Medicare Management: CMS Faces Challenges to Sustain Progress and
Address Weaknesses (31-JUL-01, GAO-01-817).			 
								 
Considering the complexity, the size, and the statutory 	 
constraints affecting the Medicare Program, some contend that the
Health Care Financing Administration's (HCFA)--recently renamed  
the Centers for Medicare and Medicaid Services--management of	 
Medicare has--on balance--been satisfactory. Others argue that	 
HCFA's management has been unacceptable. HCFA's record has been  
mixed and the agency's challenges are growing. Effective	 
management of Medicare depends on finding a balance between	 
flexibility and accountability--that is, granting the agency	 
adequate flexibility to act prudently while ensuring that it can 
be held accountable for its decisions and actions. Moreover,	 
because Medicare will play such a significant role in the	 
nation's fiscal future, it is prudent to make an adequate	 
investment to ensure that Medicare is professionally and	 
efficiently managed. Achieving this goal will require the	 
modernization and maintenance of Medicare's traditional 	 
day-to-day operations.						 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-01-817 					        
    ACCNO:   A01501						        
    TITLE:   Medicare Management: CMS Faces Challenges to Sustain     
             Progress and Address Weaknesses                                  
     DATE:   07/31/2001 
  SUBJECT:   Health insurance cost control			 
	     Health insurance					 
	     Program management 				 
	     Internal controls					 
	     Medical services rates				 
	     Health services administration			 
	     Claims processing					 
	     Medicaid Program					 
	     Medicare Choice Program				 
	     Medicare Program					 
	     State Children's Health Insurance			 
	     Program						 
								 

******************************************************************
** This file contains an ASCII representation of the text of a  **
** GAO Testimony.                                               **
**                                                              **
** No attempt has been made to display graphic images, although **
** figure captions are reproduced.  Tables are included, but    **
** may not resemble those in the printed version.               **
**                                                              **
** Please see the PDF (Portable Document Format) file, when     **
** available, for a complete electronic file of the printed     **
** document's contents.                                         **
**                                                              **
******************************************************************
GAO-01-817
     
Report to Congressional Requesters

United States General Accounting Office

GAO

July 2001 MEDICARE MANAGEMENT

CMS Faces Challenges to Sustain Progress and Address Weaknesses

GAO- 01- 817

Page i GAO- 01- 817 Medicare Management Letter 1

Results in Brief 2 Background 3 HCFA Has Had Mixed Success in Managing
Medicare 5 Management Approach, Resource Limitations, and Statutory

Constraints Affect the Agency?s Ability to Improve Medicare Operations 19
Concluding Observations 25 Agency Comments and Our Evaluation 26

Appendix I Centers for Medicare and Medicaid Services 28

Related GAO Products 30

Table

Table 1: Examples of CMS? Responsibilities in Managing Selected Medicare
Program Activities 4

Abbreviations

BBA Balanced Budget Act CMS Centers for Medicare and Medicaid Services DOJ
Department of Justice HCFA Health Care Financing Administration HIPAA Health
Insurance Portability and Accountability Act of 1996 HHS Department of
Health and Human Services IT information technology MIP Medicare Integrity
Program OIG Office of Inspector General PPS prospective payment system PSC
program safeguard contractor SCHIP State Children?s Health Insurance Program
SNF skilled nursing facility Y2K Year 2000 Contents

Page 1 GAO- 01- 817 Medicare Management

July 31, 2001 The Honorable John D. Dingell Ranking Minority Member
Committee on Energy and Commerce House of Representatives

The Honorable Sherrod Brown Ranking Minority Member Subcommittee on Health
Committee on Energy and Commerce House of Representatives

The Honorable Peter Deutsch Ranking Minority Member Subcommittee on
Oversight

and Investigations Committee on Energy and Commerce House of Representatives

Recently, the Congress has been examining reforms to address the Medicare
program?s uncertain, long- term fiscal sustainability. Discussions have
focused on strengthening and modernizing the program- one whose size,
complexity, and importance make it very challenging to manage. Medicare is
the nation?s largest health insurer, with nearly 1 million hospitals,
physicians, and other health care providers billing the program. Together
with tens of millions of beneficiaries, these providers and suppliers
constitute a vast universe of program stakeholders that are directly
affected by the way the program is administered.

As pressure mounts to ensure that the program will be well- managed now and
in the future, questions have been raised about the ability of the Health
Care Financing Administration (HCFA)- recently renamed the Centers for
Medicare and Medicaid Services (CMS)- to administer the program and
implement programmatic changes effectively. 1 These include questions as to
whether HCFA has adequately implemented payment method changes mandated by
the Congress, worked effectively to

1 This report will refer to HCFA where our findings apply to the
organizational structure and operations associated with that name.

United States General Accounting Office Washington, DC 20548

Page 2 GAO- 01- 817 Medicare Management

safeguard program payments, and provided adequate oversight of the quality
of care furnished to Medicare beneficiaries in nursing homes and through
other providers. Because of your interest in these issues, you asked us to
assess (1) HCFA?s record of managing certain key aspects of the Medicare
program and (2) factors that limit the agency?s ability to improve
operations. To respond to this request, we relied primarily on our published
studies and ongoing reviews of the agency?s operations and Medicare program
components. A list of related products is included in this report.

Managing Medicare entails performing a broad range of complicated
activities, such as setting payment rates for Medicare- covered services;
overseeing companies that review, process, and pay about 900 million claims
annually; and contracting with and overseeing health plans to provide
beneficiaries choices in how they access their Medicare benefits. Because
Medicare is a highly visible public program touching the lives of millions
of citizens and directly affecting the health care marketplace, CMS? actions
face close scrutiny. With such challenges, the agency?s record of success
has been mixed. On the plus side, HCFA has performed some of its core
missions well. It has developed payment systems that were difficult to
design and implement and that have helped constrain program expenditures
while ensuring beneficiary access to care. Further, it has succeeded in
ensuring that providers are paid promptly for the bulk of submitted claims
and at a low administrative cost. On the minus side, however, the agency has
experienced some difficulties in refining payment methods that were
developed to control Medicare spending, paying claims properly, overseeing
Medicare claims administration contractors, and ensuring the quality of care
delivered to Medicare beneficiaries. Further, providers have become
increasingly vocal about what they perceive as an excessive regulatory
burden placed on them by the Medicare program.

HCFA?s record of performance must be considered in light of factors that may
impede its progress in improving Medicare operations. These include its lack
of a performance- based approach to management. We recently reported that,
compared with other federal managers, relatively few HCFA managers had
performance measures to hold them accountable for achieving results. In
connection with its available resources and statutory requirements, HCFA has
worked to carry out its Medicare responsibilities and to improve existing
operations with an administrative budget that has not increased in
proportion to its growing workload. In addition, it is faced with taking on
new and challenging tasks with an aging workforce whose skills do not always
match the requirements of such new responsibilities. Results in Brief

Page 3 GAO- 01- 817 Medicare Management

Furthermore, the agency has 49 senior executives to manage the two biggest
insurance programs in the country and activities accounting for hundreds of
billions of dollars in annual spending. In addition to its resource
challenges, the agency faces statutory constraints that inhibit it from
modernizing its management of fee- for- service claims administration- the
bulk of its Medicare business. Mismatches between resources, authorities,
and the agency?s responsibilities have hindered HCFA?s efforts to acquire
appropriate expertise, modernize outdated and inefficient information
systems, and conduct oversight activities.

In commenting on a draft of this report, CMS said it was pleased that we had
recognized its progress in a number of key areas. CMS agreed that more could
be done to strengthen the management of the Medicare program.

