Department of Health and Human Services: Management Challenges and
Opportunities (Testimony, 03/18/97, GAO/T-HEHS-97-98).

GAO discussed the challenges facing the Department of Health and Human
Services (HHS) in carrying out its mission effectively and
cost-efficiently.

GAO noted that: (1) the first challenge HHS faces is its ability to
define its mission, objectives, and measures of success and increase its
accountability to taxpayers; (2) because of the size and scope of its
mission and the resulting organizational complexity, managing and
coordinating HHS' programs so that the public gets the best possible
results are especially difficult; (3) the Department has eleven
operating divisions responsible for more than 300 diverse programs; (4)
HHS has not always succeeded in managing the wide range of activities
its agencies carry out or fixing accountability for meeting the goals of
its mission; (5) another complicating factor is that HHS needs to work
with the governments of the 50 states and the District of Columbia to
implement its programs, in addition to thousands of private-sector
grantees; (6) developing better ways of managing is essential if HHS is
to meet its goals; (7) the 1993 Government Performance and Results Act
(GPRA) presents HHS with opportunities to bring discipline to management
of all levels of the Department, define the types of information it
needs to implement and assess its programs, and identify ways to
progress toward accomplishing its goals; (8) GPRA also poses a challenge
to HHS, however, because meeting the law's requirements to prepare
strategic plans, design performance measures, and assess and report on
program accomplishments will not be an easy task; (9) similarly, HHS has
found it difficult to develop the financial information necessary to
permit an audit of its financial statements; (10) the second challenge
confronting HHS is ensuring that it has the information systems it needs
to manage and evaluate its programs and to track its progress in meeting
performance goals; (11) managers must have reliable information both to
implement their programs in a way that best serves the public and to
assure the American people that federal programs are performing
responsibly and well; (12) this is especially challenging for the
Department because it relies so much on contractors, grantees, and state
and local governments as its information partners; (13) finally, HHS
responsibilities require it to constantly combat fraud, waste, abuse,
and mismanagement; (14) HHS has several programs that are vulnerable to
such exploitation; and (15) HHS needs to be vigilant now and in the
future because its programs will probably continue to be the targets of*

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

 REPORTNUM:  T-HEHS-97-98
     TITLE:  Department of Health and Human Services: Management 
             Challenges and Opportunities
      DATE:  03/18/97
   SUBJECT:  Fraud
             Accountability
             Management information systems
             Internal controls
             Interagency relations
             Strategic planning
             Program abuses
             Health care programs
             State-administered programs
             Financial statement audits
IDENTIFIER:  Medicare Program
             Medicaid Program
             Head Start Program
             HHS Rural Health Clinic Services Program
             AFDC
             Aid to Families with Dependent Children Program
             HHS Temporary Assistance for Needy Families Program
             HHS Maternal and Child Health Program
             HHS Healthy People 2000 Program
             HCFA Medicare Transaction System
             HHS Operation Restore Trust
             FDA Prescription Drug User Fee Program
             HHS Child Support Enforcement Program
             
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Cover
================================================================ COVER


Before the Subcommittee on Human Resources, Committee on Government
Reform and Oversight, House of Representatives

For Release on Delivery
Expected at 10:00 a.m.
Tuesday, March 18, 1997

DEPARTMENT OF HEALTH AND HUMAN
SERVICES - MANAGEMENT CHALLENGES
AND OPPORTUNITIES

Statement of Richard L.  Hembra
Assistant Comptroller General
Health, Education, and Human Services Division

GAO/T-HEHS-97-98

GAO/HEHS-97-98T


(108319)


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

  ACF - Administration for Children and Families
  FDA - Food and Drug Administration
  GPRA - Government Performance and Result Act
  HCFA - Health Care Financing Administration
  HHS - Health and Human Services
  HMO - Health Maintenance Organizations
  HRSA - Health Resources and Services Administration
  IG - Inspector General
  IHS - Indian Health Service
  MTS - Medicare Transaction System
  NIH - NationaL Institutes of Health
  OCSE - Office of Child Support Enforcement
  OMB - Office of Management and Budget
  PDUFA - Prescription Drug User Fee Act
  PHS - Public Health Service
  RHC - Rural Health Clinic
  SAMHSA - Substance Abuse and Mental Health Service Administration
  TANF - Temporary Assistance for Needy Families

DEPARTMENT OF HEALTH AND HUMAN
SERVICES:  MANAGEMENT CHALLENGES
AND OPPORTUNITIES
============================================================ Chapter 0

Mr.  Chairman and Members of the Subcommittee: 

I am pleased to be here today to discuss the challenges facing the
Department of Health and Human Services (HHS) in carrying out its
mission effectively and cost-efficiently. 

A department of the size and complexity of HHS deserves careful
oversight.  It is one of the largest federal departments:  in fiscal
year 1996, HHS had budget outlays of $319.8 billion and a workforce
of over 57,000.  HHS is the largest grant-making agency in the
federal government, providing approximately 60,000 grants per year. 
Its Medicare program is the nation's largest health insurer, annually
handling more than 800 million claims; Medicare alone spends far more
than most cabinet departments.  (See fig.  1.) The Food and Drug
Administration's (FDA) activities to regulate the safety of food and
cosmetics and the safety and effectiveness of drugs and medical
devices affect products representing $.25 out of every $1 in U.S. 
consumer spending. 

   Figure 1:  Budget Outlays of
   the Four Largest Federal
   Agencies, FY 1996

   (See figure in printed
   edition.)

Note:  The Department of the Treasury's budget outlay was $364.6
billion; however, $344 billion of that total was interest on the
public debt. 

Moreover, HHS' many missions affect the health and well-being of
every person in the country.  HHS provides health insurance for about
one in every five Americans, including elderly and disabled people
and poor children.  Its agencies ensure the safety of food, drugs,
and medical devices; help to contain the outbreak of infectious
diseases; conduct groundbreaking medical research on curing and
preventing disease; provide health care services to populations, such
as Native Americans, who might otherwise lack such services; provide
income support for needy children and families; and support many
services to help elderly people remain independent. 

