Medicare: HCFA's Contracting Authority for Processing Medicare Claims
(Letter Report, 08/02/94, GAO/HEHS-94-171).

Since 1966, the Health Care Financing Administration (HCFA) has awarded
most contracts to process claims under Medicare parts A and B without
competition, has renewed them annually, and has compensated contractors
on a cost-reimbursement basis. Periodically, the Congress has directed
HCFA to experiment with other types of contracts in an effort to reduce
administrative costs.  Earlier experiments had mixed results, but
current experiments indicate that different types of contracts may
reduce costs.  The Congress is now considering a legislative proposal
requiring HCFA to study the feasibility of making the contracting
process more competitive.  While HCFA's current authority provides
opportunities to achieve administrative efficiencies, it may be useful
for the Congress to direct HCFA to evaluate new approaches that could
lead to a more competitive environment. Any changes, however, should
avoid problems that have occurred in the past.  The role that the Blue
Cross and Blue Shield Association (the national trade association for
independent Blues plans) plays in coordinating part A contracting
activities with individual Blues plans may limit the need for HCFA
resources to perform these activities. However, HCFA has not evaluated
the Association's performance since 1989, even though HCFA paid the
Association over $21 million during that period.  In GAO's view, HCFA
needs to regularly assess the Association's performance, just as it does
for other contractors, to ensure that the Medicare program is being
managed efficiently.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  HEHS-94-171
     TITLE:  Medicare: HCFA's Contracting Authority for Processing 
             Medicare Claims
      DATE:  08/02/94
   SUBJECT:  Medical expense claims
             Claims processing
             Contract administration
             Cost control
             Contractor performance
             Competitive procurement
             Beneficiaries
             Contractor payments
             Insurance companies
             Evaluation methods
IDENTIFIER:  Medicare Program
             National Performance Review
             HCFA Contractor Performance Evaluation Program
             
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Cover
================================================================ COVER


Report to the Chairman, Permanent Subcommittee on Investigations,
Committee on Governmental Affairs, U.S.  Senate

August 1994

MEDICARE - HCFA'S CONTRACTING
AUTHORITY FOR PROCESSING MEDICARE
CLAIMS

GAO/HEHS-94-171

Medicare Contracts


Abbreviations
=============================================================== ABBREV

  BCBS - Blue Cross Blue Shield
  BPRs - Budget Performance Requirements
  CPEP - Contractor Performance Evaluation Program
  HCFA - Health Care Financing Administration
  HHS - Department of Health and Human Services
  OIG - Office of Inspector General

Letter
=============================================================== LETTER


B-252795

August 2, 1994

The Honorable Sam Nunn
Chairman, Permanent Subcommittee on
 Investigations,
Committee on Governmental Affairs
United States Senate

Dear Mr.  Chairman: 

Your investigation into the activities of four Blue Cross and Blue
Shield (BCBS) plans and the oversight role of their national
association and our recent report on the financial condition of Blues
plans\1 uncovered many examples of wasteful spending and
mismanagement.  Because many Blues plans also contract with the
Health Care Financing Administration (HCFA) to process and review
Medicare claims, you were concerned that this kind of waste and
mismanagement may result in HCFA overpaying Medicare contractors to
pay beneficiaries' medical claims.  Accordingly, you asked us to
examine (1) how HCFA contracts with insurance companies to process
and review Medicare claims, (2) how HCFA contracts with the Blue
Cross and Blue Shield Association to subcontract with its member
plans to process Medicare Part A claims, (3) how HCFA sets contract
prices and seeks to ensure that proper cost controls are in place,
(4) how HCFA evaluates contractors' performance, and (5) whether
payments for dues that these contractors make to insurance
associations are permissible. 


--------------------
\1 Blue Cross and Blue Shield:  Experiences of Weak Plans Underscore
the Role of Effective State Oversight (GAO/HEHS-94-71, Apr.  13,
1994). 


   BACKGROUND
------------------------------------------------------------ Letter :1

Medicare is a federal health insurance program that covers about 33
million people age 65 and over and about 2 million disabled
individuals who are under age 65.  Medicare provides coverage under
two parts.  Part A--hospital insurance--covers inpatient hospital
services, home health services, skilled nursing facilities, and
hospice services.  Part B--supplementary insurance--covers physician
services, outpatient laboratory services, and a wide array of other
health services. 