CMS (formerly HCFA), an agency within the Department of Health and Human
Services (HHS), is responsible for administering much of the federal
government?s multibillion dollar investment in health care- including the
Medicare program. Medicare is a health insurance program for people aged 65
years and older, some disabled people under 65 years of age, and people with
end- stage renal disease- which is permanent kidney failure treated with
dialysis or a transplant. Medicare covers a variety of services. Part A
services include inpatient hospital, skilled nursing facilities (SNF),
certain home health, and hospice care, while part B services include
physician and outpatient hospital services, diagnostic tests, mental health
services, and outpatient physical and occupational therapy, including
speech- language therapy, ambulance and other medical services and supplies.
Each year, Medicare serves about 40 million elderly and disabled Americans
and processes about 900 million claims submitted by nearly 1 million
hospitals, physicians, and other health care providers. In fiscal year 2000,
the program spent over $200 billion- about 11 percent of the federal budget.

The Medicare program has two components- the traditional fee- forservice
program and Medicare+ Choice- its managed care option. Most Medicare
beneficiaries participate in the traditional program and receive their
health care on a fee- for- service basis, in which providers are reimbursed
for each covered service they deliver. CMS contracts with about 50 insurance
companies to process and pay these claims. The other principal component-
Medicare+ Choice- covers about 14 percent of beneficiaries who have enrolled
in about 180 prepaid health plans that Background

Page 4 GAO- 01- 817 Medicare Management

contract with the government to receive monthly payments in exchange for
providing needed Medicare services for enrollees.

As the agency that administers Medicare, CMS performs a wide array of
management activities. Principal among these are setting prices for services
and health plans based on legislatively prescribed guidelines, ensuring
prompt and accurate payment to providers and health plans, educating
beneficiaries and providers about the Medicare program, ensuring the quality
of fee- for- service and managed care services paid by the program, and
operating the Medicare+ Choice program. See table 1 for examples of these
activities.

Table 1: Examples of CMS? Responsibilities in Managing Selected Medicare
Program Activities

Program activity Example

Setting prices In accordance with legislatively prescribed guidelines, CMS
sets tens of thousands of fees or prices to pay suppliers for
Medicarecovered items and to pay providers- including physicians, hospitals,
rehabilitation and nursing facilities, and home health agencies- for
Medicare- covered services. For example, CMS must

 develop rates for physicians that reflect the resources involved in
providing individual services as well as variations in their costs across
local markets and

 set rates for acute care hospitals reflecting services beneficiaries will
need based on diagnoses and adjust payments to reflect geographic cost
differences. Overseeing feefor- service claims administration

In monitoring about 50 Medicare claims administration contractors, CMS must
determine whether the contractors, among other things,

 meet performance standards for timeliness and accuracy of claims
processing;

 identify insurers that should have paid claims that were mistakenly billed
to Medicare;

 operate fraud units that explore leads and develop and refer cases to law
enforcement agencies;

 identify and investigate instances or patterns of inappropriate billing
that could result in unnecessary payments and serious financial losses to
the program; and

 collect overpayments. Educating beneficiaries CMS is responsible for
improving beneficiary understanding of the

Medicare program. To do this, CMS has launched a national education
campaign, Medicare & You, to provide Medicare beneficiaries with information
about Medicare and their health plan choices. Information is made available
to beneficiaries through a variety of channels, including print materials
mailed to all beneficiaries, toll- free telephone service, and an Internet
site.

Page 5 GAO- 01- 817 Medicare Management

Program activity Example

Ensuring that institutional care meets Medicare requirements

To help ensure that Medicare beneficiaries receive quality care, CMS

 contracts with state agencies to survey institutional providers, such as
SNFs, home health agencies, and dialysis facilities, and certify that they
meet Medicare?s conditions of participation and associated standards;

 conducts training activities to help ensure that state surveyors are
qualified to enforce the federal quality standards for care; and

 is required, for certain providers, such as hospitals, to accept
accreditation by the Joint Commission on the Accreditation of Health Care
Organizations or other accrediting bodies. Overseeing Medicare+ Choice CMS
contracts with managed care plans, requiring, among other

things, that they

 provide basic benefits to enrollees;

 comply with applicable provider requirements, including those relating to
certification and participation; and

 operate quality assessment and performance improvement programs.

CMS must

 review for accuracy the promotional literature and membership materials
that each plan distributes to beneficiaries and

 ensure that plans have adequately informed beneficiaries of their right to
appeal adverse coverage or payment decisions.

Tasked with administering a highly complex program, HCFA has earned mixed
reviews from us and others on its performance in managing Medicare. On one
hand, the agency presides over a program that is unparalleled in its
popularity with beneficiaries and the general public. HCFA has implemented a
variety of payment methods that have helped constrain the growth of program
costs. It has also succeeded in ensuring that Medicare claims are paid
quickly and at little administrative cost. On the other hand, HCFA has had
difficulty making needed refinements to its payment methods. The agency has
also fallen short in its efforts to oversee its Medicare claims
administration contractors and to ensure that claims are paid accurately and
beneficiaries receive quality services. While in the early 1990s HCFA came
under increasing criticism for not adequately protecting program payments,
some providers have complained recently that its safeguard efforts are
unduly burdensome. HCFA Has Had Mixed

Success in Managing Medicare

Page 6 GAO- 01- 817 Medicare Management

The size and nature of the Medicare program make it inherently challenging
to develop payment methods that prudently reimburse providers while
protecting beneficiary access to services. As Medicare?s steward, CMS cannot
passively accept what providers want to charge the program. However, because
of its size, Medicare profoundly influences health care markets. The agency
is often the dominant payer for services or products, and in such cases, it
cannot rely on market prices to determine appropriate payment amounts
because its share of payments distorts the market. In addition, HCFA has had
difficulty relying on competition to determine prices, because finding ways
of encouraging competition without excluding some providers has been
problematic. 2 This means that HCFA has had to administratively set payment
amounts for thousands of services in ways that encourage efficient delivery
of, and ensure beneficiary access to, needed health care services and
equipment.

Adding to the complexity of setting payment amounts is Medicare?s status as
a highly visible public program with certain obligations that may not be
consistent with efficient business practices. For example, the agency is
constrained from acting swiftly to reprice services and supplies even when
prevailing market rates suggest that payments should be modified. As
Medicare is a public program, its enabling legislation provides that any
changes require public input. This minimizes the potential for policymaking
to have unintended consequences. However, seeking and responding to public
interests, including various provider and supplier groups, can be a time-
consuming process that can sometimes thwart efficient program management. 3

Recent changes in provider payment methods, as mandated by the Congress,
have constrained rates paid to some providers and slowed the growth of
payments to others. This has raised provider concerns about payment
adequacy. As Medicare?s payments have become less generous in the aggregate,
payment adjustments for cost differences of providers and services become
more important. HCFA?s successes in more closely aligning payments to these
differences have sometimes been obscured by the concerns of those providers
affected, who are adapting to a new payment environment.

2 Statutory constraints on excluding providers from participating in
Medicare have resulted in the program traditionally including all qualified
providers who want to participate. 3 Medicare Payments: Use of Revised
?Inherent Reasonableness? Process Generally Appropriate (GAO/ HEHS- 00- 79,
July 5, 2000). HCFA Succeeded in

Implementing Improved Payment Methods, but Refinements Are Still Needed

Page 7 GAO- 01- 817 Medicare Management

Despite these challenges, over the last two decades HCFA has had broad
experience, and significant success, in developing payment methods that seek
to control spending by rewarding provider efficiency and discouraging
excessive service use. HCFA?s experience began in 1983 when the Congress
passed legislation requiring the development of a hospital inpatient
prospective payment system (PPS), a method that pays providers, regardless
of their costs, fixed, predetermined amounts that vary according to patient
need. 4 This approach, designed to reward hospitals that could deliver care
at lower cost than the predetermined payment, succeeded in slowing the
growth of Medicare?s inpatient hospital expenditures. Growth in Medicare
inpatient hospital expenditures averaged over 15 percent per year prior to
1983, but was generally under 10 percent in subsequent years. HCFA?s next
major effort to break the link between providers? charges and Medicare
payments was implementing a fee schedule for physicians, which was phased in
during the 1990s. This schedule was not designed to reduce the overall
expenditure level, but to redistribute payments for services based on the
relative resources used by physicians to provide different types of care.
Its development and implementation was complex because HCFA had to calculate
payment amounts for over 7,000 procedures, accounting for the three
categories of resources used to perform each procedure- physician work,
practice expenses, and malpractice insurance expenses. 5 While beneficiary
access to physician care was generally not affected, the fee schedule, as
intended, led to a shift in payments from surgical and nonsurgical services
to primary care and other evaluation and management services.