Over the years, GAO, the Inspector General (IG), and others have
examined programs and suggested numerous improvements for many HHS
programs.  Today, however, I would like to highlight three challenges
HHS faces in meeting its mission.  These challenges focus on core
problems that often obstruct HHS' effective functioning.  By
successfully addressing these underlying problems, HHS will be much
better positioned to manage its responsibilities effectively and
efficiently and to assure the Congress and the American people that
it is fulfilling its vital missions. 

In summary, the first challenge HHS faces is its ability to define
its mission, objectives, and measures of success and increase its
accountability to taxpayers.  Because of the size and scope of its
mission and the resulting organizational complexity, managing and
coordinating HHS' programs so that the public gets the best possible
results are especially difficult.  The Department has eleven
operating divisions responsible for more than 300 diverse programs. 
HHS has not always succeeded in managing the wide range of activities
its agencies carry out or fixing accountability for meeting the goals
of its mission.  Another complicating factor is that HHS needs to
work with the governments of the 50 states and the District of
Columbia to implement its programs, in addition to thousands of
private-
sector grantees.  Developing better ways of managing is essential if
HHS is to meet its goals. 

The 1993 Government Performance and Results Act (GPRA), 1990 Chief
Financial Officers Act, and Government Management Reform Act of 1994
now require federal agencies to be more accountable for the results
of their efforts and their stewardship of taxpayer dollars.  GPRA
presents HHS with opportunities to bring discipline to management of
all levels of the Department, define the types of information it
needs to implement and assess its programs, and identify ways to
progress toward accomplishing its goals.  GPRA also poses a challenge
to HHS, however, because meeting the law's requirements to prepare
strategic plans, design performance measures, and assess and report
on program accomplishments will not be an easy task.  Similarly, HHS
has found it difficult to develop the financial information necessary
to permit an audit of its financial statements. 

The second challenge confronting HHS--one that it shares with most
other federal agencies--is ensuring that it has the information
systems it needs to manage and evaluate its programs and to track its
progress in meeting performance goals.  Managers must have reliable
information both to implement their programs in a way that best
serves the public and to assure the American people that federal
programs are performing responsibly and well.  This is especially
challenging for the Department because it relies so much on
contractors, grantees, and state and local governments as its
information partners. 

Finally, HHS' responsibilities require it to constantly combat fraud,
waste, abuse, and mismanagement.  HHS has several programs that are
vulnerable to such exploitation.  For example, the size and nature of
Medicare, which accounts for over half of HHS' total budget, make
this program particularly vulnerable.  HHS needs to be vigilant now
and in the future because its programs will probably continue to be
the targets of fraud and abuse and because waste and mismanagement
can have such serious effects on taxpayers and program beneficiaries. 


   SCOPE OF HHS' RESPONSIBILITIES
   MAKES COORDINATION AND
   ACCOUNTABILITY DIFFICULT
---------------------------------------------------------- Chapter 0:1

The sheer size and complexity of HHS' responsibilities create unique
challenges.  HHS comprises several large agencies, each of which
manages a number of programs, whose many parts also must be
administered.  (See fig.  2.) For example, the $10.2 billion National
Institutes of Health (NIH) is only one of the agencies in the Public
Health Service (PHS), yet NIH includes 17 separate health institutes,
the National Library of Medicine, and the National Center for Human
Genome Research.\1 The Health Care Financing Administration (HCFA)
administers the Medicare and Medicaid programs, as well as several
quality-of-care programs such as those authorized by the Clinical
Laboratory Improvement Amendments of 1988.  The Administration for
Children and Families (ACF) is responsible for about 60 programs,
including the new federal-state welfare program; child support
enforcement; and Head Start, which alone serves about 800,000
children. 

   Figure 2:  HHS' Major Operating
   Divisions

   (See figure in printed
   edition.)

Note:  Operating divisions marked with an asterisk are part of PHS. 

This array of interrelated activities and responsibilities makes it
especially important for HHS managers to work together to address the
Department's overarching program goals.  HHS must improve
coordination and accountability among its own agencies as well as
work successfully with other federal agencies with related
responsibilities, state and local governments, and private-sector
grantees. 


--------------------
\1 Budget outlay for fiscal year 1996. 


      BETTER INTERNAL AND EXTERNAL
      COORDINATION COULD IMPROVE
      PROGRAM RESULTS AND MORE
      EFFICIENTLY USE FEDERAL
      FUNDS
-------------------------------------------------------- Chapter 0:1.1

Coordination among HHS programs with related responsibilities is
essential to efficiently and effectively meet program goals. 
Moreover, many programs under HHS share goals with or relate closely
to programs administered by other federal agencies.  In addition to
coordinating the activities of its own agencies, HHS must also
coordinate its efforts with these other agencies.  Furthermore, a
number of HHS programs, including Medicaid and the welfare block
grants, require both federal and state involvement.  Therefore, HHS
must work with all the state governments--
and at times local jurisdictions--to coordinate implementation of
these programs. 

One program area that requires HHS to focus on both internal and
external coordination is alcohol and other drug abuse treatment and
prevention.  Several years ago, we reported that abuse of alcohol and
other substances was a leading cause of death and accidents among
Indian people.\2 Yet HHS agencies responsible for research and
services for preventing and treating substance abuse--the National
Institute on Alcohol Abuse and Alcoholism, the National Institute on
Drug Abuse, and the Substance Abuse and Mental Health Services
Administration (SAMHSA)--had no process to link their expertise with
that of the Indian Health Service (IHS), the agency charged with
improving the health of American Indians and Alaskan Natives.  We
recommended that IHS and the other HHS agencies work together to
develop a plan to address substance abuse-related problems among
these people.  It wasn't until 1996, however, that HHS had developed
and implemented such a plan for interagency collaboration on
planning, research, evaluation, and training.  Although long overdue,
this plan should help HHS strategically allocate limited federal
resources to address a major public health problem in IHS service
areas. 

Programs addressing alcohol and other drug abuse issues involve not
only several HHS agencies--including SAMHSA, NIH, ACF, and the
Centers for Disease Control and Prevention--but also 15 other federal
agencies.  These include the Departments of Veterans Affairs,
Education, Housing and Urban Development, and Justice.\3 HHS also
administers 58 programs that address the problems of at-risk and
delinquent youths.  An additional 73 programs focused on such youths
involve 15 other federal Departments and agencies, including the
Departments of Justice, Education, Labor, Agriculture, and Housing
and Urban Development.\4


--------------------
\2 Indian Health Service:  Basic Services Mostly Available; Substance
Abuse Problems Need Attention (GAO/HRD-93-48, Apr.  9, 1993). 

