Medicare: HCFA Should Exercise Greater Oversight of Claims Administration
Contractors (Testimony, 07/14/1999, GAO/T-HEHS/OSI-99-167).

Pursuant to a congressional request, GAO discussed the Health Care
Financing Administration's (HCFA) oversight of its Medicare
fee-for-service claims administration contractors, focusing on: (1)
recently completed cases of criminal conduct or False Claims Act
violations committed by Medicare contractors; (2) the deceptive
contractor activities set forth in those cases or alleged by
investigating agents and former contractor employees; and (3) how these
activities were carried out without detection by HCFA.

GAO noted that: (1) although HCFA has taken recent steps to improve its
oversight of claims and administration contractors, HCFA's oversight
process has weaknesses that leave the agency without assurance that
contractors are fulfilling their contractual obligations, including
paying providers appropriately; (2) since 1993, at least six contractors
have settled civil and criminal charges following allegations that they
were not checking claims to ensure proper payment, were allowing
Medicare to pay claims that should have been paid by other insurers, or
were committing other improprieties; (3) for years HCFA left decisions
about oversight priorities entirely in the hands of regional reviewers,
did not evaluate regional oversight to achieve consistency, and set few
performance standards for contractors to aid in holding them
accountable; (4) this has led to uneven review of key program safeguards
designed to prevent payment errors; (5) HCFA is also seeking new
contracting authority that could help the agency increase competition
and better ensure contractor performance; (6) GAO believes Congress may
wish to consider amending the Social Security Act to allow the Secretary
of the Department of Health and Human Services explicit authority to
more freely contract with appropriate types of companies for claims
administration; (7) even if such legislation were enacted, however, HCFA
would need several years to carefully plan and properly implement any
new contracting initiatives to avoid the types of problems it
encountered in the past when it tried to make changes to its contracting
methods; and (8) GAO further believes that HCFA should be required to
report to Congress with an independent evaluation on the impact of any
new authorities on the Medicare program.

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

 REPORTNUM:  T-HEHS/OSI-99-167
     TITLE:  Medicare: HCFA Should Exercise Greater Oversight of Claims
	     Administration Contractors
      DATE:  07/14/1999
   SUBJECT:  Contract oversight
	     Claims processing
	     Contractor violations
	     Program abuses
	     Health insurance
	     Fraud
	     Internal controls
	     Reporting requirements
	     Overpayments
	     Fines (penalties)
IDENTIFIER:  Medicare Fee-for-Service Program
	     Blue Cross and Blue Shield Insurance Benefit Plan
	     Medicare Contractor Performance Evaluation Program
	     HCFA Performance Improvement Plan
	     Medicare Program
	     Medicare Secondary Payer Program

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Cover
================================================================ COVER

Before the Subcommittee on Oversight and Investigations, Committee on
Commerce, House of Representatives

For Release on Delivery
Expected at 10:00 a.m.
Wednesday, July 14, 1999

MEDICARE - HCFA SHOULD EXERCISE
GREATER OVERSIGHT OF CLAIMS
ADMINISTRATION CONTRACTORS

Statement of Leslie G.  Aronovitz, Associate Director,
Health Financing and Public Health Issues, and
Robert H.  Hast, Acting Assistant Comptroller General for Special
Investigations

GAO/T-HEHS/OSI-99-167

GAO/HEHS-99-167T

(101858)

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

  BCBS - Blue Cross and Blue Shield
  CPE - Contractor Performance Evaluation
  HCFA - Health Care Financing Administration
  HHS - Department of Health and Human Services
  MSP - Medicare Secondary Payer
  OIG - Office of Inspector General

MEDICARE:  HCFA SHOULD EXERCISE
GREATER OVERSIGHT OF CLAIMS
ADMINISTRATION CONTRACTORS
============================================================ Chapter 0

Mr.  Chairman and Members of the Subcommittee: 

We are pleased to be here today as you discuss the Health Care
Financing Administration's (HCFA) oversight of its Medicare
fee-for-service claims administration contractors.  HCFA paid these
contractors $1.6 billion in fiscal year 1998 to serve as Medicare's
first line of defense against inappropriate and fraudulent claims
made on Medicare funds.  They pay out over $700 million each business
day--making it a business whose size and nature require careful
scrutiny.  Revelations of inappropriate Medicare payments to
providers totaling billions of dollars each year have heightened
concerns about the program's management, as have cases in which
contractors themselves have defrauded Medicare. 