HCFA?s next challenge was to expand use of prospective payment methods for
postacute care services, such as those provided by SNFs and home health
agencies. In 1997, the Balanced Budget Act (BBA) mandated that HCFA develop
and implement four new PPS 6 from fiscal year 1998 through fiscal year 2001-
a heavy workload for the agency. For each new

4 Older payment methods reimbursed care providers for their costs (within
certain limits) for all services delivered. 5 Each medical procedure is
ranked on a scale based on three categories of resources used to perform it-
practice expense, physician work, and malpractice expenses. Practice
expenses include the costs of resources such as personnel (other than
physicians), equipment, supplies, and office space required to deliver a
procedure. Physician work resources are measured in terms of a physician?s
time, intensity of effort, level of skill required, and stress from risk of
harm to the patient.

6 These include prospective payment methods for SNFs, hospital outpatient
departments, home health agencies, and inpatient rehabilitation facilities.

Page 8 GAO- 01- 817 Medicare Management

PPS, HCFA had to (1) design the payment system- which was based on data-
intensive studies- including factors that adjust payments based on the
health status of beneficiaries receiving care, (2) develop and issue
regulations that incorporated public comment, and (3) plan and program
computer system changes. Adding to its challenge, HCFA and its contractors
needed to make significant systems changes to implement the new payment
methods at the same time that they were renovating information technology
(IT) systems for Year 2000 (Y2K) date changes. As a result of the priority
HCFA had to give to Y2K systems changes, HCFA moved more slowly than the law
required to phase in its new PPS methodologies for home health and hospital
outpatient services. 7

Each of these payment methods was an improvement over cost- and charge-
based methods, which often rewarded inefficient delivery and excessive
provision of unnecessarily costly services. PPS methods reward providers for
keeping their costs down, which in turn has helped constrain the overall
growth of Medicare payments. However, slower payment growth requires further
adjustment to better account for differences in patient needs and the
special circumstances of particular providers or facilities to ensure that
the program is paying appropriately and adequately.

HCFA has had mixed success in refining some of its payment methods. For
example, HCFA partially addressed problems with its initial methodology for
introducing a resource- based practice expense component into the
physicians? fee schedule when it issued a new methodology in 1998. Overall,
we considered HCFA?s new methodology to be acceptable. The new methodology
better defined practice expenses by specialty and used a more
straightforward and simple- to- understand approach. Although HCFA developed
the new methodology using the best available data, the agency had limited
data on resource use by some specialties, and HCFA made a series of
assumptions and adjustments without confirming their reasonableness. As a
result, questions remain about whether payment is appropriate for certain
procedures. To address these issues, we recommended that HCFA refine its
relative value payments by identifying and then focusing on the areas where
the data and

7 HCFA implemented the PPS for SNFs on time- by July 1, 1998. The home
health PPS was mandated to begin October 1, 1999, and was delayed by later
legislation until October 1, 2000. The hospital outpatient PPS was mandated
to begin by calendar year 1999 and was implemented in August 2000. The
implementation of the inpatient rehabilitation PPS was mandated by fiscal
year 2001, but has been delayed.

Page 9 GAO- 01- 817 Medicare Management

methodology weaknesses have the greatest effect, 8 but HCFA has done little
to target its refinement efforts. Similarly, we have pointed out design
flaws in the new payment methodology for SNFs and home health agencies that
could allow providers to increase payments by ?gaming?

these payment methods. 9 HCFA has begun to address some, but not all, of
these weaknesses.

HCFA has been successful in performing one of its principal missions-
ensuring that claims are generally paid quickly and at little administrative
cost to the taxpayer. Medicare contractors process over 90 percent of
Medicare claims electronically and pay ?clean? claims 10 on average within
17 days after receipt. 11 In contrast, commercial insurers generally take
longer to pay provider claims. Costs for processing Medicare claims are
roughly $1 to $2 per claim- much less than $6 to $10 or more per claim for
private insurers, or $7.50 per claim paid by TRICARE- the Department of
Defense?s managed health care program. 12

Nevertheless, some Medicare contractors? performance has been less than
exemplary, and HCFA?s lax and uneven oversight allowed performance problems
to continue undetected. In the 1990s, several contractors defrauded the
government or settled cases alleging fraud for hundreds of millions of
dollars, following allegations of serious problems. These included deleting
or destroying claims, failing to conduct proper audits,

8 Medicare Physician Payments: Need to Refine Practice Expense Values During
Transition and Long Term (GAO/ HEHS- 99- 30, Feb. 24, 1999). 9 Medicare:
Refinements Should Continue to Improve Appropriateness of Provider Payments
(GAO/ T- HEHS- 00- 160, July 19, 2000). 10 These are claims that have been
filled out properly and whose processing has not been stopped by any of the
systems? computerized edits designed to check whether the claim is
appropriate to pay- for example, that it is a covered service for an
eligible beneficiary. According to HCFA data on claims processed during
fiscal year 1999, about 81 percent of Medicare part A and part B claims
processed were paid, and, of those paid, over 99 percent were processed as
clean claims.

11 Much of this time is due to the mandatory claim payment delay provisions,
which prohibit the payment of Medicare claims until after 13 days from the
date received if electronically submitted and after 26 days for those
submitted on paper.

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

Paid Promptly and Inexpensively, but Contractor- Related Concerns Continue

Page 10 GAO- 01- 817 Medicare Management

falsifying documentation needed to prove claims were for medically necessary
services, and switching off the toll- free beneficiary inquiry lines when
staff members were unavailable to answer calls within the prescribed amount
of time. Many of these problems were discovered, not through HCFA?s routine
oversight efforts, but through whistleblowers whose information sparked
federal investigations that led to criminal and civil settlements.

HCFA?s oversight of its contractors? activities had several failings. The
agency relied on unverified performance information provided by contractors
and limited checking of each contractor?s internal management controls.
Furthermore, the agency?s reviews of its contractors? performance and
treatment of identified performance problems were inconsistent. To address
these and other weaknesses, we made a number of recommendations to improve
the rigor and consistency of HCFA?s oversight. 13

HCFA has taken steps to improve its management and oversight of contractors.
It has adopted a more consistent and strategic approach for overseeing
contractor performance, which is directed by a management board composed of
senior executives. 14 In addition, the agency has clarified accountability
for contractor oversight, 15 assigned additional staff to monitor and
oversee contractors, and separated responsibility for contractor management
from contractor evaluation. However, some of our recommendations for
improvement have not been fully implemented, including those to establish a
policy for systematic validation of essential contractor- reported data and
to strengthen controls over accountability and financial management, 16
including improving debt collection activities. 17

13 Medicare Contractors: Despite Its Efforts, HCFA Cannot Ensure Their
Effectiveness or Integrity (GAO/ HEHS- 99- 115, July 14, 1999). 14 The
Medicare Contractor Oversight Board, which reports directly to the
Administrator, was established in December 1998. 15 Medicare Contractors:
Further Improvement Needed in Headquarters and Regional Office Oversight
(GAO/ HEHS- 00- 46, Mar. 23, 2000).

