    Major Management Challenges and Program Risks: Department of Health and
    Human Services (Letter Report, 01/01/2001, GAO/GAO-01-247).

    This report, part of GAO's high risk series, discusses the major
    management challenges and program risks facing the Department of Health
    and Human Services (HHS). HHS must improve its administration of the
    Medicare Program to ensure that it remains fiscally sustainable. GAO
    found that HHS must address several issues, including frequent changes
    in leadership and recruitment of qualified personnel. Because of
    Medicare's vulnerability to waste, fraud, and abuse, HHS must strengthen
    its internal controls for processing claims. Another key mission that
    GAO identified as high risk is HHS' oversight of nursing homes. Although
    HHS has taken significant steps towards correcting problems in the
    nation's nursing homes, many weaknesses remain. HHS must also ensure
    that manufacturers of medical products comply with safety and quality
    standards. Finally, HHS faces challenges in ensuring that federal funds
    are properly used to ensure the well being of families and children.

    --------------------------- Indexing Terms -----------------------------

     REPORTNUM:  GAO-01-247
         TITLE:  Major Management Challenges and Program Risks: Department
    	     of Health and Human Services
          DATE:  01/01/2001
       SUBJECT:  Risk management
    	     Internal controls
    	     Accountability
    	     Health care services
    	     Safety standards
    	     Federal/state relations
    	     State-administered programs
    	     Nursing homes
    IDENTIFIER:  Medicare Program
    	     GAO High Risk Program
    	     High Risk Series 2001
    	     Medicare Choice Program

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    GAO-01-247

    Performance and Accountability Series

    January 2001 Major Management Challenges and Program Risks

    Department of Health and Human Services

    GAO- 01- 247

    Letter 3 Overview 6 Major

    11 Performance and Accountability Challenges

    Related GAO 49

    Products Performance

    54 and Accountability Series

    Lett er

    January 2001 The President of the Senate The Speaker of the House of
    Representatives

    This report addresses the major performance and accountability challenges
    facing the Department of Health and Human Services (HHS) as it seeks to

    “enhance the well- being of Americans by providing for effective
    health and human services and by fostering strong, sustained advances in the
    sciences underlying medicine, public health, and social services.” It
    includes a summary of actions that HHS has taken and that are under way to
    address these challenges. It also outlines further actions that GAO believes
    are needed. This analysis should help the new Congress and administration
    carry out their responsibilities and improve government for the benefit of
    the American people.

    This report is part of a special series, first issued in January 1999,
    entitled Performance and Accountability Series: Major Management Challenges
    and Program Risks. In that series, GAO advised the Congress that it planned
    to reassess the methodologies and criteria used to determine which federal
    government operations and

    functions should be highlighted and which should be designated as
    “high risk.” GAO completed the assessment, considered comments
    provided on a publicly available exposure draft, and published its guidance
    document, Determining Performance and Accountability Challenges and High
    Risks (GAO- 01- 159SP), in November 2000.

    This 2001 Performance and Accountability Series contains separate reports on
    21 agencies- covering each cabinet department, most major independent

    agencies, and the U. S. Postal Service. The series also includes a
    governmentwide perspective on performance and management challenges across
    the federal government. As a companion volume to this series, GAO is issuing
    an update on those government operations

    and programs that its work identified as “high risk” because of
    either their greater vulnerabilities to waste, fraud, abuse, and
    mismanagement or major challenges associated with their economy, efficiency,
    or effectiveness.

    David M. Walker Comptroller General of the United States

    Overview The Department of Health and Human Services (HHS), with a $376-
    billion budget, presents one of the more massive and complex management and
    program- related challenges in the federal government. The federal health
    and social programs it oversees tangibly affect the lives and well- being of
    virtually all Americans and encompass some of the most costly issues facing
    the nation. According to the mission stated in its fiscal year 2001
    performance plan, the Department “seeks to enhance the well- being of
    Americans by providing for effective health and human services and by
    fostering strong,

    sustained advances in the sciences underlying medicine, public health, and
    social services.” With such a broad mission, HHS' performance involves
    many dimensions. This report focuses on the performance of HHS programs and
    services in certain key mission areas that received heightened congressional
    attention over the past 2 years.

    Provide current and future generations with a well- designed and well-
    administered Medicare program

    ? Better safeguard the integrity of the Medicare program

    ? Improve oversight of nursing homes so that residents receive quality care

    ? Ensure the safety and efficacy of medical products

    ? Enhance the economic independence and well- being of children and families

    Medicare One key HHS mission- the effective administration of Governance

    the $200- billion- plus Medicare program- has been at the forefront of
    congressional scrutiny. In HHS, the Health Care Financing Administration
    (HCFA) administers Medicare, which provides health care to about 40 million
    individuals 65 years and older and some disabled individuals. At issue is
    how to make the program operate efficiently now and ultimately become
    fiscally sustainable when the tidal wave of baby- boom Americans becomes
    eligible for Medicare. Many experts

    agree that the program as currently designed and administered will be unable
    to effectively meet the health care needs of future generations of
    beneficiaries. While Medicare's fiscal sustainability and certain inherent
    difficulties in managing the program are not totally within HCFA's control,
    we testified in May 2000 that HCFA faces structural problems that need to be
    addressed. One problem is that, even though Medicare is

    a complicated program for the agency to administer through its more than 50
    contractors, HCFA cannot devote all its attention to Medicare because it is
    also responsible for administering Medicaid and other statecentered
    programs. In addition, frequent changes in HCFA leadership make it difficult
    for the agency to develop and implement a consistent long- term vision.

    Finally, constraints on HCFA's ability to acquire human capital expertise
    and shortcomings due to its aged information systems limit the agency's
    capacity to modernize Medicare's existing operations and carry out the
    program's growing responsibilities. Elements of recent Medicare reform
    proposals, together with alternatives from existing federal agencies,
    suggest ways of addressing focus, leadership, and capacity issues. Medicare
    Program As policymakers face the challenges of Medicare's longIntegrity term
    sustainability, HCFA's day- to- day responsibility for ensuring program
    integrity also remains a challenge. In 1990, Medicare was designated one of
    GAO's “high- risk”

    areas and remains so today because of its vulnerability to waste, fraud,
    abuse, and mismanagement. In recent years, some of the companies that
    contract with the government to pay physicians, hospitals, and other
    providers that bill Medicare had defrauded the program or had not rigorously
    safeguarded the program's payments. Breakdowns in payment safeguards were
    due partly to HCFA's weak efforts to monitor and evaluate contractors'
    performance and partly to the lack of information on how providers responded
    to Medicare's various payment policies. For fiscal year 1999, the HHS
    Inspector General estimated that about $14 billion of the nearly $170
    billion in Medicare's fee- for- service payments were improper. We made
    several

    recommendations to strengthen HCFA's oversight of Medicare's claims
    administration contractors, and the agency has taken steps in this
    direction. 1 Although much attention has been focused on ensuring the
    accuracy of Medicare's fee- for- service payments, other

    vulnerabilities exist, suggesting that this estimate understates the
    program's exposure. New prospective payment methods, along with Medicare's
    method for

    paying managed care plans, are designed to dampen providers' incentives to
    deliver unnecessary care but may result in providers achieving gains by
    inappropriately reducing patient care. HCFA has not been able to generate
    data that are timely, accurate, and useful on payment and service use trends
    essential to effective program monitoring. This will likely remain a problem
    for some time to come, as HCFA's efforts to

    modernize its information systems are still largely in the early stages. 2 1
    Medicare Contractors: Despite Its Efforts, HCFA Cannot Ensure Their
    Effectiveness or Integrity (GAO/ HEHS- 99- 115, July 14, 1999) and Medicare
    Contractors: Further Improvement Needed in Headquarters and Regional Office
    Oversight (GAO/ HEHS- 00- 46, Mar. 23, 2000). 2 Medicare: HCFA Faces
    Challenges to Control Improper Payments (GAO/ T- HEHS- 00- 74, Mar. 9,
    2000).

    Nursing Home Another key HHS mission is to oversee the care Oversight

    provided by the nation's 17, 000 nursing homes. In our July 1998 report on
    the quality of nursing home care in California and subsequent reports on
    federal and state oversight efforts nationwide, we noted that a significant
    minority of nursing homes have had serious care problems that harmed
    residents or put their lives in jeopardy. In these reports, we made a number
    of recommendations to improve the identification of care problems, secure
    their correction, and improve HCFA's oversight of state efforts. HCFA
    generally concurred

    with our recommendations, and in response the Administration introduced a
    series of initiatives focused on federal and state efforts to improve
    nursing home care quality. Certain of the initiatives seek to strengthen the
    rigor with which states conduct their required annual surveys of nursing
    homes. Others focus on the timeliness and reporting of complaint
    investigations and the use of management information to guide federal and
    state oversight efforts. The states are in a period of transition with
    regard to the implementation of these initiatives, partly because HCFA is
    phasing them in and partly because states did not begin their efforts from a
    common starting point. HCFA's efforts toward improving the oversight of
    states' quality assurance activities have begun but are unfinished or need
    refinement.