\3 Drug and Alcohol Abuse:  Billions Spent Annually for Treatment and
Prevention Activities (GAO/HEHS-97-12, Oct.  8, 1996). 

\4 At-Risk and Delinquent Youth:  Multiple Federal Programs Raise
Efficiency Questions (GAO/HEHS-96-34, Mar.  6, 1996). 


      ACCOUNTABILITY FOR MEETING
      PROGRAM GOALS NEEDS MORE
      EMPHASIS
-------------------------------------------------------- Chapter 0:1.2

In addition to complicating coordination efforts, the size and scope
of HHS' responsibilities also challenge the Department's ability to
maintain accountability for meeting its mission goals.  We have
reported an example of this difficulty concerning the Rural Health
Clinic (RHC) program, which is administered by HCFA.\5 Established
two decades ago by federal law, the program allows RHCs to receive
higher Medicare and Medicaid reimbursement to support health care
professionals, including nurse practitioners and physician
assistants, in underserved areas.  The program was designed to
improve access to health care in areas too sparsely populated to
sustain a physician practice.  RHC program goals are similar to those
of many programs in the Health Resources and Services Administration
(HRSA), the HHS agency charged with ensuring that underserved and
other vulnerable populations receive quality health care.  HCFA has
relied on HRSA criteria for identifying geographic areas where
providers could qualify for higher Medicaid or Medicare payments
under RHC.  As the program has grown, however, neither HCFA nor HRSA
has been held accountable for ensuring that its resources have been
directed at improving access in rural, underserved areas. 

In our review of 144 RHCs in four states, some clinics clearly
improved access in rural underserved areas; however, many clinics
were in more populated areas that already had well-developed health
care delivery systems.  Nevertheless, once certified, all RHCs are
eligible for the higher reimbursements, even after they may no longer
be located in rural or underserved areas.  These higher
reimbursements continue indefinitely because neither HCFA nor HRSA
routinely recertifies the geographic area or the provider as eligible
for such reimbursements.  The RHC program is adrift, in part because
neither HCFA nor HRSA has accepted responsibility for routinely
measuring or monitoring the RHC program's results. 

In administering programs that are the joint responsibility of the
state and federal governments or that involve many local grantees,
HHS must continually balance program flexibility with oversight and
maintaining program controls.  A case in point is Head Start, which
was designed to ensure maximum local autonomy.  The accountability
structure for overseeing the program is not conducive to strong
internal controls.  For example, although all Head Start programs are
governed by a single set of performance standards, these standards
are largely self-enforcing.  Grantees report annually on the extent
to which they have complied with the performance standards.  Although
HHS does have a triennial monitoring system, several HHS IG reports
have raised questions about accountability in Head Start.  For
example, a May 1993 report found significant differences between the
number of services grantees reported they had provided and the number
they had actually documented in their files.  The IG also found that
grantee files and records were often incomplete, inconsistent, and
hard to review.\6

The Medicaid program provides another example of the balancing act
between flexibility and accountability.  Federal statutes and
regulations give states substantial flexibility in designing and
administering their Medicaid programs.  HCFA is authorized to provide
states with even greater latitude by waiving certain statutory
requirements.  Such waivers permit states, for example, to provide
managed care services or home and community-based service
alternatives to long-term care.  Although HCFA performs structural
reviews of waiver programs during the planning stage, as programs are
implemented and continue to operate, problems have developed in some
states.  Flexibility can be positive for beneficiaries as well as the
states; however, HCFA's ongoing monitoring and oversight are
important to ensure the appropriate use of federal funds.  The need
for accountability will be even more pronounced if the need for
waivers to enroll beneficiaries in managed care is eliminated, as the
President has proposed in his fiscal year 1998 budget. 

With welfare reform, though states have more flexibility, HHS'
important responsibilities continue.  The recent welfare reform law
replaces Aid to Families With Dependent Children with block grants to
states, a program known as Temporary Assistance for Needy Families
(TANF).\7 The law has fundamentally changed HHS and state
responsibilities in providing income support to needy families. 
States may design and implement their own assistance programs within
federal guidelines, and HHS has a broad range of responsibilities for
ensuring accountability from the states.  Some of these duties
include setting standards for states to earn performance bonuses that
reward them for achieving program goals, monitoring work
participation rates, and ensuring that states maintain spending for
poor families.  Although the law has explicitly limited HHS' power to
regulate the states' implementation of the law and reduced the
federal welfare workforce, HHS must enforce certain aspects of the
law. 


--------------------
\5 Rural Health Clinics:  Rising Program Expenditures Not Focused on
Improving Care in Isolated Areas (GAO/HEHS-97-24, Nov.  22, 1996). 

\6 Evaluating Head Start Expansion Through Performance Indicators,
HHS Office of the Inspector General, OEI-09-91-00762 (May 1993) and
Summarization of Concerns With the Financial Management Systems and
Control Structures Found at Head Start Grantees, HHS Office of the
Inspector General, A-17-93-00001 (Sept.  1993). 

\7 The Personal Responsibility and Work Opportunity Reconciliation
Act of 1996, P.L.  104-193. 


   GPRA AND RELATED LEGISLATION
   PROVIDE FRAMEWORK FOR IMPROVED
   PROGRAM PERFORMANCE, COST
   SAVINGS, AND ACCOUNTABILITY
---------------------------------------------------------- Chapter 0:2

The complexity of HHS' responsibilities makes it especially important
for the Department to integrate program goals and activities at a
departmental planning level.  As we have just pointed out, the
Department needs to become more accountable for its responsibilities. 
Concerned that federal agencies such as HHS have not always
effectively managed their activities to ensure accountability, the
Congress has created a legislative framework to address long-standing
management challenges throughout the federal government.  The
centerpiece of this framework is GPRA.  Other elements include the
Chief Financial Officers Act and the Government Management Reform
Act.  These laws respond to the need for appropriate, reliable
information for executive branch and congressional decision-making.\8

HHS is in the process of implementing these laws, which combine to
provide a useful framework for developing (1) fully integrated
information about HHS' mission and strategic priorities, (2)
performance data to evaluate the achievement of those goals, and (3)
accurate and audited financial information about the costs of
achieving mission goals.  The type of strategic planning and
performance measurement GPRA requires is familiar to HHS.  Some
agencies in HHS have experimented--some very successfully--with
results-oriented management.  HHS, however, has not had experience
with the type of far-reaching, coordinated reform required by GPRA. 