Mr.  Chairman, by holding this hearing, we appreciate the interest
you have shown in ensuring that HCFA's Medicare contractors are
earnest stewards of the trust fund.  We also acknowledge the
long-standing concerns expressed by the Ranking Minority Member,
especially in the area of HCFA's selection, oversight, and evaluation
of the fiscal intermediaries.  We hope that our testimony today
provides some information regarding the concerns he expressed on this
topic to us last year.  We will be initiating additional related work
when needed data become available. 

Today we are releasing our report, prepared for the Chairman,
Permanent Subcommittee on Investigations, Senate Committee on
Governmental Affairs, on the weaknesses in HCFA's contractor
oversight activities that could make Medicare more vulnerable to
fraud, waste, or abuse.  We also considered whether any changes in
HCFA's contracting authority might improve its ability to manage
contractors.\1 We are also releasing a separate report today that
provides more detail on Medicare contractor integrity cases in which
there have been convictions, fines, or civil settlements.\2 That
report

  -- identifies recently completed cases of criminal conduct or False
     Claims Act violations committed by Medicare contractors,

  -- describes the deceptive contractor activities set forth in those
     cases or alleged by investigating agents and former contractor
     employees, and

  -- describes how these activities were carried out without
     detection by HCFA. 

Our comments today are based upon both our report of HCFA's oversight
and our investigative report.  Although you are focusing primarily on
the activities of the fiscal intermediaries, our reports cover both
part A fiscal intermediaries and part B carriers. 

In brief, although HCFA has taken recent steps to improve its
oversight of claims administration contractors, HCFA's oversight
process has weaknesses that leave the agency without assurance that
contractors are fulfilling their contractual obligations, including
paying providers appropriately.  Since 1993, at least six contractors
have settled civil and criminal charges following allegations that
they were not checking claims to ensure proper payment, were allowing
Medicare to pay claims that should have been paid by other insurers,
or were committing other improprieties.  For years HCFA left
decisions about oversight priorities entirely in the hands of
regional reviewers, did not evaluate regional oversight to achieve
consistency, and set few performance standards for contractors to aid
in holding them accountable.  This has led to uneven review of key
program safeguards designed to prevent payment errors.  Our report
contains several recommendations to correct identified weaknesses and
improve HCFA's oversight of its claims administration contractors. 

HCFA is also seeking new contracting authority that could help the
agency increase competition and better ensure contractor performance. 
We believe the Congress may wish to consider amending the Social
Security Act to allow the Secretary of the Department of Health and
Human Services (HHS) explicit authority to more freely contract with
appropriate types of companies for claims administration.  Even if
such legislation were enacted, however, HCFA would need several years
to carefully plan and properly implement any new contracting
initiatives to avoid the types of problems it encountered in the past
when it tried to make changes to its contracting methods.  We further
believe that HCFA should be required to report to the Congress with
an independent evaluation on the impact of any new authorities on the
Medicare program. 

--------------------
\1 Medicare Contractors:  Despite Its Efforts, HCFA Cannot Ensure
Their Effectiveness or Integrity (GAO/HEHS-99-115, July 14, 1999). 

\2 Medicare:  Improprieties by Contractors Compromised Medicare
Program Integrity (GAO/OSI-99-7, July 14, 1999). 

   WEAK CONTRACTOR OVERSIGHT
   INCREASES THE VULNERABILITY OF
   MEDICARE
---------------------------------------------------------- Chapter 0:1

Our work indicates that HCFA has had numerous cases in which
questions about contractor integrity have surfaced, but HCFA has yet
to incorporate the lessons from these cases into its oversight. 
Since 1990, nearly one in four claims administration contractors have
been alleged, usually by whistle-blowers inside the company, to be
conducting improper or fraudulent activities.  We identified at least
17 contractors that have been either the target of qui tam suits or
that have been the subject of HCFA integrity reviews.  At the time of
our review, at least 7 of the 58 current contractors were being
actively investigated by the Department of Justice or by HHS' Office
of Inspector General (OIG).  Since 1993, over $235 million has been
assessed in civil and criminal penalties against six current or
former contractors.  Among the charges involved in these cases are
that contractor employees