    Drug and Medical HHS is also responsible for ensuring the safety of food,

    Device Safety drugs, and other medical products. In HHS, the Food

    and Drug Administration (FDA) regulates drugs, medical devices, biological
    products, certain foods, and cosmetics to ensure their safety and efficacy.
    As part of this effort, FDA inspects facilities that manufacture medical
    products to ensure their compliance with federal standards for safety,
    purity, and quality. In recent years, however, the number of inspections
    completed by FDA has been far fewer than the number required by statute. To
    target its resources, FDA adopted an

    approach to inspect facilities based on their previous record of compliance
    with federal manufacturing standards. Because of our concern that this
    strategy may not ensure sufficient follow- up at problem facilities
    overseas, in 1998 we recommended that FDA revise its strategy for inspecting
    foreign manufacturers of pharmaceutical products. However, the agency did
    not

    agree to adopt the recommendation, citing its preference to wait until its
    inspection strategy had been fully implemented. With regard to monitoring
    medical products already on the market, FDA's system has been unable to
    reliably identify patient deaths or injuries caused by the use of drugs and
    medical devices. To respond to these shortcomings, FDA has begun to
    implement targeted approaches intended to maximize its resources.

    Child and Family HHS also plays a major role in overseeing the Well- Being

    implementation of the landmark 1996 welfare reform legislation. Key features
    of welfare reform put time limits on cash aid, emphasized the importance of
    employment for needy adults with children, and gave states increased
    flexibility to design their own programs. In response to this increased
    flexibility and other legislative changes, states are making sweeping
    changes to the nation's safety net programs, including welfare, child
    support enforcement, child welfare services, and

    child care subsidies. These changes heighten the importance of having
    adequate information systems in place to manage programs and provide data to
    determine the effectiveness and efficiency of program approaches. With the
    broad range of programs and multiple partners (including states and local
    public and private agencies) involved, HHS faces the challenge of holding
    its partners accountable for the use of federal

    funds to ensure the well- being of children and families.

    Major Performance and Accountability Challenges

    HHS has an annual budget of $376 billion- the largest of any federal
    department- and a direct work force of 59, 000 individuals. It is
    responsible for some 300 programs, which differ in purpose, design, and
    program delivery. Among the Department's key missions are to administer
    Medicare, including anti- fraud- and- abuse activities; oversee nursing
    homes; monitor the safety and efficacy of medical products; and enhance the
    economic independence of needy families.

    Provide Current Medicare spending growth has become one of the most and
    Future pressing and complex issues facing the Congress and

    Generations With a the nation. In 1999, Medicare program expenditures Well-
    Designed and

    were $213 billion, accounting for about 1 of every 8 Well- Administered
    federal dollars spent that year. Based on the most recent Medicare Program
    Medicare Trustees' 2000 Annual Report, Medicare is expected to double its
    share of the economy by 2075, crowding out other spending and economic
    activity of value. Yet the general consensus is that Medicare's benefit
    package has become obsolete and should be expanded at least to cover
    prescription drugs, which will

    add billions to the program's cost. Thus, to contain spending while
    revamping benefits, the Congress is considering proposals to fundamentally
    reform Medicare. Our work has focused on the issues HCFA faces in
    administering Medicare today and efforts

    embodied in proposed reforms or alternative models to ensure the program's
    solvency and sustainability for the longer term. Multiprogram Medicare is an
    inherently difficult program to manage. It Focus, Leadership

    ranks second only to Social Security in federal Tenure, and

    expenditures, covers about 40 million beneficiaries, and Capacity

    has contractors that annually process about 900 million Constraints Weaken

    claims submitted by nearly 1 million hospitals, Medicare's physicians, and
    other health care providers. Other Management factors compound this
    challenge.

    First, despite Medicare's size and complexity, there is no official whose
    sole responsibility it is to run the program. Among Medicare's numerous and
    wide- ranging activities, HCFA must monitor the 50- some claims
    administration contractors that pay claims and set local medical coverage
    policies; set hundreds of thousands of payment rates for different providers
    of Medicarecovered services, 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, the

    managed care program component (Medicare+ Choice plans), and Medicare
    supplemental insurance policies (Medigap). In addition to Medicare, the HCFA
    Administrator and top- level management have oversight, enforcement, and
    credentialing responsibilities for other major health- related programs and
    initiatives. These programs require time and attention that would otherwise
    be spent meeting the demands of the Medicare program (see table 1).

    Table 1: HCFA Runs Major Programs and Activities Other Than Medicare
    Additional responsibilities HCFA's role

    50- plus Medicaid programs Oversight and administration shared with states
    50- plus State Children's Health Insurance Programs Oversight and
    administration shared with states Health Insurance Portability and
    Accountability Act Ensures compliance with federal standards in

    states that have not adopted conforming legislation

    Medicare and Medicaid- certified hospitals, nursing Credentialing and
    oversight activities

    homes, home health agencies, hospice providers, and managed care plans; all
    clinical laboratories. Frequent changes in HCFA leadership have also
    inhibited the implementation of long- term Medicare initiatives or the
    pursuit of a consistent management strategy. The maximum term of a HCFA
    administrator is,

    as a practical matter, only as long as that of the President who appointed
    him or her. Historically, their terms have been even shorter. In the 24
    years since HCFA's inception, there have been 19 administrators or acting
    administrators, whose tenure has been, on

    average, little more than 1 year. About 10 percent of the time, HCFA has had
    an acting administrator. These short tenures have not been conducive to
    carrying out whatever strategic plans or innovations an individual

    may have developed for administering Medicare efficiently and effectively.
    In addition to leadership constraints, the agency's capacity to manage
    Medicare is limited relative to its multiple, complex responsibilities. In
    January 1998 and February 1999, we reported that HCFA was

    overwhelmed in its efforts to handle the number and complexity of
    requirements in the Balanced Budget Act of 1997 (BBA). For example, BBA
    expanded the health plan options in which Medicare beneficiaries could

    enroll. However, HCFA's staff had no previous experience overseeing these
    diverse options, such as preferred provider organizations, private fee- for-
    service plans, and medical savings accounts. According to the HHS Inspector
    General, many staff lacked experience in dealing with health maintenance
    organizations- the existing managed care option. Few regional office staff
    assigned to managed care oversight had training or

    experience in data analysis, which is key to monitoring internal trends in
    plan performance over time and assessing plan performance against local and
    national norms. 1 1 Medicare's Oversight of Managed Care: Implications for
    Regional Staffing (OEI- 01- 96- 00191, Apr. 1998).

    At the same time, HCFA faces the loss of a significant number of staff with
    valuable institutional knowledge. In February 2000, the HCFA Administrator
    testified that

    more than one- 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 leave HCFA
    unprepared to handle Medicare's future population growth and medical
    technology advances. 2 To assess its needs systematically, HCFA is
    conducting a four- phase workforce planning process that includes
    identifying current and future competencies needed to carry out the agency's
    mission and analyzing the gaps between them. 3 HCFA initiated

    this process using outside assistance to develop a comprehensive database
    documenting the agency's employee positions, skills, and functions. HCFA's
    human

    capital problems can be seen as part of a broader pattern of human capital
    shortcomings that have eroded mission capabilities across the federal
    government. See our High- Risk Series Update (GAO- 01- 263, January 2001)
    for a discussion of human capital as a newly designated governmentwide high-
    risk area. Medicare Reform

    Elements of recent Medicare reform proposals and Proposals Address

    alternative models drawn from other federal agencies Program Governance

    suggest ways to address focus, leadership, and capacity Issues

    issues. Options proposed include creating an entity that would administer
    Medicare without any non- Medicare 2 Gail Wilensky et al., “Crisis
    Facing HCFA and Millions of Americans,” Health Affairs, Vol. 18 (Jan.-
    Feb. 1999). 3 HCFA's workforce planning efforts to date have been in line
    with our guidance on this subject, as articulated in Human Capital: A Self-
    Assessment Checklist for Agency Leaders (GAO/ GGD- 99- 179, Sept. 1999).

    responsibilities; establishing tenure for the program's administrator that,
    at a minimum, would overlap presidential terms; and granting the entity
    administering

    Medicare greater operational flexibility. At hearings in February and May
    2000, we examined two leading reform proposals, 4 and while neither fully
    addressed Medicare's governance shortcomings, each provided potential
    building blocks of administrative reform. Under the reform proposed by the
    Administration, HCFA would continue to oversee Medicare+ Choice plans and
    administer the traditional program in addition to its other
    responsibilities.

    However, HCFA would be given some new flexibility in personnel, contracting,
    and purchasing practices. Under reforms proposed by Senators Breaux, Frist,
    and others, an independent Medicare Board would manage competition among
    plans; traditional Medicare would exist as one of the competing health
    plans. The proposal would also divide HCFA into two parts: one division
    would administer the traditional Medicare plan; the

    other would carry out HCFA's non- Medicare responsibilities. Creating a new
    board to oversee Medicare+ Choice would not likely be quick or easy to
    implement. Prior HCFA experience suggests that a new agency with several
    hundred staff may be needed to make functional an independent board with the
    proposed scope of responsibilities. Before HCFA was reorganized in 1997, one
    of its units- the Office of Managed Care-

    performed some of the functions envisioned for the 4 One proposal, The
    Medicare Modernization Act of 2000, S. 2342, is also known as the
    President's proposal. The other proposal, popularly known as Breaux- Frist,
    is the Medicare Preservation and Improvement Act of 1999, S. 1895. Senators
    John B. Breaux and Bill Frist sponsored the proposal; Senators J. Robert
    Kerrey, Chuck Hagel, Christopher S. Bond, Judd Gregg, and Mary L. Landrieu
    are cosponsors.

    proposed Medicare board. 5 The unit was staffed by nearly 150 individuals in
    a central location and supported by another 120 regional office staff and an
    unknown number of employees in other HCFA support units such as personnel,
    training, contracting, finance

    and budget, and computer systems. Experience also suggests that the period
    needed to establish a board- run agency and make it fully functional could
    be 2 years or

    longer, depending on the number of staff devoted to planning such an
    enterprise. In the past, the Congress addressed governance issues for
    certain programs by separating their administration from a larger body. In
    1995, for example, the Social Security Administration (SSA) was
    reestablished as an independent agency outside HHS, 6 and in so doing, the
    Congress strengthened the role of the Commissioner, SSA's agency head. The
    Commissioner is appointed by the President and confirmed by the Senate, but
    until the agency became independent, the President could remove the
    Commissioner for any reason at any time. The independence law provided for a
    fixed 6- year term and protection from arbitrary removal. The Commissioner
    can now be removed by the President only for cause- neglect of duty or
    malfeasance in office.

