    Medicare Contracting Reform: CMS's Plan Has Gaps and Its
    Anticipated Savings Are Uncertain (17-AUG-05, GAO-05-873).

    The Medicare Prescription Drug, Improvement, and Modernization
    Act of 2003 (MMA) significantly reformed contracting for the
    administration of claims for Part A, Medicare's hospital
    insurance, and Part B, which covers outpatient services such as
    physicians' care. The MMA required the Centers for Medicare &
    Medicaid Services (CMS)--the agency within the Department of
    Health and Human Services (HHS) that administers Medicare--to
    conduct full and open competition for all of its claims
    administration contracts and to transfer the work to Medicare
    administrative contractors (MAC) by October 2011. The MMA
    required the Secretary of HHS to submit a report to the Congress
    and GAO on the plan for implementing Medicare contracting reform
    and for GAO to evaluate the plan. To address this mandate, GAO
    reviewed the extent to which (1) the plan provides an appropriate
    framework for implementing Medicare contracting reform and (2)
    the plan's cost and savings estimates are sound enough to support
    decisions on implementation.
    -------------------------Indexing Terms-------------------------
    REPORTNUM:   GAO-05-873
        ACCNO:   A33338
      TITLE:     Medicare Contracting Reform: CMS's Plan Has Gaps and Its
    Anticipated Savings Are Uncertain
         DATE:   08/17/2005
      SUBJECT:   Claims processing
    	     Contract administration
    	     Contract oversight
    	     Cost analysis
    	     Federal procurement
    	     Medicare
    	     Procurement planning
    	     Reporting requirements
    	     Strategic planning
    	     Cost estimates

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    GAO-05-873

    United States Government Accountability Office

    GAO

                           Report to Congressional Committees

    August 2005

    MEDICARE CONTRACTING REFORM

             CMS's Plan Has Gaps and Its Anticipated Savings Are Uncertain

    GAO-05-873

    [IMG]

    August 2005

    MEDICARE CONTRACTING REFORM

    CMS's Plan Has Gaps and Its Anticipated Savings Are Uncertain

                                     What GAO Found

    CMS's plan provides an appropriate framework to implement contracting
    reform in some critical areas but not in others. For example, the plan
    indicates the rationale for reform but lacks a detailed schedule to
    coordinate reform activities with other major initiatives CMS intends to
    implement at the MACs during the same period. Further, CMS's plan does not
    comprehensively detail steps to address potential risks during the
    transitions of the claims workload from the current contractors, such as
    failing to pay providers or paying them improperly. These transitions will
    be complex to manage because they require moving multiple claims workloads
    from current contractors to a single MAC with new jurisdictional lines. As
    the figure shows, as many as nine separate segments of current
    contractors' workload will be moved to the first A/B MAC. CMS has
    accelerated its schedule to transfer the current contractor claims
    workload to MACs by 2009, more than 2 years ahead of the MMA's time frame.
    This schedule leaves little time for CMS to adjust for any problems
    encountered.

    Part A and Part B Transitions That Will Occur in One MAC Jurisdiction

    CMS's estimates of costs and savings are too uncertain to support
    decisions on contracting reform implementation. First, CMS's internal cost
    estimate for a 6-year implementation period of about $666 million is based
    on reasonable data but questionable assumptions about contract awards.
    Second, its estimate of $1.4 billion in savings from reductions in
    improper payment by MACs depends on questionable evidence and assumptions
    that were never validated by knowledgeable CMS staff. However, the $1.4
    billion estimate prompted CMS to accelerate its implementation schedule to
    accrue savings as rapidly as possible. While it is reasonable to assume
    that contracting reform will result in savings, the actual amount could
    differ greatly from the estimate. Basing an accelerated implementation
    schedule on uncertain savings raises concerns that CMS has unnecessarily
    created additional challenges to effectively managing the risk of these
    transitions.

                     United States Government Accountability Office

    Contents

      Letter

    Results in Brief
    Background
    CMS's Plan Does Not Provide an Appropriate Implementation

    Framework in All Critical Areas Plan's Cost and Savings Estimates Do Not
    Provide a Reasonable

    Basis for Decision Making Conclusions Recommendation for Executive Action
    Agency Comments and Our Evaluation

                                           1

                                          3 5

                                           8

    26 35 36 36

    Appendix I 	Documents CMS Officials Have Identified as Constituting the
    Agency's Plan for Implementing Contracting Reform

    Appendix II 	Documents Used by GAO to Develop Criteria for Reviewing CMS's
    Plan for Contracting Reform

    Appendix III 	GAO's Criteria for Evaluating CMS's Contracting Reform Plan

    Appendix IV Scope and Methodology

    Appendix V 	Comments from the Department of Health and Human Services

              Appendix VI CMS's MAC Procurement and Transition Schedule 57

    Appendix VII 	Jurisdictional Map of the Current Fiscal Intermediaries 58

    Appendix VIII Jurisdictional Map of the Current Carriers

    Appendix IX 	Jurisdictional Map of the Current Regional Home Health
    Intermediaries

    Appendix X 	Jurisdictional Map of the Current Durable Medical Equipment
    Regional Carriers

    Appendix XI 	Jurisdictional Map of the 15 New Medicare Administrative
    Contractors

    Appendix XII 	Jurisdictional Map of the Four DME MACs and the Four HH MACs

      Tables

    Table 1: CMS's Analysis of Restrictions or Weaknesses in Medicare Claims
    Administration Contracting and Their Associated Effects 10

    Table 2: Key Initiatives Affecting MAC Implementation 23

    Table 3: CMS's Estimates of Administrative Costs for Medicare Contracting
    Reform, Fiscal Years 2006-2011, as of February 2005 28

    Table 4: CMS's Estimates of Administrative Savings from Medicare
    Contracting Reform, Fiscal Years 2006-2011, as of February 2005 31

    Table 5: CMS's Consultant's Estimates of Savings to the Trust Funds from
    Medicare Contracting Reform, Fiscal Years 2006-2011 33

      Figures

    Figure 1: Areas of Detailed Information in CMS's Contracting Reform Plan 9
    Figure 2: Part A and Part B Transitions That Will Occur in One MAC
    Jurisdiction 17 Figure 3: Estimated Costs of Medicare Contracting Reform,
    Fiscal Years 2006-2011, as of February 2005 27 Figure 4: CMS's Annual
    Estimates of Administrative Costs and

    Savings from Medicare Contracting Reform, Fiscal Years

    2006-2011, as of February 2005 32 Figure 5: CMS's MAC Procurement and
    Transition Schedule 57

    Abbreviations

    BCC beneficiary contact centers
    CMS Centers for Medicare & Medicaid Services
    DME durable medical equipment
    DOD Department of Defense
    FAR Federal Acquisition Regulation
    HH home health and hospice
    HHS Department of Health and Human Services
    HIGLAS Healthcare Integrated General Ledger Accounting System
    IT information technology
    MAC Medicare administrative contractor
    MMA Medicare Prescription Drug, Improvement, and

    Modernization Act of 2003 PSC program safeguard contractor

    This is a work of the U.S. government and is not subject to copyright
    protection in the United States. It may be reproduced and distributed in
    its entirety without further permission from GAO. However, because this
    work may contain copyrighted images or other material, permission from the
    copyright holder may be necessary if you wish to reproduce this material
    separately.

    United States Government Accountability Office Washington, DC 20548

    August 17, 2005

    The Honorable Charles E. Grassley
    Chairman
    The Honorable Max Baucus
    Ranking Minority Member
    Committee on Finance
    United States Senate

    The Honorable Joe Barton
    Chairman
    The Honorable John D. Dingell
    Ranking Minority Member
    Committee on Energy and Commerce
    House of Representatives

    The Honorable William M. Thomas
    Chairman
    The Honorable Charles B. Rangel
    Ranking Minority Member
    Committee on Ways and Means
    House of Representatives

    Since the inception of the Medicare program in 1965, the contractors that
    process and administer medical claims have played a critical role in
    serving both beneficiaries and providers. For example, in fiscal year
    2004,
    these contractors processed over 1 billion health care claims and provided
    customer service to about 36 million beneficiaries and over 1 million
    health care providers. The Medicare Prescription Drug, Improvement, and
    Modernization Act of 2003 (MMA)1 significantly changed Medicare law
    covering contracting for claims administration services by the Centers for
    Medicare & Medicaid Services (CMS)2-the agency within the Department
    of Health and Human Services (HHS) that administers the program. CMS

    1Pub. L. No. 108-173, S: 911, 117 Stat. 2066, 2378-2386 (to be codified at
    42 U.S.C. S: 1395kk1).

    2Until July 1, 2001, CMS was called the Health Care Financing
    Administration. We use the name CMS throughout this report.

    refers to these changes, which are intended to improve service to
    beneficiaries and health care providers, as Medicare contracting reform.

    The implementation of contracting reform will fundamentally change
    Medicare claims administration contracting practices. Since the beginning
    of the Medicare program, CMS has generally been exempt from requirements
    to competitively select claims administration contractors or follow
    certain other procedures that usually apply to the selection and
    management of government contractors. However, the MMA required CMS to use
    competitive procedures to select Medicare administrative contractors (MAC)
    and to follow the Federal Acquisition Regulation (FAR),3 except where
    specific MMA provisions differ. The MMA required CMS to transfer the work
    of current claims administration contractors to MACs by October 2011. It
    also required the Secretary of HHS to submit a report to the Congress and
    GAO on HHS's plan to implement the Medicare contracting reform provisions
    by October 1, 2004. This report was submitted on February 7, 2005.4 CMS
    has designated the Report to Congressand related documents, taken
    together, as its plan for implementing Medicare contracting reform. These
    documents are listed in appendix I.

    The MMA also required GAO to evaluate and report on CMS's contracting
    reform plan no later than 6 months after the date that CMS's report was
    received. To address this mandate, as discussed with the committees of
    jurisdiction, we reviewed (1) the extent to which the plan provides an
    appropriate framework for implementing Medicare contracting reform and (2)
    the extent to which the plan's cost and savings estimates are sound enough
    to support decisions on contracting reform implementation.

    In preparing this report, we reviewed relevant sections of the MMA,
    documents prepared to help CMS plan for contracting reform, and GAO
    guidance on assessing federal agencies' procurement functions and
    improving how mission-critical work is accomplished. These documents are
    listed in appendix II. From these documents, we developed evaluation
    criteria and used them to review CMS's contracting reform plan.5 Our

    348 C.F.R. ch. 1 (2004).

    4Department of Health and Human Services,
    ReporttoCongress:MedicareContracting Reform:A Blueprint for aBetter
    Medicare(Washington, D.C.: Feb. 7, 2005).

    5We reviewed the Report toCongressand additional documents that CMS
    designated as part of its contracting reform plan that the agency provided
    to us by June 3, 2005.

      Results in Brief

    evaluation criteria are presented in appendix III. We also reviewed the
    information and assumptions on which the plan's cost and savings estimates
    were based. In addition, we interviewed officials at CMS's headquarters
    and regional offices, four current Medicare claims administration
    contractors, and CMS's actuarial contractor about the contracting reform
    plan and how it was developed. Appendix IV includes a more detailed
    discussion of our scope and methodology. We performed our work from
    November 2004 through July 2005 in accordance with generally accepted
    government auditing standards.

    CMS's plan for contracting reform provides detailed information and an
    appropriate implementation framework in some critical areas but not in
    others. For example, the plan provides detailed information on the reasons
    for, and benefits expected from, contracting reform; the organization of
    current and future Medicare claims administration contractors; the MAC
    contracting implementation schedule; and CMS's strategy for communicating
    information to potential contractors, providers, and beneficiaries. On the
    other hand, the plan does not provide detailed information on the risks of
    contracting reform and steps to mitigate them. Implementation of
    contracting reform is an inherently high-risk activity because it will
    involve complex transitions of claims workloads from current contractors
    to MACs. CMS has experience in transferring up to 10 percent of the claims
    administration workload in a year. In 13 of the past 15 years, CMS has
    transferred at least one contractor's workload, during transitions that
    took an average of 6 to 9 months, with some lasting as long as a year.
    However, the scale of the proposed transitions is much greater, since CMS
    plans to transfer as much as 91 percent of the annual Medicare claims
    processing workload-which represents an estimated $250 billion in payments
    to providers-to MACs in less than 2 years. Furthermore, CMS is proposing
    to transfer all work to MACs by July 2009, which is more than 2 years
    ahead of the MMA's specified time frame. If these transitions go awry,
    physicians and other providers could experience payment delays and errors.
    Further, the plan does not fully detail how CMS intends to implement MAC
    contracting. For example, the plan does not fully explain CMS's strategy
    for monitoring MACs' performance. In addition, the plan does not fully
    explain how CMS will manage contracting reform while also implementing the
    Medicare prescription drug benefit and the expansion of options available
    to Medicare beneficiaries who enroll in private plans. Finally, it does
    not detail how CMS will coordinate the scheduling of contracting reform
    activities with other interrelated initiatives that must be implemented
    concurrently at the MACs, such as upgrades to CMS's information and

    accounting systems. Having a schedule for implementing the interrelated
    initiatives is critical, because delays in one initiative could easily
    affect others. CMS officials have taken initial steps to deal with
    critical areas that are not fully developed, but they have not completed
    planning for them. For example, officials have identified some factors
    that may pose a risk to MAC implementation, but they have not decided on
    steps to mitigate them.

