Debt Collection Improvement Act of 1996: HHS's Centers for	 
Medicare & Medicaid Services Faces Challenges to Fully Implement 
Certain Key Provisions (22-FEB-02, GAO-02-307). 		 
                                                                 
The Debt Collection Improvement Act (DCIA) of 1996 requires that 
agencies refer eligible debts delinquent more than 180 days that 
they have been unable to collect to the Department of the	 
Treasury for payment and offset and to Treasury or a		 
Treasury-designated debt collection center for cross-servicing.  
The Centers for Medicare and Medicaid Services (CMS) made	 
progress in referring eligible delinquent debts for collection	 
during fiscal year 2001. Much of the referral volume was late in 
the year, however, and substantial unreferred balances remained  
at the end of the fiscal year. Inadequate procedures and controls
hampered prompt identification and referral of both eligible	 
non-Medicare Secondary Payer (MSP) and MSP debts. The delayed	 
referral of non-MSP debts resulted from problems with the CMS	 
debt-referral system and insufficient CMS monitoring of 	 
contractor referrals. The low level of MSP debt referrals	 
resulted primarily from limited contractor efforts and		 
insufficient CMS monitoring of contractor performance. Although  
GAO did not test whether selected CMS debts had been reasonably  
excluded from referral and reached no overall conclusion about	 
the appropriateness of CMS exclusions, GAO found that CMS did not
report reliable Medicare debt information to the Treasury	 
Department for fiscal year 2000.				 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-02-307 					        
    ACCNO:   A02805						        
  TITLE:     Debt Collection Improvement Act of 1996: HHS's Centers   
for Medicare & Medicaid Services Faces Challenges to Fully	 
Implement Certain Key Provisions				 
     DATE:   02/22/2002 
  SUBJECT:   Debt collection					 
	     Delinquent loans					 
	     Internal controls					 
	     Performance measures				 
	     Reporting requirements				 
	     Medicaid Program					 
	     Medicare Program					 
	     Medicare Trust Fund				 
	     State Children's Health Insurance			 
	     Program						 
                                                                 
	     Treasury Offset Program				 

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GAO-02-307
     
United States General Accounting Office

GAO Report to the Chairman, Subcommittee on Government Efficiency, Financial
Management and Intergovernmental Relations, Committee on Government Reform,
House of Representatives

February 2002

DEBT COLLECTION IMPROVEMENT ACT OF 1996

HHS's Centers for Medicare & Medicaid Services Faces Challenges to Fully
Implement Certain Key Provisions

                                      a

GAO-02-307

Contents

Letter

Results in Brief
Background
Objectives, Scope, and Methodology
CMS Did Not Promptly Refer All Eligible Medicare Debts in Fiscal

Year 2001
CMS Lacked Effective Processes and Controls to Promptly Refer
Eligible Medicare Debts
CMS Faces Challenges in Effectively Managing Future Medicare
Debt Referrals
CMS Does Not Provide Reliable Medicare Debt Information to

Treasury
Conclusions
Recommendations for Executive Action
Agency Comments and Our Evaluation

1 3 5 9

10

12

17

20 21 22 22

Appendix

Appendix I: Comments from the Centers for Medicare & Medicaid Services

Table Table 1:  CMS Medicare Debts Eligible for Referral as of September 30,
2000

A

United States General Accounting Office Washington, D.C. 20548

February 22, 2002

The Honorable Stephen Horn
Chairman
Subcommittee on Government Efficiency,

Financial Management and Intergovernmental Relations Committee on Government
Reform House of Representatives

Dear Mr. Chairman:

On October 10, 2001, we testified before your subcommittee on agencies'
implementation of the Debt Collection Improvement Act (DCIA) of 1996.1 One
of the major purposes of DCIA is to maximize collection of billions of
dollars of nontax delinquent debt owed to the government. Toward this end,
DCIA requires that agencies refer eligible debts delinquent more than 180
days that they have been unable to collect to the Department of the Treasury
for payment offset and to Treasury or a Treasury-designated debt collection
center for cross-servicing. Treasury performs payment offset through its
Treasury Offset Program (TOP), which includes the offset of certain benefit
payments, vendor payments, and tax refunds. Cross-servicing involves such
actions as locating debtors, issuing demand letters, and referring debts to
private collection agencies.

As you know, we testified on (1) problems we identified in selected federal
agencies' processes and controls for identifying and referring eligible
debts to Treasury's Financial Management Service (FMS) for collection
action, (2) obstacles that hampered agencies from promptly referring
eligible debts, and (3) problems we identified related to the
appropriateness of exclusions from referral requirements.

1U.S. General Accounting Office, Debt Collection Improvement Act of 1996:
Agencies Face Challenges Implementing Certain Key Provisions, GAO-02-61T
(Washington, D.C.: Oct. 10, 2001).

This report provides additional detail on the Centers for Medicare &
Medicaid Services' (CMS)2 progress in implementing the debt-referral
requirements of DCIA to collect delinquent Medicare debts and includes
several recommendations.3 Collection of delinquent Medicare debts is
particularly critical because they represented a significant portion-about 9
percent-of the approximately $58 billion of reported delinquent nontax debts
governmentwide as of September 30, 2000, and continue to represent a large
amount.

In September 2000, we reported that the Health Care Financing Administration
(HCFA), now known as CMS, had not fully implemented the referral provision
of DCIA. 4 The agency had implemented pilot referral projects for its two
major types of Medicare debt: (1) Medicare Secondary Payer (MSP) debts, for
which insurance or other entities are primarily financially responsible and
CMS is seeking reimbursement, and (2) other debts, referred to as non-MSP
debts. CMS was referring delinquent Medicare debts to the Department of
Health and Human Services' (HHS) Program Support Center (PSC), a
Treasury-designated debt collection center for certain HHS debts. However,
we reported that under the pilot projects, contractors referred only older,
large-dollar-value Medicare debts, thereby excluding from referral a
significant amount of debt and, in particular, more recent,
lower-dollar-value claims. Collection industry statistics indicate that
low-dollar-value and current debts are typically easier to collect than
large-dollar-value and older debts. In the September 2000 report, we
recommended that CMS (1) immediately refer all Medicare debts to PSC as soon
as they become more than 180 days delinquent and are determined to be
eligible for referral and (2) refer the backlog of eligible debts as quickly
as possible.