--------------------
\8 Managing for Results:  Using GPRA to Assist Congressional and
Executive Branch Decisionmaking (GAO/T-GGD-97-43, Feb.  12, 1997). 


      HHS FACES OPPORTUNITIES AND
      CHALLENGES IN COMPLYING WITH
      GPRA REQUIREMENTS
-------------------------------------------------------- Chapter 0:2.1

GPRA provides HHS with a good opportunity to improve program
performance.  Under GPRA, every major federal agency--and in many
cases, bureaus in each agency--must now ask some basic questions: 
What is our mission?  What are our goals and how will we achieve
them?  How can we measure our performance?  How will we use that
information to improve?  GPRA forces federal agencies to shift their
focus from such traditional concerns as staffing and activity levels
to a single overriding concern:  results. 

Specifically, GPRA directs agencies to consult with the Congress and
obtain the views of other stakeholders and to clearly define their
missions.  It also requires them to establish long-term strategic
goals as well as annual goals linked to the strategic goals. 
Agencies must then measure their performance according to their goals
and report to the President and the Congress on their success.  In
addition to ongoing performance monitoring, agencies are expected to
identify performance gaps in their programs and to use information
from these evaluations to improve programs.\9

Meeting the GPRA requirements will challenge HHS for several reasons. 
Some of HHS' major programs have never been fully responsible for
measuring and improving program performance.  For example, the
Medicaid program has historically paid claims for medical services
and paid limited attention to monitoring program results for the
majority of beneficiaries.  Other HHS functions, such as those
related to research, are not as conducive to results-based management
as others are.  In addition, because many HHS programs are operated
by states, localities, or nongovernmental organizations, HHS agencies
will have to develop a way to make their many partners accountable
for program results.  Moreover, the data necessary for meaningful
performance measurement may not be currently available or may not be
comparable from state to state.  The immense changes spurred by
recently enacted welfare reform also add to the complexity of HHS'
task.  Nonetheless, GPRA could greatly improve HHS performance--a
vital goal when resources are limited and public demands are high. 


--------------------
\9 Executive Guide:  Effectively Implementing the Government
Performance and Results Act (GAO/GGD-96-118, June 1996) and
GAO/T-GGD-97-43, Feb.  12, 1997. 


      HHS HAS EXPERIENCE WITH
      RESULTS-BASED MANAGEMENT
      REFORMS
-------------------------------------------------------- Chapter 0:2.2

HHS is familiar with the kind of results-oriented management promoted
by GPRA.  Healthy People 2000, PHS' national public health initiative
that seeks to improve the health of all Americans, exemplifies an HHS
results-based management effort.  In consultation with HHS
stakeholders, other government agencies, and the public health
community, PHS developed a series of outcome-based public health
goals and measures. 

The Congress has incorporated Healthy People 2000 objectives into
national legislation.  Under the Maternal and Child Health Program,
for example, HHS is required to report on the states' progress toward
meeting the maternal and child health objectives in Healthy People
2000.  The broad acceptance by the public health community of certain
measures developed for these reports has encouraged states and
localities to create comparable databases and to mobilize to meet
program goals. 

When it passed GPRA, the Congress understood that most agencies would
need to make fundamental management changes to implement this law
properly and that these changes would not come quickly or easily.  To
facilitate this process, GPRA included a pilot phase during which
federal agencies could gain experience in implementing key parts of
the law to provide valuable lessons for the rest of the government. 

The Office of Management and Budget (OMB) designated about 70 pilot
tests in 26 federal entities for performance planning and reporting. 
Two pilots were in HHS' jurisdiction:  one in ACF's Office of Child
Support Enforcement (OCSE) and the other in FDA's Prescription Drug
User Fee Program.  The pilots helped OCSE and FDA identify and move
toward performance goals.  OMB based its selection of OCSE in part on
OCSE's previous efforts to develop a 5-year strategic plan; its
ability to quantify program goals, such as child support collections;
and the involvement of state and local governments as key program
administrators.  In October 1996, we reported that OCSE's GPRA pilot
had made progress in redirecting its management of the child support
enforcement program toward results.\10 For example, OCSE approved
national goals and objectives focused on key program outcomes such as
increasing the number of paternities established, support orders
obtained, and collections received.  At the time of our review, OCSE
and the states had begun to develop performance measures as
statistical tools for measuring state progress toward meeting program
goals. 

A second HHS GPRA pilot involves the Prescription Drug User Fee Act
of 1992 (PDUFA), which allows FDA to collect user fees from drug
companies seeking approval to market drugs.  The law dedicates the
revenues to expediting FDA's reviews of human drug applications.  The
act established time-specific performance goals to be met by the end
of fiscal year 1997.  To satisfy these objectives, FDA consulted with
its stakeholders to determine appropriate performance indicators and
target levels and developed output-oriented performance goals.  In
its Fourth Annual Performance Review, for fiscal year 1996, FDA
reported that the PDUFA program had exceeded its performance goals,
improving the speed and efficiency of the drug review process. 


--------------------
\10 Child Support Enforcement:  Reorienting Management Toward
Achieving Better Program Results (GAO/HEHS/GGD-97-14, Oct.  25,
1996). 


      STATUS OF HHS' GPRA
      IMPLEMENTATION
-------------------------------------------------------- Chapter 0:2.3

GPRA requires that federal agencies develop strategic plans for a
period of at least 5 years and submit them to the Congress and OMB no
later than September 30, 1997.  These plans must include the agency's
mission statement; identify the agency's long-term strategic goals;
and describe how the agency intends to meet these goals through its
activities and its human, capital, information, and other resources. 

GPRA also requires agencies to submit an annual performance plan to
OMB; the first plans are due in the fall of 1997.  The annual
performance plan should directly link the strategic goals in the
agency's strategic plan to managers' and employees' daily activities. 
This plan should include the annual performance goals for the
agency's programs as listed in the budget, a summary of the necessary
resources to conduct these activities, the performance measures that
will gauge the progress toward those goals, and a discussion of how
the performance information will be verified. 

