Medicare Management: Current and Future Challenges (19-JUN-01,	 
GAO-01-878T).							 
								 
Medicare is a popular program that millions of Americans depend  
on for covering their essential health needs. However, the	 
management of the program has fallen short of expectations	 
because it has not always appropriately balanced or satisfied	 
beneficiaries', providers', and taxpayers' needs. For example,	 
stakeholders expect that Medicare will price services prudently; 
that providers will be treated fairly and paid accurately; and	 
that beneficiaries will clearly understand their program options 
and will receive services that meet quality standards. In	 
addition, there are expectations that the agency will be prepared
to implement restructuring or added benefits in the context of	 
Medicare reform. Today's Medicare agency, while successful in	 
certain areas, may not be able to meet these expectations	 
effectively without further congressional attention to its	 
multiple missions, capacity, and flexibility. The agency will	 
also need to do its part by implementing a performance-based	 
approach that articulates priorities, documents resource needs,  
and holds managers accountable for accomplishing program goals.  
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-01-878T					        
    ACCNO:   A01210						        
  TITLE:     Medicare Management: Current and Future Challenges       
     DATE:   06/19/2001 
  SUBJECT:   Health insurance					 
	     Performance measures				 
	     Health insurance cost control			 
	     Health services administration			 
	     Claims processing					 
	     DOD TRICARE Program				 
	     Medicaid Program					 
	     Medicare Choice Program				 
	     Medicare Integrity Program 			 
	     Medicare Program					 
	     Medigap						 
	     State Children's Health Insurance			 
	     Program						 
								 
	     Medicare Prospective Payment System		 

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GAO-01-878T
     
Testimony Before the Committee on Finance, U. S. Senate

United States General Accounting Office

GAO For Release on Delivery Expected at 10: 00 a. m. Tuesday, June 19, 2001
MEDICARE

MANAGEMENT Current and Future Challenges

Statement of William J. Scanlon Director, Health Care Issues

GAO- 01- 878T

Page 1 GAO- 01- 878T

Mr. Chairman and Members of the Committee: We are pleased to be here as you
discuss the ability of the Health Care Financing Administration (HCFA), to
carry out its mission to manage the Medicare program now and in the future.
Although HCFA was renamed last week to become the Centers for Medicare and
Medicaid Services (CMS), our statement will continue to refer to HFCA where
our findings apply to the organizational structure and operations associated
with that name. Because of Medicare?s vast size and complex structure, in
1990 we designated it as a high- risk program- that is, at risk of
considerable losses to waste, fraud, abuse, and mismanagement- and it
remains so today. Since that time, we have consistently reported on HCFA?s
efforts to safeguard Medicare payments and streamline operations.

With congressional attention on proposals by Members and others to reform or
modernize Medicare, the program?s management by HCFA has become a prime
concern. Proposals for Medicare reform recommend altering HCFA?s governance
structure, making improvements to existing operations, or some combination
of both. They are being made against a backdrop of growing expectations for
how the nation?s largest health insurance program should be managed.

Therefore, my remarks today will focus on (1) HCFA?s record of performance
in managing Medicare and (2) gaps that exist between the agency?s success in
operating the program and the expectations held by HCFA?s stakeholder
community to make the program more modern and efficient. My comments are
based on previous and ongoing work by us and published reports by others.

In brief, as the nation?s largest insurer, HCFA is closely watched by a vast
universe of stakeholders. The agency has had some notable successes as
Medicare?s steward, but has also had serious shortcomings. HCFA has been
successful in developing payment methods that have helped to contain
Medicare cost growth and paying its fee- for- service claims quickly and at
low administrative cost. However, HCFA?s oversight of claims administration
has not been sufficient to ensure that claims contractors operated
effectively and that claims were paid properly, and its oversight of nursing
homes and other providers did not adequately ensure care quality. Further,
HCFA has been unable to rely on its outdated computer systems to produce
reliable management information. Without this information, HCFA has had
difficulty effectively managing the program, including being able to measure
the impact of recent payment method changes and developing needed
refinements.