2CMS was formerly the Health Care Financing Administration (HCFA). HCFA was
renamed on June 14, 2001.

3We are also issuing separate reports on certain federal agencies'
implementation of administrative wage garnishment, the Rural Housing
Service's implementation of key provisions of DCIA, the Farm Service
Agency's implementation of key provisions of DCIA, and certain federal
agencies' delinquent debt reporting practices.

4U.S. General Accounting Office, Medicare: HCFA Could Do More to Identify
and Collect Overpayments, GAO/HEHS/AIMD-00-304 (Washington, D.C.: Sept. 7,
2000).

For this report, we were to follow up to determine whether (1) CMS was
promptly referring eligible Medicare debts for collection action, (2) any
obstacles were hampering CMS from referring eligible Medicare debts, and (3)
CMS was appropriately using exclusions from referral requirements.5 At the
time of our review, the HHS Office of Inspector General (OIG) was conducting
detailed testing of CMS's implementation of DCIA and the effectiveness of
CMS's debt collection and debt management activities. According to an OIG
official, the OIG's report on its findings is scheduled for release in March
2002. As part of its work, the OIG tested selected debts to determine
whether CMS appropriately categorized their status, including their
exclusion status (e.g., in bankruptcy, under appeal). Therefore, as agreed
with your office, we did not test whether selected CMS debts had been
reasonably excluded from referral, and we reached no overall conclusion
about the appropriateness of CMS exclusions. During the course of our
review, however, we did make several observations concerning the accuracy of
the exclusion and debt-eligible amounts that CMS reported to Treasury as of
September 30, 2000.

Results in Brief CMS made progress in referring eligible delinquent debts
for collection during fiscal year 2001. Much of the referral volume was late
in the year, however, and substantial unreferred balances remained as of
September 30, 2001. PSC records indicate that in fiscal year 2001 CMS
referred about $2.1 billion of non-MSP debts, out of approximately $2.6
billion of non-MSP debts reported as eligible for referral as of September
30, 2000. The vast majority of the referrals were made from June through
September 2001. CMS made far less progress in its referral of eligible MSP
debts, despite the fact that PSC has been more successful in collecting MSP
debts than non-MSP debts. In fiscal year 2001, PSC records indicate that CMS
referred only about $47 million, or about 3 percent, of the approximately
$1.8 billion of MSP debts that were reported as eligible for referral as of
September 30, 2000.

Inadequate procedures and controls hampered prompt identification and
referral of both eligible non-MSP and MSP debts. The delayed referral of
non-MSP debts resulted from problems with the CMS debt-referral system and
insufficient CMS monitoring of contractor referrals. The low level of

5DCIA and Treasury regulations exclude certain debts from referral for
collection action, including debts under appeal or at the Department of
Justice for litigation, and debtors in bankruptcy.

MSP debt referrals resulted primarily from limited contractor efforts and
insufficient CMS monitoring of contractor performance. Further, many of the
MSP debts will never be referred to PSC because CMS instructed its Medicare
contractors to methodically close out MSP debts delinquent more than 6 years
and 3 months. CMS also lacks procedures for reporting such closed-out debts
to the Internal Revenue Service (IRS) as taxable income.

With the expansion of the referral program during fiscal year 2001 to
include all of CMS's Medicare contractors, CMS faces challenges to its
ability to effectively manage Medicare debts in the future. The agency lacks
a comprehensive database for all MSP debts, accurate information in the
non-MSP debt-tracking systems, and a comprehensive written referral plan for
all eligible Medicare debts.

In addition, although as noted above we did not test whether selected CMS
debts had been reasonably excluded from referral and reached no overall
conclusion about the appropriateness of CMS exclusions, we found that CMS
did not report reliable Medicare debt information to Treasury as of
September 30, 2000. The agency inadvertently overstated the amount of debt
referred for collection action and incorrectly reported the delinquency
aging for certain debts and the amount of debt excluded from referral
requirements.

While CMS has taken positive steps to increase referrals of delinquent
Medicare debts, substantial room for improvement remains. The
recommendations in this report urge CMS to more stringently administer
delinquent Medicare debt consistent with DCIA, Treasury expectations, and
the agency's fiduciary responsibilities.

CMS agreed with five of the six recommendations in this report but did not
agree to assess the collectibility of older closed-out debts. In support of
its position, CMS said further collection work would not be cost-effective
in light of the age of these debts and the efforts and associated costs of
our recommended follow-up work. We continue to believe that this assessment
should be performed because CMS did not complete adequate collection work to
justify discontinuing collection activity on these debts.

Background CMS, an operating division of HHS, administers Medicare,
Medicaid, and the State Children's Health Insurance Program. As
administrator of Medicare, which paid about $215 billion in benefits to
approximately 39.5 million Medicare beneficiaries in fiscal year 2000, CMS
is the nation's largest health insurer. Although most participating
providers comply with Medicare billing rules, inadvertent errors or
intentional misrepresentations that result in overpayments to providers do
occur. These overpayments represent money owed back to Medicare. According
to the HCFA Financial Report for Fiscal Year 2000,6 about $8.0 billion out
of $8.1 billion of the debts reported owed to CMS originated in the Medicare
program.

MSP and Non-MSP Medicare Debts

CMS Medicare debts consist largely of overpayments to hospitals, skilled
nursing facilities, physicians, and other providers of covered services and
supplies under Part A (hospital insurance) and Part B (supplemental medical
insurance) of the Medicare program. We examined two types of Medicare debts:

* Medicare secondary payer (MSP) debts. MSP debts arise when Medicare pays
for a service that is subsequently determined to be the financial
responsibility of another payer. Cases that result in MSP debts include
those in which beneficiaries have (1) other health insurance furnished by
their employer or their spouse's employer (or, in certain instances, another
family member) that covers the medical services provided, (2) occupational
injuries, illnesses, and conditions covered by workers' compensation, and
(3) injuries, illnesses, and conditions related to a liability or no-fault
insurance settlement, judgment, or award.