Although governmentwide implementation of GPRA has not yet officially
begun, HHS is working with OMB to meet its deadlines for submitting
its strategic plan and first annual performance plan.  HHS officials
have acknowledged, however, that the Department, "must confront some
fundamental issues that are central to the successful implementation
of GPRA in HHS over the next year.  At a minimum, there remains an
enormous amount of work to be done."\11 HHS officials do expect to
meet the September deadlines, however, for both strategic and
performance plans, they said.  HHS has drafted its strategic plan,
but it is not yet ready for public release. 

Strategic plans must consider the views of the Congress and other
stakeholders.  To ensure that these views are considered, GPRA
requires agencies to consult with the Congress and solicit
stakeholders' views as they develop their plans.  The Department
plans to begin congressional consultations in April and to send 200
to 300 stakeholders copies of the draft strategic plan in June, HHS
officials said.  HHS currently plans to release the draft plan to the
public on the Internet. 

HHS operating divisions are now developing performance plans, which
should include performance measures and objectives linked to data
systems.  To prepare for the development of GPRA's annual performance
plans, HHS officials asked each of its operating divisions to provide
performance objectives and measures for at least one program
activity.  Officials also asked operating divisions to describe their
strategies for aggregating program activities for their performance
plans for the fiscal year 1999 budget.  Last summer, OMB reported
that the performance measurement aspects of GPRA pose the greatest
challenge to HHS.  At the beginning of this calendar year, however,
even the agencies most advanced in their GPRA preparations had not
yet finished developing performance measures.  Nor had many programs
taken the next steps to relate the appropriate performance objectives
and measures to the resources needed to accomplish program
strategies. 


--------------------
\11 Integrating Performance Measurement Into the Budget Process,
Subcommittee Report of HHS' Chief Financial Officers Council, GPRA
Implementation Committee (Washington, D.C.:  Jan.  21, 1997). 


      REQUIRED FINANCIAL STATEMENT
      AUDITS ARE ONGOING AT HHS
-------------------------------------------------------- Chapter 0:2.4

To provide decisionmakers with reliable, consistent financial data on
the operations of federal agencies, the Government Management Reform
Act of 1994 requires each department and major independent agency to
submit to OMB an audited agencywide financial statement beginning in
fiscal year 1996.  The magnitude of this task for HHS is
extraordinary.  HHS expenses exceed $300 billion a year.  Over 80
percent of this amount was spent by HCFA, primarily for the Medicare
and Medicaid programs.  Although the IG tried to audit HCFA's
financial statements in prior years, the IG could not express an
opinion on the reliability of these statements primarily because of
inadequate supporting documentation for reported amounts.  HHS and
HCFA management are working to resolve these issues so that an audit
can be performed. 

The current HHS-wide financial statement audit is designed to follow
up on previously reported issues and to address whether program
expenditures, such as Medicare benefit payments, complied with laws
and regulations and were properly reported.  In addition, the audits
will evaluate the effectiveness of the agency's related internal
controls.  The IG will report the results of this audit when it is
completed. 


   RELIABLE AND COMPREHENSIVE
   MANAGEMENT INFORMATION SYSTEMS
   CRUCIAL TO HHS' SUCCESS
---------------------------------------------------------- Chapter 0:3

Nothing is more crucial to effectively managing an enterprise of HHS'
size and scope than accurate information about programs and their
effects.  The desire of the American people for accountable
government, expressed in the GPRA's mandate for measurable
performance goals, underscores the critical need for accurate
information.  In recognition of the importance of agencies' properly
managing their information systems, the Congress passed the Paperwork
Reduction Act of 1995 to guide them in this effort.  The law
addresses the acquisition and management of information resources by
federal agencies.  The Clinger-Cohen Act of 1996 elaborates on
requirements that promote the use of information technology to better
support agencies' missions and to improve program performance.  Among
these acts' provisions are requirements that agencies set goals,
measure performance, and report on progress in improving the
efficiency and effectiveness of information management
generally--and, specifically, the acquisition and use of information
technology. 

Because HHS' responsibilities involve large health insurance
programs, extensive grant-making activities, and vital regulatory
responsibilities, the Department must use effective information
systems.  To implement its programs and meet its responsibilities
successfully, HHS must have access to data that are both reliable and
appropriate to the task.  Without such data, HHS cannot inform the
Congress or the American people of its progress toward meeting its
performance goals.  Creating and implementing the sophisticated
systems that will give HHS managers the data they need, however,
present another major challenge.  Because several important HHS
programs, including Medicaid and TANF, are joint federal-state
efforts, the current lack of comparable data across states increases
the difficulty of obtaining timely and reliable data. 


      HCFA NEEDS BETTER
      INFORMATION ABOUT ENROLLEES
      AND SERVICES TO MANAGE
      MEDICAID PROGRAM
-------------------------------------------------------- Chapter 0:3.1

Medicaid, a joint federal-state program administered by HCFA,
provides health coverage for 36 million low-income people, including
17.6 million children.  Medicaid also pays for nursing home coverage
for low-income elderly and other vulnerable members of society,
accounting for almost half of total national spending for nursing
home care.  The Medicaid program's federal fiscal year 1996
expenditures totaled about $92 billion, with state expenditures
totaling about $68 billion. 

Despite Medicaid's magnitude, the federal government has only limited
data on its results, and the accuracy of these data is questionable. 
Using information supplied by the states, HCFA creates a statistical
report that has data about beneficiaries served, their eligibility
categories, types of services they received, and vendor payments. 
HCFA also generates a regular financial report.  The usefulness of
both of these reports, however, is compromised by problems with the
state data's accuracy and consistency.  Some of these problems stem
from collecting data from 50 states and the District of Columbia,
which do not all use identical definitions for data categories. 
Another problem is the difficulty of relating the information that is
in these two reports.  Problems in data quality and in the ability to
link data across data sources make it difficult for HCFA and others
to analyze and evaluate Medicaid's results.  For example, HCFA's
Medicaid managed care program has been plagued by duplicate reporting
on the number of enrollees.  Having an inaccurate count from the
states makes it difficult to assess the effect of managed care on
Medicaid expenditures. 

