members have for any of the panelists.
    Mr. Bilirakis. Well we are going to do that. I am not sure 
whether we have had unanimous consent. All members of the 
subcommittee, their opening statements will be made a part of 
the record. I don't know whether we have done that or not.
    We appreciate your being here. And HHS is represented? Is 
somebody here taking notes? A couple, two or three hands up 
there. So they are represented, and they are taking notes, and 
they have heard your concerns.
    Thank you very much.
    Mr. Serota. You're welcome. Thank you. We wish you good 
luck.
    Mr. Bilirakis. Thank you.
    [Whereupon, at 1:20 p.m. the subcommittees were adjourned, 
subject to the call of the Chair.]
    [Additional material submitted for the record follows:]
         Prepared Statement of The American Dental Association
    The American Dental Association (ADA) believes Medicare 
modernization and improvements are critical to the future stability and 
success of the program. The ADA is a professional organization that 
represents more that 144,000 licensed dentists in the United States. 
The ADA seeks to advance the art and science of dentistry, and to 
promote high-quality dental care and the oral health of the American 
public.
    Medicare does not cover most dental services. But the program 
affects thousands of small employer dentists and their Medicare-covered 
patients. For example, due to inconsistencies in Medicare regulations, 
some dentists can be required to file claims for clearly non-covered 
services. In addition, many dentists who provide covered services to 
Medicare beneficiaries on a regular basis must grapple with redundant 
notices and other unnecessary paperwork problems that can and should be 
ameliorated.
    The dental delivery system is very different from the medical 
model. Most private sector dentists are solo practitioners with fewer 
than four employees. Very few dental offices employ more than one 
administrative staff person, who often also serves as the receptionist. 
This structure is sufficient to handle private insurer rules and 
regulations and process reasonable administrative demands of public 
programs. However, the staff resources necessary to address the 
enhanced administrative burdens caused by contradictory regulations and 
outdated rules can easily outstrip the dental office administrative 
staff's capabilities. Unnecessary requirements increase the cost of 
providing dental services to Medicare beneficiaries in a price 
sensitive dental market, which could adversely affect access.
        medicare requirements that need modernization and reform
Claims Submission for ``Non-covered'' Medicare Services
    As stated above, Medicare generally does not cover dental care, 
except in limited situations. While non-covered services are exempt 
from Medicare policies, any Medicare beneficiary that receives a dental 
service may require a dentist to submit a Medicare claim. This 
requirement can occur because a Health Care Financing Administration 
(HCFA) rule, which has been interpreted by the agency and its fiscal 
intermediaries as giving the beneficiary a right to file a Medicare 
claim for virtually any dental service, has taken precedent over the 
Medicare statute excluding the vast majority of dental services.
    If a Medicare beneficiary receives non-covered, categorically 
excluded dental services and requests that the dentist file a Medicare 
claim, despite the fact that Medicare does not cover the services 
provided, the dentist must comply. The dentist must honor this request 
and all parties affected (the patient and HCFA, as well as the dentist) 
must absorb the financial burden of filing an unnecessary claim.
    There are additional costs for HCFA and dentists related to the 
filing of a Medicare claim for non-covered services. Because the 
program does not reimburse for most dental services the majority of 
dentists are not Medicare providers and, therefore have not filled out 
the lengthy application form in order to receive a provider number. 
Provider enrollment is an administratively complex process that can 
take numerous hours for the provider to complete and the agency to 
process. This process adds unnecessary costs to the health care system 
and could be easily remedied by HCFA. The ADA believes HCFA should 
bring its regulation into conformance with the Medicare statute and 
make it clear to carriers, dentists, and Medicare beneficiaries that 
there is no obligation to submit a claim for categorically excluded 
dental services. The Association would be willing to work with the 
Committee to provide language to accomplish this change.