    The plan's cost and savings estimates are too uncertain to support
    decisions on contracting reform implementation because they are based on
    future developments that are difficult to predict. CMS estimates that
    contracting reform would cost about $666 million to implement during a
    6-year period, a much higher amount than the one indicated in the Report
    to Congress, because that document did not include funding anticipated to
    be needed beyond 2006. CMS used its data on the costs of previous
    transitions of claims workloads from one contractor to another as a basis
    to develop a transition cost amount. However, to develop an overall cost
    estimate, CMS had to make assumptions about how many contractors will take
    on new claims workloads and the size of these workload transitions.
    Because CMS does not know which contractors will compete and win contracts
    for specific workloads, it is difficult to predict how much contracting
    reform implementation will cost. Second, the total savings estimate of
    over $1.9 billion for a 6-year implementation period relies on the
    expectation that MACs will reduce improper payments by over $1.4 billion
    through more effective medical reviews of claims. The $1.4 billion savings
    estimate, which was developed by an external consultant, is based on
    questionable evidence and assumptions that were not validated by the CMS
    staff who oversee medical reviews. While it is reasonable to assume that
    contracting reform will eventually lead to program savings, the exact
    level of savings is impossible to predict and could differ greatly from
    the consultant's estimates. Despite this, in order to benefit from the
    projected savings as soon as possible, CMS accelerated its implementation
    schedule for contracting reform. Basing an accelerated implementation
    schedule on such uncertain savings raises concerns that CMS has
    unnecessarily created additional challenges to effectively managing the
    risks and complexities of contracting reform. As a result, we recommend
    that CMS extend its implementation schedule to complete its workload
    transitions by October 2011, so that the agency can be better prepared to
    manage its contracting reform activities.

    In its written comments on a draft of this report, CMS did not concur with
    our recommendation. (See app. V). CMS stated that it would be able to
    achieve savings to the Medicare trust funds and operational efficiencies
    more quickly by fully implementing MAC contracting in 2009. We believe

    Background

    that our recommendation to extend the time frame for implementation
    represents a prudent approach that would allow more time for planning and
    better enable CMS to manage complex transitions and make needed midcourse
    adjustments.

    Federal agencies are generally permitted to contract with any qualified
    entity for any authorized purpose so long as that entity is not prohibited
    from receiving government contracts and the contract is not for an
    inherently governmental function. Agencies are required to use contractors
    that have a satisfactory record of integrity and business ethics, a record
    of successful past performance, and the financial and other resources
    needed to perform the contract. The FAR generally requires agencies to
    conduct full and open competition for contracts. Under the FAR, a federal
    agency may terminate a contract either for the government's convenience or
    if the agency determines that the contractor is in default. The contractor
    does not have similar rights to terminate its contract with the
    government. The FAR also provides agencies with several methods to pay
    contractors-some of which allow for financial incentives for meeting
    performance goals.

    Because of provisions in the Social Security Act, Medicare claims
    administration contracting had unique features that differed from most
    other federal contracting. Before Medicare was enacted in 1965, providers
    had been concerned that the program would give the government too much
    control over health care. To increase providers' acceptance of the new
    program, the Congress ensured that health insurers like Blue Cross and
    Blue Shield, which already served as payers of health care services to
    physicians and hospitals, became the contractors paying providers for
    Medicare services. Medicare's authorizing legislation specified that
    contractors called fiscal intermediaries would administer Part A and Part
    B claims paid to hospitals and other institutions, such as home health
    agencies.6 Contractors called carriers would administer the majority of
    Part B claims for the services of physicians and other providers. By law,
    Medicare was required to choose its fiscal intermediaries from among
    organizations that were first selected by associations representing

    6Medicare Part A covers inpatient hospital care, skilled nursing facility
    care, some home health care services, and hospice care. Part B services
    include physician and outpatient hospital services, diagnostic tests,
    mental health services, outpatient physical and occupational therapy,
    ambulance services, some home health services, and medical equipment and
    supplies.

    providers, a process called provider nomination. Medicare was also
    required to choose health insurers or similar companies to serve as its
    carriers and, by statute, did not have to award the contracts through
    competition. In addition, Medicare contracts were generally renewed each
    year. As a result, since the inception of the program, most Medicare
    claims administration contracts have been awarded and renewed on a
    noncompetitive basis, with limited exceptions.7 Contractors could not be
    terminated from the program unless they were first provided with an
    opportunity for a public hearing-a process not afforded under the FAR.
    Unlike other federal contractors, claims administration contractors could
    terminate their contracts. In addition, the contractors were paid on the
    basis of their allowable costs, generally without financial incentives to
    encourage superior performance.8

    The MMA required CMS to significantly change its contracting arrangements
    and follow the FAR, except to the extent inconsistent with a specific
    requirement of the MMA. The MMA removed the specific procedures for
    selecting fiscal intermediaries and carriers, and unlike CMS's existing
    contracts, MAC contracts must be fully and openly recompeted at least
    every 5 years. In addition, the new contracts will also contain
    performance incentives for contractors. Finally, MACs will not be
    permitted to default on their contracts or terminate their contracts as
    allowed under current contracting practices. Contract termination will
    follow the requirements of the FAR, which allow the government to
    terminate contracts for its convenience or for contractor default.

    MACs will assume work that is currently performed by 51 claims
    administration contractors. At present, there are 25 fiscal intermediaries
    and 18 carriers. In addition, four durable medical equipment (DME)
    regional carriers pay claims submitted by suppliers of DME, prosthetics,

    7For example, from 1977 through 1986, eight competitive contracts, which
    were designed to consolidate the workload of two or more small
    contractors, were established on an experimental basis. More recently, in
    2004, CMS conducted a competitive procurement to replace the fiscal
    intermediary for Washington and Alaska. However, the competition was
    limited to Medicare fiscal intermediaries and carriers.

    8The Social Security Act generally provided that Medicare use cost-based
    reimbursement contracts, under which contractors are reimbursed for
    necessary and proper costs of carrying out program activities. These
    contracts did not expressly provide for profit. Nevertheless, since the
    1980s, CMS has had some limited authority to build financial incentives
    into contracts. See 42 U.S.C. S: 1395h note (2000).

    orthotics, and supplies, and four regional home health intermediaries
    process home health and hospice (HH) claims.

    CMS plans to select 23 MACs to serve specific jurisdictions, including 15
    A/B MACs, which will process both Part A and Part B claims; 4 DME MACs,
    which will process claims for DME, prosthetics, orthotics, and supplies;
    and 4 HH MACs, which will process claims for HH care. CMS's current
    schedule calls for the full fee-for-service contracting workload9 to be
    transferred to MACs by July 2009.10 CMS plans to conduct competitions for
    existing Medicare contractor workloads beginning with a start-up
    acquisition and transition cycle for the 4 DME MACs and 1 A/B MAC. The
    start-up cycle will be followed by two additional acquisition and
    transition cycles. Appendix VI shows CMS's schedule and timing for
    competing all of the MAC contracts.

    MACs will be responsible for most of the functions currently performed by
    fiscal intermediaries and carriers. They will process and pay claims,
    handle first-level appeals of denied claims,11 and serve as providers'
    primary contact with Medicare. In addition, they will coordinate with
    CMS's functional Medicare contractors that perform limited Medicare
    functions on a national or regional basis, such as answering the
    1-800-MEDICARE help line, coordinating Medicare and other insurance
    benefits, and conducting program safeguard activities. For example, the
    functional Program Safeguard Contractors (PSC) conduct activities to
    prevent or address improper payments-such as investigating potential
    fraudulent billing related to the claims paid by the claims administration
    contractors.12

    9Workload is the total work performed by a Medicare claims administration
    contractor, with the amount usually expressed as the number of claims
    processed annually.

    10After the MAC contracts are awarded, the work performed by the outgoing
    Medicare claims administration contractors will be transferred to MACs.
    These transition activities include transferring data, records, and other
    functions to MACs.

    11Beneficiaries and Medicare providers, on behalf of their beneficiaries,
    can appeal denied claims for services. At the first appeal level, the
    Medicare claims administration contactor reexamines the claim along with
    any additional documentation provided by the appellant. If the contractor
    upholds the decision to deny the claim, the appellant may appeal the
    decision further.

    12CMS contracted for the PSCs as part of the Medicare Integrity Program,
    created by the Health Insurance Portability and Accountability Act of
    1996. In addition to the activities cited above, PSCs conduct cost report
    audits and provider education related to program safeguard activities.

    MACs' responsibilities for medical reviews of claims;13 benefit integrity,
    which involves the investigation of suspected fraud;14 and beneficiary
    inquiries will differ in some respects from those of the current claims
    administration contractors. Currently, three of the four DME regional
    carriers conduct their own medical reviews and benefit integrity
    activities for the claims they process.15 Under contracting reform, PSCs
    will be responsible for performing all medical reviews and benefit
    integrity activities related to the claims processed by the DME MACs.
    These responsibilities will be allocated differently for A/B MACs. All A/B
    MACs will conduct medical reviews of the Part A and Part B claims they
    will process, while PSCs will be responsible for conducting benefit
    integrity activities related to these claims.16 The current Medicare
    claims administration contractors respond to beneficiaries' questions that
    are specific to their claims, while staff from 1-800-MEDICARE answer
    general questions on the telephone help line. In the future, staff at
    beneficiary contact centers (BCC) will answer calls placed to
    1-800-MEDICARE and assume the role of responding to general and
    claims-specific questions. MACs will be responsible for responding to more
    complex inquiries from beneficiaries that require a more advanced
    understanding of Medicare claims processing or coverage rules.

    CMS's plan for contracting reform provides detailed information-and an
    appropriate framework for implementation-in some, but not all, critical
    areas. For example, the plan presents detail on the proposed schedule for
    MAC implementation. Nevertheless, as figure 1 shows, the plan does not
    provide detailed information on the risks associated with contracting

    CMS's Plan Does Not Provide an Appropriate Implementation Framework in All

                                     Critical Areas

    13Medical reviews of submitted claims are conducted either before or after
    payment to determine if the claims should be, or should have been, paid.
    Claims are reviewed to see if the beneficiaries' conditions meet the
    Medicare coverage criteria. If medical reviews identify claims that should
    not have been paid, the Medicare claims administration contractor that
    paid the claim is responsible for collecting overpayments.

    14Investigation of suspected fraud can involve conducting a more detailed
    analysis of claims and other investigative steps. Once a case has been
    developed, it is referred to HHS's Office of Inspector General or to other
    law enforcement agencies for investigation or prosecution.

    15One PSC currently conducts medical reviews and benefit integrity
    activities for the claims processed by the remaining DME regional carrier.

    16PSCs currently conduct medical reviews of claims processed by 2 fiscal
    intermediaries and 2 carriers. The remaining 23 fiscal intermediaries and
    16 carriers conduct their own medical reviews of the claims they process.

    reform, some aspects of CMS's implementation approach, and the integration
    of reform activities with other initiatives. CMS has recently taken steps
    to address areas of the plan where details and complete information were
    lacking, as part of its ongoing planning efforts. However, key decisions
    relating to critical areas are yet to be made and incorporated into its
    plan.

    Figure 1: Areas of Detailed Information in CMS's Contracting Reform Plan

               Source: GAO analysis of CMS's plan for contracting reform.

    CMS's Plan Provides CMS's plan provides a clear discussion of the reasons
    for implementing Useful Information about contracting reform, including
    the restrictions and weaknesses in the Some Aspects of current system, as
    shown in table 1. The plan also recognizes the benefits

    of improving Medicare contracting for beneficiaries and providers, such
    asImplementation providing a single point of contact for providers'
    claims-related inquiries.