Page 2 GAO- 01- 878T

HCFA has taken significant steps to address weak areas, but its ability to
improve its performance is constrained by multiple factors. HCFA?s ability
to manage has been diminished by frequent turnover in leadership, a
relatively sparse cadre of senior executives, human capital challenges that
threaten to worsen in the near future, the lack of a performance- based
approach to management, constraints on its contracting authority that limit
its flexibility to choose claims administration contractors and assign
administrative tasks, and archaic information technology systems incapable
of providing critical, timely management information. The desire to
strengthen Medicare management argues for increased capacity, better
documentation of the agency?s resource needs, and means to hold managers
accountable for results.

The complexity of the environment in which HCFA operates the Medicare
program cannot be overstated. It is an agency within the Department of
Health and Human Services (HHS) but has responsibilities over expenditures
that are larger than those of most other federal departments. Medicare alone
ranks second only to Social Security in federal expenditures for a single
program. Medicare spending totaled over $220 billion in fiscal year 2001;
covers about 40 million beneficiaries; enrolls and pays claims from nearly 1
million providers and health plans; and has contractors that annually
process about 900 million claims. Among Medicare?s numerous and wide-
ranging activities, HCFA must monitor the roughly 50 claims administration
contractors that pay claims and set local medical coverage policies; 1 set
tens of thousands of payment rates for Medicare- covered services from
different providers, including physicians, hospitals, outpatient and nursing
facilities, home health agencies, and medical equipment suppliers; and
administer consumer information and beneficiary protection activities for
the traditional program component, the managed care program component
(Medicare+ Choice plans), and Medicare supplemental insurance policies
(Medigap).

The providers billing Medicare create, with program beneficiaries, a vast
universe of stakeholders- hospitals, general and specialty physicians, and
other providers of health care services- whose interests vary widely. HCFA?s
responsibility to run the program in a fiscally prudent way has

1 Most medical policies for determining whether services are reasonable, are
necessary, and should be covered are set locally by the insurance companies
that Medicare contracts with for fee- for- service claims administration.
Background

Page 3 GAO- 01- 878T

made the agency a lightening rod for those discontented with program
policies. In particular, HCFA?s administrative pricing of services has often
been contentious. However, when Medicare is the dominant payer for services
or products, HCFA cannot rely on market prices to determine appropriate
payment amounts because Medicare?s share of payments distorts the market.
Moreover, because Medicare is prevented from excluding some providers to do
business with others that offer better prices, 2 it is largely impractical
for HCFA to rely on competition to determine prices.

Medicare?s public sector status also means that any changes require public
input. Thus, HCFA is constrained from acting swiftly to reprice services and
supplies even when prevailing market rates suggest that payments should be
modified. The solicitation of public comment is a necessary part of the
federal regulatory process to ensure transparency in decisionmaking.
However, the trade- off to seeking and responding to public interests is
that it is generally a time- consuming process and can thwart efficient
program management. For example, in the late 1990s, HCFA averaged nearly 2
years between its publication of proposed and final rules. 3

Consensus is widespread among health policy experts regarding the growing
and unrelenting nature of HCFA?s work. The Balanced Budget Act of 1997 (BBA)
alone has had a substantial impact on HCFA?s workload, requiring, among
other things, that the agency develop new payment methods for different
post- acute- care and ambulatory services within a short time frame and It
also required HCFA to preside over an expanded managed care component that
entailed coordinating a never- before- run information campaign for millions
of beneficiaries across the nation and developing means to adjust plan
payments based partially on enrollees? health status.

Tasked with administering this highly complex program, HCFA earns mixed
reviews in managing Medicare. On one hand, HCFA presides over a program that
is very popular with beneficiaries and the general public. It

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

Record of Success

Page 4 GAO- 01- 878T

has implemented payment methods that have helped constrain program cost
growth and has paid claims quickly at little administrative cost. On the
other hand, HCFA has difficulty making needed refinements to payment
methods. It has also fallen short in its efforts to ensure accurate claims
payments, oversee its Medicare claims administration contractors, and ensure
the quality of Medicare services. In recent years, HCFA has taken steps to
achieve greater success in these areas. However, the agency now faces
criticism for imposing payment safeguards that many providers feel
constitute an undue administrative burden.

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

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

Methods Have Helped Contain Cost Growth

Page 5 GAO- 01- 878T

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

?clean? claims 4 on average within 17 days after receipt. In contrast,
commercial insurers generally take longer to pay provider claims.