16 Medicare Financial Management: Further Improvements Needed to Establish
Adequate Financial Control and Accountability (GAO/ AIMD- 00- 66, Mar. 15,
2000). 17 Medicare: HCFA Could Do More to Identify and Collect Overpayments
(GAO/ HEHS/ AIMD- 00- 304, Sept. 7, 2000).

Page 11 GAO- 01- 817 Medicare Management

While HCFA has focused on specific contractor functions that it believes
need improvement, others may also need attention. For example, Medicare
contractors handle nearly 15 million telephone inquiries from beneficiaries
annually, but HCFA has not been able to adequately oversee contractor
performance in this area because it lacked performance data on
beneficiaries? access to telephone customer service, the accuracy of
responses to inquiries, and caller satisfaction. To better measure
performance, the agency has begun to develop measures for telephone service,
set standards, and monitor contractor performance.

In addition to sharing information with beneficiaries, contractors also play
a major role in communicating with providers. How well they do this has
become more of a concern, which is understandable given that providers have
had to adjust to numerous program changes and increased attention is focused
on potential improper payments. We have begun reviewing how CMS and other
parts of HHS communicate with physicians to assess how Medicare program
instructions are conveyed and whether communication efforts could be
improved.

Medicare is one of the federal government programs that we consider at high
risk of improper payment because of its size and complex administrative
structure. 18 Safeguarding Medicare program payments has become an increased
focus of HCFA?s activities in the last few years. Although HCFA and its
contractors have taken a number of steps to address improper payment,
program vulnerabilities remain. Recent concerns have focused on three
program integrity issues- improperly paid claims, the integrity of HCFA?s
new payment methods, and difficulties that providers face in understanding
and complying with payment rules.

Since 1996, the Office of Inspector General (OIG) in HHS has repeatedly
estimated that Medicare contractors inappropriately paid claims worth
billions of dollars annually. These claims successfully passed through
Medicare?s highly automated claims processing systems because the claims
appeared valid on their face. Claims were disputed only after the OIG
obtained the underlying patient medical records from providers and reviewed
them in detail. The OIG and contractor staff could then determine that some
services were not properly documented to support the claims, not medically
necessary, coded improperly, or not covered.

18 High- Risk Series: An Update (GAO- 01- 263, Jan. 2001). Safeguarding
Program

Payments Remains Challenging

Estimates of Large Improper Payments Underscore Importance of Integrity
Efforts

Page 12 GAO- 01- 817 Medicare Management

Such labor- intensive and detailed review of even a significant fraction of
the millions of fee- for- service claims is not practical or efficient. It
would involve significant administrative cost and impose a considerable
burden on providers required to submit patient medical records. As more than
90 percent of the improper payments the OIG identified were for claims that
contained no visible errors and individual fee- for- service claims
typically involve small amounts of money, the returns from an investment in
such a review may not be cost effective.

Nevertheless, these large improper payment estimates reinforce the
importance of having the agency and its contractors develop and implement
effective strategies to prevent or detect such payments. The Congress aided
HCFA in this effort by creating the Medicare Integrity Program (MIP) and
giving HCFA a stable source of funding for program safeguard activities as
part of the Health Insurance Portability and Accountability Act of 1996
(HIPAA). In fiscal year 2000, HCFA used its $630 million in MIP funding to
support a wide range of efforts. These included conducting antifraud
activities, provider and managed care organization audits, targeted medical
review of claims, and awarding a competitive contract to a coordination of
benefits contractor, which will help safeguard Medicare dollars by
identifying when other companies should pay claims as the primary insurer
instead of Medicare. Concentrating audit efforts on providers and
reimbursement areas in which program dollars are most at risk has been a
cost- effective approach in identifying overpayments. Based on HCFA?s
estimates, in fiscal year 2000, MIP saved the Medicare program more than $16
for each dollar spent. In addition to activities funded through the MIP
program, HCFA has been conducting a range of other stewardship activities,
such as revising its process for enrolling providers in Medicare to ensure
that only legitimate providers are billing the program.

The agency now has additional options for conducting safeguard activities
because HIPAA gave it new authority to contract with entities other than the
Medicare claims administration contractors to perform specific payment
safeguard functions. Through a competitive bidding process, HCFA selected 12
entities to act as its program safeguard contractors (PSC) and has assigned
them a variety of tasks. These have ranged from doing specific focused
assignments to supplement the work of the claims administration contractors
to conducting most of the program safeguard

Page 13 GAO- 01- 817 Medicare Management

activities for a contractor. 19 PSCs are also conducting nationwide
safeguard activities. This incremental approach to assigning work to PSCs is
a prudent first step that will allow the agency to test how best to
integrate these specialized contractors into Medicare program integrity
efforts.

The agency has faced difficulties, however, in determining where its
safeguard activities could be improved. The reason is that it lacked
detailed information on payment accuracy by claims administration contractor
and by type of provider or service. To develop a more refined understanding
of how and why payment errors occur, the agency has an initiative to measure
the error rate for each claims administration contractor. A PSC ?validation?
contractor has begun to randomly sample claims paid by contractors and to
recheck the processing and payment decisions made. From the results, CMS
will be able to target contractors whose best practices should be emulated
by others and those that need improvement.

Moving a larger share of program payments to methods that pay a global fee
for a set of services creates new integrity challenges. Under global payment
methods, providers face the risk of financial loss if their costs exceed
their payments, while those who can furnish care for less than the global
fee retain the difference. This provides incentives for providers to skimp
on services, which may compromise patients? quality of care. For example,
managed care organizations participating in Medicare+ Choice have incentives
to inappropriately maximize the gains from their global payment by skimping
on the delivery of services. Similarly, home health agencies are now paid a
global payment for services provided during a 60- day episode of care,
rather than being paid for each individual service. Thus, home health
agencies can increase profits by reducing the number of visits provided
during the payment period. In addition, no standards

19 For example, a PSC is supplementing the work of the claims administration
contractors by conducting field audits at the home offices of large SNF and
other provider chains. A PSC is also supporting the efforts of fraud unit
activities for several claims administration contractors by performing
postpayment data analysis. However, some PSCs have been given more extensive
tasks, such as performing all of the program integrity functions for a
durable medical equipment regional carrier. PSCs are also maintaining the
system of automated edits used by all claims administration carriers to
identify certain types of inappropriate claims, conducting a national needs
assessment, and developing a comprehensive plan for educating Medicare
providers. For a discussion of PSC contracting authority implementation, see
Medicare: Opportunities and Challenges in Contracting for Program Safeguards
(GAO- 01- 616, May 18, 2001). Revised Payment Methods

Raise New Integrity Challenges

Page 14 GAO- 01- 817 Medicare Management

exist for what is the right amount of home health care for specific types of
patients- particularly for home health aide care- a major share of home
health visits. To reduce the system?s vulnerability to exploitation, we have
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. 20 However, HCFA was concerned
that any additional change to payment policy would be too confusing for home
health agencies and has not agreed to implement the recommendation.

Depending on their design, these global payment methods are not immune to
being gamed by increasing services provided. This is because the link
between amount of service provided- as determined by a provider- and payment
has not been entirely broken. For example, payments to SNFs for serving
beneficiaries are adjusted by a number of factors, including the amount of
therapy services provided. This gives facilities incentives to raise their
payment rates by providing more therapy services to beneficiaries than they
would otherwise. Similarly, home health agencies have incentives to
inappropriately increase the number of episodes of care provided, which
could escalate, rather than constrain, Medicare spending.