    Table 1: CMS's Analysis of Restrictions or Weaknesses in Medicare Claims
    Administration Contracting and Their Associated Effects

    Restriction or weakness in current system Effects of current restriction
    or weakness

    Lack of full and open competition 	CMS lacks the flexibility to choose
    qualified organizations to process Medicare claims through full and open
    competition. Provider institutions, such as hospitals, nominate fiscal
    intermediaries to process Part A claims, which limits CMS's ability to
    manage the program effectively. The Secretary of HHS is required, by law,
    to choose Part B carriers from health insurers or similar companies and
    did not have to compete these contracts.

    Separate processing of Part A and Part B Part A and Part B claims are
    generally processed by separate claims administration claims contractors
    and claims processing systems. For example, a beneficiary with a hospital
    stay followed by home health care will have hospital and some home health
    claims paid by a fiscal intermediary, while other home health and
    physician claims will be paid by a carrier. This division of
    responsibilities for claims payment sometimes makes it difficult for
    beneficiaries and providers to have their questions answered quickly.
    Providers also face increased expenses due to separate processing and are
    limited in their ability to understand and coordinate services on behalf
    of their patients.

    Specialization restrictions 	CMS is limited in its ability to award
    separate contracts for individual claims administration activities in
    which certain companies may excel, such as operating data centers or
    educating providers about program rules.

    Absence of performance-based incentives 	Contractors work under cost-based
    reimbursement contracts through which they are reimbursed for the
    necessary and proper costs of carrying out Medicare activities, but do not
    have financial incentives to improve their performance.

    Cumbersome termination procedures 	Contractors are allowed to terminate
    their contracts without cause, simply by providing 180 days notice. CMS,
    on the other hand, has to demonstrate that a poorly performing or
    unresponsive contractor has failed substantially to carry out its
    contract, or that continuation of the contract is disadvantageous or
    inconsistent with the effective administration of Medicare before it is
    able to terminate a contract. CMS is also required to provide the
    contractor an opportunity for a hearing before termination.

    Outdated information technology (IT)	Medicare's IT infrastructure is
    inadequate for the program's expanding needs and does not take advantage
    of current technologies (e.g., use of the Internet to submit and track
    claims) that would improve customer service and result in additional cost
    savings.

                   Source: GAO analysis of CMS's Report to Congress.

    The plan also provides maps of the current jurisdictions of Medicare
    contractors and future jurisdictions of MACs. A CMS official told us that
    the agency took beneficiaries' patterns of care into account when drawing
    jurisdictional lines. In addition, according to the plan, CMS designed the
    new MAC jurisdictions, which were based on state boundaries, to achieve
    operational efficiencies, promote competition, and better balance the
    allocation of workloads. For example, there are one fiscal intermediary
    and three carriers currently serving New York, as well as two fiscal
    intermediaries and one carrier serving Connecticut. Under contracting
    reform, one A/B MAC will administer Part A and Part B claims for
    beneficiaries residing in these two states.

    Currently, different claims administration contractors handle Part A and
    Part B claims in the majority of states.17 For example, in Michigan,
    United Government Services processes Part A claims, and Wisconsin
    Physicians Service Insurance Company processes Part B claims. In addition,
    while some current contractors serve one state, others serve several-
    sometimes noncontiguous-states. For example, Blue Cross Blue Shield of
    Arizona processes Part A claims exclusively in Arizona, while National
    Heritage Insurance Company processes Part B claims on the East Coast in
    Maine, New Hampshire, Vermont, and Massachusetts and, on the West Coast,
    in California. The varying jurisdictions for contractors that process Part
    A and Part B claims have resulted in what CMS's plan terms "a patchwork of
    responsibility and service."18 CMS has developed 15 distinct,
    nonoverlapping geographic jurisdictions for the A/B MACs.19 Appendixes
    VII, VIII, IX, X, XI, and XII show the jurisdictional maps for the current
    fiscal intermediaries, the current carriers, the current regional home
    health intermediaries, the current DME regional carriers, the 15 new A/B
    MACs, and the 4 new DME MACs and 4 new HH MACs. A CMS official stated that
    while the A/B MACs' jurisdictions continue to vary somewhat in size and
    workload, they are reasonably balanced in terms of the numbers of
    fee-for-service beneficiaries and providers served.20 However,

    17As of October 1, 2004, different contractors processed Part A and Part B
    claims in 39 states and the District of Columbia, and the same contractor
    processed both Part A and Part B claims in 11 states.

    18Department of Health and Human Services, ReporttoCongress, I-2.

    19CMS aligned the jurisdictions so that the 15 A/B MAC jurisdictions fit
    within the boundaries of the 4 DME MACs and the 4 HH MACs. Jurisdictions
    are identical for the DME MACs and the HH MACs.

    20According to CMS, the new MAC jurisdictions will include from 1.1
    million to 3.4 million beneficiaries and from 21,000 to 76,000 physicians.

    CMS officials have stated that companies might be able to win more than
    one MAC contract, and, if so, their workloads in multiple jurisdictions
    would potentially be greater than those of companies that win contracts
    for a single jurisdiction.

    In addition to providing information on MACs' jurisdictions, CMS's plan
    provides timelines for implementing MAC contracting, including anticipated
    contract award dates for the start-up cycle and two subsequent cycles. CMS
    plans to monitor each cycle, including transitions, and to adjust the
    implementation schedule if necessary. The start-up cycle, which will
    result in the award of four contracts to DME MACs and one contract to an
    A/B MAC, should provide CMS with experience that can be applied to the
    next two cycles. For example, the start-up cycle will allow new CMS
    personnel to obtain additional expertise, if needed, on contracting
    activities. It will also allow CMS to examine its acquisition and
    transition efforts and apply lessons learned to future cycles.

    Recognizing that open communication with stakeholders is important to the
    successful implementation of contracting reform, CMS's plan incorporates a
    written strategy to provide information and solicit questions, comments,
    and feedback on Medicare contracting reform from potential MACs,
    providers, and beneficiaries. This communication strategy includes
    periodically holding open meetings and establishing a Medicare contracting
    reform Web site.21 For example, CMS hosted a series of open meetings in
    2004 and 2005 to share information and seek input on aspects of its
    contracting reform plan, including MAC jurisdictions, draft statements of
    work,22 and proposed performance standards.23 In addition, CMS's Web site
    is routinely updated to provide answers to questions about contracting
    reform and provide access to important documents, such as its Report to
    Congress. The Web site also provides a link to a federal procurement Web
    site,24 where draft and final versions of MAC statements of work can be
    found. Interested parties, including organizations

    21The Web site's address is
    www.cms.hhs.gov/medicarereform/contractingreform/. It was established on
    March 15, 2004.

    22A statement of work is the portion of a contract that describes the
    actual work to be done by the contractor by means of specifications,
    performance dates, and quality requirements.

    23The MMA required that CMS consult with providers, beneficiary
    organizations, and others on the development of performance requirements
    and standards for MACs.

    24The Web site's address is http://www.fedbizopps.gov/. It provides
    information on federal government procurement opportunities over $25,000.

    interested in competing for MAC contracts, provided feedback on these
    drafts through CMS's open meetings and its Web site. In developing certain
    areas of the contracting reform plan, CMS also sought input from its
    headquarters and regional office staff. For example, CMS teams worked
    collaboratively to develop the draft statements of work for A/B MACs and
    DME MACs.

        CMS's Contracting Reform Plan Does Not Fully Address Three Critical
        Implementation Areas

    Plan Does Not Fully Address Implementation Risks

    While CMS's contracting reform plan provides detailed information in some
    areas, it does not comprehensively address (1) contracting reform risks
    and how the agency plans to mitigate them; (2) the intended approach for
    implementing certain aspects of MAC contracting, including details on how
    CMS will monitor MACs' performance; and (3) coordination of contracting
    reform activities with other complex initiatives that CMS is implementing.
    While a comprehensive contracting reform plan was due in October 2004, we
    found that the plan was still incomplete as of June 2005. The agency has
    begun to develop, but has not completed, a more detailed plan in critical
    implementation areas. Nevertheless, without having all of the critical
    elements of its plan in place, the agency is undertaking an accelerated
    schedule and intends to transfer all claims processing work to MACs by
    July 2009, more than 2 years ahead of the MMA's time frame.

    CMS's plan does not comprehensively address three major risks and indicate
    the steps that the agency plans to take to mitigate them. These are CMS's
    proposed implementation schedule, the volume and complexity of anticipated
    claims processing workload transitions, and the potential for voluntary
    contractor withdrawals. Each of these risks has the potential to disrupt
    claims administration services, resulting in delayed or improper payments
    to providers.

    The Report toCongress-one of the documents in CMS's contracting reform
    plan-briefly noted that the anticipated implementation schedule "will
    require substantial risk management and schedule precision to minimize
    possible operational disruption."25 CMS's proposed implementation schedule
    calls for all work to be transferred to MACs by July 2009-more than 2
    years ahead of the MMA's time frame. The initial

    25Department of Health and Human Services, ReporttoCongress, III-3.

    start-up acquisition cycle26 is taking place in a 27-month period-from
    April 2005 to July 2007-during which about 9 percent of the national
    claims possessing workload will be transferred to MACs. If CMS chooses
    current contractors that are administering claims in the MAC
    jurisdictions, the percentage of the workload transferred would be less.
    In the first phase of the start-up cycle, CMS will select and transfer
    workload to 4 DME MACs. In the second phase, CMS will select and transfer
    workload to 1 A/B MAC. Following the initial start-up cycle, CMS is
    planning two acquisition cycles, which will last from September 2006 to
    July 2009, during which it will select and transfer the remaining current
    contactors' work to 14 A/B MACs and 4 HH MACs. As part of these two
    cycles, in the 22 months from September 2007 to July 2009, CMS plans to
    manage transitions of as much as 91 percent of the annual Medicare claims
    processing workload, which represent an estimated $250 billion in payments
    to providers.27 The transition period for cycle one is 1 year, from
    September 2007 to September 2008, and the transition period for cycle two
    is 10 months, from September 2008 to July 2009. In 13 of the past 15
    years, CMS has transferred at least one contractor's workload. These
    transitions took an average of 6 to 9 months, with some lasting as long as
    a year.

    CMS decided on a more compressed schedule after initially considering a
    longer implementation period. In November 2004, CMS officials told us that
    they were planning to move to MAC contracting using six acquisition cycles
    to be completed around April 2011. According to the Report to Congress,
    CMS officials believed that the potential savings from contracting reform
    suggested that transferring larger portions of the workload to MACs in a
    shorter time frame would allow savings to accrue more quickly to the
    Medicare program.

    Despite the ambitious time frame for implementation, CMS's plan does not
    provide detailed information on the risks involved in transferring large
    segments of Medicare's claims processing workload on an accelerated

    26Each acquisition cycle begins with the issuance of the request for
    proposals, which announces CMS's intent to award a contract. The cycle
    also includes a transition period, which begins with the award of the
    contract and ends when all work has been transferred to the MAC from the
    prior claims administration contractor.

    27The first acquisition cycle will affect about 44 percent of the claims
    processing workload and the second acquisition cycle will affect about 47
    percent. However, a smaller percentage of the claims workload may need to
    be transferred, since some of the current contractors may become MACs for
    jurisdictions that include part of their current service areas.

    schedule or outline contingency plans for the transitions to MACs. CMS's
    accelerated schedule for cycles one and two leaves little time for CMS to
    examine its acquisition and transition efforts, apply lessons learned, and
    resolve disagreements about the agency's award process with companies that
    were not selected. Furthermore, due to the accelerated cycle, interested
    companies-some of which may be among the best qualified to perform as
    MACs-may decide not to compete to win multiple MAC contracts because
    developing concurrent proposals or assuming the workload for more than one
    jurisdiction simultaneously might strain their resources. In addition, it
    may prove difficult for CMS staff to evaluate proposals, award contracts,
    and manage concurrent transitions within the proposed time frame.

