Medicare: Opportunities and Challenges in Contracting for Program
Safeguards (18-MAY-01, GAO-01-616).				 
								 
The Health Care Financing Administration (HCFA) chose 12 claims  
administration contractors in 1999 to act as program safeguard	 
contractors (PSC) for Medicare. This report examines (1) HCFA's  
progress in implementing its PSC contracting authority and (2)	 
whether HCFA could better manage of the PSCs to ensure their most
effective use. GAO found that HCFA is experimenting with	 
different options for integrating the PSCs into Medicare's	 
program safeguard activities. Between September 1999 and March	 
2001, HCFA issued 15 task orders that include different ways of  
using PSC services. HCFA lacks a long-term strategy to determine 
how best to use the PSCs. Instead, it has  issued task orders in 
an ad-hoc manner, which has afforded HCFA certain flexibilities, 
such as targeting its task orders on known problem areas.	 
Although this experimental approach may be prudent in the	 
short-term, it does not represent a process for systematically	 
testing different options for using PSC services in the 	 
long-term. Also HCFA has not set formal criteria and timeframes  
for determining how the PSCs should be integrated into Medicare's
existing program integrity efforts. Finally, HCFA has not	 
established clear, measurable performance criteria to assess the 
PSCs' performance on individual task orders.			 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-01-616 					        
    ACCNO:   A00878						        
  TITLE:     Medicare: Opportunities and Challenges in Contracting for
             Program Safeguards                                               
     DATE:   05/18/2001 
  SUBJECT:   Fraud						 
	     Health care programs				 
	     Program abuses					 
	     Internal controls					 
	     Health insurance					 
	     Contract performance				 
	     Performance measures				 
	     Program evaluation 				 
	     Medicare Program					 

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GAO-01-616
     
GAO United States General Accounting Office

Report to Ranking Member, Subcommittee on Labor, Health and Human Services,
Education and Related

Agencies, Committee on Appropriations, U. S. Senate

May 2001 MEDICARE Opportunities and Challenges in Contracting for Program
Safeguards

GAO- 01- 616

Page i GAO- 01- 616 Program Safeguard Contractors Letter 1

Appendix I Comments From the Health Care Financing Administration 18

Appendix II GAO Contact and Acknowledgments 23

Table

Table 1: General Categories of HCFA?s PSC Task Orders 6

Abbreviations

HCFA Health Care Financing Administration HHS OIG Department of Health and
Human Services Office of

Inspector General HIPAA Health Insurance Portability and Accountability Act
of 1966 PSC program safeguard contractor Contents

Page 1 GAO- 01- 616 Program Safeguard Contractors

May 18, 2001 The Honorable Tom Harkin Ranking Member Subcommittee on Labor,
Health and

Human Services, Education and Related Agencies Committee on Appropriations
United States Senate

Dear Senator Harkin: In fiscal year 1999, the Medicare program, which ranks
second only to Social Security in federal expenditures, paid over $200
billion to provide medical care to about 39 million elderly and disabled
beneficiaries. Because of its size and complexity, we designated Medicare in
1990 as being at high risk for fraud, waste, abuse, and mismanagement and
that designation continues today. The Congress passed the Health Insurance
Portability and Accountability Act of 1996 (HIPAA) in part to provide better
stewardship of the program. 1 This act gave the Health Care Financing
Administration (HCFA)- the agency that administers Medicare- the authority
to contract with specialized entities to combat fraud, waste, and abuse.
Previously, such safeguard activities were exclusively performed by the
insurance companies- known as claims administration contractors- that HCFA
contracts with to process and pay Medicare claims.

In May 1999, HCFA selected 12 of these specialized entities to act as
program safeguard contractors (PSCs). A little over a year later, you asked
us to review HCFA?s implementation of its new contracting authority.
Specifically, you requested that we (1) describe HCFA?s progress in
implementing its PSC contracting authority and (2) assess whether HCFA could
improve its management of the PSCs to ensure their most effective use.

To learn how HCFA is implementing its PSC contracting authority, we
interviewed officials from two HCFA divisions- Program Integrity; and
Acquisitions and Grants. We discussed their plans for managing the PSCs,
evaluating their performance, and compensating them through different

1 P. L. 104- 191.

United States General Accounting Office Washington, DC 20548

Page 2 GAO- 01- 616 Program Safeguard Contractors

arrangements. We also interviewed representatives from six PSCs and four
claims administration contractors. We reviewed relevant documents, including
the general contract requirements- which apply to all the PSCs- and the
individual task order contracts, which define the specific activities
individual PSCs are to perform.