Under its tight administrative budget, HCFA has kept processing costs to
roughly $1 to $2 per claim- as compared to the $6 to $10 or more per claim
for private insurers, or the $7.50 per claim paid by TRICARE- the Department
of Defense?s managed health care program. 5 Costs for processing Medicare
claims, however, while significantly lower than other payers, are not a
straightforward indicator of success. We and others have reported that
HCFA?s administrative budget is too low to adequately safeguard the program.
Estimates by the HHS Inspector General of payments made in error amounted to
$11.9 billion in fiscal year 2000, which, in effect, raises the net cost per
claim considerably. Taken together, these findings suggest that an
investment in HCFA?s administrative functions is a trade- off that could
ultimately save program dollars.

Moreover, due in part to HCFA?s historically uneven oversight, the
performance of some Medicare?s claims administration contractors has been
unsatisfactory. Among its failings, HCFA relied on unverified performance
information provided by contractors and limited checking of each
contractor?s internal management controls. HCFA?s performance reviews and
treatment of problems identified were not done using consistent criteria
across contractors. In the last year, HCFA has taken significant steps to
improve its management and oversight of contractors. Nevertheless, key areas
needing improvement remain, such as policies to verify contractor- reported
data and controls over contractor accountability and financial management,
including debt collection activities.

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

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

Claims Inexpensively, But Greater Scrutiny and Control Needed

Page 6 GAO- 01- 878T

A major aspect of contractor performance- the stewardship activities that
contractors conduct to safeguard Medicare dollars- is itself a story of
mixed results. In the early 1990s, HCFA?s contractors decreased certain key
safeguard activities to maintain claims processing timeliness under
constrained budgets. In order to ensure that program safeguards were
strengthened, the Congress created the Medicare Integrity Program (MIP),
which gave HCFA a stable source of funding for these activities as part of
the Health Insurance Portability and Accountability Act of 1996 (HIPAA). In
fiscal year 2000, HCFA used its MIP funding to support a wide range of anti-
fraud- and- abuse efforts, including provider and managed care organization
audits and targeted medical reviews of claims.

These audits and reviews, targeted at providers whose previous billings or
cost reports have been questionable, have 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. As part
of its safeguard efforts, HCFA also has begun to measure how accurately its
contractors process claims, to determine if individual contractors are
effective in safeguarding program payments. Such objective information could
provide HCFA with important management information and identify contractors?
?best practices? that could serve as a model for others.

While HCFA has strengthened its payment safeguard activities, these efforts
have raised concerns among providers about the clarity of billing rules and
the efforts needed to be in compliance. Providers whose claims are in
dispute have complained about the burden of reviews and audits and about the
fairness of some specific steps the contractors follow. However, their
concerns about fairness may also emanate from the actions of other health
care overseers- such as the HHS Office of Inspector General and the
Department of Justice- which, in the last several years, have become more
aggressive in pursuing health care fraud and abuse.

HCFA 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 intensive claims review is undoubtedly vexing for the
provider involved, very few providers actually undergo them. In fiscal year
2000, HCFA?s contractors conducted complex medical claims reviews of only
three- tenths of 1 percent of physicians- 1,891 out of a

Page 7 GAO- 01- 878T

total of more than 600,000 physicians who billed Medicare that year. 6 We
are currently reviewing several aspects of HCFA?s auditing and review
procedures for physician claims to assess how they might be improved to
better serve the program and providers.

HCFA?s oversight of health care quality, a resource- intensive activity, has
significant shortcomings. The agency is responsible for overseeing
compliance with federal quality standards for the services delivered to
Medicare beneficiaries. As much of the actual inspection of quality is
carried out by the states, HCFA must work with the states to ensure that the
inspectors of nursing homes, home health agencies, renal dialysis centers,
psychiatric hospitals, and certain Medicare- certified acute care hospitals
identify significant care problems. 7 Our findings on nursing home quality
present a very disturbing picture: in 1999, we reported that an unacceptably
high number of the nation?s 17,000 nursing homes- an estimated 15 percent-
had recurring care problems that caused actual harm to residents or placed
them at risk of death or serious injury. Our previous findings showed that
complaints by residents, family members, or staff alleging harm to residents
remained uninvestigated in some states for weeks or months. HCFA?s efforts
to oversee state monitoring of nursing home quality were limited in scope
and effectiveness, owing, in part, to a lack of expert staff to assess the
state inspectors? performance.

