Medicare: Successful Reform Requires Meeting Key Management	 
Challenges (25-JUL-01, GAO-01-1006T).				 
								 
Management of Medicare has come under increasing scrutiny. The	 
Health Care Financing Administration (HCFA) has had mixed success
running the program. The agency has developed payment methods	 
that have contained cost growth, and HCFA has paid		 
fee-for-service claims quickly and at low administrative cost.	 
However, HCFA has had difficulty ensuring that it paid claims	 
appropriately. In addition, Medicare claims administration	 
contractors have done a poor job of communicating with Medicare  
providers. HCFA has taken important steps to address some of	 
these shortcomings, including strengthening payment safeguards,  
but several factors have hampered its efforts. Despite its	 
growing responsibilities, HCFA suffers from staffing shortages.  
The agency also continues to rely on archaic computer systems. At
the same time, HCFA has faltered in its attempts to adopt a	 
results-based approach to agency management. Constraints on the  
agency's contracting authority have limited its use of full and  
open competition to select claims administration contractors and 
assign administrative tasks. Rising expectations among Medicare  
beneficiaries and providers are putting pressure on the Centers  
for Medicare and Medicaid Services to modernize and improve	 
agency operations. Such improvements will require HCFA to begin a
performance-based management approach that holds managers	 
accountable for achieving program goals. Congressional attention 
also appears warranted if Medicare is to meet the challenges of  
the 21st century.						 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-01-1006T					        
    ACCNO:   A01451						        
  TITLE:     Medicare: Successful Reform Requires Meeting Key	      
             Management Challenges                                            
     DATE:   07/25/2001 
  SUBJECT:   Health care programs				 
	     Health insurance					 
	     Health insurance cost control			 
	     Internal controls					 
	     Program management 				 
	     DOD TRICARE Program				 
	     Hospital Insurance Trust Fund			 
	     Medicare Choice Program				 
	     Medicare Program					 
	     National Medicare Education Program		 
	     State Children's Health Insurance			 
	     Program						 
								 

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GAO-01-1006T
     
Testimony Before the Committee on the Budget, House of Representatives

United States General Accounting Office

GAO For Release on Delivery Expected at 10: 00 a. m. Wednesday, July 25,
2001 MEDICARE

Successful Reform Requires Meeting Key Management Challenges

Statement of William J. Scanlon Director, Health Care Issues

GAO- 01- 1006T

Page 1 GAO- 01- 1006T

Mr. Chairman and Members of the Committee: I am pleased to be here today as
you discuss the long- term sustainability and the more immediate management
challenges of the Medicare program. As noted in our companion statement
today by the Comptroller General, the Hospital Insurance trust fund is
expected to run a cash deficit in 15 years. 1 This projection, while only a
partial picture of Medicare?s fiscal health, nevertheless sounds the alarm
for the longer term, when it is projected that, without meaningful reform,
demographic and cost trends will drive Medicare to fiscally unsustainable
levels. As the Congress examines large- scale reform proposals, it is also
focusing on improvements needed in Medicare program management to meet
current 21st century needs and expectations.

In that spirit, the Committee asked us to report on the agency that runs
Medicare, newly named the Center for Medicare and Medicaid Services (CMS)
and formerly known as the Health Care Financing Administration (HCFA). 2 My
remarks today will focus on (1) the Medicare agency?s record in carrying out
selected program activities, (2) key factors affecting program management,
and (3) challenges the agency faces in running a more modern Medicare
program. My comments are based on our previous and ongoing work.

In brief, against a backdrop of Medicare reform proposals, the management of
the Medicare program has come under close scrutiny. Our past work shows that
HCFA had some notable successes as Medicare?s steward but also had serious
shortcomings. The agency was successful in developing payment methods that
have helped contain Medicare cost growth and in paying its fee- for- service
claims quickly and at low administrative cost. However, the agency?s efforts
to ensure that claims were paid appropriately achieved mixed results. In
addition, the performance of Medicare claims administration contractors in
communicating with Medicare providers was often substandard. For example, in
our ongoing work for the Committee, we find shortcomings in how Medicare
contractors provide information to physicians and respond to their
questions.

1 Medicare: New Spending Estimates Underscore Need for Reform (GAO- 01-
1010T, July 25, 2001). 2 Our statement will refer to ?HCFA? where our
findings apply to the organizational structure and operations associated
with that name.