To identify ways that HCFA could improve its management of the PSCs, we
interviewed HCFA officials and reviewed HCFA planning documents. We also
interviewed 12 contract management specialists at federal and state
agencies, as well as at private organizations. These specialists included
experts in performance measurement and performance- based contracting, and a
former director of the Office of Federal Procurement Policy. We conducted
our work from June 2000 through April 2001 in accordance with generally
accepted government auditing standards.

HCFA is experimenting with different options for integrating the PSCs into
Medicare?s program safeguard activities. From September 1999 through April
2001, HCFA issued 15 task orders that include different ways of utilizing
PSC services. Some task orders involve discrete activities that focus on
specific areas vulnerable to fraud and abuse, such as community mental
health center services; others require PSCs to replace some or all of the
program safeguard activities traditionally performed by claims
administration contractors. Still others may have a national impact on fraud
and abuse prevention and detection, such as the development of a plan that
all contractors could use for reviewing the appropriateness of physical,
speech, and occupational therapy services. HCFA also plans to explore
different methods of paying the PSCs to better control costs and encourage
more effective performance. Finally, because the PSCs have begun to play a
larger role in HCFA?s program integrity efforts, the agency recently revised
its approach to monitoring and evaluating the PSCs? performance.

HCFA lacks a long- term strategy for determining how best to use the PSCs.
Instead, its approach has been to issue task orders ad hoc. This has
afforded HCFA certain flexibilities, such as targeting its task orders on
known problem areas. While this experimental approach may be prudent in the
short term, it does not represent a process for systematically testing
different options for using PSC services in the long term. Moreover, HCFA
has not set clearly defined criteria for determining how the PSCs should be
integrated into Medicare?s existing program integrity efforts. In addition,
HCFA has not established clear, measurable performance criteria Results in
Brief

Page 3 GAO- 01- 616 Program Safeguard Contractors

to assess the PSCs? performance on individual task orders. Although HCFA
identified dimensions for evaluating PSC performance on most task orders,
these dimensions are very broad and not well defined. One dimension, for
example, deals with cooperation and coordination between the PSCs and
stakeholders. However, HCFA has not developed criteria to rate how well the
PSCs are performing in these dimensions.

We are making two recommendations to the Acting Deputy Administrator of HCFA
to help improve the management of the PSCs. HCFA agreed that our
recommendations are critical to ensuring the effectiveness of the PSCs and
indicated that it is already beginning to implement them. However, HFCA
expressed concern that we did not sufficiently recognize its efforts in
managing the PSCs.

Traditionally, HCFA?s claims administration contractors performed most of
Medicare?s program safeguard functions. These five functions are intended to
ensure that Medicare pays only appropriate claims for covered services
performed by legitimate providers to eligible beneficiaries. They include:

 medical reviews of claims to identify claims for noncovered, medically
unnecessary, or unreasonable services, conducted both before the claims are
paid (prepayment review) and after payments are made (postpayment review);

 reviews to identify other primary sources of payment, such as private
health insurers, that are responsible for paying claims mistakenly billed to
Medicare;

 audits of cost reports submitted by institutional providers to determine
if their costs are allowable and reasonable;

 identification and investigation of possible fraud cases that are referred
to the Department of Health and Human Services Office of Inspector General
(HHS OIG) for investigation and possible prosecution by the Department of
Justice; and

 provider education and training related to Medicare coverage policies and
appropriate billing practices.

In May 1999, HCFA selected 12 entities to act as PSCs, using a competitive
bidding process. 2 These entities represent a mix of health insurance

2 HCFA initially selected 13 PSCs, but one dropped out. Background

Page 4 GAO- 01- 616 Program Safeguard Contractors

companies, information technology businesses, and several other types of
firms. To be selected as a PSC, potential contractors had to indicate that
they were capable of performing four of HCFA?s five program safeguard
activities- either directly or through subcontracts with other
organizations. 3 Almost all of the PSCs have had experience as HCFA
contractors: Six are currently Medicare claims administration contractors 4
and an additional five have other types of contracts with HCFA.

HCFA awarded each of the PSCs an indefinite delivery/ indefinite quantity
contract. This type of contract allows HCFA to select a contractor and
outline in broad terms the activities to be performed. When HCFA identifies
a specific function to be performed, it issues a task order proposal for
that work, and the PSCs compete to receive the task order contract. HCFA can
issue numerous task orders covering one, several, or the entire range of
program safeguard activities, and it can award multiple task orders to an
individual PSC.

HCFA is exploring different ways to use and pay the PSCs to combat fraud,
waste, and abuse in the Medicare program. Because the PSCs represent a new
means of promoting program integrity, HCFA took an incremental approach to
implementing its specialized contracting authority and awarding the task
orders. This incremental approach gave HCFA the opportunity to test multiple
options for how the PSCs will function. These options include, for example,
a PSC performing all safeguard functions in a particular region of the
country and PSCs conducting work targeted at specific types of providers or
benefits considered particularly vulnerable to fraud and abuse. In addition,
HCFA plans to experiment with different methods of paying PSCs to enhance
their performance. Finally, HCFA recently revised its approach to monitoring
and evaluating the PSCs? performance because of their growing role in
program integrity.