To protect program dollars, CMS needs information to monitor provider
responses to payment changes and their effect on beneficiaries. Monitoring
global payment methods is particularly important to ensure that providers do
not skimp on services in ways that could negatively affect beneficiaries?
health. However, HCFA?s efforts to systematically gather and evaluate
program data to monitor the impact of its SNF and home health payment
reforms on providers and beneficiaries have not been sufficient to identify
desirable or undesirable consequences. Furthermore, in Medicare+ Choice,
rather than developing proactive methods to monitor beneficiaries? access to
services, HCFA sometimes relied on complaints as the main indicator that
enrolled beneficiaries may be experiencing problems in getting access to
needed care. This is a weak mechanism because beneficiaries do not always
understand the benefits that plans are expected to provide. We have made
several recommendations that HCFA improve plan marketing and the appeals
process literature so beneficiaries can understand their benefits and

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

Page 15 GAO- 01- 817 Medicare Management

appeal rights. 21 The agency has implemented some of our recommendations and
has established work groups to consider others.

While we and the OIG have continued to encourage the agency to close
programmatic loopholes that can lead to improper payment, CMS? safeguard
efforts are viewed differently by some provider groups. Providers whose
claims are in dispute have complained about the burden of medical review
audits and about the fairness of some specific steps the contractors follow.
CMS faces a difficult task in finding an appropriate balance between
ensuring that Medicare pays only for services allowed by law while making it
as simple as possible for providers to treat Medicare beneficiaries and bill
the program. While an extensive claims review is undoubtedly vexing for the
provider involved, relatively few providers actually undergo them. In fiscal
year 2000, HCFA?s contractors conducted medical claims review audits of only
three tenths of 1 percent of physicians- or 1,891 out of a total of more
than 600,000 physicians who billed Medicare that year. We are beginning work
to review several aspects of the agency?s auditing and review procedures for
physician claims.

Providers? concerns about fairness may also emanate from the actions of
others who oversee federal health care- such as the HHS OIG and the
Department of Justice (DOJ)- which, in the last several years, have become
more aggressive in pursuing possible health care fraud and abuse. In the
mid- 1990s, the OIG initiated a series of audits that targeted the billing
practices of physicians at teaching hospitals. As we reported, the OIG
intended to audit the major teaching hospital or facility practice plan
affiliated with each of the nation?s 125 medical schools. 22 The OIG chose
these institutions because, of the nation?s 1,200 teaching hospitals, they
had the largest number of residents and had received the most Medicare
revenue- not because the OIG had reason to suspect that their billing
activities were inappropriate. The medical community considered the audits
costly and burdensome. We suggested to the OIG that a risk- based approach
that focused on the most problem- prone institutions would be a more
effective use of federal resources and less burdensome to compliant

21 Medicare+ Choice: New Standards Could Improve Accuracy and Usefulness of
Plan Literature (GAO/ HEHS- 99- 92, Apr. 12, 1999) and Medicare Managed
Care: Greater Oversight Needed to Protect Beneficiary Rights (GAO/ HEHS- 99-
68, Apr. 12, 1999). 22 Medicare: Concerns With Physicians at Teaching
Hospitals (PATH) Audits (GAO/ HEHS- 98- 174, July 23, 1998). Safeguard
Efforts Have Raised

Concerns by Providers

Page 16 GAO- 01- 817 Medicare Management

institutions. 23 The OIG agreed, but said that the office could not do so in
its ongoing work because it did not have techniques for narrowing the
selection to the most problem- prone institutions.

Providers have also charged that DOJ was overzealous in its use of the False
Claims Act- a powerful enforcement tool with substantial damages and
penalties. DOJ?s efforts included a series of nationwide investigations of
hospitals known as national initiatives. 24 These initiatives- particularly
the Laboratory Unbundling initiative 25 -which began in 1994, have provoked
considerable controversy. For example, the hospital community alleged that
DOJ subjected many of the nation?s hospitals to unwarranted investigations,
resulting in large penalties for unintentional errors. Concerns with the
Laboratory Unbundling initiative centered on the basis for selecting
hospitals for audit, the reliability of the data used by the U. S.
Attorneys? Offices, and the manner in which hospitals were treated.
Ultimately, several of these offices acknowledged that the data they had
relied on contained errors that could not be corrected. As a result, these
offices withdrew from the initiative, and all the hospitals in these areas
that had entered into settlement agreements had their settlement amounts
returned.

In June 1998, DOJ issued guidance to all its attorneys, including those in
its U. S. Attorneys? Offices, that emphasizes fair and responsible use of
the act in all civil health care matters. It instructs DOJ attorneys to
determine- before they allege violations of the act- that the facts and the
law sufficiently establish that a claimant knowingly submitted false claims.
At first, as we reported in August 1999, implementation of the guidance
varied among U. S. Attorneys? Offices and some had taken steps in their
investigations prior to the issuance of DOJ guidance in June 1998 that were,
to varying degrees, inconsistent with the issued guidance. 26 However, U. S.
Attorneys? Offices had largely addressed their shortcomings

23 See GAO/ HEHS- 98- 174. 24 DOJ defines a national initiative as a
nationwide investigation stemming from an analysis of national claims data,
indicating that numerous similarly situated health care providers have
engaged in similar conduct to improperly bill government health care
programs.

25 Unbundling is the practice of submitting bills piecemeal to maximize the
reimbursement for various tests that are required to be billed together and
therefore at a reduced cost. 26 Medicare Fraud and Abuse: DOJ?s
Implementation of the False Claims Act Guidance in National Initiatives
Varies (GAO/ HEHS- 99- 170, Aug. 6, 1999).

Page 17 GAO- 01- 817 Medicare Management

in implementing the guidance by 2000. 27 In our more recent March 2001
report, we found that DOJ?s two newer initiatives are being conducted
consistent with the guidance and that DOJ had improved its oversight of its
U. S. Attorneys? Offices. 28

A major responsibility of CMS is to oversee federal quality standards for
the services delivered to Medicare beneficiaries. Because many of these
quality checks are actually carried out by the states, a key CMS mission is
working with the states to oversee the care provided by nursing homes, home
health agencies, end- stage renal dialysis centers, and psychiatric and
certain Medicare- certified hospitals. 29 We and the OIG have been studying
the effect of HCFA?s oversight of nursing home quality for several years and
have found significant weaknesses in federal and state survey and oversight
activities designed to detect and correct quality problems in nursing homes.
For example, in 1999, we reported that about 1 in 4 of the nation?s 17,000
nursing homes- an unacceptably high number- had care problems that caused
actual harm to residents or placed them at risk of death or serious injury.
30 Complaints by residents, family members, or staff alleging harm to
residents remained uninvestigated for weeks or months. State surveys
understated the extent of serious care problems, both because of procedural
weaknesses in the surveys and their predictability. Federal mechanisms for
overseeing state monitoring of nursing home quality were limited in their
scope and effectiveness. In addition, when serious deficiencies were
identified, federal and state enforcement policies did not ensure that they
were corrected and remained corrected.

27 Medicare Fraud and Abuse: DOJ Has Made Progress in Implementing False
Claims Act Guidance (GAO/ HEHS- 00- 73, Mar. 31, 2000). 28 Medicare Fraud
and Abuse: DOJ Has Improved Oversight of False Claims Act Guidance (GAO- 01-
506, Mar. 30, 2001). 29 State surveyors review whether nursing homes, home
health agencies, end- stage renal dialysis centers, and laboratories comply
with applicable federal standards for health, safety, and quality of care.
About 80 percent of Medicare- certified hospitals have their quality
overseen through the Joint Commission on the Accreditation of Health Care
Organizations- the others have their quality reviewed by state surveyors.
Most psychiatric hospitals are accredited through the Joint Commission, but
state surveyors must check whether they meet a few specific requirements.