Page 2 GAO- 01- 1006T

HCFA took significant steps in recent years to address certain weak areas,
such as strengthening payment safeguards, but several factors deterred
improvements. The agency?s responsibilities for other programs and
activities and its new Medicare responsibilities emanating from recent
statutory changes are substantial. Its capacity to carry out these
responsibilities has not kept pace. Notably, the agency faces staff
shortages in both skills and numbers and is operating Medicare with archaic
information technology systems that are unsuited to meet requests for basic
management information within reasonable time periods. At the same time,
HCFA faltered in adopting a results- based approach to agency management. In
addition, constraints exist on the agency?s contracting authority, limiting
its use of full and open competition to choose claims administration
contractors and assign administrative tasks.

Stakeholder expectations for a modern Medicare program are putting increased
pressure on CMS to improve agency operations, particularly the agency?s
relationship with the Medicare beneficiary and provider communities. Such
improvements will require efforts by the agency to implement a performance-
based management approach that holds managers accountable for accomplishing
program goals. However, in combination with agency actions, congressional
attention also appears to be warranted to meet the challenges associated
with administering Medicare in the 21st century.

The complexity of the environment in which CMS operates the Medicare program
cannot be overstated. It is an agency within the Department of Health and
Human Services (HHS) but has responsibilities over expenditures that are
larger than those of most other federal departments. Medicare alone ranks
second only to Social Security in federal expenditures for a single program.
Medicare is expected to spend nearly $240 billion in fiscal year 2001;
covers about 40 million beneficiaries; enrolls and pays claims from nearly 1
million providers and health plans; and has contractors that annually
process about 900 million claims. Among numerous and wide- ranging
activities associated with the Medicare program, CMS must monitor the
roughly 50 claims administration contractors that pay claims and establish
local medical coverage policies; 3 set tens of thousands of payment rates
for Medicare

3 Most medical policies for determining whether claims for services provided
are medically necessary and covered by Medicare are established locally by
the claims administration contractor that serves the specific geographic
area involved. Background

Page 3 GAO- 01- 1006T

covered services from different providers, including physicians, hospitals,
outpatient and nursing facilities, home health agencies, and medical
equipment suppliers; and administer consumer information and beneficiary
protection activities for the traditional program component and the managed
care program component (Medicare+ Choice plans).

The providers billing Medicare- hospitals, general and specialty physicians,
and other practitioners- along with program beneficiaries and taxpayers,
create a vast universe of stakeholders whose interests vary widely. Not
surprisingly, then, the responsibility to be fiscally prudent has made the
agency that runs Medicare a lightening rod for those discontented with
program policies. For example, the agency?s administrative pricing of
services has often been contentious, even though a viable alternative is not
easily identifiable. It is impractical for the agency to rely on competition
to determine prices. The reason is that when Medicare is the dominant payer
for services or products, the agency cannot use market prices to determine
appropriate payment amounts, because Medicare?s share of payments distorts
the market. Moreover, Medicare is prevented from excluding some providers to
do business with others that offer better prices. 4

In addition, Medicare?s public sector status means that changing program
regulations requires obtaining public input. The solicitation of public
comments is necessary to ensure transparency in decision- making. However,
the trade- off to seeking and responding to public interests is that it is
generally a time- consuming process and can thwart efficient program
management. For example, in the late 1990s, HCFA averaged nearly 2 years
between its publication of proposed and final rules. 5

Consensus is widespread among health policy experts regarding the growing
and unrelenting nature of the Medicare agency?s work. The Balanced Budget
Act of 1997 (BBA) alone had a substantial impact on HCFA?s workload,
requiring, among other things, that the agency develop within a short time
frame new payment methods for different post- acute and ambulatory services.
It also required HCFA to preside over an

4 Statutory constraints on limiting the providers from which Medicare
beneficiaries may obtain medical services or products have resulted in the
program including all qualified providers who want to participate.

5 This finding reflects the last half of 1997 and the first half of 1998 and
an average of 631 days.

Page 4 GAO- 01- 1006T

expanded managed care component that entailed coordinating a neverbefore-
run information campaign for millions of beneficiaries across the nation and
developing methods to adjust plan payments based partially on enrollees?
health status.

The future is likely to hold new statutory responsibilities for CMS. For
example, some reform proposals call for expanding Medicare?s benefit package
to include a prescription drug benefit. As we have previously reported, the
addition of a drug benefit would entail numerous implementation challenges,
including the potential for the annual claims processing workload to double
to about 1.8 billion a year.

Tasked with administering this highly complex program, HCFA has earned mixed
reviews in managing Medicare. On one hand, the agency presided over a
program that is very popular with beneficiaries and the general public. It
implemented payment methods that have helped constrain program cost growth
and ensured that claims were paid quickly at little administrative cost. On
the other hand, HCFA had difficulty making needed refinements to payment
methods. It also fell short in its efforts to ensure accurate claims
payments and oversee its Medicare claims administration contractors. In
recent years, HCFA took steps to achieve greater success in these areas.
However, the agency now faces criticism from the provider community for, in
the providers? view, a program that is unduly complex and has burdensome
requirements.

