Medicare: 21st Century Challenges Prompt Fresh Thinking About Program's
Administrative Structure (Testimony, 05/04/2000, GAO/T-HEHS-00-108).

Pursuant to a congressional request, GAO discussed ways to improve the
administration of the Medicare program, focusing on the: (1) issues the
Health Care Financing Administration (HCFA) faces in administering the
Medicare program; and (2) extent to which proposed reforms or
alternative models might address these issues.

GAO noted that: (1) Medicare is an inherently difficult program to
manage, regardless of its governance structure; (2) any entity
administering a public program of Medicare's size and with its vast
universe of stakeholders will be the target of affected parties that
feel disadvantaged or harmed by some of its decisions, regardless of
their merits; (3) however, there are key problems that impair HCFA's
ability to manage Medicare effectively that are amenable to solutions;
(4) no one senior official in HCFA is responsible for managing only
Medicare; instead, the HCFA Administrator oversees Medicaid and other
state-centered programs--worthy competitors for agency management
attention; (5) frequent changes in agency leadership make it difficult
to develop and implement a consistent long-term vision; (6) constraints
on HCFA's ability to acquire appropriate resources and expertise limit
the agency's capacity to modernize Medicare's existing operations and
carry out the program's growing responsibilities; (7) elements of recent
Medicare reform proposals, together with alternatives from existing
federal agencies, suggest ways of addressing the focus, leadership, and
capacity issues; and (8) options could include creating an entity that
would administer Medicare without any non-Medicare responsibilities;
establishing a tenure for the program's administrator that, at a
minimum, would overlap presidential terms; and granting the entity
administering Medicare greater operational flexibility.

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

 REPORTNUM:  T-HEHS-00-108
     TITLE:  Medicare: 21st Century Challenges Prompt Fresh Thinking
	     About Program's Administrative Structure
      DATE:  05/04/2000
   SUBJECT:  Program management
	     Quality assurance
	     Health care programs
	     Health insurance
	     Health services administration
	     Accountability
	     Patient care services
IDENTIFIER:  Medicare Choice Program
	     Medicare Program
	     Medicaid Program

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GAO/T-HEHS-00-108

   * For Release on Delivery
     Expected at 9:30 a.m.

Thursday, May 4, 2000

GAO/T-HEHS-00-108

MEDICARE

21st Century Challenges Prompt Fresh Thinking About Program's Administrative
Structure

        Statement of William J. Scanlon, Director

Health Financing and Public Health Issues

Health, Education, and Human Services Division

Testimony

Before the Committee on Finance, U.S. Senate

United States General Accounting Office

GAO

Medicare: 21st Century Challenges Prompt Fresh Thinking About Program's
Administrative Structure

Mr. Chairman and Members of the Committee:

We are pleased to be here as you discuss ways to improve the administration
of the Medicare program. In recent years, we have reported to the Congress
on the capacity of the Health Care Financing Administration (HCFA), the
agency that administers Medicare, to carry out its multiple, complex
missions. Today's discussion is particularly significant because reform
proposals are being made to substantially restructure the program. For
example, the President and Senators Breaux and Frist (among others) have
proposed comprehensive Medicare reform. As the Comptroller General discussed
before this Committee in February, both proposals would use a competitive
process to set health plan payments, while each offers its own approach to
administering traditional Medicare. We also reported to this Committee on
the complex issues that would be involved in administering a new outpatient
prescription drug benefit.

In this context, my remarks today will focus on (1) the issues HCFA faces in
administering Medicare today and (2) the extent to which proposed reforms or
alternative models might address these issues. My comments are based
primarily on our recent work analyzing Medicare reform proposals, our
numerous studies over the past few years regarding HCFA program management
issues, an array of our studies on payment and pricing issues pertinent to
traditional Medicare and Medicare+Choice, and our studies of other
government agencies.