HCFA administers the Medicare program by contracting with insurance
companies to process Medicare claims.  Section 1816 of the Social
Security Act (42 U.S.C.  1395h) authorizes HCFA to contract with
entities such as insurance companies, then called fiscal
intermediaries, to process Medicare part A claims.  HCFA also has a
part A contract with the Blue Cross and Blue Shield Association, the
national trade association for the independent Blues plans, which
subcontracts with 41 Blues plans to process Medicare part A claims. 
Section 1842 of the Social Security Act (42 U.S.C.  1395u) authorizes
HCFA to contract directly with entities such as insurance companies,
then called carriers, to process Medicare part B claims. 

In fiscal year 1993, Medicare contractors processed about 700 million
claims and were paid about $1.5 billion--about 2 percent of the total
Medicare budget.  The remaining 98 percent of the Medicare
budget--about $146 billion--was used to pay hospitals, doctors, and
other providers. 


   SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :2

To determine how HCFA awards and oversees Medicare contracts, we
reviewed Medicare part A and B contract and budget documents for
fiscal years 1990 through 1992 at BCBS plans in Florida and Kansas,
and at Travelers Insurance Company, Hartford, Connecticut.  We
selected these contractors to obtain a mix of both Blues and
commercial insurer plans.  We also interviewed HCFA, Medicare
contractor, and Blue Cross and Blue Shield Association officials
about the Medicare contracting process.  (See app.  II for our
detailed scope and methodology.)


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :3

Since 1966, HCFA has awarded most part A and B Medicare contracts
without competition, renewed them annually, and compensated
contractors on a cost-reimbursement basis.  Periodically the Congress
has directed HCFA to experiment with other types of contracts in an
effort to reduce administrative costs.  Earlier experiments had mixed
results, but current experiments indicate that different types of
contracts may reduce costs.  The Congress is now considering a
legislative proposal requiring HCFA to study the feasibility of
making the contracting process more competitive.  While HCFA's
current authority provides opportunities to achieve administrative
efficiencies, it may be useful for the Congress to direct HCFA to
evaluate new approaches that could lead to a more competitive
environment.  Any changes, however, should avoid problems that have
occurred in past experiments. 

The role that the Association plays in coordinating part A
contracting activities with the individual Blues plans may limit the
need for HCFA resources to perform these activities.  However, HCFA
has not evaluated the Association's performance since 1989, even
though HCFA paid the Association over $21 million during that period. 
In our view, HCFA needs to regularly assess the Association's
performance, just as it does for other contractors, to ensure that
the Medicare program is being managed efficiently. 

HCFA's budget process uses payment controls to help ensure that
contractors do not exceed their budgets.  With one exception, HCFA
reduced the per claim funding for each contract we reviewed and
limited contractor payments to the agreed upon budget.  However,
although HCFA has reduced the costs per claim, we are concerned that
these reductions could lead to cuts in funding for reviews that
ensure that claims are being paid properly and, therefore, make the
Medicare program more vulnerable to waste and abuse. 

HCFA oversees the Medicare contracting process by evaluating
contractor performance against claims processing, customer service,
and program efficiency standards.  HCFA also reviews the Department
of Health and Human Services' (HHS) Office of Inspector General (OIG)
audits of Medicare contractors.  In the past, however, these audits
have found little basis to question contractor financial activities. 
The Inspector General believes that the OIG's audit resources could
better be used in other oversight activities. 

Medicare contract provisions, which are consistent with federal
procurement regulations, permit contractors to be reimbursed for dues
paid to associations if the dues are used to help the contractors
provide better service to beneficiaries and providers.  Contractors
are not allowed to include lobbying costs in dues payments.  OIG
audits routinely review dues payments to ensure compliance with these
regulations and provisions.  The OIG audits that we reviewed for both
Blues plans and commercial insurers had found no basis to question
their dues payments. 


   HOW MEDICARE CONTRACTS FOR
   CLAIMS PROCESSING
------------------------------------------------------------ Letter :4

When Medicare began in 1966, the Congress required HCFA to contract
with entities such as insurance companies that already performed in
their private business many of the functions that they would perform
for Medicare.  Generally, contracts for processing Medicare claims
could be awarded noncompetitively and on a cost-reimbursed basis to
ensure that insurance companies would be willing to participate in
the Medicare program. 