HCFA was successful in developing payment methods that have helped contain
Medicare cost growth. Generally, over the last 2 decades, the Congress
required HCFA to move Medicare away from reimbursing providers based on
their costs or charges for every service provided and to use payment methods
that seek to control spending by rewarding provider efficiency and
discouraging excessive service use. Payment development efforts have been
largely successful, but making needed refinements to payment methods remains
a challenge. For example, Medicare?s hospital inpatient prospective payment
system (PPS), developed in the 1980s, is a method that pays providers fixed,
predetermined amounts that vary according to patient need. This PPS
succeeded in slowing the growth of Medicare?s inpatient hospital
expenditures. Medicare?s fee schedule for physicians, phased in during the
1990s, redistributed payments for services based on the relative resources
used by physicians to provide different types of care and has been adopted
by many private insurers. Management of

Medicare Has Been a Mixed Success

Medicare?s New Payment Methods Have Helped Contain Cost Growth

Page 5 GAO- 01- 1006T

More recently, as required by the BBA, HCFA worked to develop separate
prospective payment methods for post- acute care services- services provided
by skilled nursing facilities, home health agencies, and inpatient
rehabilitation facilities- and for hospital outpatient departments.
Prospective payment methods can help constrain the overall growth of
Medicare payments. But as new payment systems affected provider revenues,
HCFA often received criticism about the appropriateness and fairness of its
payment rates. HCFA had mixed success in marshaling the evidence to assess
the validity of these criticisms and in making appropriate refinements to
these payment methods to ensure that Medicare was paying appropriately and
adequately.

HCFA also had success in paying most claims within mandated time frames and
at little administrative cost to the taxpayer. Medicare contractors process
over 90 percent of the claims electronically and pay

?clean? claims 6 on average within 17 days after receipt. In contrast,
commercial insurers generally take longer to pay provider claims.

Under its tight administrative budget, HCFA kept processing costs to roughly
$1 to $2 per claim- as compared to the $6 to $10 or more per claim for
private insurers, or the $7.50 per claim paid by TRICARE- the Department of
Defense?s managed health care program. 7 Costs for processing Medicare
claims, however, while significantly lower than other payers, are not a
straightforward indicator of success. We and others have reported that
HCFA?s administrative budget was too low to adequately safeguard the
program. Estimates by the HHS Inspector General of payments made in error
amounted to $11.9 billion in fiscal year 2000, which, in effect, raises the
net cost per claim considerably. At the same time, HCFA estimated that, in
fiscal year 2000, program safeguard expenditures saved the Medicare program
more than $16 for each dollar

6 These are claims that have been filled out properly and whose processing
has not been stopped by any of the systems? computerized edits. According to
HCFA data on claims processed in fiscal year 1999, about 81 percent of
Medicare claims were processed and paid as clean claims.

7 Much of the cost difference appears attributable to differences in program
design and processing requirements, but we and others believe that TRICARE
has opportunities to reduce this administrative cost. See Defense Health
Care: Opportunities to Reduce TRICARE Claims Processing and Other Costs
(GAO/ T- HEHS- 00- 138, June 22, 2000). Medicare Processes

Claims Inexpensively, but Greater Scrutiny Over Payments Needed

Page 6 GAO- 01- 1006T

spent. 8 Taken together, these findings indicate that increasing the
investment in CMS? administrative functions is a cost that can ultimately
save program dollars.

However, HCFA?s payment safeguard activities have raised concerns among
providers about the clarity of billing rules and the efforts providers must
make to remain in compliance. To fulfill the program?s stewardship
responsibilities, claims administration contractors conduct medical reviews
of claims and audits of providers whose previous billings have been
questionable. These targeted reviews have been a cost- effective approach in
identifying overpayments.

Providers whose claims are in dispute, however, have complained about the
burden of reviews and audits and about the fairness of some specific steps
the contractors follow. Their concerns about fairness may also emanate from
the actions of other agencies involved in overseeing health care- such as
the HHS Office of Inspector General and the Department of Justice- which, in
the last several years, have become more aggressive in pursuing health care
fraud and abuse.

CMS faces a difficult task in finding an appropriate balance between
ensuring that Medicare pays only for services allowed by law and making it
as simple as possible for providers to treat Medicare beneficiaries and bill
the program. While an intensive claims review is undoubtedly vexing for the
provider involved, very few providers actually undergo such reviews. In
fiscal year 2000, Medicare contractors conducted complex medical claims
reviews of only 3/ 10 of 1 percent of physicians- 1,891 out of a total of
more than 600,000 physicians who billed Medicare that year. 9 We are
currently reviewing several aspects of the contractors? auditing and review
procedures for physician claims to assess how they might be improved to
better serve the program and providers.