    CMS's plan does not provide details on its strategy for managing these
    compressed transitions with its anticipated staff resources. CMS officials
    expressed concerns to us that many of the staff most experienced in
    handling transitions were, or were close to being, eligible to retire and
    that CMS might have to manage these transitions with less experienced
    staff. In addition, CMS staff have never had to manage as many
    simultaneous transitions, which is likely to add to the challenge of
    managing them so that they are as smooth as possible for providers. As we
    reported previously, the lack of sufficient staff resources has hampered
    other transitions.28

    The volume and complexity of claims workload transitions is a second risk
    that CMS's plan does not adequately address. Although CMS has regularly
    managed the transitions of claims administration contractors' workloads
    and functions and has much experience in doing so, recent transitions have
    affected only about 10 percent of the claims for Part A and Part B in any
    year. Nevertheless, CMS is planning to transfer 91 percent of current
    contractors' workload to MACs in less than 2 years. Furthermore, the MAC
    transitions will be more complex than past contractor transitions because
    both Part A and Part B workloads will be transferred from multiple
    contractors to a single MAC in a new jurisdiction. These changes mean, for
    example, that under the initial A/B MAC contract that is awarded-one that
    involves less than 3 percent of the national workload in a six-state

    28For example, lack of staff resources dedicated to transition efforts
    contributed to a slow implementation of updated telecommunications
    services to federal agencies, which led to increased costs and
    difficulties in holding service contractors accountable for their
    performance. See GAO, FTS2001: ContractTransition Delays and Their Impact
    on Program Goals, GAO-01-544T (Washington, D.C.: Apr. 26, 2001).

    jurisdiction-CMS will simultaneously transfer as many as nine separate
    segments of current contractors' workload to the new MAC.29 Figure 2
    illustrates the transitions that will occur to consolidate the Part A and
    Part B workload in the first contract to be awarded for an A/B MAC
    jurisdiction. These transitions will also involve transferring some
    portions of the work currently being done by the carriers and fiscal
    intermediaries to functional contractors. For example, CMS will be
    transferring medical review and benefit integrity work from DME regional
    carriers to PSCs at the same time that the claims workload transfers to
    DME MACs. While the start-up cycle transitions are complex, they are
    planned to affect only 1 A/B MAC and the 4 DME MACs. CMS will be
    conducting a much greater number of transitions for cycles one and two, as
    the rest of claims administration work is transferred from current
    contractors to 14 A/B MACs and 4 HH MACs.

    29Subsequent transitions in the next two cycles will transfer workload to
    the new MACs from two to as many as seven current fiscal intermediaries
    and carriers. Furthermore, transitions may involve transferring some work
    to functional contractors, such as the contractor that will be responsible
    for handling beneficiary inquiries.

    Figure 2: Part A and Part B Transitions That Will Occur in One MAC
    Jurisdiction

    Source: GAO.

    Additional factors may add to the complexity of the transitions. For
    example, if current fiscal intermediaries and carriers choose not to
    compete or lose competitions for MAC contracts in the jurisdictions where
    they currently process claims, they may have little incentive to be highly
    cooperative in the transition activities. In these cases, their
    knowledgeable staff who would facilitate transitions may seek employment
    elsewhere. Further, MAC transitions may involve the transfer of workloads
    to companies new to Medicare operations, which would add complexity to the
    process.

    Another risk that CMS's plan has not fully addressed is the potential
    impact that voluntary contractor withdrawals may have on the planned
    transition schedule. CMS has not developed mitigation strategies to deal
    with these potential withdrawals. Several CMS officials told us that they
    were concerned that some contractors might voluntarily withdraw before the
    agency's planned competition for jurisdictions that included their

    current service areas because the contractors did not intend to compete as
    MACs. In addition, contractors that lose competitions may opt to leave the
    Medicare program before transitions to new MACs have been completed. CMS
    has the option of paying contractors' staff retention bonuses, so that key
    contractor staff can work through transitions, but that may not be enough
    to convince contractors to stay in the program. Voluntary withdrawals
    could force CMS to conduct competitions and manage transitions for the
    affected jurisdictions on a different or more accelerated schedule than
    originally planned. CMS could elect to choose a Medicare claims
    administration contractor to briefly perform the withdrawing contractor's
    work until a MAC is chosen for the affected jurisdiction, but this could
    be perceived as limiting competition by favoring one company over others.

    The ultimate risk from transitions that do not proceed smoothly or on
    schedule is that providers might not receive payment for the items or
    services they furnished to beneficiaries or could be paid inappropriately.
    Interrupting providers' cash flow by failing to pay them can create
    significant problems in their operations. On the other hand, any increase
    in improper payments would create a further drain on the Medicare trust
    funds. In fiscal year 2004, CMS estimated that Medicare claims
    administration contractors' net improper payments amounted to $19.9
    billion.

    CMS has not completed a comprehensive risk mitigation plan to address the
    risks associated with contracting reform, but the agency has taken some
    initial steps to manage the risks. CMS has developed a procedure for
    identifying, analyzing, responding to, and monitoring and controlling
    risks. As part of this procedure, CMS has identified certain risks that
    may have an impact on implementation, including the availability of
    resources to complete scheduled procurement tasks and the difficulty of
    developing a clear, complete statement of work that minimizes the need for
    future contract modifications. The agency is currently working on
    developing a document that lists proposed actions that could mitigate
    these and other identified risks. However, CMS's descriptions of proposed
    mitigation actions lack specificity. For example, to address the risk that
    CMS may not have the funding to conduct transition activities as
    scheduled, the proposed mitigation action is to "monitor federal
    appropriations," but the document does not indicate how the agency might
    redeploy resources or restructure its transitions, should a funding gap
    occur. Further, CMS has not developed mitigation actions for some serious
    risks, including the failure to create internal processes for managing
    MACs. Without such

    Plan Lacks Detailed Information on MAC Contracting Strategy and Management
    and Oversight Approach

    internal processes, CMS may not be able to effectively administer MAC
    contracts.

    Although CMS has done extensive work toward developing a strategy that
    outlines how it intends to implement MAC contracting, the agency's plan
    lacks important implementation information in some areas. For example, CMS
    has made final decisions concerning certain elements of the MAC
    contracting strategy, such as paying performance incentives to encourage
    contractor innovation, efficiency, and cost effectiveness. However, for
    A/B MACs, the plan does not provide complete and definitive information on
    the contract type, performance measures and incentive structure, proposal
    evaluation criteria, and methods for maintaining a competitive environment
    and conducting market research to gather information on the number and
    size of companies that may submit proposals. CMS's MAC acquisition
    strategy, which will provide information on these areas, is not yet
    complete. The agency planned to finalize this strategy in July 2005 and to
    issue the A/B MAC request for proposals in September 2005.30 Knowing such
    critical contracting information well in advance of the issuance of the
    request for proposals would make it easier for interested parties to
    develop specific plans for competing to win A/B MAC contracts. Having a
    robust pool of potential contractors with good proposals would make it
    easier for CMS to choose applicants likely to be effective as MACs.

    CMS's contracting reform plan states that some MAC functions will be
    integrated with those of other types of Medicare contractors, but the
    agency has not fully developed the details of this integration. For
    example, the plan states that CMS expects that PSCs will continue to
    perform activities such as medical reviews and fraud investigations in the
    future and will coordinate closely with MACs. In addition, the statements
    of work for DME MACs and A/B MACs require that they sign agreements with
    PSCs to define respective roles and responsibilities. Among their
    responsibilities, DME MACs and A/B MACs will be expected to coordinate
    with PSCs in referring potential fraud cases when, for example, MACs
    identify claim forms that have been altered to obtain a higher payment or
    when it appears that a supplier or provider may have attempted to obtain
    duplicate payments. MACs' coordination with PSCs is critical because
    findings of fraud could affect payments to providers. Coordination with

    30The request for proposals announces CMS's intent to award a contract and
    specifies the service or product to be delivered, the criteria to be used,
    applicant qualifications, deadline, and other relevant information.

    PSCs is also discussed in "concept of operations" documents for DME MACs
    and A/B MACs. These documents provide high-level information on how MACs
    will be expected to work with PSCs and other contractors that focus on
    particular Medicare program functions, such as claims appeals. However,
    CMS has yet to develop many details, including information on the specific
    steps that will be used to facilitate contractor coordination.

    In addition, CMS's plan does not fully outline how the agency intends to
    evaluate and manage MACs. CMS's plan incorporates a strategy paper on
    evaluating MACs' performance, which was developed for the agency by a
    support services contractor. The strategy paper makes a number of
    recommendations, including establishing a specific office within CMS to
    gather, validate, and score contractor performance data and to share this
    information with agency management. CMS officials are currently
    considering these and other recommendations that were contained in the
    strategy paper. However, as of June 2005, they had not decided whether to
    implement any of these recommendations and had not completed their design
    of an approach for overseeing and evaluating MAC performance. Contractor
    oversight is an area of considerable concern, because, in the past, CMS's
    failure to monitor Medicare claims administration contractors left the
    Medicare program vulnerable to fraud, waste, and abuse.31 For example, CMS
    did not always detect activities, such as the falsification of reports on
    contractor performance and the improper screening, processing, and paying
    of claims, that led to additional costs to the Medicare program.

    In developing the MAC oversight strategy paper, CMS's contractor drew on
    the work of a cross-component work group within CMS that was established
    in April 2003.32 The work group reported in June 2004 that CMS lacked an
    integrated and coordinated framework to guide a wide range of evaluation
    activities and that the agency had difficulty in compiling a

    31GAO, Medicare:HCFAOversight AllowsContractorImproprietiesto Continue
    Undetected,GAO/T-HEHS/OSI-99-174 (Washington, D.C.: Sept. 9, 1999);
    Medicare: HCFA Should Exercise Greater Oversight
    ofClaimsAdministrationContractors, GAO/T-HEHS/OSI-99-167 (Washington,
    D.C.: July 14, 1999); Medicare: Improprietiesby Contractors Compromised
    Medicare ProgramIntegrity, GAO/OSI-99-7 (Washington, D.C.: July 14, 1999);
    and MedicareContractors:Despite itsEfforts,HCFACannot EnsureTheir
    Effectiveness or Integrity, GAO/HEHS-99-115 (Washington, D.C.: July 14,
    1999).

    32CMS's Medicare fee-for-service contractor evaluation work group was
    established to compile an inventory of all internal and external
    contractor assessments and to research alternative frameworks to integrate
    contractor evaluation, reporting, and follow-up activities.

    comprehensive view of individual contractor performance.33 The work group
    also noted that complete and accurate information on contractor
    performance will be imperative as contracts for MACs are periodically
    recompeted and determinations about their records of performance become
    part of the qualification criteria. This information could also be
    critical in determining the amounts CMS pays to MACs as performance
    incentives.

    The plan also lacks detailed information on organizational changes to
    better realign agency personnel to support the management and oversight of
    new MAC contracts because CMS has not made final decisions in this area.
    While CMS currently administers some types of contracts that are governed
    by the FAR,34 MAC contracts generally will be larger, more complex, and
    more challenging to administer. CMS's past oversight of claims
    administration contractors was hindered by organizational weaknesses,35
    and at present, multiple central office components and regional offices
    have responsibilities to help oversee and manage claims administration
    contractors.36 Having an organizational structure that is appropriately
    aligned for CMS to manage and oversee MACs will make it easier for the
    agency to routinely evaluate its contractors on the basis of a

    33We found similar problems in 1999. We reported that CMS's headquarters
    office had not set contractor oversight priorities, leaving such decisions
    almost entirely to regional office reviewers. This led to inconsistent
    contractor evaluations by regional reviewers, which made it more difficult
    for CMS to determine which contractors were performing effectively. See
    GAO/HEHS-99-115.

    34CMS's contracts that are governed by the FAR include those with quality
    improvement organizations and PSCs and for Medicare systems maintenance
    and data centers.

    35We reported in 2000 that while responsibility for overseeing contractor
    performance was dispersed among central office components and the agency's
    10 regional offices, lines of accountability had not been clearly
    established. The regional office staff who were responsible for overseeing
    contractors were not directly accountable to the central office group
    responsible for contractor oversight activities. GAO, Medicare
    Contractors: Further ImprovementNeeded in HeadquartersandRegional
    OfficeOversight, GAO/HEHS-00-46 (Washington, D.C.: Mar. 23, 2000). CMS
    took steps to address this issue. While the agency was reviewing a draft
    version of our report, it announced that it was making organizational
    changes to improve regional accountability.

    36For example, while the Center for Medicare Management's Medicare
    Contractor Management Group has overall responsibility for managing claims
    administration contractors, the Office of Financial Management has
    significant responsibilities for the contractors' financial and program
    integrity activities, and the Office of Information Systems is responsible
    for oversight and security of the information systems used to pay claims.
    In addition, regional staff are currently responsible for monitoring the
    claims administration contractors' activities and helping to evaluate
    their performance.