For Medicare part A, providers nominate a contractor to process their
Medicare claims, subject to HCFA approval.  These contractors, called
fiscal intermediaries, are responsible for processing and reviewing
all part A claims and communicating with providers--hospitals,
nursing facilities, home health agencies, and hospices--about the
program.  Most providers nominate local Blues plans as their
intermediaries, but commercial insurers, such as Travelers, are also
nominated by providers.  In fiscal year 1993, HCFA had part A
contracts to process claims with five commercial insurers and the
Blue Cross Blue Shield Association, which, in turn, subcontracted
with 41 local Blues plans.  These contractors were paid $475 million
in fiscal year 1993. 

For Medicare part B, HCFA selects the contractors rather than
providers nominating them.  These contractors, called carriers,
process and review claims from doctors and suppliers in a particular
geographic area.  In fiscal year 1993, HCFA had 54 contracts with 36
insurance companies that were paid about $1.04 billion to process and
review claims. 

Since the early 1980s, the Congress has twice authorized HCFA to
experiment with different types of contracts to determine whether
they would reduce administrative costs.  The Deficit Reduction Act of
1984, section 2326, authorized HHS to use a limited number of
fixed-price competitions annually.  The fixed-price experiments had
mixed results.  Some fixed price contracts generated savings, but
some resulted in payment errors and lost program dollars that more
than offset any estimated savings resulting from the change in
contracting method.\2 For example, high payment error rates in two
experiments resulted in over $130 million in payment errors (both
overpayments and underpayments). 

In the Omnibus Budget Reconciliation Act of 1989, section 6215, the
Congress provided for HCFA to experiment with incentive contracts for
processing Medicare claims.  Under these experiments, if a
contractor's final costs are less than the agreed upon budget, the
contractor and HCFA share the savings.  This legislation expired on
September 30, 1993, but contracts awarded under this legislation are
still ongoing.  HCFA internal evaluations of these contracts indicate
that they result in savings and that they encourage well-performing
contractors to remain in the program. 

In September 1993, the National Performance Review recommended that
HCFA's contracting authority be amended to allow for competitive
contracts to reduce costs and eliminate inefficiencies.  The Congress
is now considering legislation that would require HCFA to study the
feasibility of changing the contracting process to a more competitive
environment. 

HCFA has developed a long-standing practice of contracting with the
same entities--typically insurance companies that also process claims
for private clients and policyholders.  While HCFA officials are
working to improve their contracting practices, they perceive many
obstacles to changing this practice.  As a result, it may be
necessary for the Congress to authorize HCFA to evaluate new
approaches leading to a more competitive environment and lower claims
processing costs.  Pending legislative provisions to require that
HCFA study the feasibility of making the Medicare contracting process
more competitive could eventually lead to improvements in HCFA's
contracting practices, but we believe that current Medicare statutes
provide HCFA greater flexibility than has been exercised to date. 
Any changes in HCFA's contracting process should, however, seek to
avoid problems that have occurred in past experiments. 


--------------------
\2 Medicare:  Existing Contract Authority Can Provide for Effective
Program Administration (GAO/HRD-86-40, Apr.  22, 1986). 


   AWARD AND OVERSIGHT OF THE
   ASSOCIATION'S PRIME CONTRACT
------------------------------------------------------------ Letter :5

When the Medicare program began, most hospitals nominated the Blue
Cross Blue Shield Association as its part A intermediary.  HCFA
entered into a contract, referred to as the prime contract, with the
Association to act as the national coordinating agency to subcontract
with individual Blues plans to process Medicare part A claims. 
HCFA's intent was to reduce its workload by having the Association
oversee these contracts because it was familiar with the local Blues
plans that most hospitals wanted as their intermediaries. 

HCFA payment controls for the prime contract are similar to those for
the contractors that process claims in that HCFA sets the total
budget limits for the prime contract.  In negotiating the prime
contract, HCFA proposes a total budget based on the Association's
workplan.  In addition to the Association's subcontracting
activities, the workplan includes tasks such as providing training to
subcontractors, serving as an advocate in the appeals process,
assisting local Blues plans in their budget process, chairing
technical assistance groups for special projects, and interpreting
HCFA guidance and providing analysis for individual plans.  According
to Association officials, the final budget usually does not exceed
HCFA's initial proposal.  Throughout the year, the Association can
request supplemental funds for new work requirements, similar to the
other contractors. 