8 As part of the Health Insurance Portability and Accountability Act of 1996
(HIPAA), the Congress created the Medicare Integrity Program (MIP), which
gave HCFA a stable source of funding for program safeguard activities. In
fiscal year 2000, HCFA used its MIP funding to support a wide range of anti-
fraud- and- abuse efforts, including provider and managed care organization
audits and targeted medical reviews of claims.

9 Complex medical reviews are in- depth reviews of claims by clinically
trained staff based on examination of medical records. In contrast, routine
medical reviews may be carried out by nonclinical staff and do not involve
review of patient records.

Page 7 GAO- 01- 1006T

Congressional concern has recently heightened regarding the regulatory
requirements that practitioners serving Medicare beneficiaries must meet. Of
the several studies we have under way to examine the regulatory environment
in which Medicare providers operate, one study, conducted at the request of
this Committee, examines ways in which explanations of Medicare rules and
other provider communications could be improved. The preliminary results of
our review of several information sources from selected carriers- the
contractors that process physicians? claims- indicate a disappointing
performance record. In particular:

 Bulletins. Contractor bulletins, which are newsletters from carriers to
physicians outlining changes in national and local Medicare policy, are
viewed as the primary source of communication between the agency and
providers. However, providers have complained that the information in these
bulletins is often difficult to interpret, incomplete, and untimely. We
reviewed the bulletins issued since February 2001 by nine carriers to
determine, among other things, whether they included notices about four new
billing procedures that were going into effect in early July 2001. The
bulletins of five carriers either did not contain notices about the billing
procedures until after the procedures had gone into effect or had not
published this information as of mid- July. We also found that many of the
bulletins contained lengthy discussions with significant technical and
legalistic language.

 Telephone call centers. Call centers are intended to serve as another
important information source for providers on a variety of matters,
including clarification of Medicare?s billing rules. Contractors maintain
these call centers to respond to the roughly 80,000 provider inquiries made
each day. We placed about 60 calls to 5 carrier call centers to obtain
answers to common questions (those found on the ?Frequently Asked Questions?
Web pages at various carriers? web sites). For 85 percent of the calls
placed, the answers that call center representatives provided were either
incomplete (53 percent) or inaccurate (32 percent).

 Web sites. A third source of information for Medicare providers is the
Internet. The agency imposes minimum requirements on carriers to maintain
Web sites. Of 10 carrier Web sites we examined, 8 did not meet all of the
Web site requirements, which include, among others, the inclusion of a
frequently- asked- questions Web page and the capability for providers to
send e- mail inquiries to customer service. These 8 also lacked the required
links to both the CMS and Medicare Web sites. Many lacked user- friendly
features: 7 did not have ?site maps,? which list the Web site?s contents,
and although 6 sites had search functions, only 4 worked as intended. Five
sites contained outdated information. Communications With

Providers Were Poor

Page 8 GAO- 01- 1006T

Although these results cannot be generalized to all carriers, the carriers
we reviewed serve tens of thousands of physicians and the results are
consistent with some of the concerns recently expressed by physicians in the
Medical Group Management Practice Association. 10

Our study, to be issued this fall, seeks to identify the actions CMS can
take to ensure that carriers improve the consistency and accuracy of their
communications with providers; it will also assess the adequacy of carriers?
budgets to conduct these activities.

CMS faces several limitations in its efforts to manage Medicare effectively.
These include divided management focus, limited capacity, lack of a
performance- based management approach, and constraints impeding the
agency?s ability to hold Medicare contractors accountable.

CMS? management focus is divided across multiple programs and
responsibilities. Despite Medicare?s estimated $240- billion price tag and
far- reaching public policy significance, there is no official whose sole
responsibility it is to run the Medicare program. In addition to Medicare,
the CMS Administrator and senior management are responsible for oversight of
Medicaid and the State Children?s Health Insurance Program. They also are
responsible for individual and group insurance plans? compliance with
standards in the Health Insurance Portability and Accountability Act of 1996
in states that have not adopted conforming legislation. Finally, they must
oversee compliance with federal quality standards for hospitals, nursing
homes, home health agencies, and managed care plans that participate in
Medicare and Medicaid, as well as all of the nation?s clinical laboratories.
The Administrator is involved in the major decisions relating to all of
these activities; therefore, time and attention that would otherwise be
spent meeting the demands of the Medicare program are diverted.