    Plan Does Not Fully Integrate Scheduling of Contracting Reform Activities
    with Other Initiatives

    variety of newly established performance measures. CMS has reorganized the
    central office component that will be responsible for awarding MAC
    contracts and has been considering ways to use regional offices' staff
    expertise to support MAC contracting efforts. However, CMS has not
    completed its plan for organizational changes, including the division of
    labor and responsibilities for management and oversight of Medicare
    contractors among CMS components and between the central and regional
    offices.

    CMS has not developed an approach that fully integrates the planning and
    scheduling of Medicare contracting reform with other initiatives that will
    affect Medicare contractors, beneficiaries, and providers over the next
    several years. As CMS works toward implementing contracting reform, it is
    also focusing on several critical initiatives that must be integrated, or
    implemented concurrently, with Medicare contracting reform. These include
    the Medicare prescription drug benefit and the expansion of the existing
    options available to Medicare beneficiaries who enroll in private health
    plans. According to CMS officials, these initiatives may compete with
    contracting reform for agency resources. Other key planned initiatives,
    such as major systems upgrades or replacement, will directly affect
    Medicare claims administration operations and are anticipated to be fully
    or partially implemented between now and 2009 in conjunction with
    contracting reform. Information on these interrelated initiatives is
    provided in table 2. As we have previously reported, planning for IT
    system transitions has often been problematic in federal agencies.37
    Coordinating the schedule for implementing these initiatives in
    conjunction with Medicare contracting reform is crucial to ensuring that
    claims administration operates smoothly during the transition to MACs.

    37GAO, BusinessSystemsModernization: Internal RevenueService
    NeedstoFurther StrengthenProgram Management,GAO-04-438T (Washington, D.C.:
    Feb. 12, 2004), and InformationTechnology:DOD'sAcquisition Policiesand
    GuidanceNeed toIncorporate Additional BestPractices andControls,GAO-04-722
    (Washington, D.C.: July 30, 2004).

    Table 2: Key Initiatives Affecting MAC Implementation Implementation
    schedule and integration issues related to MAC implementationInitiative
    Description

    Standard front end This initiative will standardize the way

    Implementation of this initiative will occur within the DME MACs and that
                electronic claims enter the automated processing system.

    the A/B MACs at the same time they are implemented. Changing claims
    administration contractors can require providers and billing agents to
    adapt to a new front end, which is why standardizing the front end as part
    of MAC implementation could minimize future disruption for providers and
    billers.

    Data center CMS plans to consolidate its current

    consolidation 	14 operational data centers that conduct claims processing
    functions into 2 data centers.

    CMS had initially planned to begin consolidating the data centers in
    fiscal year 2006 to overlap with MAC implementation, but in May 2005, the
    agency postponed the initiative for about 2 months, due to the extent of
    public comments received on the draft request for proposals for data
    center contracts. Future consolidation of data centers will affect MACs
    because they are required to work with their respective data centers to
    maintain electronic information. As a result, delays or difficulties in
    transferring workload to the chosen data centers could increase the risks
    of claims payment problems during MAC transitions.

    BCCs CMS plans to establish two to three BCC implementation overlaps with
    MAC implementation. CMS plans BCC contracts, which will be to award the
    first BCC contract in the summer of 2006 and transfer responsible for
    handling beneficiaries' the workload in the summer of 2007. The second BCC
    contract will telephone and written inquiries. be awarded in fall 2007,
    and the workload will be transferred in 2008. While BCCs will assist
    beneficiaries by answering claimsrelated inquires, they will need to
    coordinate with MACs because MACs will be responsible for answering more
    complex questions.

    Healthcare Integrated HIGLAS is a major CMS initiative to HIGLAS
    implementation overlaps with MAC implementation. General Ledger modernize
    Medicare's accounting and HIGLAS is expected to be fully operational in
    2007. In the future, all Accounting System financial management systems.
    CMS's MACs will be required to use HIGLAS. However, several current
    (HIGLAS) current accounting systems are contractors have begun to use
    HIGLAS, and other fiscal

    fragmented and overlapping and will intermediaries and carriers will have
    begun to use HIGLAS before be replaced with HIGLAS-a single, MAC
    competitions get under way. For jurisdictions where transitions integrated
    financial accounting system. to HIGLAS are not complete, CMS will need to
    coordinate its

    scheduling of MAC and HIGLAS implementation because CMS wants all MACs to
    use HIGLAS as their financial accounting system.

    PSCs          PSCs focus on program PSC transitions overlap with MAC
                                 safeguard implementation. The medical
            activities, such as the review review and benefit integrity work will
                          of                      transfer from three DME
            provider activities, including regions to PSCs simultaneously with
                                  medical, the transition to DME MACs.
                utilization, and fraud         The work conducted under three PSC
                    reviews; cost                    medical review contracts for
                   report audits; Medicare    A/B claims will transfer to the A/B
                                 secondary     MACs in the affected jurisdictions
                 payer determinations; and     at the same time that the A/B MACs
                                  provider         assume their other contractual
              and beneficiary education.             responsibilities.

    Recovery Audit   This initiative is a      The implementation of this
                           demonstration         initiative overlaps with MAC
         Contractor    initiative required by implementation. This demonstration
         initiative         the MMA. It       will run through mid-2008 and
                       includes two Medicare  will affect California, New York,
                       secondary              and Florida. MACs will not perform
                       payer recovery audit   any postpay medical reviews for
                       contractors and        prior fiscal years for claims paid
                                              to
                       three claims review    providers in these states, but must
                       recovery audit         coordinate with the contractors
                            contractors.       tasked with this assignment. MACs
                                                  processing claims for these
                                                  three states must also complete
                                              some additional administrative work
                                                  related to debt collection.

    Source: GAO analysis of CMS documents.

    HIGLAS, in particular, provides an example of why effective integration is
    essential. Most outgoing contractors will not be utilizing HIGLAS at the
    time their workloads are transferred to MACs. Therefore, CMS will have to
    coordinate HIGLAS transition activities, including data preparation and
    data conversion testing, between the MACs that will be using HIGLAS and
    the outgoing contractors that have been using the existing financial
    management systems. Given that the HIGLAS implementation strategy calls
    for "just in time" data conversion to HIGLAS format by outgoing
    contractors at the time the work is transferred to the MACs, problems or
    delays in this conversion could delay MAC transitions. Therefore, the
    scheduling for HIGLAS will have to be carefully managed to allow
    sufficient time for the data conversion.

    Although CMS has begun initial efforts to integrate the planning and
    scheduling of several major initiatives that will affect contractors, an
    agency official told us that there are no planning documents to provide a
    detailed integration framework and that he did not know when such
    documents would be available.38 He said that CMS is attempting to
    determine the appropriate sequencing and interdependencies of the multiple
    initiatives occurring in the agency. To focus its sequencing efforts, CMS
    has designated the contracting reform implementation schedule as the
    anchor around which it will schedule the implementation of HIGLAS and
    other critical initiatives. For example, since CMS plans call for MACs
    moving to HIGLAS either before or with MAC claims workload transitions,
    the MAC implementation plan will be pivotal in determining when the HIGLAS
    transitions will be accomplished. CMS is also examining each project's
    resource requirements to help ensure that the agency is able to fund the
    initiatives in the sequence planned.

    Delays in the implementation of MAC-related initiatives could potentially
    have a significant impact on the timing, scope of work, costs, and
    ultimate success of MAC implementation. For example, CMS has already begun
    to experience schedule slippage for its initiative to consolidate the
    contractors' data centers. These data centers, which are provided by
    current carriers and fiscal intermediaries, conduct the physical
    processing of Medicare claims and as a result, play a crucial role in
    efficient and accurate claims administration. The agency had intended to
    award

    38The official told us that the agency's integration planning efforts had
    been delayed until the agency's Reportto Congresswas issued in February
    2005, in part because of the concern that procurement-sensitive
    information might be prematurely made public.

    contracts for four data centers that would consolidate the work of 14
    current centers before awarding the DME MAC contracts, which are
    anticipated to be awarded in December 2005. However, it suspended the
    request for proposals on May 3, 2005, because it was unable to consider
    the large number of comments that were received on its draft request. It
    reissued its solicitation on June 27, 2005, for two, instead of four, data
    centers. Delays or other problems in implementing the consolidation of its
    data centers could affect the efficiency and effectiveness of MACs' claims
    processing transitions. CMS's Report toCongressstated that having the new
    data centers would be critical to achieving the greatest efficiency from
    the MAC transitions, in part because some of the information services and
    support to be provided by MACs would depend on the modernized platform.39
    Currently, CMS expects that one of the new DME MACs will be managing a
    data center for all of the DME MACs as a stopgap measure and plans to
    award the contract for the two data centers in February 2006.
    Implementation of the data centers is planned to coincide with
    implementation of the first A/B MAC selected.

    The data center consolidation effort faces some of the same complexities
    that might occur during the transition of the claims processing contracts.
    If claims administration contractors operating data centers opt to leave
    the program before the conclusion of their contracts, CMS will have to
    find other data center contractors to temporarily take over that workload.
    Furthermore, because the data center consolidation is planned to occur
    during the MAC transition period, the two data center contractors will
    have to support claims administration contractors moving in or out of the
    program, while also integrating some of the prior data center contract
    work into their new data center responsibilities. CMS generally envisioned
    multiple data center transitions overlapping, but the schedule for data
    center consolidation is uncertain. CMS has not indicated how it intends to
    handle the risks associated with moving data center work at the same time
    claims processing workload is being transferred to MACs.

    39Department of Health and Human Services, ReporttoCongress, III-7 and
    III-8.

      Plan's Cost and Savings Estimates Do Not Provide a Reasonable Basis for
      Decision Making

    CMS's plan includes estimated costs and savings for Medicare as a result
    of contracting reform, but the estimates are too uncertain to provide a
    reasonable basis for making implementation decisions. Because CMS has
    never undertaken an effort comparable to full-scale contracting reform,
    the plan's cost and savings projections were based on questionable
    evidence and assumptions about a contracting environment that differs
    considerably from its current one. As a result, the costs to implement
    contracting reform and the savings generated from it could be
    significantly greater or less than CMS has anticipated.

        Cost Estimates Depend on Uncertain Outcomes

    In its plan, CMS estimated that the costs to implement contracting reform
    from 2006 to 2011 would total about $666 million.40 The plan's cost
    estimate is higher than indicated in the Report toCongress, which included
    only the fiscal year 2006 budget request of $58.8 million to support a
    single year of contracting reform implementation costs. CMS opted not to
    include its estimates for funds that would likely be requested in its
    budgets for fiscal years 2007 through 2011. The Report toCongress
    indicated that contracting reform would require "substantial additional
    investment in subsequent years."41 The costs CMS anticipates incurring
    each year are shown in figure 3.

    40To be able to negotiate yearly costs with the MACs prior to the
    beginning of the contract period, CMS plans to request adjustments to its
    budget authority to change the period of performance for MACs to coincide
    with the calendar year, instead of the current fiscal year basis. Changing
    the period of performance will not increase or decrease overall or net
    administrative outlays and is not included in the administrative cost
    estimate.

    41Department of Health and Human Services, ReporttoCongress, IV-3.

    Figure 3: Estimated Costs of Medicare Contracting Reform, Fiscal Years
    2006-2011, as of February 2005

    Dollars in millions

    250

    $213.3

    200

    150

    100

    50

    0 2006 2007 2008 2009 2010 2011 Fiscal year

    Source: GAO analysis of CMS cost estimates.

    Note: The costs for each year are adjusted for inflation, using 2004 as
    the base year.

    The estimated $666 million in costs is divided into four categories, as
    noted in table 3.42 The largest cost component is for the termination and
    transition of the current Medicare contractors, which CMS has estimated at
    $331.5 million. When a Medicare contract is terminated, contractors can
    have costs for items such as lease termination, equipment depreciation,
    and severance pay for contractors' employees. The current Medicare
    contracts may require CMS to pay many of these termination costs when
    contractors leave the Medicare program. Similarly, when a Medicare
    contract workload is transferred from an outgoing contractor to another
    one, transition costs are incurred. Such transition costs include expenses
    related to transferring Medicare records and updating records related to

    42The MMA mandates that contracting reform be completed before October 1,
    2011, the first day of fiscal year 2012. Although all of the transitions
    to MACs are planned to be completed by July 2009, some of the costs-such
    as IT enhancement and oversight-will be incurred through fiscal year 2011.