  -- improperly screened, processed, and paid claims, resulting in
     additional costs to the Medicare program;

  -- destroyed or deleted backlogged claims;

  -- failed to recoup within the prescribed time moneys owed by
     providers, and failed to collect required interest payments;

  -- manufactured documentation to support paying claims that
     otherwise would have been rejected as medically unnecessary;

  -- switched off customer service telephone lines when staff could
     not answer incoming calls within the prescribed time limit;

  -- arbitrarily turned off computer edits that would have subjected
     questionable claims to more intensive review;

  -- altered or hid files that involved claims that had been
     incorrectly processed or paid and altered contractor audits of
     Medicare providers before HCFA reviews; and

  -- falsified documentation and reports to HCFA regarding their
     performance. 

Our investigative report focuses on three Medicare fee-for-service
contractors with cited integrity problems.  In these three cases, the
contractors entered into civil settlements totaling about $180
million.  Also, in two of the cases, contractors pleaded guilty to
multiple counts of criminal fraud. 

The following illustrates the types of problems alleged at some
contractors.  A qui tam complaint filed in June 1993 alleged that
from 1988 through 1993, Blue Cross and Blue Shield (BCBS) of Michigan
(1) routinely altered its audit work papers in order to fix
deficiencies and then forwarded the altered papers to HCFA for
review, rather than forwarding the original work papers as required;
(2) concealed its clean up efforts from HCFA and the participating
hospitals; (3) lied to HCFA about the status of certain of its audits
of providers to steer HCFA away from audits that were so poorly done
that they could not be fixed before submission to HCFA; and (4)
circumvented a requirement to collect overpayments within 30 days by
using various evasive means to make it appear that payments were
collected on time when, in fact, they were not. 

In January 1995, this case was settled for $27.6 million.  In the
settlement agreement, the contractor denied the allegations contained
in the qui tam complaint.  Nevertheless, as a result of the
allegations and resulting investigations, the Medicare fiscal
intermediary and carrier contracts of BCBS of Michigan were not
renewed.  HCFA chose BCBS of Illinois as the replacement for both
contracts.  In 1998, BCBS of Illinois settled criminal and civil
allegations of wrongdoing for $144 million and withdrew from the
Medicare program. 

Unfortunately, few contractor integrity problems have been detected
through HCFA's oversight.  Of the 17 contractors we identified as
having had integrity problems, only 3 were first identified by HCFA. 
Despite this record of contractor problems, HCFA's oversight is not
designed to detect deliberate contractor fraud.  Information from
whistle-blowers, federal investigators, former contractor employees,
and HCFA officials familiar with integrity investigations suggests
that the way HCFA conducted on-site verification of contractors' work
allowed problems to go undetected.  For example, for many years, HCFA
notified contractor officials in advance of the review dates and the
specific or probable records that would be reviewed.  In addition,
HCFA reviewers sometimes relied on contractor officials to pull
claims or files for review, and sometimes reviewed copies of
information made by the contractors rather than the original
documents.  HCFA's reviews were so predictable that companies were
able to identify the areas in their audit operations that could be
improperly altered to achieve favorable reviews.  Based on our
interviews with investigators and former contractor employees, we
believe that HCFA may have placed too much trust in its contractors. 

      HCFA OVERSIGHT IS UNEVEN AND
      INCONSISTENT
-------------------------------------------------------- Chapter 0:1.1

One of the key problems is that HCFA's current oversight process does
not ensure that contractors are efficiently and effectively paying
claims and protecting the integrity of the program.  Poor management
controls and falsified data have been common in the integrity cases,
yet HCFA continues to rely on contractor self-certifications of
management controls and contractors' self-reported performance data
that it rarely validates.  HCFA currently has few performance
standards to measure contractors, has been uneven in setting
priorities, and has given regional oversight staff broad discretion
over what aspects of contractor performance to review and how to
review them.  Furthermore, HCFA does not check on the quality of
regional oversight.  Not surprisingly, important program safeguards
have received little scrutiny at some contractors, and regions have
been inconsistent in dealing with contractor performance problems. 