From 1990 through 1992, HCFA paid the Association over $21 million to
serve as the prime contractor (see app.  I).  However, HCFA's last
evaluation of the Association's performance as the part A prime
contractor was in 1988.  According to HCFA officials, although they
evaluated the 41 Blues plans that the Association subcontracted with,
HCFA officials stopped evaluating the Association's performance
because contract administration resources were limited and they
believed that their daily contact with the Association provided
assurance that the prime contract was appropriately administered.  In
our view, while daily contact is useful for the day-to-day
administration of the contract, it is not an acceptable substitute
for a periodic, in-depth evaluation of the Association's
performance--as is being done for the other contractors.  Such
evaluations are necessary to measure a contractor's effectiveness and
efficiency to decide whether to continue or terminate the Medicare
contract. 


   HOW HCFA CONTROLS CONTRACT
   COSTS
------------------------------------------------------------ Letter :6

HCFA determines the amount of funding each contractor will receive
using cost per claim data.  Using data from a 1989 engineering study
that has been updated annually, HCFA calculates the cost per claim
based on the mix of claims and each contractor's historical data. 
According to HCFA officials, this payment control ensures that
contractors are not overpaid.  HCFA's process has kept the cost per
claim low, and for the contractors we visited costs per claim
declined for eight of the nine contractors.  However, we are
concerned that these reductions decrease funding for payment
safeguard activities that are critical for protecting Medicare from
waste, fraud, and abuse. 

HCFA begins the budgeting process by issuing budget performance
requirements (BPRs) to each contractor.  BPRs identify the particular
contractor's tasks to be completed during the annual budget cycles,
which vary according to the work involved in processing a
contractor's specific workload.\3 BPRs also include HCFA's cost per
claim goal, called the bottom line unit cost.  The bottom line unit
cost, which varies by contractor, is the maximum allowable cost to
process a Medicare claim. 

Contractors' costs to process Medicare claims are allocated among
several line items or processing activities.  Each line item includes
costs for items such as salaries, computers, facilities, postage,
pensions, travel, accounting, and activities that detect fraud and
abuse.  (App.  I contains a summary of budget line items of the
contracts for the part A and B contractors in our study.)

After HCFA issues the BPRs, each contractor submits a budget to HCFA
that reflects the contractor's estimate of the claims processing
workload and costs to perform the work.  When HCFA's cost per claim
to perform the work is lower than the contractor's estimate, the
parties discuss the differences and attempt to resolve them. 
Contractors may submit supplemental budget requests throughout the
year if HCFA requires additional services from the contractor. 

For the part A contractors\4 that we reviewed for fiscal years 1990
through 1992, the costs to process a Medicare claim declined (see
fig.  1). 

   Figure 1:  Changes in Medicare
   Part A Costs per Claim

   (See figure in printed
   edition.)

Costs per claim also declined for eight of the nine part B
contractors that we reviewed for fiscal years 1990 through 1992.\5
The contractor whose costs per claim increased attributed the
increase to the transition costs and increased workload it assumed
when it took over the claims processing activities of another
contractor who voluntarily left the Medicare program (see fig.  2). 

   Figure 2:  Changes in Medicare
   Part B Costs per Claim

   (See figure in printed
   edition.)

Although HCFA has reduced contractors' costs per claim each year, our
past studies have shown that contractors have responded by decreasing
funding for payment safeguard activities.  Such activities are aimed
at helping to avoid unnecessary or inappropriate Medicare payments.\6
HCFA contractors have a record of saving about $14 for every $1 spent
on payment safeguards. 

Despite the rising volume of Medicare claims, contractors' per claim
funding for payment safeguards has declined by over 20 percent since
1989.  These cuts have had a significant effect on how well
contractors control the billions of dollars of benefit payments.  In
response to reduced per claim funding, contractors may apply fewer or
less stringent payment controls to keep the workload manageable.  In
our view, HCFA needs to better manage contractor payment safeguard
activities to ensure that declining funding for claims processing
does not come at the expense of controls that protect Medicare from
waste, fraud, and abuse.  According to HCFA officials, in 1994, HCFA
initiated approaches to better direct the funding to areas with the
potential for large dollar savings. 


--------------------
\3 Factors that can affect the amount of work involved in processing
claims include such things as the percentage of claims submitted
manually rather than electronically.  Claims from different types of
providers also differ in processing difficulty, so the mix of claims
also affects budgeted costs. 

\4 Travelers' part A costs reflect aggregate costs for three separate
contracts it holds in New York, Michigan, and Connecticut. 

\5 Travelers' part B costs reflect aggregate costs for the four
separate contracts it holds in Michigan, Connecticut, Mississippi,
and Virginia. 

\6 Medicare:  Adequate Funding and Better Oversight Needed to Protect
Benefit Dollars (GAO/T-HRD-94-59, Nov.  12, 1993). 