* Non-MSP debts. Although Medicare is phasing out this payment method,
Medicare has paid certain institutional providers interim amounts based on
their historical service to beneficiaries. Medicare contractors
retrospectively adjust these payments based on their review of provider
costs. When a provider's cost-reporting year is over, the provider files a
report specifying its costs of serving Medicare beneficiaries. Cost report
debts arise when the cost report settlement process, which includes audits
and reviews by Medicare contractors,

6U.S. Department of Health and Human Services, Health Care Financing
Administration, HCFA Financial Report for Fiscal Year 2000 (Baltimore, Md.:
2001).

determines that the amount an institution was paid based on its cost report
exceeds the final settlement amount. Another type of non-MSP debt related to
cost reporting is unfiled cost report debt. If an institutional provider
fails to submit a timely cost report, CMS establishes an unfiled cost report
debt. The amount of the debt equals the full amount disbursed for the year
in which the provider failed to submit a timely report. Most providers have
an ongoing business relationship with the Medicare program; therefore,
contractors are able to collect most non-MSP debts by offsetting subsequent
Medicare payments to providers. However, if offsetting subsequent payments
does not fully liquidate the debt (e.g., because the provider has left the
Medicare program), unpaid balances more than 180 days delinquent are subject
to DCIA's debt-referral requirements.

Collection Services for CMS Medicare Debts

CMS refers its eligible MSP and non-MSP debts to PSC, which provides debt
management services for certain HHS operating divisions. Under DCIA, federal
agencies are required to refer all eligible debts that are more than 180
days delinquent to Treasury or a Treasury-designated debt collection center.
In 1999, Treasury designated PSC a debt collection center for HHS, allowing
PSC to service certain debts, including MSP and unfiled cost report debts.
PSC is responsible for attempting to collect MSP debts, obtaining cost
reports for unfiled cost report debts, reporting MSP and unfiled cost report
debts to TOP, and referring other types of Medicare debts to Treasury's FMS
for cross-servicing.

Prior Findings on CMS's In September 2000, we reported that CMS was slow to
implement DCIA but

Implementation of DCIA could increase Medicare overpayment collections if it
fully implemented the referral requirements of the act. We recommended, and
CMS agreed, that CMS fully implement DCIA by transferring Medicare debts to
PSC or Treasury for collection as soon as they became delinquent and were
determined to be eligible. We also recommended that CMS refer the backlog of
eligible Medicare debts to PSC as quickly as possible. 7

7GAO/HEHS/AIMD-00-304.

We noted in the report that CMS had two pilot projects under way that were
designed to expedite the transfer of delinquent Medicare debts for
collection action. One pilot covered certain MSP debts valued at $5,000 or
more, and the other covered certain non-MSP debts, primarily related to cost
report audits, of $100,000 or more.8 Contractors participating in the pilots
were to (1) verify the amount of a delinquent debt and ensure that it was
still uncollected, (2) issue a DCIA intent letter indicating that nonpayment
would result in the debt's referral to PSC, and (3) record the debt in a
central CMS database used to transmit the debt to PSC for collection.9 CMS's
goal is to have referred all eligible Medicare debts for collection action
by the end of fiscal year 2002.

CMS Medicare Debts Eligible for Referral as of September 30, 2000

As shown in table 1, CMS reported that about $6.6 billion of Medicare debts
were more than 180 days delinquent or classified as currently not
collectible (CNC) as of September 30, 2000. This information was reported in
the Medicare Trust Fund Treasury Report on Receivables Due from the Public
(TROR), which contained the most recent agency-certified information
available during our review. Debts classified as CNC are written off the
books for accounting purposes-that is, they are no longer carried as
receivables. A write-off does not extinguish the underlying liability for a
debt, and collection actions may continue to be taken on debts classified as
CNC.

8In the report, CMS stated that it planned to reduce the non-MSP referral
threshold to $600. In December 2000, CMS instructed Medicare contractors to
identify and send intent letters for non-MSP debts greater than $600.

9Before the pilot projects were initiated, the referral process was as
follows: (1) contractors referred delinquent debts to the appropriate CMS
regional office for review to verify that appropriate collection actions had
been taken; (2) if regional office staff found that appropriate actions had
been taken, the contractor transferred the receivable to CMS, which assumed
accountability for collection through its regional offices; and (3) CMS,
through its regional offices or headquarters, was responsible for referring
the debts to PSC.

Of the $6.6 billion of Medicare debts reported as more than 180 days
delinquent or classified as CNC, CMS reported that it had referred
approximately $2 billion of debts and had excluded from referral
approximately $1.8 billion of debts. CMS also reported in the TROR that
about $1.6 billion in unfiled cost reports were delinquent more than 180
days. Because CMS does not recognize amounts associated with unfiled costs
reports as receivables for financial reporting purposes, the agency reports
unfiled cost report debts more than 180 days delinquent as a separate,
additional item in the TROR.10 With these exclusions and additions, CMS
reported about $6.4 billion of Medicare debts eligible for referral to PSC
for collection action as of September 30, 2000.

Table 1: CMS Medicare Debts Eligible for Referral as of September 30, 2000

                            Dollars in millions

                                Debt amounts

   Debts more than 180 days delinquent and debts classified as CNC $6,604

         Plus: other delinquent debts (unfiled cost reports) 1,591

Less:  debts excluded  from referral  because of bankruptcy,  appeals, 1,809
litigation

          Debts eligible for referral for collection action 6,386

                Debts referreda for collection action 2,046

        Debts eligible but not referred for collection action 4,340

aPSC reported that CMS had referred about $1.65 billion of delinquent debt
as of September 30, 2000. We noted that CMS inadvertently overstated debt
referrals by $67 million because of a data-entry error. In addition, during
our review, a PSC official stated that PSC was reconciling the debts
reported as referred by CMS to the debts reported as being received by PSC
for collection action.

Source: Medicare Trust Fund Treasury Report on Receivables Due from the
Public for fourth quarter 2000 (September 30, 2000).

Of the approximately $6.4 billion of Medicare debts that CMS had reported as
eligible for referral by the end of fiscal year 2000, the agency reported
that about $4.3 billion of the debts had not been referred to Treasury or a
Treasury-designated debt collection center. About $2.6 billion of the
unreferred amount was non-MSP debt, and the remainder was MSP debt.