         HCFA DOES NOT VALIDATE
         CONTRACTORS' INTERNAL
         MANAGEMENT CONTROLS OR
         WORKLOAD DATA
------------------------------------------------------ Chapter 0:1.1.1

HCFA's first critical weakness is that it accepts Medicare
contractors' self-certification of management controls without
routinely checking that controls are working as intended.  Medicare
contractors are required to certify annually that they have
established a system of internal management controls over all aspects
of their operations.  This helps ensure that they meet program
objectives, comply with laws and regulations, and are able to provide
HCFA with reliable financial and management information concerning
their operations.  In April 1998, the HHS OIG reported that the
regional offices were not evaluating the accuracy and reliability of
contractor internal control certifications.  In response, HCFA
headquarters sent guidance to the regional offices reminding them to
validate contractors' self-reports within the 1998 evaluation review
cycle.  Our analysis of fiscal year 1998 reviews performed for seven
contractors found no case in which a self-report of internal controls
was validated.  We believe systematic validations of contractor
internal controls would significantly contribute to reducing the
likelihood of contractor fraud. 

An equally fundamental activity in overseeing contractor performance
is obtaining reasonable assurance that performance and financial data
self-reported by the contractor are accurate.  We analyzed 170
contractor reviews for fiscal years 1995 through 1997 for the seven
contracts we studied; only two of these reviews documented efforts to
validate contractor-supplied performance data.  For 1998, staff in
one of the three regions we visited validated contractor data in five
reviews.  Staffs of the other two regions did not validate
performance data over the 4-year period for the contractors we
examined. 

To address these weaknesses, we have recommended that the HCFA
Administrator establish a contractor management policy that requires
the verification that each contractor has the internal controls
necessary to ensure the adequacy of its operations.  We have also
recommended that HCFA require the systematic validation of
statistically significant samples of contractor-reported data.  HCFA
agreed on the importance of validating contractors' internal controls
and reported workload data.  In its response to our draft report,
HCFA stated that it was hiring a firm to develop procedures and
methodologies to evaluate contractor self-certifications of internal
controls.  HCFA also plans to contract for the development of a
protocol to be used for data validation reviews that would begin in
fiscal year 2001. 

         HCFA SETS FEW PERFORMANCE
         STANDARDS FOR CONTRACTORS
------------------------------------------------------ Chapter 0:1.1.2

Holding contractors accountable for meeting performance standards and
measuring contractors on reaching these outcomes is one recognized
way to improve performance quality.  From 1980 to 1995, HCFA used an
evaluation process for which performance standards were explicit but
which focused on process rather than outcome.  For example, it did
not score contractors on the outcomes of their postpayment programs,
such as whether their efforts resulted in recovering overpayments. 
Also, HCFA limited its review to standards published in the Federal
Register at the beginning of each year, which, HCFA believed, caused
contractors to mainly focus on those standards to ensure a high
score.  In response, in 1995, HCFA developed the Contractor
Performance Evaluation (CPE) process to allow individual reviewers
greater flexibility in determining the appropriate types and levels
of review for each contractor."\3 Under the CPE model, HCFA's
reviewers have broad discretion to examine any aspect of contractor
operations.  Until fiscal year 1998, HCFA headquarters did not,
however, issue guidance for reviewers to evaluate a minimum set of
essential operations and did not require CPE reports to follow a
standard format. 

Except for standards mandated by legislation, regulation, or judicial
decision, HCFA's current CPE process is more descriptive than outcome
oriented.  There are only a few mandated standards, such as
processing certain types of claims within specific time periods. 
There are no standards required for HCFA reviewers to ensure that
contractors adequately perform the most important program
safeguards--such as medical review of claims.  The lack of standards
is worrisome because HCFA has made more effective medical review part
of its plan to strengthen program integrity.  In our opinion, the
lack of clearly defined and measurable payment safeguard performance
standards decreases the likelihood that HCFA will get maximum
performance from contractors. 