3 One of HCFA?s program safeguard activities is to identify other insurers
responsible for paying claims mistakenly billed to Medicare. Because HCFA
has a separate contractor to perform this activity, however, the PSCs are
not required to do so.

4 Two of the six PSCs with claims administration contracts have established
new entities to perform PSC work. HCFA Is

Experimenting With Different PSC Approaches

Page 5 GAO- 01- 616 Program Safeguard Contractors

In September 1999, about 3 years after HIPAA was enacted, HCFA awarded its
first PSC task order. Officials emphasized that they needed time to consider
how best to implement HCFA?s contracting authority. This included the time
necessary to develop the indefinite delivery/ indefinite quantity contract
and the proposed regulations governing their new program integrity efforts.
By April 2001, HCFA had awarded 15 task orders focusing on different aspects
of program integrity, such as fraud detection and medical review of claims.

HCFA first awarded task orders for projects that would not disrupt the
processing of Medicare claims; for example, several projects involved
reviewing claims after they have been processed. In developing the initial
task orders in 1999, HCFA was concerned about the potential effects of the
year 2000 conversion on its claims processing systems and the possibility
that one or more of the claims administration contractors would leave the
program. HCFA decided that its initial task orders would either be focused
on tasks that were independent of claims processing or that supplemented,
but did not replace, the claims administration contractors? program
safeguard activities. Subsequent task orders have, in many cases, given the
PSCs greater safeguard responsibility for performing work, including
replacing the functions traditionally performed by the claims administration
contractors.

Based on our assessment, the 15 task orders can be divided into four
categories representing different ways of structuring the PSCs?
responsibilities. As shown in table 1, these categories cover a wide range
of options, from discrete, narrowly focused task orders related to a
particular service or provider type to task orders with a broad focus that
can have a national impact on Medicare?s program safeguard activities. HCFA
is testing these options to identify how the PSCs can make the most
significant contributions to program integrity. HCFA Is Taking an

Incremental Approach to Implementing the PSCs

Page 6 GAO- 01- 616 Program Safeguard Contractors

Table 1: General Categories of HCFA?s PSC Task Orders Name Purpose Start of

Contract Category 1: Task orders that are discrete and narrowly focused.

Community Mental Health Center Reviews Conduct unannounced site visits to
selected community mental health centers to determine whether they are
complying with Medicare requirements.

11/ 22/ 99 Home Office Cost Report Audits Conduct field audits at the home
offices of large provider chains,

such as skilled nursing facilities. 11/ 24/ 99 Compliance with Corporate
Integrity Agreements Perform on- site reviews of providers subject to
corporate integrity

agreements to determine whether they are complying with the terms of their
agreements.

11/ 24/ 99 Nebulizer Project Conduct medical reviews and participate in
field investigations on

the use of nebulizer drugs a in three states. 6/ 14/ 00

Category 2: Task orders that support or replace some safeguard activities at
one or more claims administration contractors.

Benefit Integrity Support Center Perform postpayment data analysis and
support fraud unit activities at New England claims administration
contractors. 11/ 24/ 99 Statistical Analysis Center Conduct statistical
analyses and trending activities on Medicare

claims data in three midwestern states. 3/ 14/ 00 Western Integrity Center
Perform postpayment medical review, fraud detection, and data

analysis for 12 western states. 7/ 14/ 00

Category 3: Task order that replaces all safeguard activities at a claims
administration contractor.

Durable Medical Equipment Perform all program integrity functions, including
prepayment and postpayment review, for the northeast region?s claims
processing contractor for durable medical equipment.

11/ 7/ 00

Category 4: Task orders that have a broad focus and a potential national
impact on improving the efficiency and effectiveness of Medicare?s safeguard
activities.

Year 2000 Analysis Conduct national analyses to minimize the risk of
increased fraud and abuse as technological changes were made for the year
2000. 9/ 30/ 99 Provider Education Plan Conduct a national education needs
assessment and develop a

comprehensive educational plan for Medicare providers. 11/ 15/ 99 Systems
Requirements Assess Medicare claims processing systems and recommend

modifications required to fully integrate the PSCs into the claims payment
process.

3/ 8/ 00 Comprehensive Error Rate Testing Program Develop national paid
claim error rates by contractor, benefit

category, and provider type through independent review of a random sample of
claims.