10Unfiled cost reports are not recognized as receivables because the failure
to file a cost report does not complete the earnings process; thus, no
accounting event occurred from which a receivable can be established. Also,
without a cost report, CMS cannot reasonably estimate the amount of the
receivable, as required by federal accounting standards.

CMS's goal for fiscal year 2001, which the agency met, was to refer an
additional $2 billion of unreferred eligible debts. CMS's goal for fiscal
year 2002 is to refer the remainder of eligible Medicare debts.

Objectives, Scope, and Methodology

Our objectives were to determine whether (1) CMS was promptly referring
eligible Medicare debts for collection action, (2) any obstacles were
hampering CMS from referring eligible Medicare debts, and (3) CMS was
appropriately using exclusions from referral requirements.

Although CMS also administers Medicaid and the State Children's Health
Insurance Program, we limited our review to Medicare debts because the
Medicare program is the source of the vast majority of CMS's reported
delinquent debt.

To address our objectives, we obtained and analyzed the Medicare Trust Fund
TROR for the fourth quarter of fiscal year 2000, which was the most recent
agency-certified report available at the completion of our fieldwork, and
other financial reports prepared by CMS. The most recent year-end TROR
should contain the most reliable information available because Treasury
requires that agency chief financial officers (or their designees) certify
year-end data as accurate. We interviewed CMS and PSC officials to obtain an
understanding of the debt-referral process and any obstacles that may be
hampering referral of eligible debts. In addition, we reviewed CMS policies
and procedures on debt referrals and examined current and planned CMS
efforts to refer eligible delinquent debts.

We also met with representatives from 4 selected CMS contractors that
process and pay Medicare claims, and we discussed how they identified and
referred eligible Medicare debts to PSC. At the time of our review, CMS had
55 Medicare contractors that processed claims and collected on overpayments.
We used two criteria to select the 4 contractors: (1) the size of their debt
portfolio and (2) whether the contractor participated in the CMS pilot
projects. Specifically, 1 of the selected contractors had the largest amount
of debt overall and the largest amount of Part A debt, 1 other selected
contractor had the largest amount of Part B debt, and another of the
selected contractors had the largest amount of MSP debt. We selected the
fourth contractor to ensure that our review covered at least one-third of
all the debt maintained at the CMS contractors. Three of the 4 contractors
that we selected participated in the MSP pilot project, and 2 participated
in the non-MSP pilot project.

As agreed with your office, we did not test selected debts that were
excluded from referral because the HHS OIG was performing detailed testing
of CMS's implementation of DCIA and the effectiveness of its debt collection
and debt management activities. As part of its work, the OIG tested selected
debts at CMS and its Medicare contractors to determine whether the status of
debts had been appropriately categorized. We also did not independently
verify the reliability of certain information that CMS and PSC provided
(e.g., debts reported as more than 180 days delinquent).

We performed our work from November 2000 to September 2001 in accordance
with U.S. generally accepted government auditing standards.

We requested written comments on a draft of this report from the
administrator of CMS or his designated representative. CMS's letter is
reprinted in appendix I. We also considered, but did not reprint, the
technical comments provided with CMS's letter and have incorporated them
throughout this report, where appropriate.

CMS Did Not Promptly Refer All Eligible Medicare Debts in Fiscal Year 2001

Overall, CMS did not promptly refer all of its reported eligible Medicare
debts in fiscal year 2001. Although CMS referred approximately $2.1 billion
of Medicare debts during the year, almost all were non-MSP debts primarily
related to cost report audits. Further, the vast majority of these debt
referrals-about $1.9 billion-occurred late in the fiscal year, from June
through September. While approximately $1.8 billion of eligible MSP debts
were reported as eligible for referral as of September 30, 2000, CMS
referred only about $47 million of MSP debts in fiscal year 2001.

CMS Referred a Significant  Amount of Non-MSP Debts in Fiscal Year 2001, but
Not Promptly

CMS made progress in referring non-MSP debts to PSC during fiscal year 2001,
but most of the progress occurred late in the fiscal year. Problems with the
debt-referral system contributed to the late referral of non-MSP debts.
Although CMS reached its $2 billion referral goal for fiscal year 2001, both
the prospects for collection during the year and the collectibility of the
debts were likely diminished by the referral delays.

At the end of fiscal year 2000, about $2.6 billion of non-MSP debts remained
to be referred. Throughout most of fiscal year 2001, CMS made little
progress in referring these debts. It was not until June 2001, approximately
two-thirds of the way through the fiscal year, that CMS began making
substantial referrals of non-MSP debts to PSC. Of the approximately

$2.1 billion of non-MSP debts reported as being referred during fiscal year
2001, CMS referred about $1.9 billion of the debts from June through
September.

CMS officials stated that they were not significantly concerned by the low
level of non-MSP debt referrals during the first two-thirds of fiscal year
2001 because they met their goal of referring $2 billion of eligible
Medicare debts in fiscal year 2001 and they intend to meet their goal of
referring the remaining eligible debts by the end of fiscal year 2002.
However, the prompt referral of delinquent debts is critical because, as
industry statistics indicate, the likelihood of recovering amounts owed on
delinquent debts decreases dramatically as the age of the debt increases.

CMS Made Little Progress in Referring MSP Debts in Fiscal Year 2001

CMS made little progress in referring the approximately $1.8 billion of MSP
debts that were reported as eligible for referral as of September 30, 2000.
Limited contractor efforts, coupled with inadequate monitoring of contractor
performance by CMS, contributed to the slow progress. In addition, many
existing MSP debts will never be referred because in February 2001 CMS
instructed its Medicare contractors to close out MSP debts delinquent more
than 6 years and 3 months, thereby terminating all collection efforts on
such debts.