HCFA's mandated standards generally apply to contractors' claims
processing--rather than program integrity--activities.  We found,
however, that HCFA has not ensured that regional reviewers check
contractor performance on these standards.  Reviewers are only
required to evaluate whether contractors meet the mandated standards
when the reviewers choose that specific area of contractor
performance to review.  Our analysis of CPE reports for three
regional offices found that when HCFA reviewers did assess claims
processing activities, they only checked about half of the applicable
mandated standards.  The three regions varied considerably in their
reviews, with one region checking less than 15 percent of the
standards, while another region checked over 80 percent. 

To address these weaknesses, we have made a number of
recommendations, including the development of a comprehensive set of
clearly defined and measurable performance standards, the regular
assessment of all contractors on core performance standards, and the
development of performance reports that allow contractor comparisons
on the core performance standards across regions.  HCFA agreed with
these recommendations and, in response to our draft report, outlined
a number of steps it is taking to implement them including the
development of a contractor-specific claim payment error rate as well
as a contractor-specific fraud rate, which should facilitate
contractor comparisons. 

--------------------
\3 HCFA, Regional Office Manual, Section 1100, Contractor
Performance Evaluation (Washington, D.C.:  HCFA). 

         HCFA REGIONS PROVIDE
         UNEVEN AND INCONSISTENT
         REVIEWS AND REMEDIES
------------------------------------------------------ Chapter 0:1.1.3

With limited headquarters guidance and little follow-up to ensure
that guidance is followed, contractor oversight is highly variable
across regions.  Without a set of common performance standards or
measures, reviewers and contractors lack clear expectations.  This
has resulted in both uneven review of critical program safeguards and
inconsistencies in HCFA reviewers' handling of contractor performance
problems.  Besides the inequity for contractors, such uneven review
leaves HCFA without an ability to discriminate between contractors'
performance when assigning new workload. 

One such critical program safeguard for which oversight has been
limited and uneven is that of Medicare Secondary Payer--so-called
MSP--activities.  Contractor MSP activities seek to identify insurers
that should pay claims mistakenly billed to Medicare and to recover
payments made by Medicare that should have been paid by others.  This
program safeguard has saved about $3 billion annually from 1994
through 1998.  Our review of three regions' CPE reports shows that
many of the key MSP activities most germane to spotting claims
covered by MSP provisions were not reviewed at the seven contractors
in our study.  Also, the three regions varied considerably in how
much review they gave to MSP, with one region rarely checking MSP
activities at any of its contractors whose CPEs we reviewed. 

This paucity of review is particularly disturbing because the
potential for contractor fraud regarding MSP activities is
significant as a result of an inherent conflict of interest. 
According to a former contractor employee, one contractor with a
private line of business in health insurance in the same geographic
area as its contract sometimes failed to send out letters to newly
enrolled beneficiaries to determine whether Medicare payments should
be secondary to those of another health insurer.  HCFA has had to
pursue several insurance companies--some with related corporations
that serve as Medicare contractors--in federal civil court for
refusing to pay before Medicare when Medicare should have been the
secondary payer.  In such a case filed by HCFA against BCBS of
Michigan, the company paid $24 million in settlement of the MSP case
in addition to $27.6 million to settle fraud allegations lodged
against it in another case.  Since 1995, settlements in the civil
cases filed by HCFA in which a company with related interests was
also a Medicare carrier or intermediary have totaled almost $66
million.  HCFA currently has an additional $98 million in claims
filed against current and former contractors as a result of its MSP
activities. 

HCFA's regions differ in their identification of problem contractors. 
For example, one company held two contracts for two states--each
overseen by a different region.  As part of its program safeguard
activities, the company analyzed paid claims at one central location
to identify possible fraudulent or abusive provider billing trends. 
While the company conducted identical types of analyses for both
contracts, one region found that the contractor's data analysis
activities were not fulfilling HCFA's expectations, while the other
region found the contractor to be in compliance with HCFA's analytic
expectations.  Although these regions had signed a memorandum of
understanding to seek consistency in how they directed the contractor
and to coordinate oversight to avoid duplication of effort, they did
not work together to resolve their differences and guide the
contractor with one voice. 