5/ 17/ 00 Therapy Services Perform data collection and statistical analyses
related to therapy

services and create a plan for reviewing therapy services and developing
educational materials.

8/ 14/ 00 Correct Coding Initiative Maintain automated system edits used by
all claims administration

contractors to identify certain types of inappropriate claims. 9/ 29/ 00
Managed Care Payment Validation Analyze Medicare+ Choice payment data to
validate accuracy of

payments and to identify program integrity vulnerabilities and solutions.

11/ 22/ 00 a These drugs are intended to provide relief to individuals
suffering from respiratory problems and may be used with a nebulizer, a
medical device to aid inhalation. Source: GAO analysis of task orders
awarded to HCFA?s program safeguard contractors as of April 2001.

Page 7 GAO- 01- 616 Program Safeguard Contractors

The task orders in the first category represent special projects that focus
attention on particular areas that are considered vulnerable to fraud and
abuse. For example, in recent years, community mental health center services
have been the target of investigations by law enforcement agencies,
including the HHS OIG and the Federal Bureau of Investigation. These
investigations were due, in part, to concerns about steep increases in the
cost per patient treated and increases in the number of these providers in
certain regions of the country. Further, the nebulizer task order was
awarded because nebulizer drugs have historically been a source of fraud and
abuse- including kickbacks from suppliers to beneficiaries and physicians.

The second category represents task orders in which the PSC supplements or
replaces some of the routine program integrity activities of one or more
claims administration contractors. For example, the Benefit Integrity
Support Center task order calls for the PSC to work with all the claims
administration contractors that have jurisdiction over the New England
states to identify potential cases of fraud and abuse. In addition, the PSC
staff are also supplementing the work conducted by fraud control units at
four of these contractors- partly because these units have few staff. The
PSC that was awarded the Western Integrity Center task order is replacing
some of the safeguard activities- including postpayment reviews and fraud
case development- of two claims administration contractors that serve 12
western states.

The third category, in which a PSC performs all program safeguard functions,
consists solely of the Durable Medical Equipment task order. This task order
is important in that it represents a test for determining whether a PSC can
effectively replace the safeguard activities performed by the claims
administration contractors. These activities include the performance of
prepayment medical reviews by the PSCs. These reviews must be completed
before the claims can be processed and paid by the responsible claims
administration contractor. This process poses a challenge because the PSC
must complete an assessment of whether claims should be paid without
delaying the processing and payment of appropriate claims to legitimate
providers by the claims administration contractors. 5 Although this is the
only task order being used to test this

5 Several years ago HCFA conducted a pilot project testing this separation
of duties between different contractors. HCFA found that separating
prepayment review and claims processing posed logistical challenges that
could make it difficult to complete prepayment reviews without creating a
backlog of unprocessed claims.

Page 8 GAO- 01- 616 Program Safeguard Contractors

option, the results may provide HCFA with important insights regarding how
to identify improper claims prior to payment without creating undue
processing delays.

The task orders in the fourth category are national in scope and aim to
build HCFA?s knowledge base and systems to enhance the prevention and
detection of fraud, waste, and abuse. For example, the PSCs that were
awarded the Systems Requirement task order are identifying potential changes
to existing claims processing systems to enable PSCs? automated systems to
be fully integrated with those of the claims processors. The Therapy
Services task order requires the development of a plan that all contractors
could use for reviewing the appropriateness of physical, speech, and
occupational services- services that the HHS OIG has identified as prone to
improper Medicare payments. HCFA expects the PSC?s efforts on this task
order will reduce payment error rates for therapy services without
disrupting the delivery of these services to Medicare beneficiaries.

HCFA plans to explore a variety of methods for paying PSCs to determine
which are most appropriate for the specific functions required in the task
orders. These methods fall under the general categories of
costreimbursement, fixed- price, and cost- plus- incentive contracts. Most
of the task orders are currently paid on some variation of a cost-
reimbursement basis. Under a cost- reimbursement contract, HCFA reimburses
the PSCs for their allowable costs- including such items as salaries,
travel, and subcontractors needed to perform the activities specified in the
task order. This type of contract provides the least incentive for a PSC to
manage its costs because HCFA assumes most of the risk for inefficient
performance. Thirteen of the 15 task orders are paid on this basis. 6

A fixed- price contract requires a PSC to assume most of the risk for
managing its costs and provides it with the greatest incentive for efficient
performance. Despite these potential benefits for HCFA, a fixed- price
contract has been used for only one task order. 7 Establishing fixed- price
contracts is difficult because HCFA has no prior experience with using

6 This includes four time and materials contracts, in which direct and
indirect labor are paid at specified rates, while materials are paid at
cost. 7 One other task order was initially awarded as fixed- price contract,
but was changed to a cost reimbursement contract before any substantial work
had been conducted. HCFA Plans to Experiment

With Different Types of Contract Payments

Page 9 GAO- 01- 616 Program Safeguard Contractors

task orders for program safeguards. HCFA officials told us that this type of
contract currently may not be feasible for most task orders because the
agency generally lacks the data necessary to reasonably estimate costs. As a
result, neither HCFA nor the PSCs can have a complete understanding of the
costs associated with meeting the contract requirements. Without reliable
cost data, HCFA officials fear that PSCs could submit high bids that include
excessive profits or low bids that lead to disagreements over the scope of
work and subsequent requests for additional funds.

