Medicare Financial Management: Further Improvements Needed to Establish
Adequate Financial Control and Accountability (Testimony, 03/15/2000,
GAO/T-AIMD-00-118).

Pursuant to a congressional request, GAO discussed its review of the
Health Care Financing Administration's (HCFA) financial management
activities for Medicare, focusing on challenges HCFA faces in
establishing an adequate foundation for control and accountability over
the Medicare program's financial operations.

GAO noted that: (1) financial statement audits have repeatedly cited
claims contractors for internal control and financial reporting
weaknesses, including failure to safeguard checks received from
providers for overpayments and incorrectly recording billions of dollars
owed to the Medicare program for such overpayments; (2) however, HCFA's
procedures for following up on audit findings and evaluating corrective
actions were insufficient; (3) HCFA's monitoring of contractor financial
activities was also insufficient; (4) until recently, HCFA's oversight
focused mainly on contractor compliance with administrative budgets,
which total about $1.6 billion annually, instead of on the significant
financial activities related to the approximately $170 billion expended
annually to pay Medicare health benefit claims; (5) further, HCFA did
not routinely analyze contractor financial data to detect irregularities
and assess risk as part of day-to-day monitoring activities, nor had it
issued complete and up-to-date instructions to contractors on key
financial matters; (6) audit reports have also cited HCFA for
inefficiencies in its internal financial reporting practices, including
a lack of documented policies and procedures; (7) overall, these
shortcomings in HCFA's financial operations mean that it could not
adequately ensure the reliability of data that the agency and Congress
used to track the cost of the Medicare program and to help make informed
decisions about future funding; (8) HCFA's management has recognized the
seriousness of these problems and has shown a commitment to improving
financial management; (9) to address these issues, HCFA has started
several initiatives designed to establish better control and
accountability, such as hiring outside consultants to evaluate
contractor internal controls; (10) HCFA has not yet developed a
comprehensive strategy to ensure successful implementation of the
initiatives, direct financial management activities, and sustain
improvements in the long term; (11) in the absence of a comprehensive
strategy, HCFA cannot effectively direct and monitor its many
initiatives, potentially putting billions of dollars at risk for fraud
and abuse and increasing the likelihood that financial management
problems will continue; (12) HCFA has not yet completed ongoing
assessments of financial management human capital needs; and (13)
without sufficient staff who possess the necessary skills to perform the
oversight, analytical, and other tasks that are needed to manage the
complex Medicare program, the prospects for improving HCFA's financial
management remain dim.

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

 REPORTNUM:  T-AIMD-00-118
     TITLE:  Medicare Financial Management: Further Improvements Needed
	     to Establish Adequate Financial Control and
	     Accountability
      DATE:  03/15/2000
   SUBJECT:  Health services administration
	     Contract oversight
	     Claims processing
	     Internal controls
	     Financial management
	     Accountability
	     Health insurance
	     Health care programs
	     Federal agency accounting systems
IDENTIFIER:  Medicare Contractor Performance Evaluation Program
	     Medicare Program

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   * For Release on Delivery
     Expected at
     10 a.m.

Wednesday,

March 15, 2000

GAO/T-AIMD-00-118

medicare financial management

Further Improvements Needed to Establish Adequate Financial Control and
Accountability

        Statement of Gloria Jarmon

Director, Health, Education, and Human Services Accounting and Financial
Management Issues

Accounting and Information Management Division

Testimony

Before the Subcommittee on Government Management, Information and
Technology, Committee on Government Reform, House of Representatives

United States General Accounting Office

GAO

Mr. Chairman and Members of the Subcommittee:

I am pleased to be here today to discuss our review of the Health Care
Financing Administration's (HCFA) financial management activities for
Medicare. Our report on these issues is being issued today and copies have
been given to the Subcommittee. Medicare is the nation's largest health
insurer, covering almost 40 million beneficiaries at a cost of over $200
billion annually. Each business day, HCFA's contractors process about 3.5
million claims worth an average of more than $650 million.

Addressing the financial management challenges associated with administering
the Medicare program is a daunting task given the size and complexity of the
program. As the Medicare program steward, HCFA is accountable for ensuring
that funds are spent wisely and in accordance with applicable Medicare laws
and that the Medicare program is well managed.