A restructuring of the agency in July 1997 inadvertently furthered the
diffusion of responsibility across organizational units. The intent of the

10 These concerns are contained in a June 2001 letter from Medical Group
Management Practice Association to the House Budget Committee staff. Various
Constraints

Complicate Efforts To Manage Medicare Effectively

Agency Focus Is Divided Across Multiple Programs and Responsibilities

Page 9 GAO- 01- 1006T

reorganization was to better reflect a beneficiary- centered orientation
throughout the agency by dispersing program activities across newly
established centers. However, after the reorganization, many stakeholders
claimed that they could no longer obtain reliable or timely information. In
addition, HCFA?s responsiveness was slowed by the requirement that approval
was needed from several people across the agency before a decision was
final.

The recent change from HCFA to CMS reflects more than a new name. It
consolidates major program activities: the Center for Medicare Management
will be responsible for the traditional fee- for- service program; the
Center for Beneficiary Choices will administer Medicare?s managed care
program. We believe that this new structure is consistent with the desire to
be more responsive to program stakeholders.

As we and others have consistently noted, the agency?s capacity is limited
relative to its multiple, complex responsibilities. Human capital
limitations and inadequate information systems hobble the agency?s ability
to carry out the volume of claims administration, payment, and pricing
activities demanded of it.

Staff shortages- in terms of skills and numbers- beset the agency that runs
Medicare. These shortages were brought into sharp focus as HCFA struggled to
handle the number and complexity of BBA requirements. When the BBA expanded
the health plan options in which Medicare beneficiaries could enroll, HCFA?s
staff had little previous experience overseeing these diverse entities, such
as preferred provider organizations, private fee- for- service plans, and
medical savings accounts. Few staff had experience in dealing with the
existing managed care option- health maintenance organizations. Half of
HCFA?s regional offices lacked managed care staff with clinical backgrounds-
important in assessing quality of care issues- and few managed care staff
had training or experience in data analysis- key to assessing plan
performance against local and national norms and monitoring trends in plan
performance over time. 11

11 HHS Office of the Inspector General, Medicare?s Oversight of Managed
Care: Implications for Regional Staffing (OEI- 01- 96- 00191, April 1998).
Agency Capacity Limited

Relative to Multiple, Complex Responsibilities

Page 10 GAO- 01- 1006T

At the same time, CMS faces the potential loss of a significant number of
staff with valuable institutional knowledge. In February 2000, the HCFA
Administrator testified that more than a third of the agency?s current
workforce was eligible to retire within the next 5 years and that HCFA was
seeking to increase ?its ability to hire the right skill mix for its
mission.? As we and others have reported, too great a mismatch between the
agency?s administrative capacity and its designated mandate could have left
HCFA, and now CMS, unprepared to handle Medicare?s future population growth
and medical technology advances. 12 To assess its needs systematically, CMS
is conducting a four- phase workforce planning process that includes
identifying current and future expertise and skills needed to carry out the
agency?s mission. 13 HCFA initiated this process using outside assistance to
develop a comprehensive database documenting the agency?s employee
positions, skills, and functions. Once its future workforce needs are
identified, CMS faces the challenge of attracting highly qualified employees
with specialized skills. Due to the rapid rate of change in the health care
system and CMS? expanding mission, the agency?s existing staff may not
possess the needed expertise.

Another constraint on agency effectiveness has been inadequate information
systems for running the Medicare program. Ideally, program managers should
be able to rely on their information systems to monitor performance, develop
policies for improvement, and track the effects of newly implemented
policies. In reality, most of the information technology HCFA relied on was
too outdated to routinely produce such management information. As a result,
HCFA could not easily query its information systems to obtain prompt answers
to basic management questions. Using its current systems, CMS is not in a
position to report promptly to the Congress on the effects of new payment
methods on beneficiaries? access to services and on the adequacy of payments
to providers. It cannot expeditiously determine the status of debt owed the
program due to uncollected overpayments.

12 Gail Wilensky and others, ?Crisis Facing HCFA & Millions of Americans,?
Health Affairs, Vol. 18, No. 1 (Jan./ Feb. 1999). 13 HCFA?s workforce
planning efforts were in line with our guidance in Human Capital: A Self-
Assessment Checklist for Agency Leaders (GAO/ GGD- 99- 179, Sept. 1999).

Page 11 GAO- 01- 1006T

To encourage a greater focus on results and improve federal management, the
Congress enacted the Government Performance and Results Act of 1993 (GPRA)-
a results- oriented framework that encourages improved decision- making,
maximum performance, and strengthened accountability. Managing for results
is fundamental to an agency?s ability to set meaningful goals for
performance, to measure performance against those goals, and to hold
managers accountable for their results. As late as January 1998, we reported
that HCFA lacked an approach consistent with GPRA to develop a strategic
plan for its full range of program objectives. Since then, the agency
developed a plan, but it did not tie global objectives to management
performance.