To address these concerns, HCFA officials stated that they are developing a
new reporting system to obtain cost data associated with different program
safeguard activities. They believe this system, which may be implemented by
the end of 2001, will establish an independent data source to assess the
reasonableness of the PSCs? estimated costs and will ultimately provide a
stronger basis for competing future task order contracts on a fixed- price
basis. For example, in regard to a task order for prepayment medical review,
HCFA could use this data system to estimate the cost for a registered nurse
to review 1, 000 claims. Certain types of program safeguard work, however-
such as the development of fraud cases- might not be amenable to a fixed-
price contract due to the uncertainties inherent in detecting,
investigating, and developing such cases.

The third type of contractor payment incorporates the use of financial
incentives, such as performance awards or fees, that a contractor can earn
for meeting certain performance goals. For example, HCFA has begun to
experiment with financial incentives on the Comprehensive Error Rate Testing
program task order. This task order requires the PSC to evaluate the
accuracy of a random sample of claims processed by the claims administration
contractors. The PSC has the opportunity to earn two separate award fees:
One is based on the PSC?s success in obtaining medical records from
providers after the claims have been submitted, and the second is based on
having few successful appeals of its medical review decisions. HCFA chose
the first measure because obtaining relevant medical records is critical to
the PSC?s ability to accurately determine if a claim was paid correctly,
while the second measure is an indicator of the quality of the PSC?s medical
review decisions.

HCFA?s initial efforts to manage the task orders generally have focused on
the PSCs? start- up activities. HCFA has worked closely with the PSCs to
ensure that they acquire and develop the resources and systems needed to
ultimately fulfill contract requirements. This focus on the PSCs? early HCFA
Has Revised Its

Approach to PSC Monitoring and Evaluation

Page 10 GAO- 01- 616 Program Safeguard Contractors

efforts has resulted in HCFA?s central office assuming a major role in
overseeing the PSCs and managing the individual task orders. HCFA recognized
that as the PSCs play a larger role in its program integrity efforts, it
would be appropriate to reconsider its approach to PSC monitoring and
evaluation.

Consistent standards for monitoring and evaluating PSC performance are
important for developing a common understanding of how to use PSCs most
effectively. We have previously reported that HCFA?s regional office staff
charged with monitoring the work performed by the claims administration
contractors were given wide discretion in how they conducted their
oversight, resulting in inconsistent evaluations. 8 We subsequently reported
that HCFA was taking a number of steps to strengthen its oversight of the
claims administration contractors, such as providing detailed direction to
the regions to improve the quality and consistency of contractor reviews. 9

HCFA has revised its approach to PSC monitoring and evaluation to more
effectively assess the PSCs? progress in accomplishing the task orders?
specific objectives. Until recently, the same staff who generally monitored
the PSCs? day- to- day progress were also responsible for periodically
evaluating these contractors? performance in completing certain tasks. HCFA
has since assigned primary responsibility for day- to- day monitoring of the
PSCs to the regional offices. To ensure independence, the central office
will be responsible for separately evaluating the PSCs. This approach should
help HCFA maintain an appropriate level of objectivity and independence in
these assessments.

HCFA has not followed a systematic, strategic approach for testing and
evaluating how best to use the PSCs to promote program integrity. Also, HCFA
has not yet developed clear, measurable criteria to evaluate PSCs?
performance on the individual task orders. By addressing both of these
issues, HCFA would be in a better position to ensure that the PSCs are used
most effectively.

8 Medicare Contractors: Despite Its Efforts, HCFA Cannot Ensure Their
Effectiveness or Integrity (GAO/ HEHS- 99- 115, July 14, 1999). 9 Medicare
Contractors: Further Improvement Needed in Headquarters and Regional Office
Oversight (GAO/ HEHS- 00- 46, Mar. 23, 2000). Improvements in PSC

Strategy and Evaluation Process Are Needed

Page 11 GAO- 01- 616 Program Safeguard Contractors

HCFA lacks a strategy for determining how best to use the PSCs in the long
term. During our review, HCFA officials could not provide us with specific
goals and objectives for using the PSCs to combat fraud, waste, and abuse or
their evaluation criteria for assessing which PSC options work best under
different circumstances. While an incremental, experimental approach for
implementing its new contracting authority may be prudent in the short term,
a long term strategy would help HCFA to better target its PSC resources and
provide a basis for deciding where and how to use the PSCs to promote
program integrity.