Unreferred MSP debts represented about 40 percent of the approximately $4.3
billion of reported eligible Medicare debts that had not been referred for
collection as of September 30, 2000. PSC collection reports show that the
center has had comparatively more success in collecting MSP debts than it
has had in collecting non-MSP debts. By the end of fiscal year 2001, PSC
reported collecting almost as much on delinquent MSP debts as on delinquent
non-MSP debts, even though the total dollar amount of MSP referrals was a
small fraction, about 2 percent, of the total dollar amount of non-MSP
referrals.11

CMS began referring MSP debts to PSC in March 2000. PSC records indicate
that through September 30, 2001, CMS had referred only about $83 million, or
5 percent, of the approximately $1.8 billion of MSP debts

11As of the end of fiscal year 2001, PSC reported collecting about $3.8
million during fiscal year 2001 of the approximately $83 million of MSP
debts referred. For non-MSP debts, PSC reported that it and Treasury had
collected about $4.1 million during fiscal year 2001 of the approximately
$3.7 billion of non-MSP debts referred.

eligible for referral to PSC as of September 30, 2000. Of this amount, about
$47 million was referred in fiscal year 2001. These limited referrals were
likely the only collection action taken on most of the eligible MSP debts
from March 2000 through September 2001. In most cases, CMS instructed its
contractors only to send initial demand letters to MSP debtors and follow up
on any resulting inquiries.

CMS Lacked Effective Processes and Controls to Promptly Refer Eligible
Medicare Debts

CMS did not establish and implement effective controls to promptly refer
eligible Medicare debts to PSC for collection action. CMS failed to promptly
refer non-MSP debts because the agency had problems with its debt-referral
system. Limited contractor efforts, coupled with inadequate CMS monitoring
of contractor performance, were primarily responsible for the slow progress
in referring MSP debts. Because of a CMS policy to close out debts
delinquent more than 6 years and 3 months, some debts will never be referred
for collection action. In addition, CMS has not developed a process to
report closed-out debts to IRS, even though discharged debt is considered
income and may be taxable.

Problems with the Debt-Referral System Delayed the Referral of Non-MSP Debts

Non-MSP debt referrals were delayed until late in fiscal year 2001 primarily
because CMS suspended its debt-referral system in November 2000. According
to a CMS official responsible for non-MSP debt referrals, the agency
suspended the system in order to identify and correct numerous discrepancies
found in the system's data (e.g., duplicate debt entries, inconsistencies
between debt amounts in the referral system and debt amounts in the tracking
system) and to place additional edits in the system to prevent such errors
in the future. CMS did not resume referring non-MSP debts to PSC through the
debt-referral system until June 2001.

Not only did CMS's suspension of the debt-referral system limit the
debt-referral activities of the 5 contractors participating in the non-MSP
pilot, it also delayed CMS's planned October 2000 expansion of the
debt-referral program to all contractors. CMS did not issue updated
instructions for referring non-MSP debts to each of its 55 contractors until
April 2001. The guidance, revised in response to our September 2000
recommendation that all CMS debt be transferred to PSC as soon as it becomes
delinquent and is eligible for transfer, expanded the criteria for referring
non-MSP debts by including Part B debts, as well as Part A debts, and
lowering the referral threshold from $600 to $25.12

After the debt-referral system began operating again and the referral
requirements were expanded and extended to all contractors, CMS increased
its referrals of non-MSP debts to PSC by about $1.9 billion from June
through September 2001.

Limited Contractor Efforts and Inadequate Monitoring of Contractor
Performance Impeded Referral of MSP Debts

The low referral of MSP debts in fiscal year 2001 occurred partly because
for most of the year, until May 2001, only the 15 contractors participating
in the pilot project were authorized to identify eligible Part A debts and
refer them to PSC. According to information from CMS, as of September 30,
2000, these 15 contractors held a total of about $542 million of Part A
debts that were more than 180 days delinquent, representing about 31 percent
of MSP debts eligible for referral as of that date.

12As we reported in September 2000, CMS planned to reduce the non-MSP
referral threshold from $100,000 to $600. In December 2000, CMS instructed
Medicare contractors to identify and send intent letters for non-MSP debts
greater than $600. In April 2001, CMS reduced the threshold to $25 and
instructed Medicare contractors to begin referring all eligible non-MSP
debts that are $25 or greater.

In response to our September 2000 recommendation, CMS issued a program
memorandum in May 2001 extending to all MSP contractors the requirement to
identify delinquent MSP debts and refer them to PSC. CMS also expanded the
referral criteria to include Part B debts, as well as Part A debts. The
dollar threshold for referral is to be reduced in phases, from $5,000 to
$25.13 The phased reduction is intended both to eliminate the backlog of
higher-dollar debts and to ensure referral of current debts, thereby
avoiding a continuing backlog. A CMS official stated that the memorandum was
not issued sooner partly because CMS had to respond to contractors' concerns
that they needed additional funding to automate their debt-referral
processes to comply with the new referral requirements. The CMS official
stated that after much consideration, CMS concluded that referrals could be
performed manually and that seeking additional funding for automation would
likely cause further delays in referring MSP debts to PSC.

Another factor that contributed to the low amount of MSP debt referred to
PSC was the failure of certain pilot project contractors to promptly refer
eligible debts. Under the MSP pilot project, contractors were required to
identify eligible Part A debts, send DCIA intent letters (which state CMS's
intention to refer a debt for collection action if it is not paid within 60
days) to those debtors, and enter the debt information into the
debt-referral system. We selected and reviewed the work of 3 large Medicare
contractors that participated in the MSP pilot project and found that none
of the 3 promptly identified and referred all eligible MSP debts.

One of the contractors held $255 million of Part A MSP debt more than 180
days delinquent as of September 30, 2000. As of May 2001, the contractor
reported that it had identified and sent out DCIA intent letters for only
about $33 million, or about 13 percent, of the debt. The contractor official
responsible for MSP debts stated that the contractor was under the
impression that the pilot project required it to make only two file queries,
in February 2000, to identify eligible debts and that the queries were to
cover only debts incurred from March 1997 through August 1998. However, our

13To address the existing backlog of delinquent debt, CMS established a
workload standard for MSP contractors. The standard specifies that each
contractor is to issue 200 "intent to refer" letters or to resolve 500
selected debts each month, as long as the contractor has sufficient
delinquent debts to meet this requirement. If a contractor has insufficient
debts greater than $5,000 to meet the workload standard, the contractor then
selects debts greater than $250. If the contractor has insufficient debts
greater than $250 to meet the workload standard, the contractor then selects
debts greater than $25.

review of the implementing instructions for the pilot project found that it
was to cover all MSP debts that were not more than 6 years old, and CMS
officials responsible for MSP debts advised us that they had never
instructed the contractor to limit its file queries.