   HOW HCFA PERFORMS CONTRACTOR
   OVERSIGHT
------------------------------------------------------------ Letter :7

HCFA evaluates contractor performance each year through its
Contractor Performance Evaluation Program (CPEP), with the exception
of the Association's prime contract.  CPEP evaluates contractors'
performance against a set of standards announced at the beginning of
each budget year.  The standards emphasize claims processing, service
to the provider and the beneficiary, payment safeguards,
administrative management, and program efficiency.  CPEP results are
used to compare contractors' performance, correct inadequate
performance, or terminate contracts.  Although CPEP is generally
accepted as a useful tool in comparing contractor performance, it has
focused more on process rather than outcome.  Therefore, CPEP does
not sufficiently emphasize efforts to save program benefit payments,
particularly through its measurement of the effect of payment
safeguards.\7

In addition to CPEP, the OIG audits all costs that the contractors
and the Association incur in administering the Medicare program. 
Each year's contract costs are audited within 5 years of the contract
year.  According to OIG officials, the audits have questioned
relatively few of the costs the contractors have claimed.  Because of
the low dollar findings in these audits the OIG has proposed to HCFA
that it reduce the scope of these audits to only reviewing costs that
have been problematic in the past, such as pension funding and space
allocation.  OIG officials believe that their limited resources can
be more effectively used in other audits of the Medicare program,
such as fraudulent claims and overpayments, where the dollar findings
are much more significant. 

For the contracts we reviewed, all passed CPEP requirements,
including the criteria to remain within their budget limitations.  We
also reviewed the most current OIG audits and found that overall they
questioned a very small dollar amount--less than 2 percent of the
claimed costs. 


--------------------
\7 Medicare (GAO/T-HRD-94-59, Nov.  12, 1993). 


   ASSOCIATION DUES ARE
   PERMISSIBLE
------------------------------------------------------------ Letter :8

According to provisions of the Medicare contracts, which are
consistent with federal acquisition regulations, Medicare contractors
may be reimbursed for dues paid to insurance associations.  In return
for the dues, the associations provide consulting services, training,
and interpretation and analysis of HCFA regulations.  However, OIG
audit guidelines state that dues or contributions are not permissible
when their purpose is to influence passage of legislation.  In these
cases, contractors are to assign all lobbying costs directly to their
private lines of business. 

Dues are not permissible for Blues part A plans because the services
rendered for the dues are provided as part of the prime contract. 
For Blues plans that are part B contractors, HCFA has developed a
formula, called the millage rate, based on the number of Medicare
beneficiaries that each plan serves.  In fiscal year 1992, HCFA
increased the rate of allowable dues paid to the Association, which
amounted to $1.4 million.  We reviewed the OIG audits for the Blues
plans we studied and noted that the OIG found no basis to question
dues payments to the Association. 

Travelers, the commercial insurer we reviewed, paid dues of over
$512,000 for fiscal years 1990 through 1992 to its trade
association--the Health Insurance Association of America (HIAA). 
Commercial insurers can be reimbursed for dues under both part A and
B because the services provided in return for the dues are not
already provided as they are under the Association's prime contract. 
Travelers allocates its total dues to either its private or Medicare
line of business based on the number of beneficiaries in each
program.  According to Travelers officials, all costs associated with
lobbying are assigned directly to their private line of business.  We
did not verify Travelers' cost allocations, but we reviewed OIG
audits, which found no basis to question costs relating to dues. 
Table 1 shows the dues allocated to Medicare by the three contractors
we visited. 



                           Table 1
           
              Dues Medicare Contractors Paid to
               Insurance Associations That Were
                    Allocated to Medicare

              Fiscal      Fiscal      Fiscal
            year 1990   year 1991   year 1992     Paid to
----------  ----------  ----------  ----------  ------------
Kansas       $18,937     $19,881    $59,016\a      BCBSA
 part B
Florida       39,312      36,929      51,289       BCBSA
 part B
Travelers     19,130      20,095      22,784        HIAA
 part A
Travelers    128,968     150,712     170,306        HIAA
 part B
------------------------------------------------------------
\a In fiscal year 1992, Kansas Blue Cross and Blue Shield took over
the Kansas City, Missouri, Blues plan's part B contract, increasing
the number of beneficiaries, which the HCFA formula uses to determine
the rate of allowable dues. 