HCFA reviewers may not only disagree about whether a problem exists
but also take dissimilar actions once a performance problem is
identified.  When it identifies a deficiency, HCFA's normal procedure
is to require the contractor to develop a Performance Improvement
Plan (PIP) to correct the problem, and then to monitor the plan. 
PIPs can be stringent corrective actions for contractors. 
Contractors operating under a PIP can be required to make complex
changes in operations and to submit performance data and reports
about their activities until HCFA decides that their performance has
improved. 

HCFA reviewers differ about whether they require PIPs, even in cases
in which contractor performance is clearly not satisfactory.  For
example, one region required Contractor A to develop and follow PIPs
for deficiencies in its performance in fraud and abuse prevention and
detection.  In contrast, another region, reviewing Contractor B,
found many more serious weaknesses with its fraud and abuse
prevention and detection activities.  Contractor B was spending
little or no time actively detecting fraud and abuse, failing to use
data to detect possible fraud, not developing large and complex
cases, and not referring cases to the HHS OIG.  Furthermore,
Contractor B was inadequately recovering overpayments, failing to
focus on the highest-priority cases, preparing no fraud alerts, and
not suspending payments to questionable providers.  The reviewer
concluded that Contractor B failed to meet HCFA's performance
expectations, yet the region did not require the contractor to be put
on a PIP. 

To address this weakness, we have recommended that the HCFA
Administrator designate one of the agency's organizational units to
be responsible for

  -- evaluating the effectiveness of contractor oversight policy and
     procedural direction that headquarters staff provide to the
     regions,

  -- evaluating regional office performance in conducting contractor
     oversight activities, and

  -- enforcing minimum standards for the conduct of oversight
     activities. 

Again, HCFA agreed with these recommendations, stating that it is
exploring the use of an independent evaluation of its oversight
policy and procedures and is laying the groundwork for evaluating
regional office performance and establishing uniform requirements for
CPE reports. 

         HCFA HAS STARTED TO MOVE
         TO A MORE STRUCTURED
         EVALUATION PROCESS
------------------------------------------------------ Chapter 0:1.1.4

HCFA has recognized that its oversight of contractors has been less
than adequate and issued guidance in fiscal year 1998 to have
regional reviewers follow a somewhat more structured evaluation
process.  However, these actions are only a first step in addressing
problems with contractor oversight. 

In May 1998, citing concerns raised by the HHS OIG and us regarding
HCFA's level of contractor oversight, HCFA announced the need to
reengineer our current contractor monitoring and evaluation approach
and develop a strategy demonstrating stronger commitment to this
effort. As a result, HCFA issued a contractor performance evaluation
plan specifying three evaluation priorities for fiscal year 1998: 
(1) year 2000 compliance activities, (2) activities focusing on a
subset of financial management operations--accounts receivable and
payable, and (3) activities focusing on a subset of medical review
activities. 

In 1998, HCFA also emphasized the need for regions to follow its
structured CPE report format, including clearly stating whether or
not the contractor complied with HCFA's performance requirements. 
Nonetheless, we found that some of the 1998 reviews continued to lack
a structured format, making it difficult to compare contractor
performance.  For example, HCFA's contractor evaluation plan for
fiscal year 1998, issued 5 months before the close of the fiscal
year, called for examining contractors' activities to review claims
for medical necessity before they are paid (prepayment medical
review).  Our review of the three regions' fiscal year 1998 CPE
reports shows that (1) two regions did not review contractors'
determinations of medical necessity prior to payment at all
contractors included in our study and (2) two regions did not
consistently follow the structured report format, making it difficult
for HCFA headquarters to evaluate or compare the results. 

Despite HCFA's intent to provide more direction to the regions on
contractor oversight activities, it continues to issue review
guidance late in the year.  Agency officials recently told us that
its plan for CPE reviews for fiscal year 1999 will include more
headquarters involvement in the assessment process, review teams from
headquarters and the regions, and multiregional reviews.  However, it
was not until 8 months into the fiscal year that HCFA finally issued
its fiscal year 1999 guidance. 