Another of the 3 contractors whose work we reviewed held about $61 million
of Part A MSP debt delinquent more than 180 days as of September 30, 2000.
The contractor official responsible for MSP debts stated that the contractor
believed that the MSP pilot project had ended in August 2000. As such, from
September 2000 through December 2000, the contractor did not review its debt
portfolio to identify additional MSP debts eligible for referral. The
contractor subsequently began identifying and referring debts again in
January 2001. In addition, the contractor's records indicated that as of
April 2001, about $6.2 million, or 48 percent, of the $12.8 million of debt
for which it had sent DCIA intent letters prior to September 2000 had not
been referred to PSC. These debts remained at the contractor even though
they were well beyond the 60-day time frame CMS specified for referring
debts to PSC after a DCIA intent letter is sent. The responsible contractor
official was unable to explain why the debts had not been referred for
collection action.

Before our review, CMS had not developed or implemented policies and
procedures for monitoring contractors' referral of MSP debts. As a result,
CMS did not monitor the extent to which contractors referred specific MSP
debts to PSC and did not identify specific contractors, such as those
mentioned above, that failed to identify and refer all eligible debts.
Without such monitoring, CMS could not take prompt corrective action. This
lack of procedures for monitoring contractors and the resulting lack of
monitoring are inconsistent with the comptroller general's Standards for
Internal Control in the Federal Government. The standards state that
internal controls should be designed to assure that ongoing monitoring
occurs in the course of normal operations and that it should be performed
continually and ingrained in agency operations.14

In response to our work, CMS officials stated that in June 2001 they had
begun to review selected contractors' MSP debt referrals. A CMS official
said that the 10 CMS regional offices would assume a more active role in
ensuring that contractors promptly refer eligible MSP debts to PSC. As of

14 U.S. General  Accounting Office,  Standards  for Internal Control  in the
Federal Government, GAO/AIMD-00-21.3.1 (Washington, D.C.: Nov. 1999).

September  2001,  CMS  had  not  developed  formal  written  procedures  for
monitoring  contractors, but  agency officials  stated that they  planned to
develop such procedures.

CMS Policy to Close Out Older MSP Debts Also Limited Referrals of MSP Debts

Many MSP debts will never be referred to PSC because of a CMS decision to
close out older MSP debts. In February 2001, CMS issued guidance to its
contractors directing them to methodically terminate collection action on or
close out MSP debts delinquent more than 6 years and 3 months.15 CMS
officials stated that the agency selected this delinquency criterion because
the statute of limitations prevents the Department of Justice from
litigating to collect debts more than 6 years after they become delinquent.
Also, these debts, because they are closed out, will never be reported to
FMS for TOP, which has been FMS's most effective debt collection tool.16 For
fiscal year 2000, Treasury found that the collection rate for the small
amount of MSP debt that had been reported to TOP was about 10.5 percent,
which is higher than TOP's average collection rate. The February 2001
guidance was a continuation of CMS policy set forth in the agency's
instructions to contractors at the start of the MSP pilot project in fiscal
year 2000, which authorized contractors to identify and refer only debts up
to 6 years old.

A CMS official stated that older MSP debts were closed out because it was
not cost-effective to collect them. However, CMS could not provide any
documentation to support the assertion that it is not cost-effective to
attempt to collect older MSP debts, and CMS did not test this assumption in
its MSP pilot project.

Age alone is not an appropriate criterion for terminating collection action
on a debt. The agency should pursue all appropriate means of collection on a
debt and determine, based on the results of the collection activity, whether
the debt is uncollectible. According to discussions with contractor
officials, collection activity prior to the termination of the debts likely
involved only the issuance of demand letters, as required by CMS's Budget
and Performance Requirements for contractors.

15Certain categories of debts were excluded from close-out, including debts
in litigation, in bankruptcy, and under investigation for fraud.

16According to documents provided by Treasury, during each of the last 3
calendar years FMS has collected more than $1 billion of federal nontax debt
through TOP by offsetting tax refund payments. This amount far exceeds the
amount collected through any other FMS debt collection tool.

The CMS official said she was not aware of any assessment performed to
determine the total dollar amount of debts that will be designated as
eligible for close-out because of this age threshold. During our review, CMS
had already approved close-out of about $86 million of MSP debts at the
contractors we visited. About $85 million of these debts were less than 10
years old and therefore could have been referred to PSC for collection
action, including reporting to TOP.17

In a related matter, CMS has not established a process, including providing
authorization to PSC, to report closed-out MSP debts to IRS. The Federal
Claims Collection Standards and Office of Management and Budget (OMB)
Circular No. A-129 require that agencies, in most cases, report closed-out
debt amounts to IRS as income to the debtor, since those amounts represent
forgiven debt, which is considered income and therefore may be taxable at
the debtor's current tax rate. Thus, reporting the discharge of indebtedness
to IRS may benefit the federal government, through increased income tax
collections. CMS stated that agency officials and the CMS Office of General
Counsel are discussing the reporting of closed-out MSP debts to IRS but did
not specify when actions, if any, would be taken to report such debts to
IRS.

CMS Faces Challenges in EffectivelyManaging Future Medicare Debt Referrals

Even with CMS's non-MSP debt-referral system operating again and its MSP and
non-MSP referral requirements extended to all of its contractors, the agency
still faces obstacles to effectively managing its Medicare debt referrals.
As mentioned earlier, in fiscal year 2001 CMS expanded debt-referral
requirements from the pilot projects to include all 55 Medicare contractors.
CMS lacks complete and accurate debt information, however, and this
shortcoming will likely hamper the agency's ability to adequately monitor
contractors' debt referrals. In addition, CMS's referral instructions to
contractors currently do not cover some types of Medicare debts, including
MSP liability debts. Without a comprehensive plan in place that covers all
types of Medicare debts, CMS faces significant challenges to be able to
achieve its goal of referring all eligible Medicare debts by the end of
fiscal year 2002.

17For most types of debt, DCIA provides that administrative offset is
available for claims that have not been outstanding for more than 10 years.
TOP is available to collect nontax debts referred within 10 years after the
agency's right of action accrued.