Even with this record of weak federal oversight, nursing homes get more
scrutiny than other health care providers. States survey nursing homes at
least yearly, on average, whereas other facilities are surveyed much less
frequently. For example, home health agencies were once routinely reviewed
annually, but surveys now vary and can be as infrequent as every 3 years. In
addition, our work has shown that the number of HCFA- funded inspections of
dialysis facilities declined significantly between 1993 and 1999, dropping
the proportion reviewed from 52 percent to 11 percent. Yet, in 1999, 15
percent of the facilities surveyed had deficiencies severe

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

7 The Joint Commission on the Accreditation of Health Care Organizations
oversees quality in about 80 percent of Medicare- certified acute care
hospitals; the other Medicare- certified hospitals, nursing homes, renal
dialysis centers, home health agencies, and laboratories have quality
reviewed by state surveyors. HCFA?s Oversight of Health

Care Quality Generally Has Been Weak

Page 8 GAO- 01- 878T

enough, if uncorrected, to warrant terminating their participation in
Medicare.

In addition to the challenges inherent in running Medicare, other factors
associated with HCFA?s structure and capacity diminish the agency?s ability
to administer the program effectively. These limitations leave HCFA poorly
positioned to operate Medicare as a modern, efficient health care program.

HCFA faces several limitations in its efforts to manage Medicare
effectively. These include divided management focus, little continuity of
leadership, limited capacity, lack of a performance- based management
approach, and insufficient flexibility to modernize program operations.

HCFA?s management focus is divided across multiple programs and
responsibilities. Despite Medicare?s $220- billion price tag and far-
reaching public policy significance, there is no official whose sole
responsibility it is to run the Medicare program. In addition to Medicare,
the HCFA Administrator and senior management are responsible for oversight
of Medicaid and the State Children?s Health Insurance Program. They also are
responsible for individual and group insurance plans? compliance with HIPAA
standards in states that have not adopted conforming legislation. Finally,
they must oversee compliance with federal quality standards for hospitals,
nursing homes, home health agencies, and managed care plans that participate
in Medicare and Medicaid, as well as all of the nation?s clinical
laboratories. The Administrator is involved in the major decisions relating
to all of these activities; therefore, time and attention that would
otherwise be spent meeting the demands of the Medicare program are diverted.

A restructuring of the agency in July 1997 inadvertently furthered the
diffusion of responsibility across organizational units. The intent of the
reorganization was to better reflect a beneficiary- centered orientation
throughout the agency by interspersing program activities across newly
established centers. However, after the reorganization, many stakeholders
claimed that they could no longer obtain consistent or timely information.
In addition, HCFA?s responsiveness was slowed by the requirement that Major
Gaps Exist

Between HCFA?s Capabilities and Stakeholder Expectations

Multiple Constraints Help Explain Agency?s Mixed Record

Agency Focus and Leadership

Page 9 GAO- 01- 878T

approval was needed from several people across the agency before a decision
was final.

The recent change from HCFA to CMS reflects more than a new name. It
consolidates major program activities: the Center for Medicare Management
will be responsible for the traditional fee- for- service program; the
Center for Beneficiary Choices will administer Medicare?s managed care
program. We believe that this new structure could improve efforts to more
efficiently manage aspects of Medicare.

At least two other factors weaken agency focus. First, the frequent turnover
of the administrator has complicated the agency?s implementation of long-
term Medicare initiatives or pursuit of a consistent management strategy.
The maximum term of a HCFA administrator is, as a practical matter, only as
long as that of the President who appointed him or her. Historically, their
actual tenure has been even shorter. In the 24 years since HCFA?s inception,
there have been 21 administrators or acting administrators, whose tenure has
been, on average, about 1 year. Over 15 percent of the time, HCFA has had an
acting administrator. These short tenures have not been conducive to
carrying out strategic plans or innovations an administrator may have
developed for administering Medicare efficiently and effectively.

Of equal concern is the sparseness of HCFA?s senior ranks. Its corps of
senior executives is smaller than that of most other civilian agencies
having significantly smaller annual expenditures. In fiscal year 1999, HCFA
had 49 senior executive officials to manage Medicare, Medicaid, and SCHIP
(among other programmatic responsibilities) and nearly $400 billion in
expenditures. While some tasks at HCFA are contracted out- thus providing
HCFA with purchased executive expertise- contractors? objectives may not be
fully aligned with those of the agency. Indeed, the critical need to oversee
contractors effectively to ensure that they are fulfilling their
responsibilities has been repeatedly demonstrated.