   CONCLUSIONS
------------------------------------------------------------ Letter :9

HCFA's contract process has changed little since the inception of the
Medicare program.  The Congress is considering requiring HCFA to
study the feasibility of changing its contracting process to
encourage a more competitive environment.  We believe that directing
HCFA to explore new contracting methods could be valuable, provided
that past problems are avoided. 

The Association functions as an extension of HCFA in its role of
subcontracting with its individual plans to process Medicare part A
claims.  However, HCFA needs to routinely evaluate the Association's
performance to ensure that the Medicare program is being managed
efficiently. 

HCFA's budget process has controls to ensure that contractors are not
overpaid.  While costs declined for all but one of the contractors we
reviewed, we are concerned that these reductions could result in
fewer payment safeguard activities that are essential for protecting
Medicare from waste, fraud, and abuse. 

HCFA oversees the Medicare contracting process through its annual
CPEP evaluation and through OIG financial audits of contractors'
administrative costs.  For the contractors we reviewed, all passed
the requirements of CPEP, and the OIG audits found little basis to
question contractors' costs. 

Medicare contract provisions, which are consistent with federal
acquisition regulations, permit Medicare contractors to be reimbursed
for dues paid to insurance associations provided that the services
rendered for the dues benefit the Medicare program.  Dues payments
used for lobbying are not reimbursable under federal laws and
Medicare regulations.  For the contractors we reviewed, the OIG
reports found no basis to question the dues payments. 


   RECOMMENDATIONS
----------------------------------------------------------- Letter :10

We recommend that the Secretary of HHS direct the Administrator of
HCFA to develop criteria and evaluate the performance of the Blue
Cross and Blue Shield Association in its role as the part A prime
contractor to ensure that the Medicare program is being managed
efficiently. 


--------------------------------------------------------- Letter :10.1

We discussed a draft of this report with HCFA officials who generally
agreed with its comments.  We have incorporated the officials'
comments where appropriate.  HCFA officials also stated that the
contract process should be changed, particularly the nomination
process.  We believe that the pending legislation requiring HCFA to
study its contracting process is called for and, if enacted, could
lead to such changes. 

We are sending copies of this report to the Secretary of HHS, the
Administrator of HCFA, Association officials, and the contractors we
visited.  Copies also will be made available to others on request. 
Should you have any questions about this report, please contact John
Hansen, Assistant Director, at (202) 512-7105 or Karyn Bell, Senior
Evaluator, at (202) 512-7155.  Vernette Shaw also contributed to this
report. 

Sincerely yours,

Leslie G.  Aronovitz
Associate Director, Health
 Financing Issues


SUMMARY OF CONTRACT COSTS
=========================================================== Appendix I



                                    Table I.1
                     
                      Florida Blue Cross Blue Shield -Part A


Contract type                               Cost            Cost            Cost
--------------------------------  --------------  --------------  --------------
(1) Bills payment                     $5,452,061      $5,592,001      $5,128,581
(2) Appeals                              407,704         389,179         335,389
(3) Medicare secondary payer           1,475,913       1,154,893       1,235,755
(4) Medical review                       890,027         744,902         896,523
(5) Desk audit                         1,160,018         919,296       1,005,571
(6) Field audit                        2,366,766       2,873,274       2,411,730
(7) Provider settlement                  955,902         931,342         960,375
(8) Provider reimbursement             1,557,025       1,616,058       1,481,561
(9) Productivity investment            2,216,264       2,049,037       2,648,143
(10) Other                                     0             550          10,800
Total administrative cost            $16,418,680     $16,270,532     $16,114,428
Benefits paid                     $3,988,481,702  $3,380,197,927  $3,389,482,762
Percent of administrative costs     Greater than    Greater than    Greater than
                                              1%              1%              1%
Bottom line unit costs                     $4.51           $4.68           $4.96
Number of claims processed             3,640,416       3,477,822       3,249,804
--------------------------------------------------------------------------------


                                    Table I.2
                     
                      Kansas Blue Cross Blue Shield -Part A


Contract type                               Cost            Cost            Cost
--------------------------------  --------------  --------------  --------------
(1) Bills payment                     $1,346,427      $1,234,872      $1,249,034
(2) Appeals                               52,297          69,644          41,196
(3) Medicare secondary payer             393,286         437,955         679,427
(4) Medical review                       213,700         227,745         214,300
(5) Desk audit                           154,248         264,636         226,741
(6) Field audit                          635,818         657,093         619,652
(7) Provider settlement                   83,754         139,284         115,502
(8) Provider reimbursement               170,710         205,760         228,615
(9) Productivity investment              162,899         151,080          47,545
(10) Other                                 3,600               0               0
Total administrative costs            $3,216,739      $3,388,069      $3,422,012
Benefits paid                       $543,795,380    $497,391,301    $509,860,178
Percent of administrative costs     Greater than    Greater than    Greater than
                                              1%              1%              1%
Bottom line unit costs                     $4.06           $4.61           $5.01
Number of claims processed               792,145         735,043         682,532
--------------------------------------------------------------------------------