Without a clearly defined strategic direction, HCFA has issued the task
orders ad hoc. This ad hoc approach has provided HCFA significant
flexibility in targeting its task orders on known problem areas and in using
the PSCs in different ways. However, it does not represent a strategy for
systematically testing different PSC options and for building upon the
results of one task order to issue future task orders- a strategy we believe
would provide HCFA with a sound basis for deciding how best to use its PSC
resources. Currently, HCFA relies on its staff to identify and develop
proposals for work that the PSCs should perform. Task orders are also
developed as opportunities arise- such as when a claims administration
contractor leaves the program, creating the opportunity to shift some or all
of the contractor?s program safeguard activities to a PSC.

HCFA officials said that they believe that it is important to gain some
experience with their PSC contracting authority before establishing HCFA?s
strategic direction for these contractors. They also told us that they have
a vision for consolidating program safeguard activities among the PSCs and
fewer claims administration contractors and are currently drafting a plan to
this effect. Until May 2001, however, they could not tell us when this plan
would be issued or whether it would contain goals and objectives for its
PSCs or criteria for evaluating the success or failure of these contractors.
In commenting on a draft of this report, HCFA officials identified four
general questions they are using to evaluate the PSC options. They also told
us that they plan to complete their evaluation of the PSC options by October
2001 in order to have a more clearly defined long- term strategy in place
for fiscal year 2002.

HCFA has not clearly defined the specific outcomes it would like to achieve
under each task order. Instead, we found that many of the specific outcomes
outlined in the PSC task orders describe work processes- critical steps to
be performed that serve as a substitute for outcomes. For example, under the
Benefit Integrity Support Center task order, two of HCFA?s Implementation of

the PSC Task Orders Lacks a Strategic Direction

HCFA Lacks Clearly Defined Criteria for Evaluating PSC Performance

Page 12 GAO- 01- 616 Program Safeguard Contractors

HCFA?s desired outcomes are that the PSC will (1) use a variety of methods
to detect potential fraud cases, and, (2) establish good working relations
with its law enforcement partners. Both of these are processes that HCFA
believes will contribute to accomplishing its desired outcome, developing
?quality? fraud cases.

Contract specialists told us that it is not always possible to develop
specific outcomes during the initial stages of a project and that using
processes as proxies for outcomes is therefore acceptable. However, they
also said that outcomes could begin to be developed once work has proceeded
for a period. As of April 2001, work on 8 of the 15 task orders had been
ongoing for at least a year, thereby providing HCFA with information from
which to review and better define its expected outcomes on each.

HCFA has begun to evaluate the PSCs? performance. However, HCFA has not
developed clear, quantifiable performance measures and standards for most of
these task orders. HCFA officials told us that several task order
evaluations are under way but none have been completed. They said that the
ongoing evaluations generally consist of reviewing the PSCs?
selfassessments, progress reports, and general performance. For most of its
task orders, HCFA established seven broad dimensions for assessing PSC
performance: (1) cooperation and coordination, (2) innovation, (3)
integrity, (4) quality, (5) timeliness, (6) value added, and (7)
satisfaction. 10 However, it has not developed measures to determine how
well the PSCs performed in these dimensions nor established standards
against which to judge whether the PSCs? performance was satisfactory.

To illustrate, as part of the Provider Education task order, HCFA plans to
assess the PSC?s cooperation and coordination with stakeholders based, in
part, on stakeholder feedback and the number of outstanding issues that
reflect a lack of communication. However, HCFA has no written guidance
explaining how it will obtain and measure stakeholder feedback. This task
order does not explain how HCFA will define an outstanding issue or judge
what constitutes a lack of communication between the PSC and a stakeholder.
It also does not define the standards against which HCFA will differentiate
between PSC performance that is excellent, good, acceptable,

10 Some task orders include performance requirements that are specific to
the work performed for that task order. For example, HCFA plans to assess
the effectiveness of the audit determinations made by the PSC conducting the
Home Office Cost Report Audits task order.

Page 13 GAO- 01- 616 Program Safeguard Contractors

poor, or unacceptable. Therefore, HCFA will not have a strong basis for
assessing the PSC in this dimension.