    The Congress has acted in the past to fix the tenure of other agency heads
    and thus help insulate them from immediate political pressures. In 1976, the
    term of the Director of the Federal Bureau of Investigation (FBI) 5 After
    the reorganization, the functions of the Office of Managed Care were
    distributed among three new HCFA units: the Center for Health Plans and
    Providers, the Center for Beneficiary Services, and the Center for Medicaid
    and State Operations. 6 The impetus for SSA's independence stemmed from
    concerns expressed in congressional hearings and reports about a variety of
    issues, including, among others, the need to improve management and

    continuity of leadership at SSA and make SSA more accountable to the public
    and the Congress.

    was set at 10 years. Since 1978, there have been five directors and acting
    directors, serving on average 4.2 years. Within their 10- year terms,
    however, FBI Directors remain accountable to the President and are not
    completely insulated from the political environment. The President can
    remove a director and did so in 1993 when the Director faced allegations of
    ethics violations.

    The Congress has also created advisory boards to help guide an agency's
    operations. In 1998, for example, the Congress passed legislation that
    provided for an Internal Revenue Service (IRS) oversight board and
    introduced other changes in agency governance. 7 The board is intended to
    help bring accountability, continuity, and expertise to executive governance
    and oversight of the agency and to give the Congress more confidence in IRS'
    day- to- day operations. 8 Most Medicare reform proposals recognize that- to
    meet the financing challenges caused by an aging population and increasingly
    expensive medical technology- the program must be modernized. A fundamental
    concern is to find a balance between giving the administering entity
    adequate flexibility to act prudently and ensuring that the entity can be
    held accountable for its decisions and their implementation.

    No single approach offers a complete solution, but a combination of elements
    may be worth considering. Key Contacts William J. Scanlon, Director Health
    Care Issues (202) 512- 7114 scanlonw@ gao. gov 7 Internal Revenue Service
    Restructuring and Reform Act of 1998.

    8 National Commission on Restructuring the Internal Revenue Service, A
    Vision for a New IRS, June 25, 1997.

    Laura A. Dummit, Director Health Care- Medicare Payment Issues (202) 512-
    7119 dummitl@ gao. gov Better Safeguard

    Because of the program's vast size and complex the Integrity of the
    structure, we designated Medicare as a high- risk Medicare Program

    program- that is, at risk of considerable losses to waste, fraud, abuse, and
    mismanagement- and it remains so today. Each year, we have reported on
    systemic difficulties in safeguarding Medicare payments. One such difficulty
    is the production of reliable management information, which has had an
    impact on paying or denying Medicare claims appropriately, developing new
    payment methods for post- acute care, paying Medicare's managed care
    (Medicare+ Choice) plans appropriately, and implementing sound financial
    management practices. In Medicare's traditional fee- for- service component,
    HCFA does not have a clear picture of the individual or relative performance
    of the program's claims

    administration contractors, which are responsible for safeguarding
    Medicare's fee- for- service payments. In fiscal year 1999, these payments
    totaled about $170 billion. HCFA also lacks sufficient information on newly
    designed payment systems to determine whether providers are being paid
    appropriately for the services they deliver. As for Medicare+ Choice, HCFA
    similarly lacks the data needed to monitor the appropriateness of payments
    made to health plans and the services Medicare enrollees receive. Due to a
    failed attempt in the 1990s to modernize Medicare's multiple information
    systems, HCFA's current systems remain seriously outmoded. Without effective
    systems, the agency is not well positioned for sound financial or
    programmatic management.

    In Traditional HCFA contracts with private companies, mostly Medicare,
    Problems insurance companies, to review and pay providers' Ensuring
    Appropriate claims for health care delivered to program

    Claims Payment beneficiaries. These contractors run the day- to- day Remain
    operations of Medicare's traditional, fee- for- service program component,
    which accounts for over 80 percent of the program. Although the contractors
    are the

    front- line of defense against provider fraud and abuse and erroneous
    Medicare payments, in the 1990s, several contractors defrauded the
    government or settled cases alleging fraud for hundreds of millions of
    dollars.

    HCFA rarely uncovered these cases through its own oversight efforts. The
    reason is, in part, that the agency relied on contractors' self-
    certifications of management controls and contractors' self- reported data
    on performance and seldom made independent validations

    of contractor- provided information. This is inconsistent with federal
    standards that require the monitoring of internal controls to assess the
    quality of performance over time and ensure that identified problems are
    promptly resolved. 9

    Our July 1999 report on HCFA's efforts to monitor Medicare's claims
    administration contractors identified many weaknesses. For years, HCFA's
    contractor evaluation process lacked the consistency that agency reviewers
    need to make comparable assessments of contractor performance. HCFA
    reviewers had few measurable performance standards and little agencywide
    direction on monitoring contractor's payment safeguard activities. Under
    these circumstances, the reviewers in HCFA's 10 regional 9 The Comptroller
    General's Standards for Internal Control in the Federal Government (GAO/
    AIMD- 00- 21. 3. 1, Nov. 1999) provides a framework for agencies to
    establish and maintain internal controls and identify and address major
    performance and management challenges in areas at greatest risk of fraud,
    waste, abuse, and mismanagement.

    offices, who were responsible for conducting contractor evaluations, had
    broad discretion to decide what and how much to review as well as what
    disciplinary actions to take against contractors with performance problems.
    This highly discretionary evaluation process allowed key program safeguards
    to go unchecked and led to the

    inconsistent treatment of contractors with similar performance problems. In
    addition, responsibility for various aspects of contractor activities was
    splintered across many central office components, while regional staff who
    conducted day- to- day oversight were not directly accountable to any
    particular central office unit.

    As a result of these findings, we made a number of recommendations to
    improve HCFA's management and oversight of Medicare claims administration
    contractors. In summary, we recommended that HCFA enforce contractors'
    compliance with existing standards while developing better standards for
    assessing

    contractor performance; strengthen accountability for evaluating contractor
    performance and agency oversight; and require verification of contractors'
    internal controls and contractor- reported data. In response to our
    recommendations, HCFA

    ? has begun using national review teams to conduct contractor evaluations.
    The teams combine the expertise and dual perspective of central and regional
    office staff. ? established an executive- level position at its central
    office with ultimate responsibility for contractor oversight and recently
    established four positions in

    the field reporting directly to that executive position, reflecting the 4
    groupings of its 10 regional offices.

    ? hired several public accounting firms to review overall internal control
    design and the effectiveness of financial controls at 26 Medicare
    contractors and required contractors with control weaknesses to develop
    plans to correct them. 10

    HCFA is also seeking to enhance the usefulness of the Medicare national fee-
    for- service claims error rate developed by the HHS Office of the Inspector
    General

    (OIG). Each year, from reviewing a sample of paid claims, the OIG estimates
    how many claims were paid in error because they lacked appropriate
    documentation, were not for Medicare- covered services, or were for services
    deemed not medically necessary. However, the error rate does not distinguish
    between benign paperwork mistakes and abusive billing practices, nor does it
    identify the volume of erroneous payments at each contractor. Thus, to
    improve the error rate's use as a management tool, HCFA has an initiative to
    develop a separate error rate for each contractor. It has hired a
    “validation” contractor that will randomly sample processed
    claims and recheck the processing and

    payment decisions made. From the results, HCFA intends not only to measure
    contractor performance but also to identify which categories of services or
    provider types are the source of improper billing practices, thus targeting
    specific areas that need improvement. Improved Payment

    In addition to monitoring the contractors' claims review Methods Can Still
    Be activities to ensure that only appropriate claims are Exploited

    paid, HCFA faces challenges in establishing appropriate prices to pay for
    covered services. Most recently, it has had the challenge of ensuring the
    integrity of new payment methods mandated by the Congress. For

    10 For fiscal year 2001, HCFA is planning to have effectiveness of
    information technology, claims processing, financial, and debt collection
    controls tested at 13 Medicare contractors.

    example, the Balanced Budget Act of 1997 introduced several payment reforms,
    calling for HCFA to develop and implement new methods to pay for post- acute
    care- the care provided principally by skilled nursing facilities, home
    health agencies, and outpatient rehabilitation facilities. Under the old
    payment methods,

    post- acute care providers were reimbursed their costs (within certain
    limits) for all the services delivered. The Congress changed this payment
    approach to control the rapid spending growth for post- acute care that
    occurred during most of the 1990s.