30 Nursing Homes: Additional Steps Needed to Strengthen Enforcement of
Federal Quality Standards (GAO/ HEHS- 99- 46, Mar. 18, 1999). Quality of
Care Continues

to Be a Concern

Page 18 GAO- 01- 817 Medicare Management

We have made a number of recommendations to address these problems. 31 HCFA
generally concurred with our recommendations, and, in response, in 1998 the
Administration introduced a series of initiatives focused on federal and
state efforts to improve nursing home care quality. Certain 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.

To realize the potential of these nursing home quality initiatives,
sustained efforts by CMS and the states are essential. Because the agency is
phasing in the initiatives and states began their efforts from different
starting points, much unfinished work remains. In September 2000, we
reported that- following state efforts to use new survey methods to better
spot serious deficiencies- the proportion of nursing homes nationwide with
such deficiencies increased slightly. 32 This could be due to better
identification of problems by surveyors, but it could also be due to
facility staff shortages during that period. Better detection and
classification of serious deficiencies through the standard survey process
will require further refinement of survey methods and more unpredictability
in survey dates, which would limit the opportunities for nursing homes to
prepare for them. States whose nursing home inspection activities we most
recently reviewed 33 had improved investigation and follow- up to
complaints, but were still not meeting HCFA?s standard of investigating
certain serious complaints within 10 days. These states also differed in how
far they had progressed in establishing procedures to make it easier to file
complaints or developing tracking systems to improve their oversight of
investigations by local district offices. As for the application of
strengthened federal enforcement policies, more time must elapse before
progress in this area can be assessed, although referral of problem homes to
the agency is on the rise. Similarly, with respect to improved federal
oversight, the effectiveness of recent internal agency

31 California Nursing Homes: Care Problems Persist Despite Federal and State
Oversight (GAO/ HEHS- 98- 202, July 27, 1998); GAO/ HEHS- 99- 46; Nursing
Homes: Complaint Investigation Processes Often Inadequate to Protect
Residents (GAO/ HEHS- 99- 80, Mar. 22, 1999); and Nursing Home Care:
Enhanced HCFA Oversight of State Programs Would Better Ensure Quality (GAO/
HEHS- 00- 6, Nov. 4, 1999). 32 Nursing Homes: Sustained Efforts Are
Essential to Realize Potential of the Quality Initiatives (GAO/ HEHS- 00-
197, Sept. 28, 2000). 33 These states were California, Missouri, Tennessee,
and Washington.

Page 19 GAO- 01- 817 Medicare Management

reorganizations to ensure more consistent oversight and management
information reporting enhancements can only be judged in the months to come.

While recent attention has focused on quality of care in nursing homes, they
generally get more scrutiny than other providers do. Nursing homes are
generally surveyed at least yearly. Other facilities are surveyed much less
frequently. For example, home health agencies were once reviewed annually,
but now are reviewed every 3 years. The OIG has also documented gaps in
surveillance of psychiatric hospitals and kidney dialysis facilities. In
addition, our work has shown that the number of HCFA- funded inspections of
dialysis facilities has declined significantly. These unannounced
inspections, which are the agency?s primary tool for ensuring that
facilities meet standards protecting health and safety, were conducted at
only 11 percent of the dialysis facilities eligible for Medicare
recertification in 1999, compared with 52 percent in 1993. When such surveys
were conducted, they showed that noncompliance was a problem. To illustrate,
in 1999, 15 percent of the facilities surveyed had deficiencies severe
enough, if uncorrected, to warrant terminating their participation in
Medicare.

No examination of HCFA?s record of Medicare management successes and
shortcomings would be complete without recognizing the importance of the
agency having the necessary tools to carry out its mission. Critical to the
agency?s success are an organizational focus on results and accountability,
coupled with adequate resources and the flexibility to effectively deploy
them.

CMS has not yet developed an effective performance- based culture- a key
factor that limits ongoing efforts to manage effectively. Managing for
results is fundamental to an agency?s ability to set meaningful goals for
performance, measure performance against those goals, and hold managers
accountable for their results. It is part of the direction set for federal
agencies by the Congress through the Government Performance and Results Act
of 1993. Management

Approach, Resource Limitations, and Statutory Constraints Affect the
Agency?s Ability to Improve Medicare Operations

Management Approach Lacks Strong Performance Focus

Page 20 GAO- 01- 817 Medicare Management

In May 2001, we reported on the results of our survey of federal managers at
28 departments and agencies on strategic management issues. 34 Overall, HCFA
fared poorly on this survey. For example, HCFA was the second lowest among
the agencies we surveyed in the percentage of managers who reported that
they were held accountable for results to at least a great extent. In
addition, the percentage of the agency?s managers who reported having
performance measures for the programs they were involved with was
significantly below that of other government managers. The agency ranked
lowest in terms of the percentage of managers who reported having four key
performance measures- output, efficiency, quality, and outcome measures- and
it ranked second lowest in having a customer service measure. Measuring
performance in assessing a program?s efforts to achieve its goals is
essential to fostering a performance- based culture and managing for
results. For example, such measures could be used to demonstrate whether
intended results are being achieved and to gauge if programs are operating
efficiently.

In addition to an organizational focus on managing for results, sufficient
resources- in terms of both dollars and human capital- are vital to
fulfilling the agency?s multiple management responsibilities. These
responsibilities include key oversight and stewardship activities and
modernization of the agency?s IT systems. However, CMS faces many competing
priorities when trying to fund and staff Medicare- related activities.

Over the years, HCFA?s administrative dollars have been stretched thinner as
the agency?s mission has grown. For many years, budget pressures forced the
Congress to make difficult decisions to limit discretionary spending. Like
many other federal agencies, the agency has been operating with a
discretionary administrative budget that has increased slowly. But, during
the last decade, mandatory spending on Medicare benefit payments has
doubled. Further, this was a period when the agency?s workload increased
appreciably as it sought to fulfill BBA Medicare mandates and to take on new
non- Medicare programmatic responsibilities, such as implementing the State
Children?s Health Insurance Program (SCHIP).

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

Affect Medicare- Related Activities

Budget Constraints at the Agency

Page 21 GAO- 01- 817 Medicare Management

We and others have contended that too great a mismatch between the agency?s
administrative capacity and its designated mandate has affected HCFA?s
responsiveness and will leave the agency unprepared to handle Medicare
reforms and future enrollment growth. In fiscal year 2000, Medicare?s
operating costs represented less than 2 percent of the program?s benefit
outlays. Although private insurers seek to earn a profit and incur other
costs, such as those for advertising, they would not attempt to manage such
a large and complex program with so comparatively small an administrative
budget.

Examples from the recent past show that sufficient resources are
particularly important to support key oversight activities, such as ensuring
proper payment of claims. In recent years, we have found that because of
resource limits, claims administration contractors checked a smaller
percentage of claims, audited a smaller percentage of cost reports from
institutional providers, and were unable to identify and collect some
overpayments promptly. In order to ensure that program safeguards were
strengthened, the Congress created MIP, which provided- among other things-
stable funding of safeguard activities. Although MIP began in fiscal year
1997, funding for safeguard activities did not increase until fiscal year
1998, when the MIP budget increased from $440 million to $550 million. 35
Total program safeguard appropriations are slated to increase annually until
fiscal year 2003, when the appropriation will total $720 million.

Resource issues have affected other oversight activities. In the area of
nursing home quality, HCFA has made negligible use of its most effective
oversight technique- an independent survey performed by HCFA employees
following completion of a state?s survey- for assessing state agencies?
abilities to identify serious deficiencies in nursing homes. Conducting a
sufficient number of these comparisons is important because of concerns that
some state agencies may miss significant problems, but HCFA lacked
sufficient staff and resources to perform these checks. In addition, limited
resources affected HCFA?s ability to oversee Medicare contractors. In fiscal
year 2001, the agency requested and received funding for 100 additional
positions to focus on key activities such as overseeing claims processing
activities, monitoring payments to providers and suppliers, and using
computer- based auditing techniques.