    Medicare benefit payments, including overpayments and other accounts
    receivable, so they are ready for the incoming contractor to use.

    Table 3: CMS's Estimates of Administrative Costs for Medicare Contracting
    Reform, Fiscal Years 2006-2011, as of February 2005

                                  Dollars in millions

                              Type of cost Estimated cost

                        Termination and transition costs $331.5

                              Performance incentives 190.6

                               IT and other costsa 132.5

                           Provider satisfaction surveys 11.7

                                      Total $666.3

    Source: GAO analysis of CMS cost estimates.

    aCMS informed us on July 29, 2005, that it had updated this cost estimate,
    but the updated estimate was not available to be included in this report.

    Although CMS's estimate for termination and transition costs is based on
    cost data from prior years, it is impossible to predict with certainty the
    termination or transition costs that will be incurred through implementing
    contracting reform. CMS's estimate for termination and transition costs is
    based on the agency's experience with both types of costs from 1995 to
    2001. The estimate assumes that current contractors will win the majority
    of the MAC contracts and retain about 60 percent of their current
    workload. However, CMS officials do not know how many of the existing
    contractors will win MAC contracts for particular jurisdictions, so this
    assumption is speculative. Additionally, some of CMS's prior contractor
    transitions were "turnkey" operations, in which an incoming contractor
    simply assumed the prior contractor's business arrangement and staff
    without needing to incur some of the usual start-up costs, such as
    equipment purchases. Likewise, in turnkey transitions, CMS did not have to
    cover severance pay, because the outgoing contractor's existing staff
    could be employed by the incoming contractor. As a result, the prior
    transitions may have cost less than the transitions that will occur during
    contracting reform because CMS is not requiring MACs to retain outgoing
    contractors' work sites or staff.

    Contracting reform will allow CMS to pay performance incentives that are
    designed to reward MACs with exceptional performance. However, it is
    impossible to know the amount of incentive fees contractors will earn in
    the full-scale MAC environment until the contracts are awarded and CMS has
    more experience with contractor performance. These performance

    incentives are projected to cost 5.5 percent of the total estimated costs
    of the MAC contracts, or $190.6 million for fiscal years 2006 through
    2011. CMS based this estimate on its prior experience in managing
    contractor incentive programs on a much smaller scale.

    Several IT modernization projects designed to support MACs by facilitating
    electronic claims processing are included in CMS's estimate of contracting
    reform costs.43 These IT project costs include CMS's planned consolidation
    of its current data centers. However, delays in the data consolidation
    initiative may affect the amount of these costs.44 The IT modernization
    costs also include plans to standardize the front end, or the way that
    electronic claims enter the DME MACs' automated processing systems. CMS
    did not include similar costs for A/B MACs, because the agency had not
    made a decision to standardize the A/B MAC front ends at the time these
    estimates were made.45 CMS's $132.5 million estimate for IT and other
    costs included $78.7 million in IT costs needed to support Medicare
    contracting reform, primarily the cost of data center consolidations.46

    The final type of costs CMS estimated was for surveys of providers to
    assess their opinions about MAC performance. The MMA required that MAC
    performance be assessed in part based on provider satisfaction. CMS plans
    to begin surveying providers to measure their satisfaction with their
    MAC's performance after MACs begin operating. The cost estimate for these
    surveys is $11.7 million and was based on an internal CMS analysis.

    43CMS is simultaneously implementing other IT-related initiatives, which
    are not considered to be part of contracting reform and are not included
    in the contracting reform costs.

    44CMS had planned to begin consolidating the data centers in fiscal year
    2006, so this cost is reflected in its estimated costs for contracting
    reform. However, in May 2005, the data center consolidation initiative was
    postponed for about 2 months. CMS anticipates awarding the data center
    contracts in February 2006, about 5 months later than originally planned.

    45CMS currently plans to consolidate the A/B MACs' front ends, to coincide
    with the beginning of the cycle one A/B MAC implementation. The agency is
    developing requirements for the A/B MAC standardized front end. It plans
    to award a contract in early fiscal 2007 and be ready to implement the
    standardized front end by the fall of 2007.

    46In its technical comments on a draft of this report, CMS stated that it
    has updated its IT cost estimate to reflect the adjustments to the data
    center consolidation initiative and to include the standard front end
    initiative. This updated estimate is somewhat higher than CMS's original
    estimate and was not available as of July 29, 2005. CMS plans to make its
    estimate final and public through the official budget process.

    A potential operational cost not part of CMS's implementation estimate is
    funding for MAC contract modifications. Under the current contract
    arrangements, CMS is able to develop new tasks for contractors to
    complete. The agency may pay more for these tasks to be completed,
    regardless of the initial requirements set for the year, or may direct the
    contractor to do the work within its existing budget, if CMS's review of
    the contractor's spending pattern indicates that new funding is not needed
    to complete the new tasks. In the MAC environment, unless they become part
    of the statement of work, CMS will not be able to add new tasks to the MAC
    contracts without negotiating payment for them. Because contractors will
    submit proposals based on the tasks described in the original statement of
    work, work required after the contract is awarded could require CMS to
    negotiate with MACs. This could be the case, for example, if new
    legislation requires CMS to implement a major program change that was not
    anticipated in the established MAC contract costs. For example, in 2001,
    we reported that the Department of Defense (DOD) was not including
    contract adjustments when budgeting for its contracts with the insurers
    delivering health care to DOD employees.47 We warned that this approach
    could become quite costly, because in fiscal year 2001, it led to a $500
    million shortfall in the DOD budget. When an agency is negotiating changes
    with an existing contractor, the competitive aspect of the negotiations is
    lost. As a result, the federal government may not always receive the best
    price. If CMS has to negotiate new tasks with the MACs for greater
    payment, contracting costs could rise above the agency's estimates. To
    address this concern, CMS has instructed companies interested in becoming
    DME MACs to assume a level of effort for a specific number of changes. As
    long as the extra work to implement program changes does not exceed the
    level of effort in the statement of work, the Medicare program would not
    incur additional operational expenses.

    Savings Estimates Depend Based on estimates generated both internally and
    by a consultant, CMS on Contractor expects that contracting reform will
    generate significant savings to Performance in Reducing Medicare's
    administrative budget and to the Medicare trust funds. While it

    is rational to assume some level of savings, these estimates are
    highlyImproper Payments uncertain because they project the outcome of
    contracting processes and protocols that CMS has not used before.
    Furthermore, the consultant's

    47GAO, DefenseHealth Care:Continued Management FocusKey toSettlingTRICARE
    Change OrdersQuickly, GAO-01-513 (Washington, D.C.: Apr. 30, 2001).

    estimates relied on questionable evidence and were not reviewed by CMS
    program staff with the expertise to confirm whether the assumptions upon
    which they are based are realistic.

    CMS's estimate of savings from 2006 to 2011 for the administrative budget
    totals $459.5 million, as shown in table 4. These savings are estimated to
    come from two sources. First, CMS anticipates that the competed MAC
    contracts will cost less than the current agreements and encourage more
    innovative efforts among contractors, which will allow them to operate at
    lower cost. CMS estimates that the introduction of competition will lower
    the contractor budget for awarded MAC contracts by 6 percent in the first
    year and 12 percent in each succeeding year. Second, CMS anticipates that
    the consolidation of its 14 Medicare data centers will lower operating
    costs.48 Both of the savings estimates shown in table 4 will be highly
    dependent upon contractor performance and the outcome of the competitive
    process. For instance, any savings CMS incurs from competing the MAC
    contracts will substantially depend on their final costs.

    Table 4: CMS's Estimates of Administrative Savings from Medicare
    Contracting Reform, Fiscal Years 2006-2011, as of February 2005

                                  Dollars in millions

                          Source of savings Estimated savings

                          Competition for MAC contracts $376.3

                      Consolidation of Medicare data centersa 83.2

                                      Total $459.5

    Source: GAO analysis of CMS savings estimates.

    aCMS informed us on July 29, 2005, that it had updated this savings
    estimate and it is now higher, but the updated estimate was not available
    to be included in this report.

    CMS's annual estimates of savings for the administrative budget increase
    significantly from fiscal year 2006 to fiscal year 2011. As shown in
    figure 4, these estimated savings would begin to outpace CMS's estimated

    48In its technical comments on a draft of this report, CMS stated that it
    has updated its IT savings estimate to reflect the adjustments to the data
    center consolidation initiative and to include the standard front end
    initiative. This updated estimate is somewhat higher than CMS's original
    estimate and was not available as of July 29, 2005. CMS plans to make its
    estimate final and public through the official budget process.

    administrative costs in 2009, and by 2011, they would exceed estimated
    costs by $100 million.

    Figure 4: CMS's Annual Estimates of Administrative Costs and Savings from
    Medicare Contracting Reform, Fiscal Years 2006-2011, as of February 2005

    CMS anticipates that the bulk of the savings from Medicare contracting
    reform will occur through funds it can avoid spending from the Medicare
    trust funds, but the basis for this estimate is uncertain. CMS's
    consultant estimated the total projected savings to the trust funds
    through fiscal year 2011 to be over $1.4 billion.49 The savings to the
    trust funds are expected to come from the three main sources shown in
    table 5. The consultant who created these savings estimates explained that
    while it is logical to assume some level of savings to the Medicare
    program, there are "enormous uncertainties" at this stage of the
    implementation process, which make it

    49The Report toCongressnoted an estimated savings of $900 million to the
    Medicare trust funds by the end of fiscal year 2010.

    difficult to project the savings with much accuracy. Ultimately, each of
    these sources of savings assumes that contracting reform will lead to a
    lower rate of improperly paid claims. Further, while the estimate for each
    of the three sources is based on a different methodology and formula, the
    basis for each is similar enough that the savings accrued through each may
    overlap, resulting in possible double counting. Therefore, whether
    contracting reform will actually achieve the $1.4 billion savings is
    highly uncertain.

    Table 5: CMS's Consultant's Estimates of Savings to the Trust Funds from
    Medicare Contracting Reform, Fiscal Years 2006-2011

                                  Dollars in millions

                                                               Total fiscal years
                                      Fiscal year 2006-Fiscal year 2011 2006-2011
                                               2010 estimated estimated estimated
                                        Source of savings savings savings savings

    Combining Medicare
    contracts for Part A and
    Part B, resulting in more
    comprehensive medical
    reviews of claims $350 $220 $570

    Higher claims denial rates,
    because MACs will perform
    more effective medical
    reviews, to remain
    competitivea 160 100 $260

    Greater incentive for MACs
    to operate efficiently and
    adopt industry innovations in
    automated review of claims
    to remain competitive 390 260 $650

                        Total estimated savings $900 $580 $1,480

    Source: GAO analysis of CMS's consultant's savings estimates.

    Note: The Report to Congress stated savings for 2006 through 2010, but the
    consultant's complete estimates were calculated through 2011.

    aThe consultant assumed that a portion of claims denial rates can be
    associated with contractor performance and that contractors would have an
    incentive for higher performance in the new competitive contracting
    environment. As a result, the savings estimate includes projected savings
    from higher claims denial rates.

    The consultant's estimate anticipates that MACs could detect a larger
    amount of improper payments because they will be examining both Part A and
    Part B claims, but there is little evidence to support the amount of
    savings assumed. Currently, Part A and Part B medical reviews are
    generally conducted by different contractors, which lessens their focus on

    problematic billing that spans both parts. The consultant estimated that
    having MACs conduct joint Part A and Part B medical reviews would lower
    the amount of improperly paid Medicare claims by 0.08 percent. However,
    CMS's senior medical review staff indicated that they had no prior
    knowledge of this actuarial estimate until we showed it to them. The staff
    told us that there is no evidence to realistically estimate the amount of
    savings that may result from consolidating the medical review
    responsibility for both parts. Furthermore, according to CMS staff, the
    greatest savings would likely come through computerizing medical reviews
    to automatically examine and compare Part A and Part B claims before they
    are paid. However, this capability is not currently possible, because Part
    A and Part B claims are processed on different payment systems, and
    developing a combined Part A and Part B claims processing system that
    could automatically compare Part A and Part B claims before payment would
    take years to complete.50

    Potential savings from improved fraud detection are also impossible to
    quantify, based on current information. The PSCs currently conduct fraud
    detection activities for both Part A and Part B in 40 states, the District
    of Columbia, Puerto Rico, and the Virgin Islands. As CMS implements
    contracting reform, the jurisdictions in which PSCs will conduct fraud
    detection for both parts may change. While CMS considers having a single
    PSC handling both Part A and Part B fraud detection a way to make its
    contractors more efficient, a senior official acknowledged that the agency
    had no evidence with which to determine whether having the PSCs conduct
    combined fraud reviews has been more effective in detecting fraud than
    having these reviews conducted by separate contractors for Part A and Part
    B.