Last month, we reported on the results of our survey of federal managers at
28 departments and agencies on strategic management issues. The proportion
of HCFA managers who reported having output, efficiency, customer service,
quality, and outcome measures was significantly below that of other
government managers for each of the performance measures. HCFA was the
lowest- ranking agency for each measure- except for customer service, in
which it ranked second from the lowest. In addition, the percentage of HCFA
managers who responded that they were held accountable for results to a
great or very great extent- 42 percent- was significantly lower than the 63
percent reported by the rest of the government.

Constraints on the agency?s flexibility to contract for claims
administration services have also frustrated efforts to manage Medicare
effectively. Under these constraints, the agency is at a disadvantage in
selecting the best performers to carry out Medicare?s claims administration
and customer service functions.

At Medicare?s inception in the mid- 1960s, the Congress provided for the
government to use existing health insurers to process and pay physicians?
claims and permitted professional associations of hospitals and certain
other institutional providers to ?nominate? their claims administration
contractors on behalf of their members. At that time, the American Hospital
Association nominated the national Blue Cross Association to serve as its
fiscal intermediary. 14 Currently, the Association is one of

14 Intermediaries primarily review and pay claims from hospitals and other
institutional providers, while carriers review and pay claims from
physicians and other outpatient providers. Strategic Management

Approach Lacks Performance Component

Agency Has Difficulty Holding Claims Administration Contractors Accountable

Page 12 GAO- 01- 1006T

Medicare?s five intermediaries and serves as a prime contractor for member
plans that process over 85 percent of all benefits paid by fiscal
intermediaries. Under the prime contract, when one of the local Blue plans
declined to renew its Medicare contract, the Association- rather than HCFA-
chose the replacement contractor. This process effectively limited HCFA?s
flexibility to choose the contractors it considered most effective.

HCFA also considered itself constrained from contracting with non- health
insurers for the various functions involved in claims administration because
it did not have clear statutory authority to do so. As noted, the Congress
gave HCFA specific authority to contract separately for payment safeguard
activities, but for a number of years the agency has sought more general
authority for ?functional contracting,? that is, using separate contractors
to perform functions such as printing and mailing and answering beneficiary
inquiries that might be handled more economically and efficiently under one
or a few contracts. HCFA sought other Medicare contracting reforms, such as
express authority for the agency to pay Medicare contractors on an other-
than- cost basis, to provide incentives that would encourage better
performance. 15

Although the health care industry has grown and transformed significantly
since Medicare?s inception, neither the program nor the agency that runs it
has kept pace. Nevertheless, CMS is expected to make Medicare a prudent
purchaser of services using private sector techniques and improve its
customer relations.

Private insurance has evolved over the last 40 years and employs management
techniques designed to improve the quality and efficiency of services
purchased. In a recent study, an expert panel convened by the National
Academy of Social Insurance (NASI) suggested that Medicare test private
insurers? practices designed to improve the quality and efficiency of care
and determine whether these practices could be adapted for Medicare. 16
Private insurers have taken steps to influence utilization and

15 For a discussion of this issue, see Chapter 3 in Medicare Contractors:
Despite Its Efforts, HCFA Cannot Ensure Their Effectiveness or Integrity
(GAO/ HEHS- 99- 115, July 14, 1999). 16 From a Generation Behind to a
Generation Ahead: Transforming Traditional Medicare, Final Report of the
Study Panel on Fee- for- Service Medicare, National Academy of Social
Insurance (Washington, D. C.: January 1998). Key Hurdles Exist as

Agency Seeks To Move Forward

Agency Faces Challenges in Adopting Modern Management Strategies

Page 13 GAO- 01- 1006T

patterns of service delivery through efforts such as beneficiary education,
preferred provider networks, and coordination of services. They are able to
undertake these efforts, in part, because they have wide latitude in how
they run their businesses. In contrast, federal statutory requirements and
the basic obligation to be publicly accountable have hampered agency efforts
to incorporate private sector innovations.

Medicare?s efforts to encourage use of preferred providers is a case in
point. The Medicare statute generally allows any qualified provider to
participate in the program. This is significant in light of HCFA?s
experiment related to coronary artery bypass graft surgery in which certain
hospitals- identified as those with the best outcomes for these surgeries-
were designated to receive bundled payments for hospitals and physicians
delivering certain expensive procedures. 17 The experiment cut program costs
by 10 percent for the 10,000 coronary artery bypass surgeries performed and
saved money for beneficiaries through reduced coinsurance payments. HCFA
began a similar experiment at selected acute- care hospitals, which involves
bundling payments for hospital, physician, and other health care
professionals? services provided during a beneficiary?s hospital stay for
selected cardiovascular and orthopedic procedures. However, more wide- scale
Medicare implementation of such hospital and physician partnership
arrangements may be difficult. Providers have raised concerns about
government promotion of certain providers at the expense of others, thus
creating a barrier to this and other types of preferred provider
arrangements.