One of HCFA?s attempts to develop performance measures and standards that
are clear and quantifiable has been for the Statistical Analysis Center task
order. This task order requires the PSC to develop a wide variety of data
analyses for claims data in three states. These measures and standards were
drafted by the PSC at HCFA?s request and were recently incorporated into the
task order requirements. The PSC?s performance measures for the quality
dimension, for example, require that the findings resulting from these data
analyses be accurate and able to withstand external validation. The PSC?s
standards are that HCFA will rate the quality of the PSC?s data analyses as
excellent if 95 percent or more of the PSC?s analyses meet these criteria,
while HCFA will rate them unacceptable if the performance measures are met
fewer than 86 percent of the time.

Contract specialists told us that, ideally, measures and standards should be
incorporated into the task orders before work begins, so that all parties
agree on how performance will be evaluated. They also emphasized that
developing clear, quantifiable performance measures and standards is an
evolving process. While HCFA has not yet developed such measures and
standards for nearly all of its task orders, we believe that it is best for
the agency to now start with fairly simple measures and refine them over
time as it gains experience with each task order. It is also important to
collect data on various aspects of PSC performance and test different
measures to identify the right combination for motivating the PSCs to
perform well.

Developing the right mix of measures that will not distort contractor
behavior but will lead to the desired outcomes is a challenging task facing
HCFA. For example, HCFA officials consider more traditional performance
measures for program safeguards- such as the number of fraud referrals to
the HHS OIG- to be inappropriate because they might motivate a PSC to be
overzealous in its pursuit of marginal cases. While it is important to
consider how performance measures can potentially distort contractor
behavior, such concerns should not prevent HCFA from developing appropriate
measures. For example, testing different combinations can help HCFA identify
the right mix of performance measures to minimize such distortions.

HCFA officials told us they are trying to develop appropriate performance
measures and acknowledge that they need better information to evaluate the
PSCs. For example, HCFA plans to contract with a consulting firm to

Page 14 GAO- 01- 616 Program Safeguard Contractors

collect data on the performance measures and standards used by private
insurers to assess their program safeguard functions. In addition, HCFA is
developing error rate data by contractor, benefit category, and provider
type as part of the Comprehensive Error Rate Testing program task order.
HCFA officials told us that they would eventually like to use these data as
the basis for performance measures for future task orders- perhaps judging a
PSC by how much it reduces the paid claims error rate for hospitals or for
durable medical equipment.

HCFA was prudent in using an incremental approach to test the integration of
PSCs into Medicare?s program safeguard activities in the short term.
However, HCFA now has well over a year?s experience with the PSC task orders
and should develop a long- term strategy to ensure that the PSCs are used
most effectively. We believe it is important for HCFA to now define its
goals for the PSCs and determine how it will evaluate different options for
PSC integration into Medicare?s program safeguard efforts. Creating a long-
term strategy would enable HCFA to test different options more
systematically and to use the results of this testing in the development of
future task orders.

Although HCFA has already started to evaluate PSC performance on several
task orders, it cannot do so effectively because it lacks clear,
quantifiable performance measures and standards that are linked to defined
outcomes. We recognize that it will take some time for the agency to develop
appropriate performance criteria, but we believe it is important to start
experimenting with different performance measures, standards, and outcomes
to lay the groundwork for effective task order performance evaluations in
the future. This need for better performance measures, standards, and
outcomes will become especially critical if HCFA adopts more fixed- price
contracts containing financial incentives and penalties that are based on
PSC performance.

To assist HCFA in determining if the PSCs are an effective approach to
safeguarding Medicare payments, we recommend that the Acting Deputy
Administrator of HCFA define the strategic direction for future use of the
PSCs. This should include setting goals and objectives for the PSC program
and devising evaluation criteria for assessing the overall effectiveness of
the PSCs in promoting program integrity. Conclusions

Recommendations for Executive Action

Page 15 GAO- 01- 616 Program Safeguard Contractors

In addition, as HCFA gains experience with PSC performance, the Acting
Deputy Administrator should begin to develop clear, quantifiable performance
measures and standards tied to well defined outcomes for each of the task
orders.

In written comments on a draft of this report, HCFA agreed that our
recommendations are critical to ensuring the effectiveness of the PSCs.
However, HCFA also expressed concern that we did not sufficiently recognize
its efforts in managing the PSCs. In addition, HCFA supplied new information
to update us on its management of the PSCs and indicated that it is already
taking steps to implement our recommendations. We have included HCFA?s
letter as appendix I. HCFA also provided us with technical comments, which
we incorporated as appropriate.

Regarding our first recommendation, HCFA agreed that it needs to establish a
strategic direction for future use of the PSCs, but stated we should give
greater recognition to its ongoing planning efforts. HCFA also provided new
information regarding its PSC strategy. For example, HCFA noted that it has
finalized its PSC Management and Performance Evaluation Strategy and stated
that it intends to evaluate five different models as part of its effort to
develop a long- term strategy. HCFA also noted that its plan identifies the
following critical questions to be used in its evaluation of the PSC models.