Some of Medicaid's long-standing data problems could worsen because
of the program's growing reliance on managed care to provide health
services to beneficiaries.  The proportion of Medicaid beneficiaries
enrolled in managed care, as reported by HCFA, quadrupled from about
10 percent in 1991 to about 40 percent in 1996.  Because Medicaid
pays many managed care organizations a defined fee for providing a
range of services, HCFA usually lacks the detailed utilization data
available under fee-for-service billing.  This, in turn, makes
evaluating the program's success even more difficult. 


      WELFARE REFORM PRESENTS HHS
      WITH MANY INFORMATION
      CHALLENGES
-------------------------------------------------------- Chapter 0:3.2

The new welfare reform law gives HHS new administrative and oversight
responsibilities, the performance of which will rely on
state-provided data.  One of HHS' major new administrative
requirements is for the child support enforcement program.  Using
state-provided data, HHS is to establish a national directory of
newly hired employees and registry of child support orders to
strengthen child support enforcement.  Another information management
challenge for HHS is ensuring that the states provide comparable and
reliable data to help it fulfill its oversight responsibilities under
the new legislation.  HHS will need such information to ensure that
states are enforcing the federal 5-year time limit on receiving
welfare benefits, meeting minimum work participation rates, and
maintaining a certain level of welfare spending.  Enforcing this
limit, for example, will be difficult because information on the
total amount of time someone has received welfare is often
unavailable in a state, let alone across states.  In addition, HHS
will need to collect state data to assess penalties and provide
performance bonuses.  With the increased flexibility of states in
designing their programs, obtaining comparable and reliable data to
assess the effect of welfare reform on children and families could be
difficult for HHS. 


      FDA NEEDS TO IMPROVE ITS
      SYSTEM FOR MONITORING
      MEDICAL DEVICE PROBLEMS
-------------------------------------------------------- Chapter 0:3.3

Another possible problem in managing information systems is a failure
to use the information appropriately to advance program goals.  We
recently reported on such a problem concerning FDA's medical device
adverse event reporting system, used to gather information about
problems with marketed medical devices.\12 Medical devices range in
complexity from simple tongue depressors to heart pacemakers.  The
reporting system enables FDA and the medical device industry to work
together to take corrective action on device problems and, when
appropriate, to alert the public to potentially hazardous devices to
prevent injury or death. 

FDA has not systematically acted to ensure that the reported problems
have received prompt attention and appropriate resolution.  As a
result, FDA's adverse event reporting system has not always provided
the intended early warning about problem medical devices.  Because
the increased volume of adverse event reports resulting from changes
in the law made it difficult for FDA to process and review reports in
a timely manner, the agency chose to give priority to death and
serious injury reports.  As result, FDA delayed processing and
reviewing almost 50,000 malfunction reports for nearly 2 years. 
Malfunction reports are essential in alerting FDA to potentially
serious device problems before they result in death or serious
injury. 

Moreover, although FDA contends that it notifies manufacturers and
user facilities about imminent hazards and industrywide safety
concerns, it does not routinely document the corrective actions it
takes--or those taken by manufacturers--to address reported medical
device problems.  As a result, it is unclear how manufacturers and
FDA have responded to device problems reported by user facilities. 
Feedback to medical device users could increase knowledge about
medical device performance, improve patient safety awareness, and
help users make purchase decisions.  FDA, however, does not routinely
communicate the results of analyses of medical device problems and
corrective actions to the medical device user facility community. 


--------------------
\12 Medical Device Reporting:  Improvements Needed in FDA's System
for Monitoring Problems With Approved Devices (GAO/HEHS-97-21, Jan. 
29, 1997). 


      IMPLEMENTATION OF MEDICARE
      CLAIMS PROCESSING SYSTEM AT
      RISK
-------------------------------------------------------- Chapter 0:3.4

Finally, another information management challenge facing HHS involves
the Medicare program, which accounts for over half of HHS' annual
budget.  An important initiative to improve Medicare claims
processing activity could create problems if it is not carefully
implemented.  To better protect Medicare from fraud and abuse, HCFA
has begun to acquire a new claims processing system, the Medicare
Transaction System (MTS).  HCFA expects MTS to replace the nine
different processing systems it currently uses by the year 2000.  We
have previously reported on the benefits and risks associated with
this effort.\13

The intent of using a single automated system is to allow HCFA to
improve administrative efficiency, better manage contractors, and
place greater emphasis on safeguarding program dollars and improving
beneficiary and provider service.  In response to some of the risks
we identified, HCFA revised its initial approach for developing and
installing MTS, reducing the potential for problems stemming from
large-scale system failures.  We also reported on risks related to
difficulties in defining the system's requirements, inadequate
investment analysis, and significant schedule problems.  HCFA is
working on these concerns.  We plan to continue evaluating HCFA's
efforts on this important initiative. 

Another critical task for HCFA involves revising computerized systems
to accommodate dates beyond the year 1999.  This year 2000 problem
stems from the common practice of abbreviating years by their last
two digits.  Thus, miscalculations in all kinds of activities--such
as benefit payments--could occur because the computer system would
interpret "00" as 1900 instead of the year 2000.  HHS, along with
other agencies that maintain time-based systems, must develop
strategies to resolve this potential problem in the near future. 


--------------------
\13 High-Risk Series:  Medicare (GAO/HR-97-10, Feb.  1997) and
Medicare:  New Claims Processing System Benefits and Acquisition
Risks (GAO/HEHS/AIMD-94-79, Jan.  25, 1994). 


   SAFEGUARDING VULNERABLE
   PROGRAMS REQUIRES CONSTANT
   VIGILANCE AND INNOVATION
---------------------------------------------------------- Chapter 0:4

With HHS' broad range of programs, large number of grantees and
contractors, huge volume of vendor payments, and millions of
beneficiaries, the Department must always be vigilant in protecting
its programs from fraud, abuse, mismanagement, and waste.  The sheer
dollar size of HHS' programs makes them attractive targets, and the
consequences can be severe.  HHS needs to improve its processes for
identifying and preventing fraud, abuse, mismanagement, and waste and
maintain constant vigilance in the future.  The Medicare program
offers an example of how important such efforts are. 