In addition to leadership constraints, the agency?s capacity is limited
relative to its multiple, complex responsibilities. Inadequate information
systems and human capital hobble HCFA?s ability to carry out the volume of
claims administration, payment and pricing, and quality oversight activities
demanded of the agency.

Ideally, program managers should be able to rely on their information
systems to create a feedback loop that allows them to monitor performance,
use the information to develop policies for improvement, Agency Capacity

Page 10 GAO- 01- 878T

and track the effects of newly implemented policies. In reality, most of the
information technology HCFA relies on is too outdated to routinely produce
such management information. Despite major advances in information
technology in recent years, HCFA relies on outmoded systems, some of which
date back to the 1970s, to pay claims and maintain data on beneficiaries?
use of services. As a result, HCFA cannot easily query its information
systems to obtain prompt answers to basic management questions. Using its
current systems, HCFA is not in a position to report promptly to the
Congress on the effects of new prospective payment policies on
beneficiaries? access to services and on the adequacy of payments to
providers. It cannot expeditiously determine the status of debt owed the
program due to uncollected overpayments. It cannot obtain reliable data on
beneficiaries enrolled in managed care plans and must reconcile one system?s
output with data from other systems. Finally, HCFA lacks a set of rules to
govern how it will develop, implement, and operate systems to prevent and
detect inappropriate access.

Staff shortages- in terms of skills and numbers- also beset HCFA. These
shortages were brought into sharp focus as the agency struggled to handle
the number and complexity of BBA requirements. When the BBA expanded the
health plan options in which Medicare beneficiaries could enroll, HCFA?s
staff had little previous experience overseeing these diverse entities, such
as preferred provider organizations, private fee- forservice plans, and
medical savings accounts. Few staff had experience in dealing with the
existing managed care option- health maintenance organizations. Half of
HCFA?s regional offices lacked managed care staff with clinical backgrounds-
important in assessing the appropriateness of a health plan?s denial of
services to a beneficiary- and few managed care staff had training or
experience in data analysis- key to monitoring internal trends in plan
performance over time and assessing plan performance against local and
national norms. 8

Staffing constraints have also handicapped HCFA?s efforts to ensure quality
of care. In recent years, the agency has made negligible use of its most
effective oversight technique for assessing state agencies? abilities to
identify serious deficiencies in nursing homes- an independent survey
performed by HCFA employees following the completion of a state survey.

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

Page 11 GAO- 01- 878T

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 enough of these checks. In
1999, the number of HCFA independent surveys averaged about two per state- a
frequency totally inadequate to fairly measure any state?s performance.

At the same time, HCFA faces the loss of a significant number of staff with
valuable institutional knowledge. In February 2000, the HCFA Administrator
testified that more than a third of the agency?s current workforce was
eligible to retire within the next 5 years and that HCFA was seeking to
increase ?its ability to hire the right skill mix for its mission.? As we
and others have reported, too great a mismatch between the agency?s
administrative capacity and its designated mandate could leave HCFA
unprepared to handle Medicare?s future population growth and medical
technology advances. 9 To assess its needs systematically, HCFA is
conducting a four- phase workforce planning process that includes
identifying current and future expertise and skills needed to carry out the
agency?s mission and analyzing the gaps between them. 10 HCFA initiated this
process using outside assistance to develop a comprehensive database
documenting the agency?s employee positions, skills, and functions.

Once its future workforce needs are identified, HCFA faces the challenge of
attracting highly qualified employees with specialty skills. Due to the
rapid rate of change in the health care system and HCFA?s expanding mission,
the agency?s existing staff may not possess the needed expertise. While the
Congress has granted exemptions from the Office of Personnel Management
salary rules for information technology staff, these exemptions do not
extend to other skills- such as clinical experience and managed care
marketing expertise.

While HCFA has many resource- related challenges- including rehabilitating
its information systems- the agency has not documented its resource needs
well. As early as January 1998, we reported that the agency lacked an
approach- consistent with the Government Performance and

9 Gail Wilensky et al. and ?Crisis Facing HCFA & Millions of Americans,?
Health Affairs,

Vol. 18, No. 1 (Jan./ Feb. 1999). 10 HCFA?s workforce planning efforts to
date have been in line with our guidance on this subject, as articulated in
Human Capital: A Self- Assessment Checklist for Agency Leaders

(GAO/ GGD- 99- 179, Sept. 1999). Strategic Management

Approach Lacks Performance Component

Page 12 GAO- 01- 878T

Results Act of 1993 (GPRA)- to develop a strategic plan for its full range
of program objectives. Since then, the agency has developed a plan, but it
has not tied global objectives to management performance. Moreover, its
workforce planning efforts remain incomplete.

