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

Related GAO Products Medicare

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:
Improvements Needed in the Foreign Drug Inspection Program (GAO/ HEHS- 98-
21, Mar. 17, 1998). Medical Device Reporting: Improvements Needed in FDA's
System for Monitoring Problems With Approved Devices (GAO/ HEHS- 97- 21,
Jan. 29, 1997).

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
Ensure That Juvenile Justice Placements Are Reviewed (GAO/ HEHS- 00- 42,
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
Benefits (GAO/ HEHS- 00- 86, Apr. 14, 2000).

Preschool Education: Federal Investment for LowIncome Children Significant
but Effectiveness Unclear (GAO/ T- HEHS- 00- 83, Apr. 11, 2000).

Medicaid in Schools: Improper Payments Demand Improvements in HCFA Oversight
(GAO/ HEHS/ OSI- 00- 69, Apr. 5, 2000). Welfare Reform: State Sanction
Policies and Number of Families Affected (GAO/ HEHS- 00- 44, Mar. 31, 2000).
Foster Care: Effectiveness of Independent Living Services Unknown (GAO/
HEHS- 00- 13, Nov. 5, 1999). Medicaid Enrollment: Amid Declines, State
Efforts to Ensure Coverage After Welfare Reform Vary (GAO/ HEHS- 99- 163,
Sept. 10, 1999).

Children's Health Insurance Program: State Implementation Approaches Are
Evolving (GAO/ HEHS- 99- 65, May 14, 1999). Welfare Reform: Information on
Former Recipients' Status (GAO/ HEHS- 99- 48, Apr. 28, 1999).

Results Act: Using Agency Performance Plans to Oversee Early Childhood
Programs (GAO/ T- HEHS- 99- 93, Mar. 25, 1999). Child Support Enforcement:
Information on Federal and State Databases (GAO/ AIMD- 99- 42R, Dec. 31,
1998). Welfare Reform: States Are Restructuring Programs to Reduce Welfare
Dependence (GAO/ HEHS- 98- 109, June 17, 1998).

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

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Contents

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Comptroller General of the United States

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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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