    The consultant's estimate also anticipated that MACs will be able to pay
    claims more accurately than the current Medicare contractors, due to more
    effective medical review of claims, thus increasing claims denial rates.
    While noting that some elements of claim denials are not associated with
    contractor performance, the consultant assumed that better contractor
    performance could be equated with increased claims denial rates. The
    calculation for this assumption was based on the projection that

    50CMS's goal is to have a unified claims processing system in 2011, but
    the consultant's estimate assumes that savings will be generated from
    combined medical reviews much sooner.

    contractor denial rates would increase51 and that half of these increased
    denials would lead to program savings. However, CMS program staff told us
    that they do not consider denial rates in their evaluation of contractor
    performance but instead evaluate claims administration contractors' rates
    of paying claims properly. The CMS program staff told us that they were
    not sure of the basis for the consultant's calculations, and one senior
    official stated that it was unclear whether more denials would occur with
    new MACs.

    Finally, the consultant projected that if CMS awards contracts
    competitively, contractors will have an incentive to operate more
    efficiently and to adopt the leading industry innovations that improve
    performance. The consultant expected these efforts to result in lower
    levels of improperly paid claims. This projection was based on a 1995 GAO
    report that estimated that if Medicare contractors adopted the technology
    and capabilities used by private insurers to detect improper payments
    through automated claims reviews, Medicare payments for physicians'
    services and supplies could be reduced by 1.8 percent. Since that report
    was issued, CMS has made additional efforts to reduce improper payments.
    In addition, CMS was not certain that GAO's assumed savings were
    achievable. Recognizing this, the consultant reduced this portion of the
    savings estimate to a 0.09 percent reduction in Medicare fee-for-service
    payments. In the consultant's opinion, this adjusted for current error
    rates and CMS's opinion that the initial 1995 GAO estimate was too high.
    However, when we followed up with CMS in April 2005, a senior official
    stated that while it would be realistic to expect some level of savings in
    the new competitive contracting environment, she did not know how the
    amount could be accurately quantified.

    The millions of dollars in savings that CMS envisions achieving through
    contracting reform in the early years of implementation are largely based
    on questionable estimates. However, these anticipated savings have been
    the driving force behind the agency's decision to accelerate its schedule
    for contracting with MACs. The agency has opted to transfer the entire
    current contractor workload to MACs 2 years ahead of the MMA time frame,
    in the hope of garnering savings to Medicare as quickly as possible.

    51The consultant calculated this expected increase in denials by dividing
    all current carriers and fiscal intermediaries into quartiles, based on
    their current claims denial rate. Then, the consultant assumed that the
    denial rate for the bottom half of contractors in each quartile could be
    expected to increase to the median denial rate for that quartile.

      Conclusions

    The accelerated schedule raises concerns for a number of reasons. First,
    CMS has never before undertaken a project of this scope and magnitude- one
    that affects more than 35 million beneficiaries and 1 million health care
    providers. If transitions do not run smoothly, operational disruptions
    could lead to delayed payments to providers and increased improper
    payments by contractors. With Medicare net improper payments estimated to
    be almost $20 billion annually, any potential increase is cause for
    concern. Second, while CMS's plan provides detailed information in some
    areas, other critical areas of the agency's plan are still being
    developed. Although the agency is employing a start-up cycle that will
    provide an opportunity to gain valuable FAR contracting experience, the
    ambitious schedule for the subsequent two cycles leaves little time for
    the agency to learn from the experience and resolve problems that might
    arise. Finally, attempting complex transitions of almost all of the claims
    administration workload in less than 2 years, in conjunction with changes
    in the data centers and financial management systems, significantly
    increases the risk that providers' claims will be paid improperly or not
    be paid at all. As CMS undertakes this important challenge, it is critical
    that the agency proceed at a prudent pace in order to apply lessons
    learned from early implementation experiences to future contracting
    cycles.

    To better ensure the effective implementation of Medicare contracting
    reform, we recommend that CMS extend its implementation schedule to
    complete its workload transitions by October 2011, so that the agency can
    be better prepared to manage this initiative.

    In its written comments on a draft of this report, CMS noted that
    implementing Medicare contracting reform would enable the agency to
    improve the efficiency of the services delivered to Medicare beneficiaries
    and providers. CMS agreed that implementing contracting reform was a
    significant undertaking, but did not concur with our recommendation to
    extend its implementation schedule. CMS stated that by fully implementing
    MAC contracting 2 years earlier than required, it would achieve savings to
    the trust funds and operational efficiencies more quickly. In addition,
    CMS stated that extending the transition schedule would increase the risk
    of current contractors leaving the program before MAC contracts are
    awarded and eliminate the agency's flexibility to adjust its schedule in
    response to unforeseen changes and still meet the mandated implementation
    date. We believe that by accelerating its implementation schedule to
    transfer the entire Medicare claims processing workload to MACs by July
    2009, CMS is assuming an unnecessary risk.

    Recommendation for Executive Action

      Agency Comments and Our Evaluation

    While it is true that lengthening the implementation schedule could
    increase the possibility that one or more contractors might withdraw from
    Medicare prematurely, we see greater risk in attempting complex
    transitions without sufficient time for adequate planning and midcourse
    adjustments. When the considerable risk associated with accelerated
    implementation is considered in light of uncertain savings, a more prudent
    approach would be to use the time frame established in the MMA to fully
    develop implementation plans, evaluate lessons learned, and apply them to
    future acquisition cycles. In recommending that CMS extend its
    implementation schedule, we assume that the agency would allow sufficient
    time at the end of the final transition to adjust for problems and
    unforeseen circumstances and still meet the mandated implementation date
    of October 1, 2011. CMS agreed that it would need sufficient time for this
    kind of adjustment and has not developed plans for all contingencies. For
    example, CMS responded to a relatively short schedule slippage for its
    enterprise data center implementation by including in contract language
    the option for one of the DME MACs to run a data center on an interim
    basis. However, CMS will still have to develop the details of the contract
    and choose the most appropriate company to perform this work. This is one
    example of the many adjustments that will undoubtedly have to be made
    before all of the transitions are finished.

    CMS also stated that it disagreed with our conclusion about its readiness
    to conduct transitions to MACs. Our report did not conclude that CMS would
    not be ready to conduct transitions according to its proposed schedule.
    However, having a fully developed plan in place would assist CMS in
    conducting these transitions as smoothly as possible. As we stated in the
    report, CMS has recognized that it needs to develop certain critical areas
    in its plan and is taking steps to address them. For example, it is clear
    from its comments that the agency is very concerned about the risks
    involved in the complex transitions of claims workload and is planning
    mitigation actions-such as hiring a contractor to help manage the effort.
    CMS's comments provide additional information on other steps that it is
    taking to reduce or mitigate significant risks, coordinate the schedule
    for MAC implementation with other agency fee-for-service initiatives,
    develop detailed integrated implementation schedules, and address other
    GAO concerns. Nevertheless, the additional information provided by the
    agency generally reinforces our point that the agency's implementation
    plan, which was due to the Congress and to us in October 2004, is still a
    work in progress. For example, as we pointed out in the report, CMS's
    comments indicate that it has not completed its integrated implementation
    schedule and that it is leaving details concerning contractor coordination
    to MACs and other contractors. In addition, CMS has not finalized
    important

    implementation information, such as key performance measures or its MAC
    evaluation strategy and evaluation criteria for A/B MACs, or completed its
    proposal for a new organizational structure to oversee and manage the
    MACs. While CMS does have a risk management process, its current
    identification of risks and mitigation strategies lacks specificity and
    the agency has not completed a comprehensive risk mitigation plan.

    CMS also disagreed with our assessment of the quality of its cost and
    savings estimates. CMS said that its estimates of implementation costs
    were well informed by program experience and were the best available
    predictions of future costs. As we reported, CMS used information from
    previous transitions of contractor workload to help estimate its
    administrative costs. This grounded the estimate in the agency's past
    experience. However, CMS had to make assumptions about the amount of
    claims workload to be transferred and transition costs to be paid, which
    might turn out to be inaccurate. Unlike previous workload transitions, CMS
    is not requiring MACs to maintain staff and facilities from the former
    contractors. This should allow the MACs to gain efficiencies in
    operations, but CMS may end up paying more in severance pay or for
    start-up costs than estimated. Similarly, CMS's experience informed its
    estimate of administrative savings, but the estimate depends on
    assumptions about the efficiencies MACs will achieve that are difficult to
    predict with certainty. While CMS's assumptions about administrative costs
    and savings might appear reasonable, if the assumptions are inaccurate,
    the estimates will not reflect the real costs and savings over time. In
    addition, CMS indicated that because the costs of contract modifications
    were for operations after the transfer of claims workload, they should not
    be included in the implementation cost estimate. As CMS noted, its DME
    statement of work includes a provision for implementing a specific number
    of programmatic changes after the contract is awarded, to reduce the
    possibility that CMS would have to negotiate contract modifications that
    incurred additional costs. We modified our draft to clarify our discussion
    of the potential costs of contract modifications.

    Our greatest concern relates to CMS's consultant's estimate of savings to
    the trust funds. As we indicated in our report, the estimate of savings to
    the trust funds is generally based on little evidence and its underlying
    assumptions may not be reasonable, yet it played a significant role in
    CMS's decision to compress its implementation schedule. While CMS
    suggested that the savings estimate is conservative, the consultant who
    generated this estimate indicated that there were "enormous uncertainties"
    in estimating savings at this point in the implementation process. In its
    comments, CMS noted that our report highlighted the lack

    of direct evidence to support the amount of estimated savings. In
    response, CMS stated that the savings estimate was the best available,
    given that the changes proposed are unprecedented. CMS indicated that each
    of the three elements of the estimate of savings to the trust funds
    addresses a different aspect of the claims process. However, each of the
    three elements actually addresses the same aspect-MACs improving their
    medical and other claims review to increase denials of improper claims.
    CMS's comments indicate that its technical staff agree that the
    assumptions underlying this estimate are reasonable. We discussed these
    estimates with CMS officials most knowledgeable about medical and other
    claims review and they did not agree that the assumptions were based on
    evidence and were reasonable. Further, because each element in the savings
    estimate assumes improvement in claims review and improper claims denial,
    we think it is likely that CMS is double counting its potential savings.
    For example, the consultant estimated that the MACs would have higher
    claims denial rates, but also separately estimated savings from other
    aspects of claims review that-if conducted more efficiently-would lead
    back to higher claims denial rates.

    We are sending copies of this report to the Secretary of HHS, the
    Administrator of CMS, appropriate congressional committees, and other
    interested parties. We will also make copies available to others upon
    request. This report is also available at no charge on GAO's Web site at
    http://www.gao.gov.

    If you or your staff have any questions about this report, please contact
    me at (312) 220-7600 or aronovitzl@gao.gov. Contact points for our Offices
    of Congressional Relations and Public Affairs may be found on the last
    page of this report. GAO staff who made major contributions to this report
    are Sheila K. Avruch, Assistant Director; Sandra D. Gove; Joy L. Kraybill;
    Kenneth Patton; and Craig Winslow.