    Under the new approach, known as prospective payment (currently in place for
    home health providers and skilled nursing facilities), post- acute care
    providers are paid rates fixed in advance for units of care (such as a day
    in a skilled nursing facility or an episode of home health care) rather than
    for the costs of each service.

    Providers face the risk of loss if their costs exceed their payments, while
    those that can furnish care for less than the prospective payment rate will
    retain the difference. However, a new opportunity for providers to boost net
    revenues inappropriately exists under this approach: providers could skimp
    on services and compromise the patient's quality of care. HCFA does not have
    the

    analytic tools available to identify and document underservice. Major gaps
    in information make prospective payment systems vulnerable to manipulation,
    thus undermining the systems' potential to constrain Medicare costs. To
    protect taxpayer dollars, HCFA needs the information to ensure that claims
    payments are accurate and that payment rates are set at the appropriate
    level. To protect beneficiaries, HCFA needs information on patients' health
    status and use of services to guard against providers' withholding needed
    services. Our findings on the prospective payment method for home health
    services illustrate the problem and support our recommendation, as shown in
    table 2.

    Table 2: Risk- Sharing Could Mitigate Potential Problems in Home Health
    Payments

    Design of home health Selected design features include the following:
    prospective payment system ? Home health agencies receive one payment for
    each 60- day episode

    of care, regardless of the services provided. There are no limits on the
    number of episodes a home health agency may provide a patient. ? Rates are
    based on pre- BBA use levels, which are widely regarded as excessive.

    Vulnerability to payment To increase revenues, a provider could abuses ?
    treat beneficiaries for more episodes than necessary, and

    ? reduce the number of visits provided during an episode. GAO recommendation
    To mitigate beneficiary and financial risk, we recommended that HCFA

    adopt a risk- sharing provision whereby the government shares in a home
    health agency's excessive losses but protects the program from an agency's
    excessive gains. Agency response HCFA did not agree to implement our
    recommendation. It was

    concerned that any additional change to payment policy would be too
    confusing for home health agencies at this time. However, we disagree and
    believe that the absence of any constraint on payments leaves Medicare's new
    home health payment system open to exploitation.

    Medicare+ Choice Medicare's managed care component known as Has Its Own Set
    of Medicare+ Choice is also subject to improper payment

    Integrity Issues problems. In fiscal year 1999, payments to Medicare+ Choice
    plans totaled $37 billion, or more than 17 percent of all program spending.
    The fact that Medicare+ Choice plan receives a fixed monthly payment for
    each beneficiary it enrolls rather than for each service delivered raises
    another set of program integrity challenges involving excessive payments for
    enrollees and failure to deliver necessary services. Plans may be overpaid
    when they attract relatively healthy and low- cost beneficiaries. It becomes
    a

    program integrity issue when plans purposely seek to enroll these
    individuals. Plans may also be overpaid when their reported data used to
    establish payment levels are erroneous or misreported. Program integrity is
    also compromised when plans fail to deliver services that enrolled
    beneficiaries need. Table 3 provides specific examples of these issues.

    Table 3: Program Integrity Issues in Medicare+ Choice

    Favorable selection of Through their marketing practices or provider
    incentive arrangements, some healthier beneficiaries plans may attract
    healthier beneficiaries and have more of their sick members disenroll. Plans
    gain financially because healthy beneficiaries cost less to serve than
    chronically or acutely ill beneficiaries. Whether intentional or accidental,
    however, favorable selection results in huge excess Medicare costs. In
    August 2000, we reported that, in 1998, Medicare+ Choice plans were paid an

    estimated $3.2 billion more than if the plans' enrollees had received care
    in the traditional Medicare program. In reports and testimony, we have
    consistently discussed the need to adjust Medicare+ Choice payments to
    reflect enrollees' health status. However, in 1999, the Congress slowed
    implementation of HCFA's health- status- based payment adjuster and mandated
    additional studies on HCFA's adjustment methods.

    Misreported or The HHS OIG found cases in which Medicare paid plans for
    deceased erroneous data that beneficiaries and beneficiaries receiving
    services in traditional Medicare. The

    increase payments OIG also found that some plans erroneously reported some
    of their enrollees as having institutional status, which allowed them to
    receive inappropriately

    enhanced payments. In 1998, we reported that some plans took advantage of an
    overly broad Medicare definition to classify healthy beneficiaries living in
    retirement communities as living in “institutions,” thereby
    increasing their Medicare payments substantially. HCFA has since adopted our
    recommendation to tighten the definition of an institution for payment
    purposes, but the extent to which the new definition is being enforced is
    uncertain.

    Failure to deliver In April 1999, we reported that a large Medicare+ Choice
    plan provided a

    required services prescription drug benefit with less coverage than it
    agreed to in its contract with HCFA. This case was discovered in our review
    of plan marketing materials, which found that several plans distributed
    misleading, inaccurate, or incomplete information about covered benefits. In
    a separate April 1999 report, we noted

    that several plans failed to adequately inform beneficiaries that they could
    appeal a plan's decision to deny services or payment for services. We have
    made several recommendations addressing HCFA's need to develop formatting

    and content standards for plan marketing and appeals process literature.
    HCFA has implemented some of our recommendations and has established work
    groups to consider others. Reliable information about plan enrollees will
    become even more critical in the future as Medicare phases in a

    new risk adjustment methodology that will pay plans on the basis of their
    enrollees' expected care costs. Under this new methodology, payment rates
    will be determined largely by patient utilization data submitted by plans.
    Any errors in the patient data will thus result in inaccurate plan payments.
    Inadequate

    A major weakness underlying HCFA's efforts to ensure Information Systems
    proper payments of Medicare claims is that its and Financial information
    systems are outmoded and many of its Management financial management
    procedures are not yet in order. Continue to Although HCFA has taken steps
    to begin modernizing its

    Undermine Efforts to systems and strengthening its financial management,

    Safeguard Medicare many challenges remain. In the early 1990s, HCFA launched
    a systems acquisition initiative to replace Medicare's multiple,
    contractoroperated

    claims processing systems with a single, more technologically advanced
    system. It was envisioned that such a system would have information for both
    traditional Medicare and Medicare+ Choice, simplify program administration,
    save on administrative costs, and better ensure proper payment by greatly
    improving HCFA's ability to spot improper billing practices. Although based
    on a sound notion, this system acquisition failed due to a series of
    planning and

    implementation missteps. Thus, Medicare was left with numerous aging
    information systems that needed year 2000 renovation. To its credit, HCFA
    made exceptional efforts to ensure that the agency's systems and those of
    its business partners were prepared, with the result that HCFA reported few
    significant year 2000 problems.

    These system renovations, however, put broader modernization plans on the
    back burner until recently. To date, initial work on some of its systems has
    begun,

    but completion of its systems modernization remains years away.

    Similarly, HCFA's first step toward improving its financial management
    procedures met with success, but much work in this area remains to be done.
    In an audit of its fiscal year 1999 financial statements, HCFA received for
    the first time an unqualified, or “clean,” opinion. The agency
    achieved this, in part, because it recognized the need to address long-
    standing concerns about the accuracy of Medicare accounts receivable-
    primarily overpayments made to providers that need to be recouped. Assisted
    by the HHS OIG and auditors

    from an independent public accounting firm, HCFA conducted an extensive
    effort to validate reported receivables, which resulted in a one- time
    write- off of $3 billion.

    However, HCFA has a long way to go to achieve sound financial management-
    that is, systems, processes, and controls that routinely generate reliable,
    useful, and timely information for managers and other decisionmakers. Since
    the audit of the fiscal year 1996 financial statements, subsequent annual
    audits and other reviews have found numerous weaknesses in internal controls
    in HCFA's financial activities. At the heart of its problems, the agency
    does not have a single,

    integrated financial accounting system that can be used to track and report
    financial activities, including receivables. Instead, HCFA and its
    contractors use several fragmented and overlapping systems and do not
    adequately verify the accuracy of reported activities and balances, which
    increases the risk of errors and misstatements. For example, Members of
    Congress

    were concerned that millions of dollars were owed to Medicare by Texas home
    health agencies that had been paid too much for services provided to
    Medicare beneficiaries and were no longer in business. The usefulness of the
    information HCFA developed in response to this concern was limited, however,
    since HCFA was not able to determine the correct amounts owed. In part, this
    was because HCFA's Provider Overpayment Report system, which it uses to
    track

    certain overpayments, had incorrect information. This situation and problems
    with the adequacy of existing internal controls indicate that extraordinary
    measures will be needed to maintain a clean opinion on HCFA's annual
    financial statements until these problems can be remedied. The fragmentation
    of accounting systems that overlap

    without being reconciled makes generating accurate and reliable information
    a major challenge. For example, even after the $3 billion write- off of
    accounts receivable, HCFA was left with significant amounts of delinquent
    receivables. At the end of fiscal year 1999, HCFA had an accounts receivable
    balance of $7. 3 billion, of which 45 percent was more than 6 months
    delinquent. HCFA's efforts under the Debt Collection Improvement Act of 1996
    to refer delinquent debt for collection to the Treasury Department in a
    timely manner have been confounded, in part, because of the work it takes
    the

    contractors to validate each debt before it can be referred to Treasury. 11
    Such validation is problematic because of the unreliability of the agency's
    systems for tracking and recording overpayments. We, the OIG, and
    independent auditors have made numerous recommendations to strengthen HCFA's
    financial management. Because of the seriousness of the challenge, we
    recommended that HCFA develop a comprehensive strategy to address financial
    management and accountability issues. To this end, HCFA has initiated a
    number of efforts, including working to develop a set of integrated
    financial management information systems. However, these

    systems are not expected to be fully operational until 2004 at the earliest.
    In the meantime, using its current 11 The act generally requires that debts
    delinquent more than 180 days be transferred to Treasury or, in certain
    cases, a Treasury- designated center for debt collection.