Over the past 4 years, HCFA has set and achieved goals of improving its
audit opinion each year. For fiscal year 1999, HCFA received an unqualified,
or "clean," opinion on its financial statements, and its audit reports were
issued on time. Annual financial audits represent an important means to
assure continued progress in improving financial management and to identify
significant weaknesses in financial management that require management's
attention. Audit results are also key indicators of the quality of the
underlying agency financial data and related systems used to compile that
information.

For HCFA, as well as other federal agencies, while obtaining an unqualified
or "clean" audit opinion on its financial statements is an important
objective, it is not an end in and of itself. The key for agencies is to
take steps to continuously improve internal controls and underlying
financial systems for programs such as Medicare. The ultimate goal is for
agencies to be able to generate reliable, timely, accurate, and useful
information for decision-making on an ongoing basis.

Since fiscal year 1996, audits of HCFA's financial statements have cited the
agency for many financial management weaknesses that affect the agency's
ability to establish adequate control and accountability. Many of the
underlying internal control weaknesses in HCFA's operations continue. The
Medicare program has also received increased attention as a result of
investigations by the Department of Health and Human Services' (HHS) Office
of the Inspector General (OIG) and the Department of Justice that cited
Medicare claims contractors and providers, such as hospitals and physicians,
for payment errors and fraudulent billing practices. For fiscal year 1999,
the OIG estimated that claims contractors improperly paid $13.5 billion in
Medicare claims, mostly for medical services that were not covered by
Medicare or were not reasonable, necessary, and appropriate.

At the same time, HCFA has been the subject of increased congressional
interest since we designated the Medicare program a high-risk area in the
early 1990s. Just recently, we testified before the Subcommittee on Labor,
Health and Human Services, Education and Related Agencies, Senate Committee
on Appropriations, on Medicare program integrity issues, including the
ongoing and emerging challenges HCFA faces in safeguarding Medicare
payments.

Today, I will discuss the results of our report that is being issued today
on HCFA's financial management activities for Medicare. As our report
highlights, HCFA has not yet established an adequate foundation for control
and accountability over the Medicare program's financial operations. Let me
begin by summarizing these weaknesses:

   * Financial statement audits have repeatedly cited claims contractors for
     internal control and financial reporting weaknesses, including failure
     to safeguard checks received from providers for overpayments and
     incorrectly recording billions of dollars owed to the Medicare program
     for such overpayments. However, HCFA's procedures for following up on
     audit findings and evaluating corrective actions were insufficient.
   * HCFA's monitoring of contractor financial activities was also
     insufficient. Until recently, HCFA's oversight focused mainly on
     contractor compliance with administrative budgets, which total about
     $1.6 billion annually, instead of on the significant financial
     activities related to the approximately $170 billion expended annually
     to pay Medicare health benefit claims. Further, HCFA did not routinely
     analyze contractor financial data to detect irregularities and assess
     risk as part of day-to-day monitoring activities, nor had it issued
     complete and up-to-date instructions to contractors on key financial
     matters.
   * Audit reports have also cited HCFA for inefficiencies in its internal
     financial reporting practices, including a lack of documented policies
     and procedures.

Overall, these shortcomings in HCFA's financial operations mean that it
could not adequately ensure the reliability of data that the agency and the
Congress used to track the cost of the Medicare program and to help make
informed decisions about future funding.

HCFA's management has recognized the seriousness of these problems and has
shown a commitment to improving financial management. To address these
issues, HCFA has started several initiatives designed to establish better
control and accountability, such as hiring outside consultants to evaluate
contractor internal controls. These initiatives, if successfully
implemented, will assist HCFA in correcting some of its longstanding
financial management problems. At the same time, HCFA has not yet taken
critical steps to address the challenges of implementing its planned
improvement efforts.

   * HCFA has not yet developed a comprehensive strategy to ensure
     successful implementation of the initiatives, direct financial
     management activities, and sustain improvements in the long term. In
     the absence of a comprehensive strategy, HCFA cannot effectively direct
     and monitor its many initiatives, potentially putting billions of
     dollars at risk for fraud and abuse and increasing the likelihood that
     financial management problems will continue.
   * HCFA has not yet completed ongoing assessments of financial management
     human capital needs. Without sufficient staff who possess the necessary
     skills to perform the oversight, analytical, and other tasks that are
     needed to manage the complex Medicare program, the prospects for
     improving HCFA's financial management remain dim.