    Leslie G. Aronovitz Director, Health Care

    Appendix I: Documents CMS Officials Have Identified as Constituting the Agency's
    Plan for Implementing Contracting Reform

    The Centers for Medicare & Medicaid Services (CMS) has designated its
    report, entitled Report toCongress: Medicare Contracting Reform: A
    Blueprint for a Better Medicare, and the documents underlying this report
    as its plan for implementing Medicare fee-for-service contracting reform.
    Documents include the following:1

    o 	maps of jurisdictions for A/B Medicare administrative contractors
    (MAC), durable medical equipment (DME) MACs, and home health and hospice
    MACs;

    o 	CMS's estimates for savings to the Medicare trust funds, administrative
    costs and savings, provider and beneficiary savings, and supporting
    narrative and information;

    o  MAC transition timelines;

    o  DME and A/B MAC project schedules;

    o 	requests for information for A/B MACs and DME MACs, as published on
    FedBizOpps, including concepts of operations, draft statements of work,
    draft performance standards, and workload implementation handbooks;

    o 	DME MAC request for proposals and related documents, including the
    final statement of work, as published on FedBizOpps;

    o  materials on beneficiary and provider customer service;

    o 	materials concerning work on reengineering Medicare fee-for-service
    contract management processes;

    o 	BearingPoint, Inc., Health Services Research & Management Group,
    Contractor Evaluation Improvement Project (CEIP) StrategyPaper, Final
    Report(McLean, Va.: Mar. 18, 2005);

    o 	Centers for Medicare & Medicaid Services, Medicare Contracting Reform:
    Acquisition Strategy forMedicare Administrative Contractors, draft
    (Baltimore, Md.: Feb. 28, 2005);

    o 	Centers for Medicare & Medicaid Services, MAC Implementation Project,
    Risk and Issue Management Process,Schematic(Baltimore, Md.: Jan. 24,
    2005);

    o 	Centers for Medicare & Medicaid Service, MCMG Risk Management Plan for
    the Medicare Administrative Contractor ImplementationProject, draft
    (Baltimore, Md.: Dec. 7, 2004);

    o 	Centers for Medicare & Medicaid Services, Medicare Contracting Reform,
    Communication Plan(Baltimore, Md.: Nov. 10, 2004);

    o 	LMI Government Consulting, Medicare FFS Contracting Reform: Level Five
    Work Breakdown Structure andMaster Project Plan(McLean, Va.: October
    2004);

    1Where documents were prepared by support services contractors and contain
    recommendations, CMS may have chosen not to adopt all recommendations or
    not to adopt them in full.

    Appendix I: Documents CMS Officials Have Identified as Constituting the
    Agency's Plan for Implementing Contracting Reform

    o 	LMI Government Consulting, Medicare Fee-for-Service Contracting Reform:
    Assessment of Planning Needs(McLean, Va.: August 2004);

    o 	Centers for Medicare & Medicaid Services, Report to the Medicare
    Contractor Oversight Board: Integration Issues in Modernizing Medicare,
    Final Report, submitted by CMS's fee-for-service project integration team
    (Baltimore, Md.: July 2, 2004), and related briefing documents; and

    o 	Logistics Management Institute, Sensitive Assessment Center, Medicare
    Fee-for-Service Contracting Reform: Key Challenges(McLean, Va.: December
    2003).

    Also see documents found at the following Web sites:
    http://www.cms.hhs.gov/medicarereform/contractingreform/ and
    http://www.cms.hhs.gov/medicarereform/contractingreform/whats_new/

    Appendix II: Documents Used by GAO to Develop Criteria for Reviewing CMS's Plan
    for Contracting Reform

    Selected provisions of section 1874A of the Social Security Act, added by
    section 911 of the Medicare Prescription Drug, Improvement, and
    Modernization Act of 2003 (MMA), Pub. L. No. 108-173, 117 Stat. 2066,
    2378-2386 (to be codified at 42 U.S.C. S: 1395kk-1).

    Centers for Medicare & Medicaid Services, Contractor Reform-Update,
    September 22, 2004.

    Medicare fee-for-service contractor (unnamed), Contractor Suggestions
    Regarding Implementation of Medicare Administrative Contracts. Comments
    submitted to CMS by a current Medicare fee-for-service contractor.
    December 22, 2004.

    GAO, Business Process Reengineering Assessment Guide, GAO/AIMD10.1.15
    (Washington, D.C.: May 1997).

    GAO, An Evaluation Framework forImproving the Procurement Function: A
    Guide for Assessing Strengths and Weaknesses ofFederalAgencies'
    Procurement (Exposure Draft), (Washington, D.C.: October 2003).

    LMI Government Consulting, Medicare Fee-for-Service Contracting Reform:
    Assessment of Planning Needs(McLean, Va.: August 2004).

    Appendix III: GAO's Criteria for Evaluating CMS's Contracting Reform Plan

                              Element Subelement Criteria

    Contracting reform planning Contracting reform objectives Does the plan
    explain contracting reform objectives, such as

    and implementation 	promoting competition and establishing better
    communication between contractors and beneficiaries?

    Scope 	Does the plan present an overview of how MAC implementation fits
    into broader agency plans?

    Schedule 	Does the plan state when major events will take place, including
    announcing MAC jurisdictions, issuing proposed performance measures for
    inclusion in A/B MAC contracts and requests for proposals, selecting DME
    MACs and A/B MACs, and completing the transition to MAC contracting?

    Budget 	Does the plan provide key information on budget and costs for
    contracting reform, such as estimated termination costs for current
    contractors, MAC operational costs, and performance incentives?

    Performance measures for contracting reform

    Does the plan provide high-level information on performance measures-that
    is, what constitutes success in contracting reform and how will progress
    be measured?

    Contracting reform Risk management Does the plan identify a contingency or risk
         mitigation strategy for management and oversight potential problems as
                        contracting reform is being implemented?

    Transition planning 	Does the plan address transition concerns and
    contingency planning for the transitions?

    CMS staffing 	Does the plan explain how CMS staff will be organized and
    who will have specific roles and responsibilities in managing contracting
    reform?

    Management and oversight Does the plan provide information on CMS's
    intended contractor

                                       structure

    management and oversight structure for MACs?

    Human capital	Does the plan provide an approach for ensuring that the
    agency has the right staff in the right numbers with the right skills in
    the right places to accomplish its mission effectively? This approach
    requires that an agency devote adequate resources to provide its
    acquisition workforce with the training and knowledge necessary to perform
    their jobs. It also requires long-range planning, including succession
    planning, to ensure the workforce has the necessary skills and
    qualifications to perform the procurement function into the future.

                                                            Does the plan provide
    Implementation of MAC    Jurisdictions                  information on MAC
                                                         jurisdictions, including
            contracting                            number and geographic areas?
                                                            Does the plan provide
                                                               information on the
                                 Rollout plan        jurisdictional rollout plan,
                                                  and how this timeline might be
                                                  affected by voluntary
                                                  contractor
                                                           withdrawals?
                                                        Does the plan discuss the
                                                    strategy for combining Part A
                                 A/B strategy                          and Part B
                                                  and associated implications or
                                                              risks?
                                                        Does the plan address the
                                                      acquisition process for new
                             Contract acquisition                      contracts?

    Eligibility of contractors

    Does the plan describe the eligibility criteria expected of MACs?

    Appendix III: GAO's Criteria for Evaluating CMS's Contracting Reform Plan

                              Element Subelement Criteria

    MAC functions	Does the plan describe the functions that MACs will perform,
    such as developing local coverage decisions, determining payment amounts,
    making payments, educating beneficiaries, and communicating with
    providers?

    Non-MAC functions 	Does the plan provide information on functions that
    will be assigned to non-MAC contracts?

    Coordination concerning program Is the plan clear in defining the roles of
    MACs and other contractors

                                  integrity functions

    that conduct program integrity functions, so that program integrity
    efforts are not duplicative? Does the plan explain how MACs and other
    contractors will interface and coordinate their different program
    integrity activities?

    Chains 	Does the plan provide information on how MACs will deal with chain
    providers, which is a concern for those with establishments in multiple
    MAC jurisdictions?

    Performance requirements 	Does the plan address the establishment and
    definition of performance measures for MACs?

    Policies and processes 	Does the plan provide clear, transparent, and
    consistent policies and processes that provide a basis for the planning,
    award, administration, and oversight of procurement efforts?

     Source: GAO analysis of documents used to develop criteria for reviewing CMS's
                              plan for contracting reform.

    Note: Documents used to develop criteria are listed in app. II.

                           Appendix IV: Scope and Methodology

    To conduct this evaluation, we consulted CMS to determine the documents
    included in its plan for contracting reform. Appendix I lists the
    documents that were identified by agency officials as included in CMS's
    contracting reform plan, including its Report to Congress, that were
    provided to us through June 3, 2005. We developed evaluation criteria to
    assess the extent to which CMS's plan provides an appropriate framework to
    implement Medicare contracting reform. To develop these criteria, we
    analyzed the statutory provisions added by section 911 of the MMA,
    documents and related information prepared to help CMS plan for
    contracting reform, and GAO guidance on assessing federal agencies'
    procurement functions. We also reviewed GAO's guidance on changing the
    approach through which mission-critical work is accomplished. These
    documents are listed in appendix II. The evaluation criteria we developed
    address contracting reform planning and implementation, contracting reform
    management and oversight, and CMS's contracting strategy for MACs and are
    listed in appendix III. We used these criteria to evaluate CMS's plan. In
    addition to this assessment, we also conducted interviews with officials
    at CMS headquarters and regional offices concerning the process for
    developing the plan, the implementation schedule, the challenges that CMS
    faces in implementing contracting reform, lessons learned that have
    prepared CMS for moving to the MAC environment, and the risks and benefits
    involved in the transition to MAC contracting. We also interviewed
    officials from four current Medicare contractors to obtain their views on
    CMS's contracting reform plan and the challenges, risks, and benefits
    involved in undertaking this effort.

    To assess the extent to which the plan's cost and savings estimates were
    sound enough to support decision making on implementation, we reviewed
    CMS's estimates for administrative costs and savings, savings to the
    Medicare trust funds, and supporting documentation. We evaluated the
    assumptions associated with the estimates. We conducted interviews with
    CMS officials who have been involved in developing estimates for the costs
    and savings related to Medicare contracting reform in order to understand
    the rationale upon which the estimates were based. We interviewed other
    CMS officials who work in program areas that will be affected by
    contracting reform to learn how they expect contracting reform to generate
    costs or savings in their program areas. We also interviewed a
    representative of CMS's actuarial contractor, which developed the savings
    estimates for the Medicare trust funds. We did not verify the reliability
    of CMS's data that were used to generate financial estimates. We performed
    our work from November 2004 through July 2005 in accordance with generally
    accepted government auditing standards.

    Page 46 GAO-05-873 Medicare Contracting Reform

                     Page 47 GAO-05-873 Medicare Contracting Reform

                     Page 48 GAO-05-873 Medicare Contracting Reform

                     Page 49 GAO-05-873 Medicare Contracting Reform

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                     Page 56 GAO-05-873 Medicare Contracting Reform

    Appendix VI: CMS's MAC Procurement and Transition Schedule

    Figure 5 shows CMS's procurement and transition schedule for MACs, as of
    June 2005. During one start-up cycle and two additional transition cycles,
    CMS will conduct competitions to select a total of 23 MACs. In the first
    phase of the start-up cycle, CMS will select four MACs that will be
    administering claims for DME, prosthetics, orthotics, and supplies-called
    DME MACs. In the second phase of the start-up cycle, CMS will select one
    of the MACs that will be responsible for paying Part A and Part B claims-
    called A/B MACs. During cycle one, CMS will select seven A/B MACs. During
    cycle two, CMS will select seven A/B MACs and four MACs that will be
    responsible for administering claims for home health and hospice (HH)
    care, called HH MACs.

                Figure 5: CMS's MAC Procurement and Transition Schedule

    Source: GAO.

    Notes: Based on information from CMS. The request for proposals (RFP)
    announces CMS's intent to award a contract and specifies the service or
    product to be delivered, the criteria to be used, applicant
    qualifications, deadline, and other relevant information. In this figure,
    the date under RFP indicates when it was, or will be, first issued. The
    date under award indicates when CMS intends to announce publicly that the
    contract has been awarded. Cutover occurs when all work has been
    transferred to the MAC from the prior claims administration contractors.
    The date under cutoff indicates when CMS anticipates the transfer of work
    for these contracts to be completed.

    Appendix IX: Jurisdictional Map of the Current Regional Home Health
    Intermediaries

    Source: CMS.

    Note: Regional home health intermediaries process Medicare home health and
    hospice claims.

    Source: CMS.

    Note: DME regional carriers pay claims for DME, prosthetics, orthotics,
    and supplies.

                       Appendix XI: Jurisdictional Map of the 15
                        New Medicare Administrative Contractors

    Source: CMS.

    Notes: This map shows the jurisdictions for the MACs that will pay Part A
    and Part B claims, other than claims for HH care and for DME, prosthetics,
    orthotics, and supplies. These MACs will be called A/B MACs.

    Appendix XII: Jurisdictional Map of the Four DME MACs and the Four HH MACs

    Source: CMS.

    Note: This figure indicates the jurisdictions for MACs that will pay some
    specific types of claims. The DME MACs will pay claims for DME,
    prosthetics, orthotics, and supplies. The HH MACs will pay claims for HH
    care.

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