      HCFA LACKS A STRUCTURE THAT
      ENSURES ACCOUNTABILITY
-------------------------------------------------------- Chapter 0:1.2

HCFA's structure is not designed to ensure oversight accountability,
with two aspects creating particular problems.  First, HCFA
reorganized its headquarters operations in 1997, dispersing
responsibility for contractor activities from one headquarters
component to seven.  Second, HCFA's 10 regional offices--the front
line for overseeing contractors--do not have a direct reporting
relationship to other headquarters units responsible for contractor
performance.  Instead, they report to the HCFA Administrator through
their respective regional administrators and consortia directors.  We
found that this structural relationship and the dispersion of
responsibility for contractor activities to multiple headquarters
components contribute to communications problems with contractors,
exacerbate the weaknesses of HCFA's oversight process, and blur
accountability for (1) having regions adopt best practices; (2)
routinely evaluating the regional offices' performance of its
oversight; and (3) enforcing minimum standards for conducting
oversight activities, including taking action when a particular
region may not be performing well in overseeing contractors.  In an
effort to establish more consistency and improve the quality of
contractor management and oversight, HCFA has recently modified its
organizational structure once again by consolidating responsibility
for contractor management within the agency and creating a high-level
contractor oversight board.  It is too early, however, to tell
whether these changes will be sufficient. 

   HCFA WOULD NEED TIME AND
   CAREFUL IMPLEMENTATION TO REAP
   BENEFITS FROM NEW CONTRACTING
   AUTHORITY
---------------------------------------------------------- Chapter 0:2

To address perceived barriers to effective contracting for Medicare
claims administration services and to help attract new companies to
become contractors, HCFA has proposed legislative changes.  The
proposals include obtaining repeal of the nomination provision--which
allows institutional providers to select their intermediary--and
authority to (1) contract with other than health insurers, (2)
contract for specific functions, and (3) award other-than-cost-based
contracts. 

When Medicare was enacted, the Congress authorized HCFA to use health
payersalmost all health insurance companiesto be its contractors. 
Because providers were fearful that the new program would give the
government too much control over medicine, institutional providers
such as hospitals were allowed to designate an intermediary between
themselves and the government.  The American Hospital Association
picked the national Blue Cross Association to serve as the
intermediary for its members.  Today, the Association is one of
Medicare's five intermediaries and serves as prime contractor for 32
local member plan subcontractors that together process over 85
percent of all benefits paid by intermediaries.  Under the prime
contract, when one of the local Blue Cross plans declines to renew
its Medicare contract, the Association, rather than HCFA, chooses the
replacement.  While this may have made sense to ensure that the
fledgling program became successfully launched, today it leaves HCFA
with less ability to choose and manage its contractors. 

Similarly, HCFA's regulations limit its ability to contract for
specific functions, rather than have each contractor perform the full
range of Medicare functions.  As a result, with one recent exception,
HCFA has not experimented with having one or two contractors
performing consolidated functions to achieve economies of scale.  The
one area where HCFA has begun to try functional contracting is
program safeguards, because in 1996 HCFA was given new authority to
contract separately for these activities.  However, HCFA's experience
in implementing its new payment safeguard contract authority attests
to the need for significant time to explore and resolve feasibility
issues.  Implementing these functional contracts will provide useful
experience in the advantages and possible pitfalls of such functional
contracts. 

Apart from program safeguards, other functions might be better
performed if consolidated at a few contractors.  For example, in the
fee-for-service Medicare program, each contractor conducts hearings
on provider and beneficiary appeals of its own claims decisions,
despite the possible conflict of interest and inefficiency.  While
choosing certain functions and consolidating them in a limited number
of contractors could benefit Medicare, current Medicare contractors
have expressed concern that contracting by function would be
disruptive to their operations and the program.  After 30 years of
integration, contractors' functions may not be easy to separate, and
having multiple companies doing different tasks could create
coordination difficulties.  Which functions would be best suited for
separate functional contracts has not yet been determined, suggesting
that some experimentation would be a necessary step for the success
of such an initiative. 

Contractor payment is a third area where HCFA is seeking change. 
Medicare law generally requires intermediary and carrier contracts to
be paid on the basis of cost.  Though generally not able to earn
profits, contractors benefit when Medicare pays a share of corporate
overhead.  Nevertheless, the adequacy of current funding to attract
and retain contractors is being questioned and may be contributing to
contractors' withdrawing from the program.  Existing constraints on
earning a profit make participation in the Medicare program less
attractive to companies that have been part of the program for years. 