One of the long-standing management challenges HHS faces is
safeguarding Medicare, the government's second largest social
program.  Medicare provides health insurance for 37 million elderly
and disabled Americans; federal Medicare expenditures were $174
billion in fiscal year 1996.  Medicare's expansive size and mission
make it vulnerable to exploitation.  That wrongdoers continue to find
ways to dodge safeguards illustrates the dynamic nature of fraud and
abuse and the need for constant vigilance and increasingly
sophisticated ways to protect the program. 

Both the Congress and HCFA have made important legislative and
administrative changes to address chronic payment safeguard problems. 
Because of the hundreds of billions of dollars at stake, however, the
government must exercise unflagging oversight and effective
management for the foreseeable future to protect Medicare from waste,
fraud, abuse, and mismanagement.  Two factors heighten the continuing
need to control claims fraud and abuse in Medicare.  First, although
growth in Medicare costs has moderated somewhat in the last 2 years,
many believe even this lower growth rate cannot be sustained. 
Second, the Medicare trust fund that pays for hospital and other
institutional services is expected to be depleted within the next 5
years. 


      INFUSION OF RESOURCES AND
      LEADERSHIP FROM HCFA SHOULD
      HELP LESSEN VULNERABILITIES
      OF MEDICARE FEE-FOR-SERVICE
      PROGRAM
-------------------------------------------------------- Chapter 0:4.1

HCFA administers Medicare largely through a structure of claims
processing contractors.  Medicare contractors--insurance companies
such as Blue Cross and Blue Shield--use federal funds to pay health
care providers and beneficiaries and are reimbursed for their
administrative expenses.  HCFA has largely delegated its effort to
guard against inappropriate payments to these contractors, giving
them broad discretion in acting to protect Medicare program dollars. 
As a result, significant variations exist in contractors'
implementation of Medicare's payment safeguard policies. 

A pattern of unstable funding for antifraud and abuse activities
since 1989 has made it more difficult to guard the large Medicare
program.  For example, although the number of Medicare claims climbed
70 percent--to 822 million--between 1989 and 1996, resources
committed to claims review, without adjusting for inflation, grew
less than 11 percent during that period.  Passage of the Health
Insurance Portability and Accountability Act of 1996 adds new funds
to fight fraud and abuse starting in 1997, but this additional
funding will still leave per claim safeguard funding in 2003 at about
one-half the 1989 level, after adjusting for inflation. 

The inadequate funding of Medicare's claims scrutiny activities has
hurt contractors' efforts to review the medical necessity of services
billed to the program.  For example, we reported in 1996 that because
of the small number of claims selected for review, home health
agencies billing for noncovered services were less likely to be
caught than was the case 10 years earlier.\14 Besides covering so few
claims, paper reviews of home health claims are simply limited in
their ability to detect claims for noncovered care.  In the case of a
large home health organization we investigated, claims passed review
scrutiny even for visits never made because company staff allegedly
falsified medical records. 

As we noted in many reports and testimonies in recent years, HCFA has
not aggressively managed the Medicare claims processing function. 
HCFA has not taken a leadership role, for example, in managing how
contractors select the criteria used to identify claims that may not
be eligible for payment or in helping contractors with this task. 
The agency has not systematically aggregated information on
contractors' medical policies or their related use of prepayment
screens.  As a result, HCFA has not adequately assessed the relative
performance of contractors or helped share with all contractors the
experience of some in using effective claims screening controls.  One
of our studies revealed, for example, that 10 of 17 contractors
reviewed lacked screens for echocardiography, Medicare payments for
which exceeded those for any other diagnostic test in fiscal year
1994 and which increased in use nationwide by over 50 percent between
1992 and 1994.\15 We estimated that Medicare could have denied at
least $10.5 million in echocardiography payments made in 1993 if just
seven contractors that did not screen for these procedures had
applied the medical necessity screens used by other contractors. 


--------------------
\14 Medicare:  Home Health Utilization Expands While Program Controls
Deteriorate (GAO/HEHS-96-16, Mar.  27, 1996). 

\15 Medicare:  Millions Can Be Saved by Screening Claims for Overused
Services (GAO/HEHS-96-49, Jan.  30, 1996). 


      LEGISLATIVE AND OTHER
      INITIATIVES IMPROVE HCFA'S
      ABILITY TO FIGHT FRAUD AND
      ABUSE
-------------------------------------------------------- Chapter 0:4.2

The 1996 Health Insurance Portability and Accountability Act will
gradually increase the funding for pursuing health care fraud and
abuse, including HCFA's audit and related activities.  For fiscal
year 1997, the act boosts the claims processing contractors' budget
for program safeguard activities 10 percent over 1996; by 2003, the
level will be 80 percent higher than for 1996. 

Operation Restore Trust is an antifraud initiative involving three
HHS agencies--the IG, HCFA, and the Administration on Aging--and the
Department of Justice and various state and local agencies.  This
effort currently targets Medicare abuse and misuse in five states
that together account for over one-third of all Medicare
beneficiaries and focuses on fast-growing services:  home health
care, nursing homes, and medical equipment and supplies.  In its
first year, Operation Restore Trust reported recovering $42.3 million
in inappropriate payments.  It also resulted in many convictions,
fines, and exclusions of fraudulent providers.  IG officials believe
that the major achievement of this initiative will be continued
coordination of the participating agencies and greater awareness of
the effectiveness of constant vigilance. 

The Health Insurance Portability and Accountability Act has built
upon Operation Restore Trust by establishing a program run jointly by
the Departments of Justice and HHS to coordinate federal, state, and
local law enforcement efforts against fraud in Medicare and other
health care programs.  The program also establishes a national health
care fraud data collection program, specifies health care fraud as a
separate criminal offense, and increases criminal penalties. 

HCFA has taken other actions to improve Medicare's fraud detection
activities.  These include efforts to adopt fraud and abuse detection
software and to reduce Medicare's vulnerability to abusive billing as
well as to prevent fraudulent or excluded providers from continuing
to bill the program.  For example, HCFA will assign new
identification numbers--
National Provider Identifiers--to every provider and supplier in the
Medicare program and require the use of these numbers for billing
purposes.  The numbers assigned to providers and suppliers are unique
and will identify them throughout their Medicare participation. 