    The Association also believes it is necessary to include dentists 
in the private contracting law. This is important not only because it 
is fundamentally fair to allow any practitioner the ability to decide 
whether the practitioner wants to participate in a federal program, but 
also because opting out eliminates unnecessary paperwork affecting all 
of those associated with the Medicare system. However, dentists, unlike 
many other providers, are unable to decline or withdraw participation 
in Medicare. Section 1802 of the Social Security Act, as amended by 
Section 4507 of the Balanced Budget Act of 1997, permits a physician or 
practitioner to enter into private contracts and effectively withdraw 
their Medicare participation with Medicare beneficiaries, if specific 
requirements are met. The ADA supports an amendment to section 1802 to 
include dentists.
Advance Beneficiary Notices
    An Advanced Beneficiary Notice (ABN) must be completed on behalf of 
a Medicare beneficiary when there is uncertainty as to whether a given 
health care service is covered by the program. The form notifies the 
patient that Medicare may not pay for the services rendered by the 
provider, thus the patient may be responsible for any and all charges. 
This form must be completed and filed for each visit, even if the 
purpose of the visit is for the continuation of care in a series of 
treatments for a specified illness. As a result, at times redundant 
ABNs are filed, which provide no new notice to the patient. HCFA, 
participating dentists and their patients would all benefit from a 
change in policy on this matter to permit the filing of a single ABN 
that would be valid for all procedures intended to address a single 
illness.
Provider Enrollment Forms
    Medicare's provider enrollment form is the source of quandary for 
many dentists who participate in the Medicare program. When they apply 
for a Medicare provider number, all dentists, regardless of whether 
they are generalists or specialists, must use the same provider 
category, which is category 19 (Dentist-Oral Surgeon). This is, at 
best, misleading because oral surgeons are a specialty within 
dentistry, representing a relatively small segment of all practicing 
dentists. HCFA should offer provider categories for all dental 
specialties as well as general dentists. This would avoid confusion and 
help alleviate problems encountered by oral surgeons, who too 
frequently are denied reimbursement for medical procedures for which 
they are qualified to perform because the carrier incorrectly assumes 
all procures performed by an oral surgeon are dental services, which 
are generally not covered by Medicare. The current system unnecessarily 
expends HCFA and dental office resources and delays proper payment on 
behalf of Medicare beneficiaries.
    Mr. Chairman and members of the committee, thank you for providing 
the ADA with this opportunity to discuss our concerns about the need to 
modernize Medicare and modify the program's regulations in a manner 
that will save scarce HCFA resources and reduce burdens placed on 
dentists and many of their patients. The Association looks forward to 
working with you on this issue.
                                 ______
                                 
   Prepared Statement of the Medical Device Manufacturers Association
    The Medical Device Manufacturers Association (MDMA), the national 
voice for the entrepreneurial sector of the medical device industry, 
appreciates the interest displayed by the Subcommittee on Health and 
the Subcommittee on Oversight and Investigations on reforming the 
systems that the Medicare program uses to contract for the processing 
of claims.
    Our statement focuses on the role that Medicare's contractors play 
in developing local Medicare coverage decisions, also known as local 
medical review policies (LMRP). While MDMA believes there are certainly 
areas of Medicare contracting for which close scrutiny is long overdue, 
we do support the concept of local Medicare coverage policymaking, and 
we believe that technological innovation would suffer if Medicare 
carriers did not have the discretion to develop a local coverage policy 
in the absence of a national policy. Nevertheless, we need to instill 
in the local policymaking process much of the same openness, 
transparency, and accountability that the Centers for Medicare and 
Medicaid Services (CMS) are attempting to bring to the national 
process.
    MDMA welcomed CMS's November 24, 2000 program memorandum 
(Transmittal AB-00-116) to its contractors on the development of local 
medical review policies in the Medicare program. The memorandum 
mandated new open LMRP development requirements and new draft LMRP 
publication requirements. We saw the program memorandum as a long-
awaited first step toward modernization of the local processes for 
determining Medicare coverage of medical procedures and technologies 
where no national policy exists.