Efforts to facilitate disease management provide another example of the
potential limitations of adapting private sector management strategies to
Medicare. HCFA was able to implement broad- based education efforts to
encourage the use of Medicare- covered preventive services, but the agency
could be deterred in approaches targeting individual beneficiaries most
likely to need the help. For example, the agency has overseen the
dissemination of more than 23,000 posters with tear- off sheets that
beneficiaries can hand to physicians to facilitate discussions of colon
cancer screening that otherwise might be avoided because of unfamiliar terms
and sensitive issues. It has also been involved in a multifaceted effort to
increase flu vaccinations and mammography use. However, the

17 A number of studies prior to this experiment have found that hospitals
with the greatest volume of these procedures generally had better outcomes,
as measured by mortality and complications.

Page 14 GAO- 01- 1006T

agency may be less able to undertake the more targeted approaches of some
private insurers, such as mailing reminders to identified enrollees about
the need to obtain a certain service. Because targeting information would
require using personal medical information from claims data, CMS could
encounter opposition from those who would perceive such identification to be
government intrusion. Providers might also object to a government insurance
program advocating certain medical services for their patients.

In its study, NASI concluded that these and other innovations could have
potential value for Medicare but would need to be tested to determine their
effects as well as how they might be adapted to reflect the uniqueness of
Medicare as both a public program and the largest single purchaser of health
care. In addition, CMS would likely need new statutory authority to broadly
implement many of the innovations identified in the NASI study.

Congressional concern has heightened recently regarding the regulatory
burden on the practitioners that serve Medicare beneficiaries. In his
testimony before the Senate Committee on Finance, the Secretary of HHS
emphasized the importance of communication between CMS and providers,
stating, ?When physicians call us? we need to respond quickly, thoroughly
and accurately.? 18 Under the spotlight held by both the Congress and the
Administration, CMS is expected to improve its customer service to the
provider community.

Concern about regulatory burden is not limited to providers in Medicare?s
traditional fee- for- service program. Policymakers are also concerned about
the regulatory burden on health plans that participate in the Medicare+
Choice program. During each of the last 3 years, substantial numbers of
health plans reduced the geographic areas they served or terminated their
Medicare participation altogether. Cumulatively, these withdrawals affected
more than 1.6 million beneficiaries who either had to return to the fee-
for- service program or switch to a different health plan. Industry
representatives have attributed the withdrawals, in part, to

18 Statement Before the Senate Committee on Finance, Hearing on Medicare
Governance: Perspectives on the Centers for Medicare and Medicaid Services
(formerly HCFA) (June 19, 2001). Agency Seeks To Meet

Expectations for Improved Customer Service for Providers

Page 15 GAO- 01- 1006T

Medicare+ Choice requirements that they characterize as overly burdensome.
19

HCFA took steps to address plans? regulatory concerns modifying some
requirements or delaying their implementation. It also launched an
initiative designed to help the agency better understand plans? concerns,
assess them, and recommend appropriate regulatory changes. At the request of
the House Ways and Means Subcommittee on Health, we are evaluating Medicare+
Choice requirements. Our study will compare Medicare+ Choice requirements
with the requirements of private accrediting organizations and those of the
Office of Personnel Management for plans that participate in the Federal
Employees Health Benefits Program. The study?s objective is to document
differences in these sets of requirements and determine whether these
differences are necessary because of the unique nature of the Medicare
program and the individuals it serves.

CMS is also expected to improve communications with beneficiaries,
particularly as the information pertains to Medicare+ Choice health plan
options. The agency has made significant progress in this regard but
continues to face challenges in meeting the sometimes divergent needs of
plans and beneficiaries.

As required by the BBA, HCFA began a new National Medicare Education Program
(NMEP). 20 For 3 years the agency has worked to educate beneficiaries and
improve their access to Medicare information. It added summary health plan
information to the Medicare handbook and increased the frequency of its
distribution from every few years to each year. It also established a
telephone help line and an Internet Web site with comparative information on
health plans, Medigap policies, and nursing homes and sponsored local
education programs.