To encourage a greater focus on results and improve federal management, the
Congress enacted GPRA- a results- oriented framework that encourages
improved decision- making, maximum performance, and strengthened
accountability. Managing for results is fundamental to an agency?s ability
to set meaningful goals for performance, to measure performance against
those goals, and to hold managers accountable for their results. Last month,
we reported on the results of our survey of federal managers at 28
departments and agencies on strategic management issues.

The proportion of HCFA managers who reported having output, efficiency,
customer service, quality, and outcome measures was significantly below that
of other government managers for each of the performance measures. HCFA was
the lowest- ranking agency for each measure- except for customer service,
where it ranked second lowest. It should therefore be no surprise that HCFA
managers? responses concerning the extent to which they were held
accountable for results- 42 percent- was significantly lower than the 63
percent reported by the rest of the government.

Statutory constraints are another structural issue that at times frustrate
HCFA?s efforts to manage effectively. One such constraint involves HCFA?s
authority to contract for claims administration services. At Medicare?s
inception in the mid- 1960s, the Congress provided for the government to use
existing health insurers to process and pay physicians? claims and gave
professional associations of hospitals and certain other institutional
providers the right to ?nominate? their claims administration contractors on
behalf of their members. At that time, the American Hospital Association
nominated the national Blue Cross Association to serve as its intermediary.
11 Currently, the Association is one of Medicare?s five intermediaries and
serves as a prime contractor for member plans that process over 85 percent
of all benefits paid by fiscal intermediaries. Under the prime contract,
when one of the local Blue plans declines to renew its

11 Intermediaries primarily review and pay claims from hospitals and other
institutional providers covered under Medicare part A, while carriers review
and pay claims from physicians and other outpatient providers covered under
part B. Agency Authority and

Flexibility

Page 13 GAO- 01- 878T

Medicare contract, the Association- rather than HCFA- chooses the
replacement contractor. This process effectively limits HCFA?s flexibility
to choose the contractors it considers most effective.

HCFA has also considered itself constrained from contracting with nonhealth
insurers for the various functions involved in claims administration because
it did not have clear statutory authority to do so. As noted, the Congress
gave HCFA specific authority to contract separately for payment safeguard
activities, but for a number of years the agency has sought more general
authority for ?functional contracting,? that is, using separate contractors
to perform functions such as printing and mailing and answering beneficiary
inquiries that might be handled more economically and efficiently under one
or a few contracts. HCFA has been seeking other Medicare contracting
reforms, such as giving the agency general authority to pay Medicare
contractors on an other- than- cost basis, to provide incentives that would
encourage better performance. 12

Although the health care industry has grown and transformed significantly
since HCFA?s inception, the agency and Medicare, in particular, have not
kept pace. Nevertheless, HCFA is expected to make Medicare a prudent
purchaser of services using private sector techniques, improve its customer
relations, and be prepared to implement benefit and financing reforms.

Private insurance has evolved over the last 40 years and now offers
comprehensive policies and employs management techniques designed to improve
the quality and efficiency of services purchased. Private insurers have
taken steps to influence utilization and patterns of service delivery
through efforts such as beneficiary education, preferred provider networks,
and coordination of services. They are able to undertake these efforts
because many have detailed data on service use across enrollees and
providers, as well as wide latitude in how they run their businesses. In
contrast, HCFA?s outdated and inadequate information systems, statutory
constraints, and the fundamental obligation to be publicly accountable have
stymied efforts to incorporate private sector innovations. In a recent
study, the National Academy for Social Insurance has concluded that these
innovations could have potential value for Medicare but would need to be

12 For a discussion of this issue, see Chapter 3 in Medicare Contractors:
Despite Its Efforts, HCFA Cannot Ensure Their Effectiveness or Integrity
(GAO/ HEHS- 99- 115, July 14, 1999). Growing Expectations

Underscore Need to Address HCFA Governance and Management Issues

Page 14 GAO- 01- 878T

tested to determine their effects as well as how they might be adapted to
reflect the uniqueness of Medicare as both a public program and the largest
single purchaser of health care. In addition, HCFA would need enhanced
capacity to broadly implement many of these innovations.