35 This included an additional $50 million in supplemental program safeguard
funds made available by the HHS fiscal year 1998 appropriation.

Page 22 GAO- 01- 817 Medicare Management

Resource issues have also affected HCFA?s ability to make capital
investments in its information systems for managing Medicare. 36 For
example, partly because resources were funneled to Y2K and other
highpriority activities, HCFA has had to postpone much- needed IT
enhancements that could help the agency and its contractors conduct Medicare
program monitoring and policy development activities more efficiently.
Resource limitations have delayed HCFA from developing a database using
modern technology that could help the agency monitor health care quality and
the appropriateness of provider payments. Some of Medicare?s vital
information systems are decades old and operate on software no longer
commonly used. The agency has recently begun to focus on developing systems
that are easier to maintain and that can increase the agency?s ability to
translate its data into useful management information. The agency?s current
and planned IT projects include developing a set of databases using more
modern technology, consolidating Medicare?s claims processing systems, and
improving the systems that maintain the program?s managed care enrollment
and payment data. However, the immediate pressing priorities to maintain
systems, keep the program operating, and respond to congressional mandates
leave less to spare for IT investments that could help the agency better
manage Medicare.

CMS? capacity for managing Medicare is also closely tied to the quality and
strength of the agency?s human capital. CMS has a reservoir of staff who are
highly skilled in many aspects of health care and its financing. However,
our prior and current work suggests that the agency lacks sufficient staff
with expertise in some key areas, such as managed care arrangements,
financial management, data analysis, rate- setting methodology, and IT. 37
These shortages have affected the agency?s ability to take on new and
challenging tasks. For example, although GAO has identified information
security as a governmentwide risk 38 that has been recognized as a
particular problem for CMS, the agency?s Chief Information Officer told us
that some IT security projects have been delayed primarily because of a lack
of staff with requisite skills.

36 Medicare: 21st Century Challenges Prompt Fresh Thinking About Program?s
Administrative Structure (GAO/ T- HEHS- 00- 108, May 4, 2000). 37 GAO/ T-
HEHS- 00- 108, HCFA Management: Agency Faces Multiple Challenges in Managing
Its Transition to the 21st Century (GAO/ T- HEHS- 99- 58, Feb. 11, 1999),
and GAO/ AIMD- 00- 66. 38 GAO- 01- 263. CMS? Human Capital

Challenges

Page 23 GAO- 01- 817 Medicare Management

Furthermore, the agency has faced the challenge of dealing with increased
responsibilities with fewer people. The BBA had 335 provisions requiring
HCFA to make substantial changes to the Medicare program, and during 1998--
a key implementation year 39 -the agency was doing this work with about
1,000 fewer employees than it had in 1980.

Compounding human capital concerns, CMS has a total of 49 senior executives
to manage program activities accounting for billions of dollars in annual
spending. In fiscal year 2002, federal benefit outlays for Medicare,
Medicaid, and SCHIP are expected to reach approximately $400 billion. In
fact, CMS? corps of senior executives is smaller than that of most other
civilian agencies that have significantly smaller annual expenditures. CMS?
senior- level executives play a vital role in focusing staff on current
mission priorities and guiding the agency on a strategic path to its future.
They manage about 4,600 agency employees and also oversee the efforts of
Medicare claims administration contractors, who have about 22,000 employees.
However, despite Medicare?s size and importance, there is no official whose
sole responsibility is to run the program. In addition to Medicare, top-
level managers have oversight, enforcement, and credentialing
responsibilities for other major healthrelated programs and initiatives,
such as the Medicaid and SCHIP programs, and for all of the nation?s
clinical laboratories. These other programmatic responsibilities naturally
require time and attention that would otherwise be spent meeting the demands
of the Medicare program.

Adding to concerns about current staffing, CMS is facing a potential loss of
human capital with managerial and technical expertise through an impending
wave of retirements. The agency has estimated that about 35 percent of its
current workforce will be eligible to retire over the next 5 years. 40
Upcoming retirements heighten concerns we raised in both 1998 and 1999 about
HCFA?s loss of technical and managerial expertise due to its aging
workforce. 41 For example, in the 5 years prior to 1998, almost 40 percent
of HCFA?s employees had left the agency. To its credit, to respond

39 In 1998, HCFA published 92 regulations and Federal Register notices
implementing congressional directives in BBA. 40 A retirement analysis by
HCFA showed that about 22 percent of HCFA employees eligible to retire in a
given year actually do so and that the average length of time between
eligibility for regular retirement and actual retirement is 3 years.

41 Medicare: HCFA Faces Multiple Challenges to Prepare for the 21st Century
(GAO/ T- HEHS- 98- 85, Jan. 29, 1998) and GAO/ T- HEHS- 99- 58.

Page 24 GAO- 01- 817 Medicare Management

to this human capital challenge, CMS is working on a human resources
planning effort to support the agency in strategic staffing, development,
and recruitment planning decisions. Part of CMS? challenge for planning its
future workforce is to determine the right balance between work performed by
CMS employees and work contracted out.

In addition to its resource challenges, CMS faces statutory constraints that
inhibit the agency from modernizing its management of fee- for- service
claims administration- the bulk of its Medicare business. At Medicare?s
inception in the mid- 1960s, the Congress authorized the government to use
existing health insurers to process and pay claims. It also permitted
professional associations of hospitals and certain other institutional
providers to ?nominate? their claims administration contractors on behalf of
their members. When the program began, the American Hospital Association
nominated the national Blue Cross Association to serve as its fiscal
intermediary. 42 Currently, the association is one of Medicare?s three
intermediaries and serves as a prime contractor for 26 local member plan
subcontractors that process about 86 percent of all benefits paid by fiscal
intermediaries. Under the prime contract, when one of the local Blue plans
declines to renew its Medicare contract, the association- rather than CMS-
nominates the replacement contractor. This process effectively limits CMS?
flexibility to choose the contractors it considers most effective. The
agency has also considered itself constrained from contracting with
nonhealth insurers for the various functions involved in claims
administration.

The Congress gave HCFA specific authority to contract separately for payment
safeguard activities and for claims administration for home health and
durable medical equipment. Nevertheless, for a number of years the agency
has sought more general authority for functional contracting and other
Medicare contracting reforms. We recently testified that Medicare could
benefit from the Congress? removal of limitations on CMS? contracting
authority and use of full and open competition in the selection of claims
administration contractors. 43 We have also suggested

42 Fiscal intermediaries primarily review and pay claims from hospitals and
other institutional providers covered under Medicare part A, while carriers
review and pay part B claims, which are submitted by physicians and other
outpatient providers.

43 Medicare Contracting Reform: Opportunities and Challenges in Contracting
for Claims Administration Services (GAO- 01- 918T, June 28, 2001).
Constraints on Flexibility

to Improve the Medicare Program

Page 25 GAO- 01- 817 Medicare Management

that, should the Congress modify the Medicare claims administration
contracting authorities, it should consider requiring that HCFA report on
its progress in implementing these new authorities. Further, we recommended
that HCFA develop a strategic plan for managing claims administration
contractors in this new contracting environment. 44

In June 2001, the Administration proposed legislation to modify the Medicare
claims administration contracting authority that, among other things, would
permit- but not require- full and open competition. The proposal would allow
CMS to select any entity it chooses, award separate contracts to perform
specific claims administration functions, and use other than cost contracts.
However, CMS would not have to use competitive procedures to select initial
claims administration contractors or to renew contracts under the proposal.
We are concerned that if CMS is not required to use such competition, it may
not identify and contract with the best entities to perform claims
administration services.