                                    Table I.3
                     
                                Travelers -Part A


Contract type                          Incentive            Cost            Cost
--------------------------------  --------------  --------------  --------------
(1) Bills payment                     $1,466,290      $1,330,378      $1,393,867
(2) Appeals                              239,068         239,835         217,438
(3) Medicare secondary Payer             258,160         380,868         530,077
(4) Medical review                       381,522         349,062         480,134
(5) Desk audit                           915,064         799,100         753,658
(6) Field audit                          354,937         513,771         546,945
(7) Provider settlement                  394,520         295,091         534,142
(8) Provider reimbursement               607,281         670,785         657,065
(9) Productivity investment              200,400         204,719         299,911
(10) Other                               121,786               0           4,561
Total administrative costs            $4,939,028      $4,783,609      $5,417,798
Benefits paid                       $627,336,240    $545,687,578    $623,889,326
Percent of administrative costs     Greater than    Greater than    Greater than
                                              1%              1%              1%
Bottom line unit costs                     $5.52           $5.96           $7.03
Number of claims processed               894,280         802,668         770,315
--------------------------------------------------------------------------------


                                    Table I.4
                     
                      Florida Blue Cross Blue Shield -Part B


Contract type                               Cost            Cost            Cost
--------------------------------  --------------  --------------  --------------
(1) Claims payment                   $45,296,390     $45,955,586     $42,865,385
(2) Appeals                            7,741,494       9,706,114       8,647,001
(3) Inquiries                         10,578,945      11,298,603      12,331,081
(4) Provider education                 1,284,078         901,647         509,532
(5) Medical review                     7,862,383       7,265,378       7,835,333
(6) Medicare secondary payer           4,130,858       1,757,456       2,458,987
(7) Participating physician            2,369,118       2,361,851       1,968,305
(8) Productivity investment            3,699,808       3,787,021       4,840,884
(9) Other                                      0               0           4,000
(10) Other                             2,229,564       2,194,800         512,800
Total administrative costs           $85,192,638     $85,228,456     $81,973,308
Total benefits paid               $3,085,046,289  $2,968,730,215  $2,955,563,822
Percent of administrative costs             2.8%            2.9%            2.8%
Bottom line unit costs                     $1.94           $2.10           $2.24
Number of claims processed            43,997,171      40,653,360      36,652,687
--------------------------------------------------------------------------------


                                    Table I.5
                     
                      Kansas Blue Cross Blue Shield -Part B


Contract type                               Cost            Cost            Cost
--------------------------------  --------------  --------------  --------------
(1) Claims payment                    $8,413,481      $4,369,119      $4,236,912
(2) Appeals                              596,700         354,689         273,798
(3) Inquiries                          2,081,700         879,303         862,805
(4) Provider education                   212,500         140,280          91,198
(5) Medical review                     1,859,491       1,113,630         935,856
(6) Medicare secondary payer             656,286         458,640         570,768
(7) Participating physician              411,607         315,856         248,291
(8) Productivity investment              936,832         733,795         204,874
(9) Other                                105,600          47,900          10,800
(10) Other                                     0               0               0
Total administrative costs           $15,274,197      $8,413,212      $7,435,302
Total benefits paid                 $461,919,686    $206,487,467    $195,720,453
Percent of administrative costs               3%              4%              4%
Bottom line unit costs                     $1.96           $2.37           $2.28
Number of claims processed             7,790,261       3,552,129       3,259,163
--------------------------------------------------------------------------------