In brief, Medicare is an inherently difficult program to manage, regardless
of its governance structure. Any entity administering a public program of
Medicare's size and with its vast universe of stakeholders will be the
target of affected parties that feel disadvantaged or harmed by some of its
decisions, regardless of their merits. However, there are key problems that
impair HCFA's ability to manage Medicare effectively that are amenable to
solutions. Currently, (1) no one senior official in HCFA is responsible for
managing only Medicare; instead, the HCFA Administrator oversees Medicaid
and other state-centered programsâworthy competitors for agency management
attention; (2) frequent changes in agency leadership make it difficult to
develop and implement a consistent long-term vision; and (3) constraints on
HCFA's ability to acquire appropriate resources and expertise limit the
agency's capacity to modernize Medicare's existing operations and carry out
the program's growing responsibilities. Elements of recent Medicare reform
proposals, together with alternatives from existing federal agencies,
suggest ways of addressing the focus, leadership, and capacity issues.
Options could include creating an entity that would administer Medicare
without any non-Medicare responsibilities; establishing a tenure for the
program's administrator that, at a minimum, would overlap presidential
terms; and granting the entity administering Medicare greater operational
flexibility.

Program Size and Public Nature Make Medicare Inherently Challenging to
Manage

Each year, Medicare accounts for over $200 billion in federal outlays, or an
estimated 12 percent of the federal budget in fiscal year 2001; covers about
40 million beneficiaries; and processes about 900 million claims submitted
by nearly 1 million hospitals, physicians, and other health care providers.
Medicare's largest component is its traditional fee-for-service program.
Traditional Medicare enrolls over 82 percent of Medicare beneficiaries and
is administered largely by private insurance companies with which the
government contracts to process and pay claims. Medicare+Choice, which
enrolls over 20 percent of Medicare beneficiaries, consists principally of
private managed care plans that contract with the government and are paid a
set, monthly per-beneficiary rate. The range and complexity of activities
involved in managing Medicare are considerable. Table 1 highlights some of
these activities.

Table 1. Examples of Selected Medicare Responsibilities and Activities
Illustrate Magnitude of Work Involved in Administering Medicare

  
 Program
 activity      Example
               HCFA's central office and its regional officesâwhich also
               oversee the monitoring of nursing homes and other
               institutionsâare responsible for monitoring the 50-some
               Medicare claims administration contractors. Among other
               things, HCFA staff must determine whether the contractors

                  * Ã¡Â½Œ process most of their claims within a month
                    or less of receipt,
                  * Ã¡Âº are not reversed on more than a small fraction of
                    their claims decisions,
 Contractor       * Ã¡Â·„ generate correctly nearly all of their
 oversight          notices to beneficiaries explaining benefits,

               Ã¡Â´ identify insurers that should have paid claims that
               were mistakenly billed to Medicare,

               Ã¡Â°Â¼ operate fraud units that explore leads and develop
               and refer cases to law enforcement agencies, and

               Ã¡Â°Â¼ identify instances or patterns of inappropriate
               billing that could result in unnecessary payments and
               serious financial losses to the program.
               HCFA must set literally tens of thousands of payment rates
               to pay suppliers for Medicare-covered items and to pay
               providersâincluding physicians, hospitals, outpatient and
               nursing facilities, and home health agencies, among
               othersâfor Medicare-covered services. If Medicare's rates
               are set too high, taxpayers lose; if set too low, providers
               lose and beneficiary access is threatened. Following are
               examples of health care providers for which HCFA must
               establish Medicare payment rates and the analytical tasks
               involved:

               Ã¡Â°Â¼ Physicians. Develop rates that reflect the resources
               involved in providing individual services as well as current
               practice costs in local markets. Ã¡Â°Â¼ Acute care
               hospitals.Update base rate and adjust payments to reflect
               inflation and geographic cost differences.Update patient
               classification mechanism that adjusts payments to reflect
               patient need.Ã¡Â°Â¼ Home health agencies.Calculate base
               payments that reflect the average costs of an episode of
               home health careModify patient classification mechanism to
               better reflect patient need.Ã¡Â°Â¼ Medicare+Choice plans.
               Set base price by estimating future growth in
               fee-for-service spending.Refine methodology that adjusts the
               base rate to reflect an enrollee's higher or
               lower-than-average expected costs.Consumer information and
               protection of beneficiary rightsHCFA is responsible for
               providing beneficiaries with general information regarding
               benefits and rights under the traditional program, Medicare
               supplemental insurance policies (Medigap), Medicare Select,
               and Medicare+Choice plans. As part of these
               responsibilities, HCFA mustÃ¡Â°Â¼ conduct an annual national
               educational and publicity campaign to inform beneficiaries
               about their Medicare options and the availability of
               Medicare+Choice plans in local areas, Ã¡Â°Â¼ ensure the
               proper functioning of the process for appealing payment and
               coverage decisions, Ã¡Â°Â¼ operate a toll-free hot-line to
               answer beneficiary questions,Ã¡Â°Â¼ distribute comparative
               information on Medicare+Choice plans,Ã¡Â°Â¼ review for
               accuracy the promotional literature and membership materials
               that each plan distributes to beneficiaries, andÃ¡Â°Â¼
               ensure that plans have adequately informed beneficiaries of
               their right to appeal adverse coverage or payment
               decisions.As health care delivery grows more complex, HCFA
               accumulates new responsibilitiesÃ¢”sometimes, however,
               without receiving the resources or the tools to adapt. For
               example, contractor budgets for claims administration have
               been falling in proportion to the volume of claims they
               process. Relative to the size of private health insurers and
               their administrative budgets, HCFA runs Medicare on a
               shoestring. As we and others have reported, too great a
               mismatch between the agency's administrative capacity and
               its designated mandate could leave HCFA unprepared to handle
               Medicare's future population growth and medical technology
               advances.Recently, the Congress added new Medicare
               responsibilities to HCFA's existing list. According to the
               HCFA Administrator, the Balanced Budget Act of 1997 (BBA)
               called for HCFA to implement 335 provisions, and the
               Balanced Budget Refinement Act of 1999 included 133
               provisions for HCFA implementation. In 1998 and 1999, we
               reported that HCFA was essentially overwhelmed in its
               efforts to handle the number and complexity of BBA
               requirements. For example, BBA expanded the health plan
               options in which Medicare beneficiaries could enroll to
               includeâin addition to health maintenance organizations
               (HMO)âpreferred provider organizations, private
               fee-for-service plans, and medical savings accounts, among
               others. However, HCFA's staff had no previous experience
               overseeing these diverse entities. In 1998, the Inspector
               General of the Department of Health and Human Services (HHS)
               reported, in a study on Medicare's oversight of managed
               care, that nearly all of the staff hired to work in the
               Medicare managed care area in the 2 previous years lacked
               previous HMO experience, half the regional offices lacked
               managed care staff with clinical backgrounds, and few
               managed care staff had training or experience in data
               analysis. Moreover, providing HCFA the tools to adapt to
               health care's new business environment is not a
               straightforward matter. Because Medicare is a public
               program, changes require public inputâwhich is a sometimes
               cumbersome, but necessary, requirement. On the one hand, the
               process of drafting regulations and obtaining public comment
               can prevent an agency from acting swiftlyâfor example, to
               reprice services and supplies when market rates suggest they
               should be significantly lower. On the other hand, without
               the requirement for public comment on proposed federal
               regulations, there would be a greater risk of rash
               policymaking that could result in undesirable consequences.
               Medicare's particular dilemma is that the number of special
               interests affected and the dollars involved make it
               difficult even to test on a limited basis the prudent
               purchasing techniques employed by the private sector. For
               example, pressure from special interest groups prevented
               HCFA, for more than a decade, from testing the pricing of
               services through a competitive bidding process. Just last
               year, under BBA authority, HCFA was able to begin a
               competitive pricing demonstration in one county for certain
               medical supplies.HCFA's Management of Medicare Is Weakened
               By Diffused Focus, Frequent Leadership Changes, and Capacity
               Constraints *** End of document. ***