    systems, HCFA and its contractors must take interim steps to put adequate
    controls in place. Without these controls, HCFA is not in a position to
    generate the consistent and accurate data needed to ensure the

    integrity of the agency's financial management operations. Key Contacts
    Leslie G. Aronovitz, Director

    Health Care- Program Administration and Integrity Issues (312) 220- 7600
    aronovitzl@ gao. gov Linda M. Calbom, Director

    Financial Management and Assurance (202) 512- 9508 calboml@ gao. gov Joel C.
    Willemssen, Managing Director

    Information Technology (202) 512- 6408 willemssenj@ gao. gov Improve
    Oversight Between 1998 and 2000, the Congress held a series of of Nursing
    Homes

    hearings on nursing home care. Our reports and So That Residents

    testimony during this period painted a grim picture. In Receive Quality
    1999, we estimated that about 15 percent of the nation's

    Care 17, 000 nursing homes were being cited in consecutive years for serious
    care problems, which are those

    classified as causing “actual harm” to residents and those
    placing residents' health, safety, or lives in “immediate
    jeopardy.” (Serious care problems include malnutrition, dehydration,
    and pressure sores, among other conditions.) Complaints by residents, family
    members, or facility staff alleging harm to residents remained
    uninvestigated for weeks or months. When serious deficiencies were
    identified, federal and state

    enforcement policies did not ensure that the deficiencies were addressed and
    remained corrected. The federal government's stake in nursing home care is
    large, amounting to an estimated $39 billion in fiscal year 1999. Thus, as
    the hearings of the Senate Special Committee on Aging focused national
    attention on the quality of nursing home care, the Administration launched a
    set of initiatives to address the problems we and others identified.

    Quality Initiatives Oversight of nursing homes is a shared federal and state
    Are Designed to responsibility. On the basis of statutory requirements,

    Address Weaknesses HCFA defines standards that nursing homes must meet

    in Federal and State to participate in the Medicare and Medicaid programs

    Oversight of Nursing and contracts with states to certify that homes meet
    Homes

    these standards through annual inspections and complaint investigations. The
    “annual” inspection, which states must conduct at each home on
    average every 12 months, is called a standard survey. The standard survey
    entails a team of state surveyors spending several days in the home to
    determine whether care and services meet the assessed needs of the
    residents. When a home does not meet these needs as embodied in federal
    standards, it is cited for deficiencies. If the deficiencies are serious
    enough, state officials refer the home to HCFA for disciplinary

    measures. The investigation of complaints is largely a state- administered
    process, with HCFA requiring that serious complaints be investigated within
    specific time frames. Our work over the past 2 years showed that federal and

    state oversight of nursing home care was flawed in the following areas. ?
    Annual standard surveys. State surveyors failed to identify serious care
    deficiencies or classified them

    as less serious than was appropriate. One reason was that the approach
    surveyors used to spot deficiencies lacked sufficient rigor. Another reason
    was that homes had time to prepare for surveyors' inspection visits. Because
    the annual inspections often occurred at roughly the same time each year,
    homes could

    anticipate when surveyors were coming. Accordingly, they could make cosmetic
    changes and add staff beforehand, thus misrepresenting the home's typical
    routines and care practices. ? Lax approach toward sustained compliance.
    HCFA's stated goal is to have nursing homes sustain compliance with federal
    requirements over time. However, the results of several years of annual
    surveys show that some of the nation's nursing homes during these years are
    “repeat offenders”-

    that is, they have been cited in at least two consecutive annual surveys for
    actual harm or immediate jeopardy deficiencies. Until recently, there was
    little to deter such poor performance because few referrals for disciplinary
    actions, such as fines or termination, ever went into effect. ? Handling of
    complaints. Another major problem was that some states did a poor job of
    handling complaints against facilities. Complainants had

    difficulty filing complaints, the state survey agency understated the
    seriousness of complaints, and serious complaints were not investigated
    promptly. As a result of our work, we have made a number of recommendations
    to improve the quality of annual surveys, keep repeat offenders from
    escaping disciplinary action, and ensure that complaints are

    promptly investigated. HCFA has generally agreed with our recommendations.
    Because these problems surfaced dramatically with our 1998 report on
    California nursing homes, which included several recommendations for action,
    the Administration began

    to address the problems cited by introducing the first of a series of
    initiatives focused on nursing home care.

    Some initiatives are being phased in, while others have been added since
    1998, concurrent with our reports of additional problems and recommendations
    made at congressional hearings on nursing home care. The initiatives focus
    on strengthening the performance of standard surveys, adding more teeth to
    HCFA's enforcement policies, and improving states' approaches to handling
    complaints. To implement these initiatives, the states and HCFA are engaged
    in a range of activities that include, among others, the following:

    ? States are adopting improved methods to detect and classify deficiencies
    found during a home's annual inspection; HCFA is developing additional
    guidance in this area. ? Following a recommendation that we made, HCFA
    required states to schedule more visits on nights and weekends in an attempt
    to make the survey visits

    more of a surprise. However, this measure has still not addressed the
    problem we identified of the visits occurring close to the same date each
    year.

    ? HCFA strengthened the enforcement options available to impose sanctions on
    nursing homes that are cited for actual harm and immediate jeopardy
    violations by requiring that states refer for immediate sanction any home
    found on successive surveys to have a pattern of harming one or more
    residents. ? To reflect a new emphasis on the more timely investigation of
    serious complaints, states are hiring additional experienced surveyor staff,
    developing or upgrading automated tracking systems, and making unit
    management changes.

    Better Use of HCFA intends to intensify its use of management Management
    information to verify and assess states' oversight

    Information Would activities and view nursing home performance more Improve
    Nursing closely. As one step, it plans to enhance the userfriendliness

    Home Oversight of the central database- the On- Line Survey, Certification,
    and Reporting (OSCAR) system-

    that compiles, among other types of information, the results of every state
    survey conducted on Medicare- and Medicaid- certified facilities nationwide.
    Although OSCAR provides extensive information about state surveys- such as
    their timing, the deficiencies cited, and the time spent conducting various
    survey activities- computer programming knowledge is typically needed to
    obtain these data in a usable form. When analyzed, such information can
    provide a more complete picture of an individual facility's performance

    record. Refinements will allow users to access such information with much
    greater ease. In addition, HCFA recently directed its regional offices to
    prepare various tracking reports on indicators of state and regional office
    oversight performance. Examples of report topics include facilities whose
    Medicare and Medicaid funding may be terminated because of noncompliance
    with federal requirements, surveys of facilities under special scrutiny,
    deadlines met for reporting information through OSCAR, tallies of state
    surveys that find homes free of deficiencies, and analyses by state of the
    most frequently cited

    deficiencies. Preparing these reports using a standard format will enable
    HCFA to compare performance within and across states and help identify
    whether federal intervention is needed. One instance of HCFA's failure to
    use such information illustrates the potential for the information to serve
    as a kind of internal control. For a recent cycle of annual surveys in one
    state, surveyors found no deficiencies at 84 homes inspected. Had HCFA
    oversight officials checked each deficiency- free home's history of
    complaint allegations, they would have seen “red flags.”

    When we did such a cross- check during our 2000 review, we found that the
    state's supposedly deficiency- free homes had received 605 complaints. One
    of these homes had 39 complaints; 19 homes had 10 or more complaints.

    Significant numbers of these complaints were substantiated when
    investigated.

    Overall, many of the new policies and practices to implement the quality
    initiatives have only recently been instituted and will need time to take
    hold. For example, better detection and classification of serious
    deficiencies through the standard survey process will require further
    methodological developments. New efforts will be required to reduce the
    opportunities for

    homes to predict the timing of, and prepare for, these inspections. More
    time must elapse to know whether strengthened federal enforcement policies
    in fact create the incentives and environment that discourage poor care and
    ensure permanent corrections. States' efforts

    to expedite complaint investigations and systematize the reporting of
    investigation results are at various stages of completion. Similarly, with
    respect to improved federal oversight, the effectiveness of HCFA's
    management information reporting enhancements can only be judged in the
    months to come. Vigilance by both state and federal officials must be
    unrelenting to ensure the safety and well- being of the

    nation's nursing home residents. The performance of oversight can neither be
    taken for granted nor relaxed, which means that neither HCFA nor the states
    can afford to lose their current momentum. The Congress, too, plays an
    important role in keeping the spotlight on oversight agencies and the
    nursing home industry to achieve quality improvements.

    Key Contact Kathryn G. Allen, Director Health Care- Medicaid and

    Private Health Insurance Issues (202) 512- 7118 allenk@ gao. gov

    Ensure the Safety FDA regulates products with annual sales of roughly $1 and
    Efficacy of

    trillion that touch the lives of virtually every American. Medical Products

    FDA seeks to ensure that human and animal drugs, medical devices, and
    vaccines, among other products, are safe and effective and that the nation's
    food resources and blood supply are safe. FDA requires manufacturers of
    drugs and devices to seek its approval

    before their products are marketed. Once products are marketed, FDA
    continues to periodically verify the quality of manufacturing processes and
    continually monitors product safety by collecting and analyzing hundreds of
    thousands of reports of adverse reactions related to medical product use
    each year. To carry out this broad mandate, FDA has about 9, 000 employees.