Our report makes recommendations designed to help HCFA resolve these
problems.

HCFA's Process for Managing Medicare Fee-For-Service

Medicare claims contractors use federal funds to pay health care providers
and are reimbursed for their administrative expenses incurred in performing
the work. More specifically, contractors have financial management
responsibilities that include (1) establishing agreements with commercial
banks to withdraw federal funds from the Medicare trust funds to pay
Medicare claims, (2) submitting various financial reports to HCFA on the
amount of funds withdrawn and expended, and (3) certifying that their
internal controls are in place and operating effectively.

Over the years, HCFA has reduced the number of Medicare contractors from a
peak of about 130 in 1966 to 56 in 1999. Generally, intermediaries are the
contractors that handle Part A claims submitted by hospitals, skilled
nursing facilities, and hospices. Carriers are those contractors handling
Part B claims submitted by physicians, laboratories, equipment suppliers,
and other practitioners.

HCFA is responsible for ensuring that contractors do their jobs accurately
and efficiently, including managing Medicare funds in a fiscally responsible
manner. HCFA is also responsible for establishing an internal control system
to safeguard Medicare assets. At HCFA's central office, the Office of
Financial Management (OFM) is responsible for monitoring of contractor
financial data and activities in addition to facilitating the annual
financial statement audit process, preparing financial statements, and
executing daily internal accounting functions. HCFA's central office unit,
the Center for Beneficiary Services (CBS) and the 10 regional offices share
the responsibility for conducting annual oversight reviews of all aspects of
contractor operations for the Medicare program as part of HCFA's Contractor
Performance Evaluation (CPE) program. HCFA's OFM is expected to coordinate
with CBS and assist the regional offices in assessing contractor financial
activities.

Establishing a Solid Foundation for Control and Accountability

Significant Financial Management Weaknesses Persist

   * HCFA's systems do not fully comply with the federal financial system
     requirements of the Federal Financial Management Improvement Act
     (FFMIA). The federal financial system requirements prescribe the basic
     elements for integrated federal financial management systems and having
     financial systems that fully comply with these requirements is key to
     the goal of having reliable, timely, and useful information for
     day-to-day decision making.
   * Contractor EDP controls over data processing systems do not provide
     adequate safeguards to reduce improper access to and manipulation of
     data.
   * Medicare contractors are unable to accurately report some financial
     data due to insufficient accounting systems, inadequate independent
     verification of reported amounts, and lack of other financial controls.
   * Medicare contractors' controls to properly account for cash balances
     and activity do not provide adequate safeguards to reduce the
     opportunities for theft and other irregularities in their cash
     procedures.
   * HCFA's preparation of annual financial statements is manually
     intensive, requiring extensive adjustments due to lack of an accounting
     software package to automatically manipulate data for the development
     of financial statements. In short, HCFA obtained a "clean" audit
     opinion through a lot of hard work because its financial systems were
     not adequate.

Most notably, HCFA has had long-standing problems in supporting the amount
of accounts receivable due back to the Medicare program either for claims in
which Medicare should be the secondary rather than primary payer (referred
to as Medicare secondary payer) or for contractor overpayments to providers,
beneficiaries, physicians, and suppliers.

For fiscal year 1999, HCFA devoted significant resources to address its
accounts receivable problems by (1) entering into an interagency agreement
with the HHS OIG to assist in validating the accuracy and completeness of
accounts receivable balances at September 30, 1998, and March 31, 1999, as
well as the activity for the first 6 months of fiscal year 1999 and (2)
implementing procedures to write off almost $3 billion of Medicare accounts
receivable balances for fiscal year 1999. While these efforts were
significant to improving HCFA's accounts receivable balance at September 30,
1999, and the auditors' opinion on the financial statements, the underlying
financial systems problems still remain. The auditors still reported the
Medicare accounts receivable issue as a material internal control weakness.
They stated that many Medicare contractors are still using processes, such
as ad-hoc spreadsheet applications and a wide variety of claims processing
systems, for tracking receivables that often cannot be reconciled to control
amounts. This means that misuse of government resources could occur and HCFA
would not be able to detect it in a timely manner.