19 Industry representatives have also cited Medicare?s payment rates as a
cause of the withdrawals. They believe that Medicare payments are inadequate
for the services health plans provide. However, our studies have estimated
that such payments exceed what Medicare would have spent if beneficiaries
enrolled in health plans instead received services through the traditional
fee- for- service program. See Medicare+ Choice: Payments Exceed Cost of
Fee- for- Service Benefits, Adding Billions to Spending (GAO/ HEHS- 00- 161,

Aug. 23, 2000). 20 We have reviewed the agency?s NMEP activities to date and
will soon release a report discussing our findings. Agency Strives To
Improve

Beneficiary Education

Page 16 GAO- 01- 1006T

Beginning this fall, it will become more important for beneficiaries to be
aware that Medicare+ Choice health plan alternatives to the traditional
feefor- service program may be available in their area and to understand
each option and its implications. As required by the BBA, Medicare will now
have an annual open enrollment period each November when beneficiaries must
select either the fee- for- service program or a specific Medicare+ Choice
plan for the following calendar year. Beneficiaries will have strictly
limited opportunities for changing their selection outside of the open
enrollment period, a provision known as ?lock- in.?

CMS recently announced that it would fund a $35 million advertising campaign
this fall to help beneficiaries learn about Medicare?s new features- such as
the proposed discount prescription drug card program, coverage for
preventive services and medical screening examinations, and the annual
enrollment and lock- in provisions- and provide general information about
Medicare+ Choice plans and the availability of Medicare?s Web site and
telephone help line. The agency will also extend the operating hours of the
help line and add an interactive feature to the Web site designed to help
beneficiaries select the Medicare option that best fits their preferences.

CMS has made other decisions about the fall information campaign that
illustrate the sometimes difficult trade- off between accommodating plans
and serving beneficiaries. To encourage health plan participation in the
Medicare+ Choice program, CMS has allowed plans additional time to prepare
their 2002 benefit proposals. This extension will hamper the ability of CMS
and health plans to disseminate information before the BBA- established
November open enrollment period. CMS will not, for example, include any
information about specific health plans in the annual handbook mailed to
Medicare households. 21 To reduce the potentially adverse effects of an
abbreviated fall information campaign, the agency will allow health plans to
distribute marketing materials with proposed benefit package information
marked ?pending Federal approval.? CMS will also extend the open enrollment
period through the end of December.

21 As a result of these decisions, the Secretary of HHS is now the subject
of a lawsuit that claims he did not have the authority to change the benefit
filing date and that the BBA requires an annual mailing containing
comparative health plan information.

Page 17 GAO- 01- 1006T

Medicare is a popular program that millions of Americans depend on to cover
their essential health needs. However, the management of the program is not
always responsive to beneficiary, provider, and taxpayer expectations. CMS,
while making improvements in certain areas, may not be able to meet these
expectations effectively without further congressional attention to the
agency?s multiple missions, limited capacity, and constraints on program
flexibility. The agency will also need to do its part by implementing a
performance- based management approach that holds managers accountable for
accomplishing program goals. These efforts will be critical in preparing the
agency to meet the management challenges of administering a growing program
and implementing future Medicare reforms.

Mr. Chairman, this concludes my prepared statement. I will be happy to
answer any questions you or other Committee Members may have.

For more information regarding this testimony, please contact me at (202)
512- 7114, Leslie G. Aronovitz at (312) 220- 7600, or Laura Dummit at (202)
512- 7119. Under the direction of James Cosgrove and Geraldine
RedicanBigott, contributors to this statement were Susan T. Anthony, Carolyn
Manuel- Barkin, Hannah Fein, William Hadley, Don Kittler, Christie Turner,
and Margaret Weber. Concluding

Observations GAO Contact and Acknowledgments

Page 18 GAO- 01- 1006T

Medicare Management: Current and Future Challenges (GAO- 01- 878T, June 19,
2001.

Medicare Reform: Modernization Requires Comprehensive Program View (GAO- 01-
862T, June 14, 2001).

Managing for Results: Federal Managers? Views on Key Management Issues Vary
Widely Across Agencies (GAO- 01- 592, May 25, 2001).

Medicare: Opportunities and Challenges in Contracting for Program Safeguards
(GAO- 01- 616, May 18, 2001.)

Medicare Fraud and Abuse: DOJ Has Improved Oversight of False Claims Act
Guidance (GAO- 01- 506, Mar. 30, 2001).

Medicare: Higher Expected Spending and Call for New Benefit Underscore Need
for Meaningful Reform (GAO- 01- 539T, Mar. 22, 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). Nursing Homes: Sustained
Efforts Are Essential to Realize Potential of the Quality Initiatives (GAO/
HEHS- 00- 197, Sept. 28, 2000).

Medicare: Refinements Should Continue to Improve Appropriateness of Provider
Payments (GAO/ T- HEHS- 00- 160, July 19, 2000).

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 Contractors: Despite Its Efforts, HCFA Cannot Ensure Their
Effectiveness or Integrity (GAO/ HEHS- 99- 115, July 14, 1999). Related GAO
Products

Page 19 GAO- 01- 1006T

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).

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