    These include approximately 2,100 scientists who evaluate new product
    applications and about 1, 100 inspectors who ensure that the country's
    almost 95, 000 FDA- regulated businesses comply with minimum safety and
    quality standards. The speed of FDA's premarketing review and approval of
    new drugs has improved in recent years, largely because the Prescription
    Drug User Fee Act of 1992 allowed FDA

    to collect fees from the sponsors of new drug applications for the purpose
    of hiring more medical officers to review the applications. In addition, the
    FDA Modernization Act of 1997 established clear performance goals and
    focused attention on medical

    products with the most risk. However, FDA's efforts to monitor the quality
    and safety of marketed products have been less successful. The focus on
    reducing new product review times has slowly shifted resources away from
    other activities amid a general increase in use of medical products by the
    American public.

    FDA's Efforts to To ensure that medical products are manufactured in Monitor
    Medical

    accordance with standards for safety, purity, and quality, Product FDA
    periodically inspects facilities that manufacture Manufacturing Need
    prescription drugs and medical devices, as well as Improvement

    facilities that process blood and blood products. These inspections ensure
    that the products are produced in conformance with good manufacturing
    practices- federal standards for ensuring that products are high in quality
    and produced under sanitary conditions.

    In recent years, FDA has not met its requirement to inspect, every 2 years,
    domestic pharmaceutical and blood manufacturing facilities, as well as most
    medical device manufacturing facilities. For example, FDA is required by law
    to annually inspect 50 percent of the manufacturers of medical devices such
    as defibrillators, which pose the greatest potential risk to patients.
    However, it was able to inspect only 26 percent of these facilities in
    fiscal year 1999. 12 Similarly, we found that

    FDA was unable to identify and locate all the medical device reprocessing
    facilities that it was supposed to inspect. FDA maintained that it had to
    reduce the number of planned inspections of drug and device manufacturers by
    almost 40 percent because it did not receive a requested increase in funding
    in fiscal year 2000.

    To target its resources, FDA has adopted a risk- based approach to setting
    medical product inspection priorities. Under this approach, facilities are
    ranked on the basis of their previous inspections. Facilities that fail to
    meet good manufacturing practice standards are inspected more frequently
    than facilities with few deficiencies. Because this approach has been in
    place 12 In its fiscal year 2001 budget request, FDA stated that, because of

    insufficient inspection resources and the growth in high- risk device
    manufacturing facilities, the agency will not meet its statutory requirement
    to inspect one- half of these facilities.

    only for a short time, it is unclear whether it will provide sufficient
    inspection coverage to ensure that medical products are being manufactured
    in a safe and appropriate manner. However, there are already some
    indications that it may be difficult for FDA to target the facilities that
    pose the highest risk. For example, we found that FDA was unable to even
    identify and locate all the medical device reprocessing facilities and
    foreign pharmaceutical facilities that it was supposed to inspect.

    In a March 1998 report, we raised questions about the application of FDA's
    risk- based strategy for inspecting foreign pharmaceutical facilities.
    According to FDA, as much as 80 percent of the bulk pharmaceutical

    chemicals used by U. S. manufacturers to produce prescription drugs are
    imported, and the number of finished drug products manufactured abroad for
    the U. S. market is increasing. However, we found that FDA's riskbased
    inspection strategy would not ensure that timely follow- up inspections were
    conducted for all foreign

    manufacturers that had been identified as having serious manufacturing
    deficiencies and that had promised to take corrective action. Omitting these
    problem facilities

    from timely reinspection raises questions about FDA's ability to ensure that
    American consumers are protected from contaminated or adulterated drug
    products. We recommended that FDA revise its risk- based strategy for

    inspecting foreign pharmaceutical manufacturers to ensure that the problem
    facilities would receive timely follow- up inspections. However, FDA said it
    would not make any revisions until after the strategy had been fully
    implemented. FDA's Surveillance

    FDA attempts to monitor the risks of marketed drugs, Systems for Marketed

    medical products, vaccines, and blood products Medical Products throughout
    their life cycles. To do this, FDA faces two Need Strengthening

    difficult tasks: (1) establishing the number and rate of illnesses and
    injuries caused by drugs and medical devices and (2) determining that such
    adverse events

    are caused by the medical product rather than by the patient's underlying
    illness or some other aspect of their medical treatment. These tasks are
    complicated by the increasingly high exposure of the American public to
    medical products; for example, roughly 3 billion

    prescriptions were filled in the United States in 1999, a number that has
    increased about 6 percent annually since 1992. The inadequacies of FDA's
    postmarketing surveillance system can have important regulatory and health
    consequences. For example, in recent years FDA has been unable to determine
    the number of deaths due to liver failure in patients taking a drug for
    diabetes, whether the suicide rate among adolescents taking an acne
    medication is unusually high, and whether the rate of adverse events caused
    by reprocessed surgical devices is higher than that for new devices.

    FDA's approach to monitoring adverse events has certain flaws. To begin
    with, FDA estimates that it receives reports for only 1 to 10 percent of
    serious adverse events. Second, partly because FDA's

    postmarketing surveillance staff is relatively small, FDA has difficulty
    sifting through the many adverse event reports it does receive to determine
    if the reports reflect injuries caused by medical products and if the
    adverse events present a pattern that requires further investigation. FDA
    has begun implementing a twofold strategy to address these limitations.
    First, it is pilot testing a “sentinel” system that uses a small
    subset of health care institutions and charges them with preparing

    frequent and detailed reports of adverse events, rather than trying to
    increase the number of reports from the larger health care community.
    Second, FDA intends to increase its information processing capabilities by,
    among other things, encouraging the electronic submission of adverse event
    reports and acquiring statistical software with improved algorithms for
    identifying important adverse events from its large report databases.

    Key Contact Janet Heinrich, Director Health Care- Public Health Issues (202)
    512- 7118 heinrichj@ gao. gov Enhance the

    The Personal Responsibility and Work Opportunity Economic Reconciliation Act
    of 1996 and subsequent legislation

    Independence and made fundamental changes to the nation's safety net for
    Well- Being of

    needy families with children. It replaced the 61- year- old Children and

    welfare entitlement program with block grants to states, Families

    called Temporary Assistance for Needy Families (TANF), which has a key goal
    of ending the dependence of needy parents on government benefits by
    promoting work. The new welfare law gave states increased flexibility over
    the design and implementation of their welfare programs and at the same time
    required them to impose work requirements and enforce a 5- year lifetime

    limit on the receipt of TANF cash assistance. The Administration for
    Children and Families (ACF) in HHS oversees state implementation of welfare
    reform. The law also ended automatic Medicaid eligibility for cash

    assistance recipients, instead creating a separate Medicaid eligibility
    category, with states free to apply different criteria for TANF eligibility,
    including work and preapplication requirements not allowed under Medicaid.

    However, concerns that about one- third of the more than 40 million low-
    income people who had been automatically eligible for Medicaid could lose
    coverage gave rise to congressionally enacted protections for continued
    Medicaid coverage. Of particular concern was the possibility that children
    might unnecessarily lose coverage because, before welfare reform, more
    children gained access to Medicaid on the basis of family receipt of cash
    assistance than through other avenues of eligibility, such as low family
    income, disability, or other

    special medical needs. In addition to establishing a separate Medicaid
    eligibility category to protect adults and their older teenaged children,
    program expansions for children that were mandated by the Medicaid statute

    were left unchanged. Also, 1 year after the passage of welfare reform, as
    part of the Balanced Budget Act of 1997, the Congress established the State
    Children's Health Insurance Program (SCHIP), an optional health insurance
    program for children in families whose income level is too high to qualify
    for Medicaid but is at or below 200 percent of the federal poverty level. 13
    In addition to overseeing the sweeping changes in welfare and health
    programs for low- income families

    with children, HHS oversees a number of other programs, such as child
    support enforcement, child welfare services, Head Start, and child care
    subsidies.

    These programs have also undergone changes at the federal, state, and local
    levels. In the wake of these changes, HHS faces significant challenges in
    ensuring that states have adequate service delivery systems in place that
    meet federal objectives efficiently and

    effectively. 13 Due to the varying eligibility requirements across state
    Medicaid programs, the SCHIP legislation allows the state to expand
    eligibility up to 50 percentage points above its existing Medicaid
    eligibility standard. Therefore, in Connecticut, children in families with
    incomes up to 300 percent of the federal poverty level are eligible for
    SCHIP.

    Better Information State and local welfare agencies have made important

    Systems and Data progress in implementing key aspects of welfare reform,

    Collection Needed to but significant challenges remain. As states have

    Improve Program refocused their efforts on moving people into Management
    employment rather than qualifying them for monthly cash assistance, they
    draw on an array of other federal and state programs to support families'
    work efforts, as shown in figure 1.