Under HCFA's proposal to repeal the cost-based contract restrictions,
HCFA would be free to award contracts that would permit contractors
to earn profits.  However, HCFA's past experiments with using
financial incentives generally have not been successful and raise
concerns about the success of any immediate implementation of such
authority.  HCFA has experimented with competitive
fixed-price-plus-incentive-fee contracts and with adding financial
incentives to cost-based contracts.  Between 1977 and 1986, eight
competitive fixed-price contracts were established as an experiment. 
Our 1986 report noted that three of the contracts generated
administrative savings,\4 but two resulted in over $130 million in
benefit payment errors (both overpayments and underpayments) so that
much of the administrative savings of the successful experiments was
offset by program losses. 

HCFA also had problems when, beginning in 1989, it was given limited
authority to award other-than-cost contracts.  HCFA provided
financial incentives in several cost-based contracts, but some of the
self-reported data that contractors used to claim incentive payments
were inaccurate.  In one case, the incentives would not have been
paid had a contractor with integrity problems not cheated by
correcting errors in about a quarter of the 60 claims reviewed by
HCFA. 

The problems in previous experiments suggest that any change from
cost-based contracting will need to be carefully designed and
thoughtfully monitored to prevent loss to the Medicare program. 
Testing different methods of contracting could help HCFA ensure that
implementation would improve, rather than weaken, program
administration. 

--------------------
\4 Medicare:  Existing Contract Authority Can Provide for Effective
Program Administration (GAO/HRD-86-48, Apr.  22, 1986). 

   CONCLUSIONS AND RECOMMENDATIONS
   TO HCFA
---------------------------------------------------------- Chapter 0:3

Medicare's fee-for-service program pays out the lion's share of
program dollars expended by HCFA, making it a business that must be
carefully monitored.  However, we found that HCFA conducted limited
scrutiny of contractor performance.  Until HCFA starts regularly
assessing the validity of contractor controls and data, it cannot be
assured of contractors' integrity, the accuracy of their payments to
providers, or contractors' fiscal responsibility in handling Medicare
funds. 

Contractor oversight could be strengthened if HCFA balanced an
appropriate level of regional discretion with sufficient effort to
establish measurable contractor performance standards, set
programwide priorities for the assessment of all contractors, and
developed a standardized report format facilitating contractor
comparisons.  HCFA needs to ensure that regions adopt best practices
and incorporate lessons learned into its oversightbeginning with
those learned from integrity cases.  In addition, HCFA needs an
organizational structure for contractor oversight that will ensure
that there is evaluation of the quality of contractor oversight
activities and of the effectiveness of contractor oversight policy
and procedural direction. 

Over the long term, HCFA could benefit from a strategic plan for
managing claims administration contractors that could be used as a
guide on the path from its current contracting mode to a new one. 
HCFA could design this plan to help it determine (1) the contractor
activities that are most conducive to functional contracting, (2) the
activities that could be performed by other than health insurance
payers, (3) better cost information to facilitate the move to
competitive contracting, (4) the functional contracts that might be
conducive to other-than-cost payments, and (5) the feasibility of
building financial incentives into the contracts. 

In our oversight report, we make a number of specific recommendations
to improve HCFA's oversight.  Implementing these recommendations
should help ensure that

  -- contractor internal controls are working;

  -- contractor-reported data are accurate and useful for management
     decision-making;

  -- contractor performance is evaluated against a comprehensive set
     of measurable standards;

  -- HCFA's treatment of contractors is more consistent; and

  -- HCFA has a strategic plan for implementing the legislative
     changes that it is seeking. 

-------------------------------------------------------- Chapter 0:3.1

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

   GAO CONTACTS AND
   ACKNOWLEDGMENTS
---------------------------------------------------------- Chapter 0:4

For future contacts regarding this testimony, please call William J. 
Scanlon at (202) 512-7114 or Leslie G.  Aronovitz at (312) 220-7600. 
Individuals who made key contributions to this testimony included
Sheila Avruch, Mary Balberchak, Elizabeth Bradley, Stephen Iannucci,
Bob Lappi, Don Walthall, and Don Wheeler. 

*** End of document. ***