Lack of Complete and Accurate Debt Information Hampers CMS's Ability to
Monitor Debt Referrals

CMS Lacks a Centralized Database for MSP Debts

CMS's Non-MSP Debt-Tracking Systems Contain Inaccurate Information

All Medicare contractors are now responsible for identifying eligible debts
from their debt portfolio, sending out DCIA intent letters to debtors, and
referring eligible debts to PSC. To help ensure that all eligible Medicare
debts are promptly identified and referred for collection, CMS must monitor
contractors' debt-referral practices. To monitor effectively, the agency
needs comprehensive, reliable debt information from its contractors, but CMS
systems currently do not contain complete and accurate information on all
CMS Medicare debts.

One of CMS's most daunting financial management challenges continues to be
the lack of a financial management system that fully integrates CMS's
accounting systems with those of its Medicare contractors. Because CMS does
not have a fully integrated accounting system, each MSP debt is maintained
only in the internal system of the specific contractor that holds the debt.
CMS has no centralized database that includes all MSP debts held by
contractors. As a result, the agency cannot effectively monitor the extent
to which its various contractors are promptly identifying eligible MSP debts
and referring them to PSC for collection. CMS is developing a system that is
to include a database containing all MSP debts. However, the agency plans to
phase the system in, and it is not scheduled to be fully implemented at all
contractors until the end of fiscal year 2006.

CMS has two debt-tracking systems for its non-MSP debts, one for Part A
debts and one for Part B debts. Medicare contractors are responsible for
entering non-MSP debts into the systems and updating the debts' status (with
respect to bankruptcy, appeals, etc.) as appropriate. According to CMS
officials, the agency intends to use these systems to monitor contractors to
ensure that they are promptly identifying and referring eligible debts to
PSC.

Accurate tracking information is critical for monitoring debt-referral
practices. CMS found, however, that its non-MSP debt-tracking systems
contain inaccurate information because a significant number of contractors
have not been adequately updating information in the systems. CMS performed
contractor performance evaluations for fiscal year 2000 on 25 contractors
and found that 19 were not adequately updating information in the non-MSP
debt-tracking systems. For 5 of the 19 contractors, CMS considered the
problems to be significant enough to require the contractors to develop
written performance improvement plans.

Our work at the 2 selected contractors involved in the non-MSP pilot project
corroborated CMS's own findings. CMS periodically sent non-MSP pilot
contractors a list of eligible Part A debts from the agency's debt-tracking
system for possible referral to PSC. For the 2 non-MSP contractors we
reviewed, CMS selected $1.3 billion of debts from the Part A non-MSP
debt-tracking system. The contractors determined that $289 million of the
debts, or about 23 percent, were actually ineligible for referral because
they were in bankruptcy, under appeal, or under investigation for fraud. In
addition, we identified $21 million of debts that 1 of the 2 non-MSP pilot
contractors had misclassified on the CMS debt-tracking system as bankruptcy
debt and ineligible for referral. These debts had actually been dismissed
from the bankruptcy proceedings and therefore should have been reported in
the debt-tracking system as eligible for referral. In this case, the
contractor had not updated its own internal system for $8 million of the
debts and was therefore not pursuing postdismissal collection actions on
them. For the remaining $13 million, the contractor had updated its internal
system and was pursuing collection but had failed to properly update the CMS
debt-tracking system.

CMS's Non-MSP Debt-Tracking To effectively monitor contractor performance,
CMS must have the ability Systems Do Not Enable the to determine whether
contractors are referring debts promptly. However, Agency to Monitor
Promptness CMS's non-MSP debt-tracking systems lack the capacity to indicate
of Debt Referral whether contractors are promptly entering non-MSP debts
into the debt-

referral system after they mail DCIA intent letters because the systems do
not track the date of status code changes (e.g., the date when the DCIA
letter was issued). We found that CMS's non-MSP debt-tracking system for
Part A debts did not identify $5.2 million of debts that had been pending
referral for at least 9 months at one of the two non-MSP contractors that we
reviewed. In response to our work, CMS officials stated that they are in the
process of modifying the non-MSP debt-tracking systems to allow the agency
to monitor how promptly contractors are referring debts in the future.

CMS Lacks a CMS has not developed a comprehensive plan that covers all types
of Comprehensive Referral Medicare debt eligible for referral. The agency
lacks information on the Plan That Covers All Types total dollar amount of
eligible debts not covered by its current referral

instructions to the Medicare contractors, and it has not developed a

of Eligible Debt detailed plan or specific time frame for referring these
debts. Without a comprehensive plan in place, CMS faces significant
challenges to be able to achieve its goal of referring 100 percent of
eligible debts in fiscal year 2002.

Types of debt for which CMS has not yet established a referral plan include,
but are not limited to, the following:

* MSP liability. MSP liability debts arise when Medicare covers expenses
related to accidents, malpractice, workers' compensation, or other items not
associated with group health plans that are subsequently determined to be
the responsibility of another payer.

* Part A claims adjustments. Part A claims receivables are created when
previously paid claims are adjusted. Reasons for claims adjustments include
duplicate processing of charges or claims, payment for items or services not
covered by Medicare, and incorrect billing. The CMS debt-tracking system
does not track these debts. Debts resulting from claims adjustments are
generally offset from subsequent Medicare payments and require no further
collection action. Should subsequent Medicare payments be unavailable for
offset, however, no requirements exist for Medicare contractors to perform
any other collection actions, such as issuing a demand letter.

We found that as of September 30, 2000, the four contractors we reviewed
held about $9.6 million of MSP liability debts and about $10.7 million of
debts related to Part A claims adjustments. CMS officials stated that the
agency intends to refer both types of debt to PSC in the future.

CMS Does Not Provide Reliable MedicareDebt Information to Treasury

The amounts of eligible debt CMS reported in the September 30, 2000,
Medicare Trust Fund TROR were not reliable. CMS did not properly report the
delinquency aging for certain debts, including debts previously transferred
to regional offices for collection. CMS also did not properly report its
exclusions from referral requirements. For example, the agency
inappropriately reported as excluded $149 million of non-MSP debts that had
been referred to CMS regional offices for collection.18 In addition, CMS did
not report any exclusion amounts for MSP debts, even though we noted that
certain MSP debts were involved in litigation, or for non-MSP debts under
investigation for fraud. Finally, because of a data-entry error, CMS
inadvertently overstated debt referrals by $67 million.