    Figure 1: Many Programs in Separate Departments Can Enhance Family
    Independence and WellBeing

    One challenge involves having adequate information systems to manage these
    efforts. In our April 2000 review of states' automated systems, we found
    that while these systems supported welfare reform in many

    ways, they also had major limitations. For example, as a

    result of separating cash assistance from Medicaid, local officials in five
    of the six states we reviewed cited automated system glitches that sometimes
    occur in enrolling families in Medicaid or ensuring their continued
    enrollment. In addition, a number of state systems do not provide enough
    information to support enforcement of the 5- year TANF time limit. One of
    the underlying causes of state systems' limitations is that, with myriad
    programs involved in supporting welfare

    reform, automated systems were generally designed to meet the particular
    needs of each program, rather than the cross- program needs of the clients
    they serve. As the federal agency with primary responsibility for welfare
    reform, HHS is well positioned to lead a coordinated federal effort to
    facilitate states' efforts to improve their automated systems. State and
    local welfare officials have many such efforts under way but face a number
    of obstacles in moving forward. These

    obstacles include the difficulties inherent in successfully managing large
    information technology projects and the complexity of obtaining federal
    approval and funding for systems projects that involve multiple agencies.

    Because of the importance of adequate automated systems to the success of
    welfare reform, we recommended that HHS work with other federal agencies,
    including the Department of Agriculture, which oversees food stamps, and the
    Department of Labor, which oversees employment and training services, to
    facilitate states' efforts by ? disseminating information on best practices
    for

    managing information technology generally and best practices specific to
    automated systems that support welfare reform, ? reviewing, and modifying as
    needed, the federal process for systems procurement to ensure that it

    meets federal needs for state accountability without unnecessarily hindering
    state development efforts, ? facilitating links among the automated systems
    used by different state and local agencies through such means as supporting
    demonstrations designed to promote better partnerships between state and
    local agencies and coordinating data reporting requirements for different
    federal programs, and

    ? working with the Congress to ensure that a national system is in place for
    tracking time limits under TANF, as some families will be reaching these
    limits this year. Officials from ACF and HCFA, Agriculture, and Labor have
    begun meeting regularly to address these issues. Sustained high- level
    attention will be needed to move forward in this important area.
    Improvements in states' automated systems would also help HHS as it attempts
    to measure the progress its state

    partners are making to increase the economic independence and well- being of
    children and families. In our assessment of HHS' fiscal year 1999
    performance

    report and fiscal year 2001 performance plan, we noted that HHS had
    completed considerable efforts to reach consensus with its state partners on
    appropriate performance measures and targets in the TANF and child care
    programs. However, the agency had data on fiscal year 1999 results for only
    5 of the 25 measures associated with the outcomes. HHS acknowledged that
    time lags in obtaining and validating data from the states was, and would
    continue to be, a problem. HHS noted that there is a concerted effort under
    way through its departmentwide Data Council to assess data needs for the
    major programs administered by ACF and to begin to deal more aggressively
    with data collection and reliability problems.

    Although much remains to be accomplished, HHS has made progress in
    developing new systems and data sources in some areas. In its child support
    enforcement program, HHS has met the deadline for getting two new national
    databases- the mandated National Directory of New Hires and the Federal Case
    Registry- up and running for use by states. These systems provide data to
    states that can be used to locate noncustodial parents,

    identify existing child support orders, and send wage withholding notices to
    employers. In addition, HHS' enhanced information sharing with IRS has also
    led to increases in child support collections, which can increase families'
    financial well- being and reduce dependence on government support. In
    addition to working with its multiple partners to improve automated systems
    and data, HHS needs to improve its internal systems related to financial
    management. ACF received a clean opinion on its fiscal year 1999 financial
    statements. However, a material weakness was reported related to the
    preparation and analysis of financial statements. 14 The auditors reported
    that ACF does not have a fully functional, integrated accounting system to
    produce financial statements in a

    timely and efficient manner. In addition, reconciliation procedures were not
    performed consistently during the year, which resulted in delayed
    reconciliations for several accounts.

    Efforts Needed to With the day- to- day administration of HHS' major Ensure
    State

    programs for low- income children and families in the Accountability and

    hands of so many partners, the agency faces continuing Program challenges in
    holding partners accountable for meeting Effectiveness federal goals while
    allowing them the flexibility they 14 HHS Office of Inspector General,
    Report on the Financial Statement Audit of the Administration for Children
    and Families for Fiscal Year 1999, Report #A- 17- 99- 00003.

    need to meet state and local needs. With the flexibility granted them,
    program partners implement varied approaches to accomplishing program goals.
    The great variety in program approaches and service delivery methods can
    complicate HHS' efforts to determine the effectiveness of its programs. This
    variety, however, can

    also create opportunities for HHS to determine the more effective and
    efficient approach among numerous alternatives and then share that
    information with program administrators and policymakers. Our work has shown
    that HHS needs to do more to ensure accountability. In foster care, states
    have on occasion claimed reimbursement for juvenile justice placements at
    facilities that were not eligible for such reimbursement and that may not
    have met procedural requirements intended to protect the welfare of foster
    children. While states have primary responsibility for making foster care
    facility eligibility decisions and

    meeting procedural requirements in juvenile justice placements, HHS, as the
    ultimate steward of foster care funds, has to exercise closer oversight of
    the use of those funds. We also found that HHS had no established method in
    place to review states' progress in helping youths live on their own-
    through the federal Independent Living Program- after leaving the foster
    care system. We recommended that HHS develop a state

    reporting system and concrete measures of effectiveness to better ensure
    states' accountability for this program. We also found inadequate internal
    controls in place in one component of the Medicaid program. Almost onethird
    of Medicaid eligible individuals are school- aged children, which makes
    schools an important service delivery and outreach point for Medicaid.
    However, to date, there have been poor controls in place on the

    varied approaches to submitting claims for Medicaid reimbursement for
    school- based health services and administrative activities. Such controls
    must achieve an

    appropriate balance between the states' needs for flexible, administratively
    simple systems and assurances that federal funds are being used for their
    intended purposes. HCFA's current oversight practices have failed to provide
    that assurance, resulting in confusing and inconsistent guidance across the
    regions and failure to prevent improper practices and claims in some states.
    In addition to ensuring that adequate internal controls are in place, HHS
    needs to have information on the effectiveness of its programs. In recent
    years, HHS has made progress in collecting the data needed to assess program
    outcomes for Head Start, which served over 830,000 children in fiscal year
    1999 through public and private nonprofit agencies. As we recommended, and
    as required by the Congress, HHS is now also taking steps

    to assess the effectiveness of Head Start by using control groups to
    ascertain the extent to which positive outcomes can be attributed to Head
    Start participation. HHS has also continued a long- term research effort
    that

    predates welfare reform on the relative effectiveness of different welfare-
    to- work approaches. HHS has also updated its research efforts, supporting
    studies in key areas of interest under welfare reform, including how best to
    help former welfare recipients retain their jobs and advance in the
    workplace. The variety of program delivery approaches across

    states and localities makes it essential that HHS work with state and local
    agencies to ensure that eligible individuals are made aware of the benefits
    to which they are entitled. For example, “transitional Medicaid”
    entitles certain families who are losing Medicaid as a result of employment
    or increased income to an additional year of coverage. However, as noted in
    our September 1999 report, in at least one state, only 1 in 25 eligible
    individuals participated in the transitional program. Moreover, some states
    did not even track the program's participation rates. As a result, we
    recommended that HCFA provide states with guidance

    or other appropriate technical assistance regarding best approaches for
    implementing transitional Medicaid such that eligible beneficiaries could
    benefit from this entitlement. Concurring with our recommendation, HCFA has
    taken steps to work with each state to review and address states'
    eligibility and enrollment policies. States' experience implementing the
    SCHIP program also illustrates the importance of federal leadership in
    coordinating the various agencies' efforts to enroll beneficiaries. In
    working with the states on SCHIP implementation, HCFA used a variety of
    methods to communicate changes and state program innovations.

    For example, HCFA helped states develop their SCHIP plans by devising a
    template that identified the key information required. HCFA also provided
    frequent guidance to the states in the form of letters to state Medicaid
    directors and, on an ongoing basis, shared answers to questions frequently
    raised by the states.

    Letters, guidance, and questions and answers were all posed on the Internet
    for easy access. HCFA also worked with the states and other interested
    groups to develop reporting requirements for key program indicators such as
    expenditures and enrollment. Despite the short implementation period and the
    related challenges of establishing programs distinct from Medicaid, the
    states and the federal government made considerable progress in getting
    SCHIP up and running, and in just over 1 year, reported enrollment of close
    to 1 million children in 42 states and territories. HHS can also work to
    improve program outcomes and

    effectiveness by making full use of its strategic planning and annual
    performance planning process under the Government Performance and Results
    Act (GPRA). Under GPRA, each federal agency is to identify ways that it will
    collaborate with other federal agencies on cross- cutting program goals. For
    example, HHS' fiscal year 2001 performance plan noted the need to coordinate
    with the Department of Education

    concerning Head Start and the goal of increasing the quality of early
    childhood development and child wellbeing. This performance plan discussed
    in much more detail than the 1999 plan Head Start's role in meeting
    education- related aspects of the early childhood development goals that cut
    across both HHS and Education. However, HHS' plan did not define how
    coordination with Education will be accomplished or the means by which
    performance in meeting crosscutting

    goals will be measured. This is in contrast to Education's fiscal year 2001
    performance plan that describes its new coordination effort with HHS on
    early childhood programs. This effort includes forming a joint task force to
    improve collaboration between the two agencies and develop common program
    outcome indicators and measures. The absence of this discussion in HHS'
    performance plan limits its value in improving agency management and
    assisting the Congress in its

    oversight role. Key Contacts Cynthia M. Fagnoni, Managing Director

    Education, Workforce, and Income Security Issues (202) 512- 7215 fagnonic@
    gao. gov Kathryn G. Allen, Director

    Health Care- Medicaid and Private Health Insurance Issues (202) 512- 7118
    allenk@ gao. gov

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    Medicare: 21st Century Challenges Prompt Fresh Governance Thinking About
    Program's Administrative Structure (GAO/ T- HEHS- 00- 108, May 4, 2000).