                                    Table I.6
                     
                                Travelers -Part B


Contract type                          Incentive            Cost            Cost
--------------------------------  --------------  --------------  --------------
(1) Claims payment                   $26,512,034     $27,299,305     $25,835,053
(2) Appeals                            2,008,501       1,626,352       1,647,515
(3) Inquiries                          4,844,757       5,245,474       4,892,627
(4) Provider education                   782,470         650,617         457,318
(5) Medical review                     3,254,228       3,575,421       3,699,007
(6) Medicare secondary payer           1,554,665       1,458,507       1,212,264
(7) Participating physician              452,328         451,302         522,911
(8) Productivity investment            2,090,579         600,989       2,168,619
(9) Other                                      0               0               0
(10) Other                             3,420,629       1,532,900         255,247
Total administrative costs           $44,920,191     $42,440,867     $40,690,561
Total benefits paid               $1,463,452,888  $1,382,350,179  $1,268,821,785
Percent of administrative costs             3.1%            3.1%            3.2%
Bottom line unit costs                     $1.72           $1.81           $1.93
Number of claims processed            26,120,595      23,401,163      21,036,169
--------------------------------------------------------------------------------


                                    Table I.7
                     
                       Blue Cross Blue Shield Association -
                              Part A Prime Contract


Contract type                               Cost            Cost            Cost
--------------------------------  --------------  --------------  --------------
(1) Bills payment                       $883,703      $1,075,268        $667,148
(2) Appeals                                    0               0               0
(3) Medicare secondary payer             140,770         153,044          93,511
(4) Medical review                       194,145         155,771         217,885
(5) Desk audit                           738,090         855,333         565,483
(6) Field audit                        1,253,737       1,464,662       1,556,262
(7) Provider settlement                3,480,579       3,442,264       3,266,806
(8) Provider reimbursement               171,911         286,013         242,327
(9) Productivity investment              147,414               0               0
(10) Other                               175,306          13,595         470,585
(11) Other                                     0               0          62,214
(12) Other                                     0               0         170,197
Total administrative costs            $7,185,655      $7,445,950      $7,312,418
--------------------------------------------------------------------------------

SCOPE AND METHODOLOGY
========================================================== Appendix II

To determine how the Medicare contract process works, we interviewed
HCFA, Medicare contractor, and Blue Cross and Blue Shield Association
officials.  We reviewed Medicare part A and B contract and budget
documents for fiscal years 1990 through 1992 at Blue Cross and Blue
Shield (BCBS) of Florida and Kansas, and at Travelers Insurance
Company, Hartford, Connecticut.  We selected these contractors to
obtain a mix of both Blues and commercial insurer plans. 

To determine how HCFA contracts with the Association to subcontract
with its member plans to process Medicare part A claims, we
interviewed HCFA, Association, and BCBS subcontractor officials.  We
also reviewed contract documents for fiscal years 1990 through 1992. 

To determine how HCFA ensures that contractors are not overpaid we
interviewed HCFA and contractor officials to determine how HCFA sets
budget limits and how contractors adhere to the budget limitations. 
For three contractors, we analyzed budget documents for a 3-year
timeframe and assessed how the budget limitations were enforced and
how the budgeted amounts changed over the timeframe reviewed.  In
reviewing the contracts, we determined how HCFA made budget decisions
and distributed funds to the contractors and how each contractor's
level of funding changed over the timeframe reviewed.  We did not
attempt to assess HCFA's methodology of setting budget limits for
each contractor, but we did assess whether or not funding increased
or decreased for the contracts we reviewed. 

To determine how HCFA evaluates the performance of these contracts,
we interviewed HCFA officials responsible for CPEP, and OIG officials
responsible for the financial audits for the contracts we reviewed. 
We also reviewed the most recent OIG audit reports for each of the
contractors we visited.  We discussed with OIG officials the fact
that these audits questioned few costs and the officials' planned
approach of reducing the scope of these audits because most Medicare
contractor audits question few costs and result in few recoveries. 
Our work focused on the oversight process and did not attempt to
assess whether or not these oversight activities were adequate. 

To determine the appropriateness of dues paid to associations, we
reviewed OIG audit requirements for allocating dues to Medicare and
discussed the appropriateness of dues payments with OIG officials. 
With HCFA officials we discussed the procedures that both Blues plans
and commercial insurers use to determine the amount of allowable dues
to be paid to associations.  For the Blues plans, we obtained
information from HCFA regarding the formula it developed for the
individual Blues plans to determine the amount of dues it can pay the
Blue Cross Blue Shield Association.  From Travelers Insurance
Company, we obtained information on how it calculates and allocates
allowable dues.  We did not verify these calculations for the
contract years that we reviewed.  However, for both the Blues plans
and Travelers we reviewed the most recent OIG audit reports to assess
the appropriateness of the dues payments and found that none of the
allocations had been questioned. 

