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
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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 [email protected]. 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.
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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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