    However, MDMA and its members remain concerned with the contractor 
medical director (CMD) workgroups and the role they play in developing 
local coverage policy; both are subjects that the program memorandum 
did not address. These CMD workgroups are not specifically authorized 
by law or regulation, do not meet publicly, and are not required to 
disclose the nature of their deliberations or to justify their 
decisions. Nevertheless, the work of these CMD workgroups is the basis 
for hundreds of local medical review policies that determine what 
medical procedures and technologies are available to Medicare 
beneficiaries.
    These CMD workgroups wield significant power in determining how 
federal entitlement benefits will be administered, yet they effectively 
are accountable to no one. MDMA believes that as CMS modernizes its 
national and local processes, CMS should do away with the CMD 
workgroups, one of the last vestiges of ``behind-closed-doors'' 
Medicare policymaking.
                               background
    CMS contracts with private insurance companies to carry out various 
duties under the Medicare program, such as processing claims, 
investigating fraud and abuse, and determining coverage policies for 
medical procedures. Local ``carriers'' administer the Medicare Part B 
benefit (physician services, laboratory and diagnostic tests, certain 
medical equipment and supplies, and other related services).
    For most Part B services, CMS has not issued national Medicare 
coverage policies. The carriers develop the vast majority of Medicare 
coverage determinations. Local coverage policies, also known as local 
medical review policies (LMRP), are supposed to be developed according 
to procedures set forth in CMS's Medicare Program Integrity Manual and 
are supposed to be published in periodic newsletters or similar 
documents issued by each carrier. According to CMS, 300 national 
coverage policies have been developed over the last 35 years, while 
more than 6,000 LMRP have been developed over just the past ten years.
    According to Chapter 1, Section 2.7 of the Medicare Program 
Integrity Manual, each carrier must establish one Carrier Advisory 
Committee (CAC) per state in which the carrier operates. The purpose of 
a CAC is to provide:

 a formal mechanism for physicians to be informed of and to 
        participate as advisors in the development of LMRP,
 a mechanism to discuss and improve administrative policies, 
        and
 a forum for the exchange of information between carriers and 
        physicians.
    CMS also instructs its carriers to release proposed LMRP to the 
public for comment prior to implementation.
    In addition, Medicare Part B carriers have also formed a number of 
contractor medical director (CMD) workgroups to develop templates for 
future LMRP development. These CMD workgroups do not meet publicly, yet 
the templates they develop are circulated among all carriers and often 
are used as the basis for the development of LMRP by other carriers.
    CMS's November 24, 2000 program memorandum mandates new open LMRP 
development requirements and new draft LMRP publication requirements. 
According to the program memorandum, Medicare contractors now must 
allow for the submission and presentation of information from members 
of the general public in the LMRP development process. Medicare 
contractors also must provide open meetings for the purpose of 
discussing draft LMRP, and these meetings must be held prior to the 
presentation of these policies at CAC meetings.
    The program memorandum, however, is silent on the role of the 
contractor medical director workgroups.
                                problem
    Contractor medical director (CMD) workgroups play a significant 
role in the development of local Medicare medical review policies, yet 
these workgroups, unlike the CACs, are not specifically authorized 
under Medicare law, regulation, or administrative procedures. The 
Medicare Program Integrity Manual only mentions these workgroups in 
passing in Chapter 1, Section 6, when it lists ``(p)articipating in CMD 
clinical workgroups'' as one of the ``other duties'' of contractor 
medical directors.
    These CMD workgroups apparently meet periodically, yet neither the 
agenda nor the minutes of these meetings are published publicly, nor do 
we know whether CMS even requires that the CMD workgroups file such 
documents with the agency. Moreover, their membership is not published 
in any official CMS document immediately available to the public, nor 
do we know how their membership is determined.