Certain innovative approaches in contracting for services could be difficult
to implement in a public program such as Medicare. Medicare was designed so
that beneficiaries would have the freedom to choose among providers and that
any qualified provider who was willing to serve Medicare?s beneficiaries
could do so. Even though approaches such as developing a network of
providers chosen for their quality and willingness to accept discounted fees
could be advantageous for beneficiaries and taxpayers, CMS would face
obstacles in implementing them. In a 1998 study, an expert panel concluded
that the agency could benefit from a more focused effort to test and adapt
such innovations in the program. However, broadly implementing the
experimental innovations that prove successful may require new statutory
authority. 45

Considering Medicare?s complexity, size, and statutory constraints, some
contend that HCFA?s management of Medicare has- on balance- been
satisfactory, while others argue that it has not been acceptable. There is
evidence that HCFA?s success has been mixed and that the agency?s challenges
are growing. Effective governance of Medicare depends on finding a balance
between flexibility and accountability- that is, granting

44 GAO/ HEHS- 99- 115. 45 Medicare Reform: Modernization Requires
Comprehensive Program View (GAO- 01- 862T, June 14, 2001). Concluding

Observations

Page 26 GAO- 01- 817 Medicare Management

the agency adequate flexibility to act prudently while ensuring that it can
be held accountable for its decisions and actions.

Moreover, because Medicare?s future will play such a significant role in the
nation?s fiscal future, we believe it prudent to make an adequate investment
to ensure that Medicare is professionally and efficiently managed. Achieving
such a goal will require that the day- to- day operations of Medicare?s
traditional program are modernized and maintained, and that achieving
program efficiency and effectiveness remains paramount.

In written comments on a draft of this report, CMS said it was pleased that
we had recognized the agency?s progress in a number of key areas, including
developing and implementing payment systems and strengthening oversight of
Medicare contractors. However, CMS disagreed with our contention that-
despite Medicare?s size and importance- there is no official whose sole
responsibility it is to run the program. The agency noted that the
Administrator of CMS has that responsibility. However, as we have pointed
out, the Administrator also has many far- reaching responsibilities for
oversight, enforcement, and credentialing for other major programs and
initiatives. CMS has reorganized to centralize the management of the
Medicare fee- for- service and managed care programs into two centers.
Nevertheless, under the reorganization discussed in CMS? comments, CMS did
not indicate that it planned to designate one senior official whose sole
responsibility will be the management of the Medicare program.

In its comments, CMS agreed that more could be done to strengthen management
of the Medicare program. CMS also discussed its plans for increasing
emphasis on responding to beneficiaries and providers, improving the quality
of care for Medicare and Medicaid beneficiaries, as well as how
restructuring the agency based on the its major lines of business could help
it achieve its mission. In addition, CMS provided technical comments, which
we incorporated as appropriate. CMS? written comments are reprinted in
appendix I.

As agreed with your offices, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 30 days after
its issue date. At that time, we will send copies of this report to the
Secretary of the Department of Health and Human Services, the Administrator
of the Centers for Medicare and Medicaid Services, appropriate congressional
Agency Comments

and Our Evaluation

Page 27 GAO- 01- 817 Medicare Management

committees, and others who are interested. We will also make copies
available to others on request.

If you or your staffs have any questions, please call me at (312) 220- 7600
or Sheila Avruch at (202) 512- 7277. Other key contributors to this report
were Hannah Fein and Sandra Gove.

Leslie G. Aronovitz, Director Health Care- Program

Administration and Integrity Issues

Appendix I: Centers for Medicare and Medicaid Services Page 28 GAO- 01- 817
Medicare Management

Appendix I: Centers for Medicare and Medicaid Services

Appendix I: Centers for Medicare and Medicaid Services Page 29 GAO- 01- 817
Medicare Management

Related GAO Products Page 30 GAO- 01- 817 Medicare Management

Medicare Contracting Reform: Opportunities and Challenges in Contracting for
Claims Administration Services (GAO- 01- 918T, June 28, 2001).

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

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

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

Medicare: Higher Expected Spending and Call for New Benefit Underscore Need
for Meaningful Reform (GAO- 01- 539T, Mar. 22, 2001).

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

High- Risk Series: An Update (GAO- 01- 263, Jan. 2001). Nursing Homes:
Sustained Efforts Are Essential to Realize Potential of the Quality
Initiatives (GAO/ HEHS- 00- 197, Sept. 28, 2000).

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

Medicare+ Choice: Plan Withdrawals Indicate Difficulty of Providing Choice
While Achieving Savings (GAO/ HEHS- 00- 183, Sept. 7, 2000).

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

Medicare Payments: Use of Revised ?Inherent Reasonableness? Process
Generally Appropriate (GAO/ HEHS- 00- 79, July 5, 2000).

Medicare: 21st Century Challenges Prompt Fresh Thinking About Program?s
Administrative Structure (GAO/ T- HEHS- 00- 108, May 4, 2000).

Medicare Contractors: Further Improvement Needed in Headquarters and
Regional Office Oversight (GAO/ HEHS- 00- 46, Mar. 23, 2000). Related GAO
Products

Related GAO Products Page 31 GAO- 01- 817 Medicare Management

Medicare: HCFA Faces Challenges to Control Improper Payments (GAO/ THEHS-
00- 74, Mar. 9, 2000).

Medicare: Lessons Learned From HCFA?s Implementation of Changes to Benefits
(GAO/ HEHS- 00- 31, Jan. 25, 2000).

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

Medicare Post- Acute Care: Better Information Needed Before Modifying BBA
Reforms (GAO/ T- HEHS- 99- 192, Sept. 15, 1999).

Medicare: Program Safeguard Activities Expand, but Results Difficult to
Measure (GAO/ HEHS- 99- 165, Aug. 4, 1999).

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

Balanced Budget Act: Any Proposed Fee- for- Service Payment Modifications
Need Thorough Evaluation (GAO/ T- HEHS- 99- 139, June 10, 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).

Medicare Physician Payments: Need to Refine Practice Expense Values During
Transition and Long Term (GAO/ HEHS- 99- 30, Feb. 24, 1999).

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

Medicare: HCFA?s Use of Anti- Fraud- and- Abuse Funding and Authorities
(GAO/ HEHS- 98- 160, June 1, 1998).

Medicare: HCFA Faces Multiple Challenges to Prepare for the 21st Century
(GAO/ T- HEHS- 98- 85, Jan. 29, 1998).

(290050)

The first copy of each GAO report is free. Additional copies of reports are
$2 each. A check or money order should be made out to the Superintendent of
Documents. VISA and MasterCard credit cards are also accepted.

Orders for 100 or more copies to be mailed to a single address are
discounted 25 percent.

Orders by mail:

U. S. General Accounting Office P. O. Box 37050 Washington, DC 20013

Orders by visiting:

Room 1100 700 4 th St., NW (corner of 4 th and G Sts. NW) Washington, DC
20013

Orders by phone:

(202) 512- 6000 fax: (202) 512- 6061 TDD (202) 512- 2537

Each day, GAO issues a list of newly available reports and testimony. To
receive facsimile copies of the daily list or any list from the past 30
days, please call (202) 512- 6000 using a touchtone phone. A recorded menu
will provide information on how to obtain these lists.

Orders by Internet

For information on how to access GAO reports on the Internet, send an email
message with ?info? in the body to:

Info@ www. gao. gov or visit GAO?s World Wide Web home page at: http:// www.
gao. gov

Contact one:

 Web site: http:// www. gao. gov/ fraudnet/ fraudnet. htm

 E- mail: fraudnet@ gao. gov

 1- 800- 424- 5454 (automated answering system) Ordering Information

To Report Fraud, Waste, and Abuse in Federal Programs
*** End of document. ***