      HCFA COULD REDUCE COSTS OF
      MEDICARE MANAGED CARE
      PROGRAM
-------------------------------------------------------- Chapter 0:4.3

Programs can also be vulnerable to excess payments because the method
for setting prices is flawed.  An example of this is the process for
setting rates for Medicare risk-contract health maintenance
organizations (HMO).  Our recent studies have revealed shortcomings
in Medicare's risk-contract program that affect both taxpayers and
beneficiaries.  Because of difficulties in establishing capitation
rates, Medicare pays some HMOs too much each year, needlessly
spending at least hundreds of millions of dollars a year from the
program's trust funds.  HMOs tend to attract Medicare beneficiaries
whose need for care when joining is low.  Although the payment
formula includes a crude risk adjustor to correct for this tendency,
it is not precise enough to account for its full effect.\16 The
Physician Payment Review Commission recently estimated that annual
excess payments to HMOs nationwide could total $2 billion. 

A second problem with Medicare's risk-contract program is that HCFA
has neither adequately enforced nor made beneficiaries aware of HMOs'
compliance with federal standards.  We have reported on the need for
HCFA to more actively serve beneficiaries enrolling in HMOs.\17 HCFA
conducted only paper reviews of HMOs' quality assurance plans. 
Moreover, the agency was reluctant to act against HMOs that used
abusive sales practices, unduly delayed appeals of decisions to deny
coverage, or exhibited patterns of poor-quality care. 

HCFA also misses an opportunity to supplement its regulatory efforts
by not sufficiently informing Medicare beneficiaries about competing
HMOs.  For example, HCFA does not provide beneficiaries with any of
the comparative consumer guides that the federal government and other
employer-based health insurance programs routinely distribute to
employees and retirees.  Public disclosure of information, such as
comparative disenrollment rates, could help beneficiaries choose
among competing HMOs and encourage HMOs to better market their plans
and serve enrollees. 

Most recent legislative proposals to reform Medicare would expand the
program's use of prepaid health plans, which illustrates the
importance of addressing these issues.  Risk- contract HMOs currently
enroll about 10 percent of Medicare's beneficiaries, and such
enrollment has grown rapidly.  In just 2 years--between August 1994
and August 1996--the number of risk HMOs nationwide rose from 141 to
229 and enrollment grew by over 80 percent, from about 2.1 million to
3.8 million beneficiaries.  The Congressional Budget Office projects
that, under one Medicare reform scenario that would encourage
beneficiaries to join HMOs, enrollment in risk HMOs and other prepaid
plans could grow to 25 percent of all beneficiaries by 2002.  If HCFA
does not correct its rate setting and standards enforcement problems,
these proposals could actually increase Medicare costs rather than
control cost growth as intended. 


--------------------
\16 Medicare HMOS:  HCFA Could Promptly Reduce Excess Payments by
Improving Accuracy of County Payment Rates (GAO/T-HEHS-97-82, Feb. 
27, 1997). 

\17 Medicare:  Increased HMO Oversight Could Improve Quality and
Access to Care (GAO/HEHS-95-155, Aug.  3, 1995) and Medicare:  HCFA
Should Release Data to Aid Consumers, Prompt Better HMO Performance
(GAO/HEHS-97-23, Oct.  22, 1996). 


-------------------------------------------------------- Chapter 0:4.4

In conclusion, although our reviews and studies and those of others
have found problems with HHS' many programs, we recognize the
difficulties that HHS faces in managing a large and diverse array of
activities.  Considering, however, the extent to which the American
people rely on HHS for essential services and support, it is critical
for the Department to focus on achieving its many missions as
effectively and efficiently as possible.  GPRA provides HHS with an
excellent opportunity to orient its management toward producing the
results its programs are intended to achieve and to engage in regular
self-assessment.  As you know, we have already committed to working
with the Congress as it reviews draft and final HHS strategic and
performance plans and other submissions under GPRA.  We urge the
administration and the Congress to use this opportunity to provide
the kind of continual oversight needed for a department of HHS' size,
diversity, vulnerability, and importance. 

Mr.  Chairman, this concludes my prepared statement.  I will be happy
to answer any questions that you or members of the Subcommittee might
have. 

CONTRIBUTORS

For more information on this testimony, please call William Scanlon,
Director, Health Financing and Systems, (202) 512-4561; Bernice
Steinhardt, Director, Health Services Quality and Public Health,
(202) 512-6543; or Jane Ross, Director, Income Security, (202)
512-7215. 



RELATED GAO PRODUCTS
=========================================================== Appendix 1

Medicare Home Health Care Benefit (GAO/HEHS-97-70R, Feb.  11, 1997). 

FDA's Mammography Inspections:  While Some Problems Need Attention,
Facility Compliance Is Growing (GAO/HEHS-97-25, Jan.  27, 1997). 

Skilled Nursing Facilities:  Approval Process for Certain Services
May Result in Higher Medicare Costs (GAO/HEHS-97-18, Dec.  20, 1996). 

Public Health:  A Health Status Indicator for Targeting Federal Aid
to States (GAO/HEHS-97-13, Nov.  13, 1996). 

Medicaid:  States' Efforts to Educate and Enroll Beneficiaries in
Managed Care (GAO/HEHS-96-184, Sept.  17, 1996). 

Medicaid:  Oversight of Institutions for the Mentally Retarded Should
Be Strengthened (GAO/HEHS-96-131, Sept.  6, 1996). 

Medicare:  Early Resolution of Overcharges for Therapy in Nursing
Homes Is Unlikely (GAO/HEHS-96-145, Aug.  16, 1996). 

Medicaid Managed Care:  Serving the Disabled Challenges State
Programs (GAO/HEHS-96-136, July 31, 1996). 

Medicaid:  Waiver Program for Developmentally Disabled Is Promising
But Poses Some Risks (GAO/HEHS-96-120, July 22, 1996). 

Health Insurance for Children:  Private Insurance Coverage Continues
to Deteriorate (GAO/HEHS-96-129, June 17, 1996). 

Medicaid Funding Formula Changes (GAO/HEHS-96-164R, June 10, 1996). 

Practice Guidelines:  Managed Care Plans Customize Guidelines to Meet
Local Interests (GAO/HEHS-96-95, May 30, 1996). 

Federal Personnel:  Issues on the Need for the Public Health
Service's Commissioned Corps (GAO/GGD-96-55, May 7, 1996). 

FDA Approval:  Review Time Has Decreased in Recent Years
(GAO/PEMD-96-1, Oct.  20, 1995). 


*** End of document. ***