    MDMA understands that during these CMD workgroup meetings, the 
Medicare contractor medical directors discuss whether new technologies 
or procedures are worthy of being covered under the broad discretion 
granted by CMS to Medicare carriers. Although there is no instruction 
or discussion in the Medicare Program Integrity Manual of a process for 
the development of ``model'' or ``template'' LMRP by these CMD 
workgroups, a cursory review of LMRP shows that such models or 
templates are cited frequently by contractors as the basis for their 
own local policies. We understand that most of these model or template 
LMRP are developed by CMD workgroups.
    Even more curiously, we hear that Medicare carriers often adopt as 
``informal'' LMRP the results of the discussions at these workgroup 
meetings, which completely circumvents and negates the LMRP development 
process. Finally, we understand that CMS staff attends many of these 
CMD workgroup meetings, which certainly lends the CMS imprimatur to 
these workgroups' decisions and actions.
    MDMA and its members are not the only CMS ``stakeholders'' 
concerned with the actions of these CMD workgroups. For example, the 
American College of Surgeons raised detailed concerns similar to ours 
in response to CMS's 1998 ``town hall'' meeting on modernizing the 
Medicare coverage process:
          At the present time, some carriers are developing and 
        announcing policy without CAC input while other carriers obtain 
        input from the CAC but ignore it and issue final policies 
        without any apparent response to the comments it received. Of 
        particular concern to the College is the dissemination of 
        ``model'' policy, which some carriers seem to view as a form of 
        national policy that must be followed without question . . .
          . . . the College has significant concerns about the current 
        model (recently renamed ``template'') policy development 
        process. Under this process, a small number of contractor 
        medical directors develop policy without providing physician 
        organizations or other stakeholders an opportunity to provide 
        input or to review early drafts. Once the contractor medical 
        directors have completed their work on so-called templates, 
        these materials are sent to all the carriers for their 
        consideration. Generally speaking, carriers then proceed to 
        adopt the templates as model policy. However, even when a 
        carrier provides its carrier advisory committee with a chance 
        to comment on the model policy, our impression is that the 
        offer comes too late in the policy development process. The 
        label ``model'' appears to signal that the issue has already 
        been subject to a rigorous review, that further analysis and 
        comment is unnecessary or unwanted, and that the policy should 
        be accepted ``as is.'' In fact, we consider the template 
        process to be a CMS-sanctioned attempt to bypass the usual, 
        albeit limited, due process safeguards associated with national 
        coverage policy making. [October 19, 1998 letter from ACS to 
        Jeffrey L. Kang, M.D., M.P.H., Director, Office of Clinical 
        Standards and Quality, CMS re September 25, 1998, Open Town 
        Hall Meeting To Discuss the Medicare Coverage Process]
                                solution
    Again, MDMA appreciates CMS's ongoing efforts to modernize the 
local Medicare coverage policymaking process. The ability to 
participate in a transparent and predictable process, as well as to 
understand the criteria by which their technologies will be evaluated 
during that process, will help medical technology entrepreneurs develop 
innovative new products that meet the needs of the Medicare program and 
its beneficiaries.
    However, CMS needs to take the next step toward true reform of the 
LMRP development process by disbanding the contractor medical director 
workgroups. Under the new open local process, CMS should not permit the 
development of model or template policies, including de facto national 
coverage (and non-coverage) policies and ``informal'' policies, by 
contractor medical directors absent public scrutiny and accountability. 
The early stages of LMRP development should be equally as open, if not 
more so, as the later stages.
    Furthermore, we believe there simply is no need for CMD workgroups 
to develop model or template policies. Local medical review policy was 
intended by CMS to be an administrative and educational tool that 
describes how contractors will review claims to ensure that they meet 
Medicare coverage requirements. Local Medicare contractors are supposed 
to develop LMRP based on a perceived need for clarification, and they 
are supposed to develop these policies locally.
    The model or template policies developed by CMD workgroups become 
de facto national policies as local contractors adopt them. If there is 
a need for clarity across the nation, then CMS should initiate the 
process of making a national coverage decision. Simply put, there 
should only be one national Medicare coverage process, and that process 
should be conducted by CMS.
    We thank the subcommittees for your consideration of our 
perspective.
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