Audit Evaluation and Follow-up Procedures Were Ineffective

Our review also found two contractors not included in previous audits that
had problems with controls over cash and review of financial data, similar
to findings reported on contractors in prior audits. One contractor that
receives cash from providers and other sources averaging about
$20 million a month did not physically secure checks while awaiting
deposits, thus increasing the risk of lost checks and untimely deposits of
Medicare funds. Another contractor with cash receipts of about $1.5 million
monthly did not record the amounts in a log when first received, thus
creating opportunities for theft.

HCFA is just starting to document procedures for ensuring that its staff
adequately evaluates audit findings and conducts follow-up with contractors
to ensure prompt resolution. We believe that these new procedures are a good
first step, but HCFA financial managers must coordinate with other HCFA
units to ensure that adequate resources are available to support a
comprehensive audit evaluation and resolution process.

Oversight of Contractor Financial Activities Was Limited in Scope

Recognizing the shortcomings of the HCFA annual oversight process, in fiscal
year 1998, the Chief Financial Officer (CFO) took steps to address
weaknesses in oversight of financial activities. For example, HCFA's OFM
developed procedures for the regions to use in checking and testing
financial data related to accounts receivable and accounts payable for
several of the large contractors. OFM also provided staff to assist regional
reviewers in an attempt to develop and leverage the skills and expertise of
staff conducting the reviews. The procedures, however, did not cover other
key financial activities, such as contractor bank balances and funds
withdrawal procedures.

Contractors and the commercial banks that act on behalf of contractors
withdraw the almost $170 billion required annually to pay Medicare benefit
claims. Despite the magnitude of dollars that flow in and out of contractor
bank accounts, HCFA has not developed detailed procedures to review
contractor bank balances and the amount of funds withdrawn. We discussed
with the CFO the need for expanded evaluation procedures to cover these
areas. The CFO agreed and has begun discussions with officials in the HCFA
headquarters unit responsible for contractor oversight about expanding
financial management oversight.

In fiscal year 1999, HCFA solicited outside help to address some of its
significant financial weaknesses. As discussed earlier, HCFA entered into a
reimbursable interagency agreement with the OIG to assess and validate the
accounts receivable activity and balances reported at September 30, 1998,
and March 31, 1999. HCFA also contracted with outside consultants to
validate internal controls at contractors in response to our July 1999
report that HCFA does not regularly check contractors' internal controls.

While these two efforts demonstrate that HCFA is acting to address its
long-standing problems, we are concerned that HCFA's financial managers have
not yet comprehensively assessed how the agency will sustain strong
oversight in these two areas in the future or address the recommendations
that will likely result from these reviews. For example, HCFA has developed
a work force planning project, but thus far this initiative has provided
limited information about specific areas, such as financial management.

Day-to-Day Monitoring of Contractor Financial Activities Is Insufficient

When HCFA was made aware of the situation, the CFO issued a letter to the
bank president to (1) inform the bank that the practice was not in
accordance with provisions of the Medicare program bank agreement and
Treasury's regulations concerning collateral requirements for federal funds
and (2) request that the bank immediately stop the practice. However,
because HCFA has so little information on contractor bank activities and
does so little analysis, it could not fully determine the extent of
irregular activities by this bank. At the request of HCFA, the OIG
investigated this bank to determine the amount of profit the bank made from
this practice. HCFA officials said that they are awaiting the results of
this report to determine what actions against the bank are needed, including
disciplinary actions. In addition, HCFA officials said that they asked the
OIG to conduct a separate review of bank procedures for a sample of banks
participating in the Medicare program to determine if other banks are
unfairly profiting from similar practices and to identify areas of potential
vulnerability.

We also found that HCFA did limited analysis of quarterly reports submitted
by contractors on bank charges, account balances, and collateral. OFM had
one staff person who monitored the Medicare bank account balances for the
approximately 20 commercial banks that maintain Medicare accounts for the 56
contractors. The staff person said that because of other responsibilities,
he only reviewed bank account reports for about 2 or 3 of the 56 Medicare
contractors each quarter. When we asked to review his analysis, the staff
person could not provide any support or written analysis procedures.

Contractors Lacked Sufficient Guidance to Resolve Financial Management
Deficiencies

HCFA's CFO acknowledged that more detailed instructions to contractors are
needed because HCFA's contracting documents do not include enough
specificity to contractors on their fiscal responsibilities. However,
because HCFA lacks baseline data on its financial management instructions,
it has hired a contractor to determine what financial guidance has been
issued and to develop a manual of financial and internal control guidance.
This effort has just begun and it is too soon to tell whether it will
succeed in addressing these fundamental problems.