It is imperative that CMS provide Treasury with reliable information on
eligible Medicare debt. Treasury uses the information to monitor agencies'

18Before implementation of the DCIA referral process, contractors were
required to transfer receivables to CMS regional offices for collection.

implementation of DCIA. In addition, the TROR is Treasury's only
comprehensive means of periodically collecting data on the status and
condition of the federal government's nontax debt portfolio, as required by
the Debt Collection Act of 1982 and DCIA. CMS's delinquent Medicare debts
represent a significant portion of delinquent debts governmentwide.
Therefore, they must be reported accurately if governmentwide debt
information is to be useful to the president, the Congress, and OMB in
determining the direction of federal debt management and credit policy.

According to CMS officials, the agency is revising its method for
determining eligible debt amounts. For example, CMS officials stated that
the agency no longer reports debts referred to regional offices as
exclusions and is in the process of identifying and reporting exclusion
amounts for MSP debts.

Conclusions Although CMS made progress in referring eligible Medicare debts
to PSC in fiscal year 2001 and met its referral goal for the year, a
substantial portion of Medicare debts-particularly MSP debts-are still not
being promptly referred for collection action. Inadequate contractor
monitoring, resulting partly from CMS's debt system limitations, has
contributed to the slow pace of MSP debt referrals. In addition, CMS has not
begun referring certain types of eligible Medicare debts, such as MSP
liability debts, and those debts will continue to age until CMS completes
and implements a comprehensive referral plan. Since recovery rates decrease
dramatically as debts age, CMS cannot accomplish DCIA's purpose of
maximizing collection of federal nontax debt unless it refers eligible debts
promptly.

CMS's policy of closing out eligible MSP debts solely on the basis of their
age, without performing a quantitative study to determine whether collection
action would be cost-effective, has also reduced referrals and eliminated
opportunities for potential collections on those debts. In addition, by not
reporting closed-out debts to IRS, the federal government may be missing an
opportunity to increase government receipts.

Medicare debts are a significant share of delinquent debt governmentwide,
and CMS's inaccurate reporting to Treasury on exclusion amounts, debt aging,
and referrals may distort governmentwide debt information used to determine
the direction of federal debt management and credit policy. CMS's inaccurate
reporting of eligible debt amounts also impedes Treasury's ability to
monitor the agency's compliance with DCIA.

Recommendations for Executive Action

To help ensure that CMS promptly refers all eligible delinquent Medicare
debts to PSC, as we recommended in September 2000, and that all benefits
from closed-out debts are realized, we recommend that the administrator of
CMS

* establish and implement policies and procedures to monitor contractors'
implementation of CMS's May 2001 instructions to ensure the prompt referral
of eligible MSP debts;

* implement changes to CMS's non-MSP debt tracking systems so that CMS
personnel will be better able to monitor contractors' referral of eligible
non-MSP debts as required by CMS's April 2001 instructions to contractors;

* develop and implement a comprehensive referral plan for all eligible
delinquent Medicare debts that includes time frames for promptly referring
all types of debts, including MSP liability and Part A claims adjustments
debts;

* perform an assessment of MSP debts being closed out because they are more
than 6 years and 3 months delinquent to determine whether to pursue
collection action on the debts, and document the results of the assessment;

* establish and implement policies and procedures for reporting closed-out
Medicare debts, when appropriate, to IRS; and

* validate the accuracy of debt-eligible amounts reported in the Medicare
Trust Fund TROR by establishing a process that ensures, among other things,
(1) accurate reporting of the aging of certain delinquent debts, (2)
accurate and complete reporting of debts excluded from referral
requirements, and (3) verification of data entry for referral amounts.

Agency Comments and Our Evaluation

In written comments on a draft of this report, CMS agreed with five of our
six recommendations and summarized actions taken or planned to address those
five. CMS expressed confidence that it would attain its goal of referring
all eligible debt to Treasury by year-end as part of its overall financial
plan.

Regarding our recommendation to assess closed-out MSP debts that were more
than 6 years and 3 months delinquent to determine whether to pursue
collection action on them, CMS stated that further collection efforts would
not be cost-effective. According to CMS, medical services at issue in these
MSP debts are typically from the early 1990s and often involve Medicare
services from the mid-to late 1980s. CMS indicated that the costs of

validating the debts and the costs and fees associated with DCIA
cross-servicing and TOP were too great to justify additional collection
efforts. However, as we stated in the report, CMS could not provide any
documentation to support its position that it is not cost-effective to
attempt to collect older MSP debts, and CMS did not test this assumption in
its MSP pilot project.

CMS's efforts to collect this debt prior to close-out were not adequate. The
Federal Claims Collection Standards require that before terminating
collection activity, agencies are to pursue all appropriate means of
collection and determine, based on the results of the collection activity,
that the debt is uncollectible. According to discussions with Medicare
contractor officials, the collection activity for many of these MSP debts
was limited to issuance of demand letters, which does not satisfy the
requirement that all appropriate means of collection action be pursued on
debts. In addition, most of the closed-out MSP debts at the Medicare
contractors we visited were less than 10 years delinquent and therefore
could have been referred to PSC for collection action, including reporting
to TOP. As such, we continue to believe that CMS should assess MSP debt to
determine whether additional collection activity is appropriate in light of
the minimal prior collection activity.

As agreed with your office, unless you announce its contents earlier, we
plan no further distribution of this report until 30 days after its issuance
date. At that time, we will send copies to the chairmen and ranking minority
members of the Senate Committee on Governmental Affairs and the House
Committee on Government Reform and to the ranking minority member of your
subcommittee. We will also provide copies to the secretary of health and
human services, the inspector general of health and human services, the
administrator of the Centers for Medicare & Medicaid Services, and the
secretary of the treasury. We will then make copies available to others upon
request.

If you have any questions about this report, please contact me at (202)
512-3406 or Kenneth Rupar, assistant director, at (214) 777-5600. Additional
key

contributors to this assignment were Matthew Valenta and Tanisha
Stewart.

Sincerely yours,

Gary T. Engel
Director
Financial Management and Assurance

Appendix I

Comments from the Centers for Medicare & Medicaid Services

Appendix I
Comments from the Centers for Medicare &
Medicaid Services

Appendix I
Comments from the Centers for Medicare &
Medicaid Services

Appendix I
Comments from the Centers for Medicare &
Medicaid Services

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