    Medicare Reform: Issues Associated With General Revenue Financing (GAO/ T-
    AIMD- 00- 126, Mar. 27, 2000). Medicare Reform: Leading Proposals Lay
    Groundwork, While Design Decisions Lie Ahead (GAO/ T- HEHS/ AIMD- 00- 103,
    Feb. 24, 2000). Medicare: Program Reform and Modernization Are Needed But
    Entail Considerable Challenges (GAO/ T- HEHS/ AIMD- 00- 77, Feb. 8, 2000).

    HCFA Management: Agency Faces Multiple Challenges in Managing Its Transition
    to the 21st Century (GAO/ T- HEHS- 99- 58, Feb. 11, 1999).

    Medicare Program Medicare Improper Payments: While Enhancements Integrity
    Hold Promise for Measuring Potential Fraud and Abuse, Challenges Remain
    (GAO/ AIMD/ OSI- 00- 281, Sept. 15,

    2000). Medicare Home Health Care: Prospective Payment System Could Reverse
    Recent Declines in Spending (GAO/ HEHS- 00- 176, Sept. 8, 2000).

    Medicare: HCFA Could Do More to Identify and Collect Overpayments (GAO/
    HEHS/ AIMD- 00- 304, Sept. 7, 2000).

    Medicare+ Choice: Payments Exceed Cost of Fee- forService Benefits, Adding
    Billions to Spending (GAO/ HEHS- 00- 161, Aug. 23, 2000).

    Medicare: Health Care Fraud and Abuse Control Program Financial Reports for
    Fiscal Years 1998 and 1999 (GAO/ AIMD- 00- 257R, July 31, 2000).

    Federal Health Care: Comments on H. R. 4401, the Health Care Infrastructure
    Investment Act of 2000 (GAO/ T- AIMD- 00- 240, July 11, 2000). Medicare Home
    Health Agencies: Overpayments Are Hard to Identify and Even Harder to
    Collect (GAO/ HEHS/ AIMD- 00- 132, Apr. 28, 2000).

    Medicare Home HealthCare: Prospective Payment System Will Need Refinement As
    Data Become Available (GAO/ HEHS- 00- 9, Apr. 7, 2000).

    Medicare Contractors: Further Improvement Needed in Headquarters and
    Regional Office Oversight (GAO/ HEHS- 00- 46, Mar. 23, 2000). Medicare
    Financial Management: Further Improvements Needed to Establish Adequate
    Financial Control and Accountability (GAO/ AIMD- 00- 66, Mar. 15, 2000).

    Medicare: HCFA Faces Challenges to Control Improper Payments (GAO/ T- HEHS-
    00- 74, Mar. 9, 2000). Year 2000 Computing Challenge: Leadership and
    Partnerships Result in Limited Rollover Disruptions (GAO/ T- AIMD- 00- 70,
    Jan. 27, 2000.)

    Medicare Contractors: Despite Its Efforts, HCFA Cannot Ensure Their
    Effectiveness or Integrity (GAO/ HEHS- 99- 115, July 14, 1999). Medicare+
    Choice: New Standards Could Improve Accuracy and Usefulness of Plan
    Literature (GAO/ HEHS- 99- 92, Apr. 12, 1999).

    Medicare Managed Care: Greater Oversight Needed to Protect Beneficiary
    Rights (GAO/ HEHS- 99- 68, Apr. 12, 1999). Nursing Home

    Nursing Homes: Sustained Efforts Are Essential to Quality Realize Potential
    of the Quality Initiatives (GAO/ HEHS- 00- 197, Sept. 28, 2000).

    Nursing Home Care: Enhanced HCFA Oversight of State Programs Would Better
    Ensure Quality (GAO/ HEHS- 00- 6, Nov. 4, 1999).

    Nursing Home Oversight: Industry Examples Do Not Demonstrate That Regulatory
    Actions Were Unreasonable (GAO/ HEHS- 99- 154R, Aug. 13, 1999.)

    Nursing Homes: Proposal to Enhance Oversight of Poorly Performing Homes Has
    Merit (GAO/ HEHS- 99- 157, June 30, 1999). Nursing Homes: Complaint
    Investigation Processes Often Inadequate to Protect Residents (GAO/ HEHS-
    99- 80, Mar. 22, 1999).

    Nursing Homes: Additional Steps Needed to Strengthen Enforcement of Federal
    Quality Standards (GAO/ HEHS- 99- 46, Mar. 18, 1999). California Nursing
    Homes: Care Problems Persist Despite Federal and State Oversight (GAO/ HEHS-
    98- 202, July 27, 1998).

    Medical Product Single- Use Medical Devices: Little Available Evidence of
    Safety and Efficacy

    Harm From Reuse, but Oversight Warranted (GAO/ HEHS- 00- 123, June 20,
    2000).

    Adverse Drug Events: The Magnitude of Health Risk Is Uncertain Because of
    Limited Incidence Data (GAO/ HEHS- 00- 21, Jan. 18, 2000).

    Medical Devices: FDA Can Improve Oversight of Tracking and Recall Systems
    (GAO/ HEHS- 98- 211, Sept. 24, 1998). Food and Drug Administration:
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    System for Monitoring Problems With Approved Devices (GAO/ HEHS- 97- 21,
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    Economic Benefit and Loan Programs: Improved Data Sharing Independence for

    Could Enhance Program Integrity (GAO/ HEHS- 00- 119, Low- Income

    Sept. 13, 2000). Families

    Welfare Reform: Work- Site- Based Activities Can Play an Important Role in
    TANF Programs (GAO/ HEHS- 00- 122, July 28, 2000). Foster Care: HHS Should
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    June 9, 2000).

    Welfare Reform: Improving State Automated Systems Requires Coordinated
    Federal Effort (GAO/ HEHS- 00- 48, Apr. 27, 2000).

    Medicaid and SCHIP: Comparisons of Outreach, Enrollment Practices, and
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    Preschool Education: Federal Investment for LowIncome Children Significant
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    Medicaid in Schools: Improper Payments Demand Improvements in HCFA Oversight
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    Results Act: Using Agency Performance Plans to Oversee Early Childhood
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    Performance and Accountability Series

    Major Management Challenges and Program Risks: A Governmentwide Perspective
    (GAO- 01- 241)

    Major Management Challenges and Program Risks: Department of Agriculture
    (GAO- 01- 242)

    Major Management Challenges and Program Risks: Department of Commerce (GAO-
    01- 243)

    Major Management Challenges and Program Risks: Department of Defense (GAO-
    01- 244)

    Major Management Challenges and Program Risks: Department of Education (GAO-
    01- 245)

    Major Management Challenges and Program Risks: Department of Energy (GAO-
    01- 246)

    Major Management Challenges and Program Risks: Department of Health and
    Human Services (GAO- 01- 247)

    Major Management Challenges and Program Risks: Department of Housing and
    Urban Development (GAO- 01- 248)

    Major Management Challenges and Program Risks: Department of the Interior
    (GAO- 01- 249)

    Major Management Challenges and Program Risks: Department of Justice (GAO-
    01- 250)

    Major Management Challenges and Program Risks: Department of Labor (GAO- 01-
    251)

    Major Management Challenges and Program Risks: Department of State (GAO- 01-
    252)

    Major Management Challenges and Program Risks: Department of Transportation
    (GAO- 01- 253)

    Major Management Challenges and Program Risks: Department of the Treasury
    (GAO- 01- 254)

    Major Management Challenges and Program Risks: Department of Veterans
    Affairs (GAO- 01- 255)

    Major Management Challenges and Program Risks: Agency for International
    Development (GAO- 01- 256)

    Major Management Challenges and Program Risks: Environmental Protection
    Agency (GAO- 01- 257)

    Major Management Challenges and Program Risks: National Aeronautics and
    Space Administration (GAO- 01- 258)

    Major Management Challenges and Program Risks: Nuclear Regulatory Commission
    (GAO- 01- 259)

    Major Management Challenges and Program Risks: Small Business Administration
    (GAO- 01- 260)

    Major Management Challenges and Program Risks: Social Security
    Administration (GAO- 01- 261)

    Major Management Challenges and Program Risks: U. S. Postal Service (GAO-
    01- 262)

    High- Risk Series: An Update (GAO- 01- 263)

    GAO United States General Accounting Office

    Page 1 GAO- 01- 247 HHS Challenges

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    Comptroller General of the United States

    Page 3 GAO- 01- 247 HHS Challenges United States General Accounting Office

    Washington, D. C. 20548

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    Related GAO Products Page 51 GAO- 01- 247 HHS Challenges

    Related GAO Products Page 52 GAO- 01- 247 HHS Challenges

    Related GAO Products Page 53 GAO- 01- 247 HHS Challenges

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    Performance and Accountability Series

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