HCFA Lacked Structure for Internal Financial Reporting Practices

Senior OFM officials said that the staff person who prepared the report had
assumed the responsibilities of a former employee but had not received
adequate training. Because of HCFA's errors, the Medicare trust fund
balances that Treasury invested for several months were incorrect, thus
resulting in a loss of investment interest income of about $80 million to
the Medicare program. HCFA officials told us they have taken steps to
enhance their procedures for reporting trust fund balances.

Recent Initiatives Hold Promise But Sustained Commitment Is Critical

No Comprehensive Strategy or Plans for Implementing Financial Management
Improvement Initiatives

HCFA's current financial management improvement initiatives include
(1) developing an integrated accounting system that incorporates Medicare
contractors' financial systems and HCFA's internal financial accounting
systems, (2) developing new systems to improve oversight and financial
reporting over Medicare receivables, (3) reviewing contractors' internal
controls, and (4) developing a comprehensive contractor financial management
manual. While these projects have the potential to provide major
improvements in HCFA's financial management, the chances of success could be
significantly improved if HCFA established and documented a specific
strategy and implementation plan for sustaining the projects and
institutionalizing improvements. HCFA officials provided us with broad
conceptual ideas of how the initiatives would need to be implemented. As of
January 2000, when we completed our fieldwork, HCFA was in the early stages
of drafting more specific details for several of its financial management
improvement initiatives.

Any delays in developing detailed plans could cause problems as the projects
progress. Specifically, the integrated accounting system project, which HCFA
describes as its most comprehensive financial systems development project,
is critical and should be well planned. In the past, we have reported on the
significant challenges that agencies face in ensuring that modern
information technology management practices are consistently defined and
properly implemented.

Another financial management improvement initiative that holds great promise
for helping HCFA improve financial control is the current project to review
contractors' internal control structures, identify poor internal controls,
and suggest needed improvements. HCFA has contracted with several
independent public accounting firms to perform these reviews. However, HCFA
has not yet developed a comprehensive plan to ensure sustained oversight of
contractor internal controls. HCFA officials envision that these contracted
reviews will continue in future years, but HCFA has not determined what
resources will be needed to do the reviews or respond to recommendations
resulting from the reviews. Further, HCFA officials do not have alternative
plans in the event that these reviews cannot be continued. Without
alternative plans, this critical activity could be interrupted.

Assessing Human Capital Needs Is Essential

In our recently issued exposure draft of an executive guide designed to help
federal agencies achieve federal financial management objectives, we
highlighted successful human capital efforts in leading organizations
including three critical elements for developing first-rate staff teams.
These elements include (1) determining required skills and competencies, (2)
measuring the gap between what the organization needs and what it has, and
(3) developing strategies and detailed plans to address current or expected
future deficiencies.

In comments to our report, HCFA officials stated that they recently
initiated an agencywide workforce planning project. This project consists of
a four-phased model designed to incorporate critical elements similar to
those mentioned in our guide. To date, the results of this project have
provided HCFA with limited information, and more detailed assessments to
analyze current and future work functions and competencies have not been
completed. HCFA's current plans are to use results from its project to
formalize hiring, staffing, and learning plans for fiscal year 2001. Having
staff with appropriate skills is key to achieving financial management
improvements. Therefore, emphasis on completing more detailed human capital
planning within HCFA's proposed time frames is important.

Conclusions

The significance of the financial management issues facing HCFA emphasizes
the need for a comprehensive strategy to direct its financial activities and
assess its human capital needs. This strategy would help HCFA establish
seamless systems and processes to improve financial management and
accountability. HCFA has agreed with the recommendations in our report that
we are releasing today. Management outlined its ongoing and planned
initiatives to address the problems highlighted in our report. Top
management's continued support of these initiatives and sustained actions,
as outlined in HCFA's response to our report, will be key to its success in
resolving these problems. We plan to continue to monitor HCFA's progress in
implementing its financial management improvement efforts.

Mr. Chairman, this concludes my statement. I would be happy to answer any
questions you or other Members of the Subcommittee may have.

Contact and Acknowledgement

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