HCFA is also expected to improve its customer service to the provider
community. In seeking answers from HCFA headquarters, regional offices, and
claims administration contractors, providers contend that the agency does
not speak with one voice, adding frustration to complexity. We are currently
studying ways in which communication with providers- including explanations
of Medicare rules- could be improved.

HCFA has also been expected to improve communications with beneficiaries,
particularly as the information pertains to health plan options. As required
by the BBA, HCFA began a new National Medicare Education Program. For 3
years the agency has worked to educate beneficiaries and improve their
access to Medicare information by annually distributing a Medicare handbook
containing comparative health plan information; establishing a telephone
help line and an Internet web site with, among other things, comparative
information on nursing homes, health plans, and Medigap policies; and
sponsoring local education programs. Although funding for these activities
previously came largely from user fees collected from Medicare+ Choice
plans, future funding is less certain. 13 At the same time, such outreach
efforts are becoming increasingly important, because in 2002 beneficiaries?
options for switching health plans will be more limited than they are today.

The future is likely to hold new challenges for CMS. For example, the agency
may be expected to oversee a prescription drug benefit administered by third
parties. As we reported to this Committee last year, the administration of a
drug benefit would entail numerous challenges, as the strategies now used by
the private sector are not readily adaptable to Medicare because of its
public sector obligations. Those challenges notwithstanding, the capacity
issue remains. The number of prescriptions for Medicare beneficiaries could
easily approach the current number of claims for all other services, or
about 900 million annually.

13 The Balanced Budget Refinement Act of 1999 significantly reduced the
amount of user fees HCFA can collect from Medicare+ Choice plans in 2001 and
subsequent years.

Page 15 GAO- 01- 878T

Today?s processing and scrutiny of drug claims by pharmacy benefit managers
(PBM) is very different from Medicare?s handling of claims for other
services. PBMs have the ability to provide on- line, real- time drug
utilization reviews. These serve a quality- and cost- control function by
supplying information to pharmacists regarding such things as whether a drug
is appropriate for a person based on his or her age, medical condition, and
other medications, as well as whether the drug is covered under the
insurer?s benefit and what copayments will apply.

If the use of PBMs or other entities were an option in administering a
Medicare prescription drug benefit, it is not clear how much they or the
others would have to increase current capacity or instead use more of the
capacity already built into their information and claims processing systems-
a consideration that could significantly affect the administrative costs
that may be incurred. To administer this benefit through such contracts
would require the agency to increase its managerial ranks with the personnel
qualified to oversee such an operation. This would include staff with
pharmaceutical industry expertise who could structure performance contracts
in line with program goals for beneficiary access and fiscal prudence.

To meet these and other expectations will require an agency with adequate
capacity to manage the Medicare program. The agency will need sufficient
flexibility to act prudently, while being held accountable for its
resultsbased decisions and their implementation. It will also need to devote
management attention to the fundamentals of day- to- day operations.

Medicare is a popular program that millions of Americans depend on for
covering their essential health needs. However, the management of the
program has fallen short of expectations because it has not always
appropriately balanced or satisfied beneficiaries?, providers?, and
taxpayers? needs. For example, stakeholders expect that Medicare will price
services prudently; that providers will be treated fairly and paid
accurately; and that beneficiaries will clearly understand their program
options and will receive services that meet quality standards. In addition,
there are expectations that the agency will be prepared to implement
restructuring or added benefits in the context of Medicare reform. Today?s
Medicare agency, while successful in certain areas, may not be able to meet
these expectations effectively without further congressional attention to
its multiple missions, capacity, and flexibility. The agency will also need
to do its part by implementing a performance- based approach Concluding

Observations

Page 16 GAO- 01- 878T

that articulates priorities, documents resource needs, and holds managers
accountable for accomplishing program goals.

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

For more information regarding this testimony, please contact me or Leslie
G. Aronovitz at (312) 220- 7600. Other contributors to this statement
include Sheila Avruch, Barrett Bader, and Hannah F. Fein. GAO Contact and

Acknowledgments

Page 17 GAO- 01- 878T

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

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

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

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

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

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

High Risk: An Update (GAO- 01- 263, Jan. 2001).

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

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

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

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

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

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

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

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