 Did the model achieve the desired outcomes?

 What was the level of internal and external customer satisfaction?

 What are the costs and benefits of the model?

 How well does the model meet HCFA?s implementation criteria? HCFA stated
that its goal is to complete the assessment of the PSC models by October
2001 and to develop a more clearly defined long- term strategy for fiscal
year 2002.

HCFA?s written comments describing its plan contain new information that is
substantively different from the draft version it provided us during the
course of our review. Although the new information lacks sufficient detail
for us to fully assess its plan, we agree that it is an important step.
However, it is difficult for us to assess the evaluation questions without
more precise definitions of the terms used, such as the ?desired outcomes?
for each of the models and the ?implementation criteria.? In our view,
Agency Comments

Page 16 GAO- 01- 616 Program Safeguard Contractors

these questions are too vague to provide a meaningful basis for determining
which PSC models are most effective. Moreover, we question whether HCFA will
be able to complete its analysis of the models by October 2001 because it
will not have had the opportunity to fully test all the PSC models. For
example, although the task order that requires the PSC to perform all
prepayment and postpayment reviews was awarded last year, the test of its
ability to effectively perform prepayment reviews is not scheduled to begin
until October 2001- the same month HCFA stated that its analysis would be
complete.

In responding to our second recommendation, HCFA said it agreed that it
should develop improved performance evaluation criteria for individual task
orders. However, HCFA pointed out that it has already identified some
performance measures in several task orders, such as the Statistical
Analysis Center and the Comprehensive Error Rate task orders. We described
the performance measures used on these two task orders in our draft report
and believe that they represent positive steps. However, as we noted, the
majority of the task orders still lack clearly defined performance
evaluation criteria.

HCFA also said that we should recognize that there are two different methods
for evaluating contractor performance- a basic approach that assesses
general performance in areas such as quality or timeliness and performance-
based contracting which focuses more on outcome than on process. HCFA said
we should discuss the two methods it is using for the PSC task orders. We do
not believe that such a discussion is necessary. Regardless of which method
is used, an effective evaluation of contractor performance depends on the
development of well- defined performance measures and standards. Our report
recognizes both the difficulty of developing these criteria and HCFA?s
initial efforts to do so. As we noted in our report, most of the performance
dimensions HCFA has developed thus far are not well defined and lack
measurable standards. We believe that HCFA will not be able to effectively
evaluate the PSCs until it develops clearly defined performance criteria.

Finally, HCFA took issue with our statement that it lacks clear goals and
objectives for the PSCs. HCFA stated that these goals and objectives are
inherent in the Medicare Integrity Program legislation, which is part of
HIPAA. We recognize the importance of these goals and objectives and believe
that they provide a foundation on which HCFA can strengthen its program
safeguard activities. However, as we noted in our report, we believe that
sufficient time has elapsed since the Medicare Integrity Program legislation
was enacted to enable HCFA to translate the

Page 17 GAO- 01- 616 Program Safeguard Contractors

legislation?s goals and objectives into a more specific and clearly defined
role for the PSCs, especially in terms of PSC operations and their future
contributions to program integrity.

As agreed with your office, unless you announce its contents earlier, we
plan no further distribution of this report until 30 days after its issuance
date. At that time, we will send copies to the Honorable Tommy Thompson,
Secretary of Health and Human Services, Michael McMullan, Acting Deputy
Administrator of HCFA, and other interested parties. We will make copies
available to others upon request.

If you or your staff have any questions about this report, please call me at
(312) 220- 7600. An additional GAO contact and other staff who made major
contributions to this report are listed in appendix II.

Sincerely yours, Leslie G. Aronovitz Director, Health Care- Program

Administration and Integrity Issues

Page 18 GAO- 01- 616 Program Safeguard Contractors

Appendix I: Comments From the Health Care Financing Administration

Appendix I: Comments From the Health Care Financing Administration

Page 19 GAO- 01- 616 Program Safeguard Contractors

Appendix I: Comments From the Health Care Financing Administration

Page 20 GAO- 01- 616 Program Safeguard Contractors

Appendix I: Comments From the Health Care Financing Administration

Page 21 GAO- 01- 616 Program Safeguard Contractors

Appendix I: Comments From the Health Care Financing Administration

Page 22 GAO- 01- 616 Program Safeguard Contractors

Page 23 GAO- 01- 616 Program Safeguard Contractors

Geraldine Redican- Bigott, (312) 220- 7678 Robert Dee, Laura Greene, Anna
Kelley, Teruni Rosengren, and Michelle St. Pierre Appendix II: GAO Contact
and

Acknowledgments GAO Contact Staff Acknowledgments

201073

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