FISCAL YEAR 2014 TOP MANAGEMENT AND PERFORMANCE CHALLENGES IDENTIFIED BY THE OFFICE OF 
INSPECTOR GENERAL 
Management Challenge 1:  Implementing, Operating, and Overseeing the Health Insurance Marketplaces 
Why This Is a Challenge 
The new Health Insurance Marketplaces, also known as Health Insurance Exchanges, (Marketplaces) are critical 
components of the health insurance market reforms enacted through the Affordable Care Act.  In 2014, The 
Centers  for  Medicare  &  Medicaid  Services  (CMS)  operated  Marketplace  functions  on  behalf  of  36  states.  
Implementation, operation, and oversight of the Marketplaces were among the most significant challenges for the 
Department of Health and Human Services (Department or HHS) in fiscal year (FY) 2014 and will continue to 
present  a  top  management  and  performance  challenge  in  FY  2015,  http://oig.hhs.gov/reports-and-
publications/top-challenges/2013/.   
In 2015, CMS and the Health Insurance Marketplaces face new and ongoing challenges including, for example, 
ensuring accurate eligibility determinations; processing enrollments, re-enrollments, and qualifying life change 
events; and communicating timely and accurate information to health insurance issuers (issuers) and consumers.  
Marketplaces must also facilitate Medicaid enrollment for those who qualify.  In coordination with states, CMS will 
implement premium-stabilization programs.  To carry out these complex Marketplace functions, the Department 
must ensure effective communication and coordination between and among all internal and external parties with 
Marketplace responsibilities, including within HHS and with contractors, issuers, and partners in state and federal 
government.  Effective coordination with, and timely provision of accurate data to, the Internal Revenue Service 
(IRS) will be particularly important for sound administration of the premium tax credit program.  In addition, CMS 
will need to be attentive to state Marketplace operations to ensure state compliance with requirements, including 
transmitting accurate and timely data used for federal payments.  Key focus areas for the federal and state 
Marketplaces should include:   
Payments.  Ensuring sound expenditure of taxpayer funds for intended purposes poses a substantial management 
challenge, especially given the use of manual systems.  The Department must implement financial management 
and payment systems that produce accurate and timely payments to issuers of advance payment of premium tax 
credits, cost-sharing reduction amounts, and premium-stabilization payments.  In addition, CMS must validate 
information received from issuers to ensure that it is timely, complete, and accurate for payment purposes.  Given 
the substantial federal funds involved, the Department should undertake a thorough risk assessment and, where 
appropriate, develop error rates to measure the integrity of program payments.   
Eligibility.  Ensuring accurate eligibility determinations is critical.  Recent Office of Inspector General (OIG) work 
addressing eligibility verification systems during the first open enrollment period found that not all internal 
controls  at  reviewed  Marketplaces  were  effective  and  that  Marketplaces  were  unable  to  resolve  most 
inconsistencies between applicants self-reported information and data obtained by the Marketplaces from other 
sources.  Moreover, for the second open enrollment period, Marketplaces must add functionality for processing 
re-enrollments.  Effective internal controls and timely and accurate resolution of inconsistencies are, and will 
continue to be, critical to ensure that eligible consumers receive appropriate benefits and that ineligible individuals 
are not enrolled.   
Management and Administration.  Following the October 1, 2013, launch of the Marketplaces, the Department 
acknowledged  the  need  for  improved  management  and  oversight,  including  clear  leadership,  disciplined 
operations, and better communication across the Department.  Challenges include selecting capable contractors 
and providing appropriate oversight to ensure successful operation of the federal Marketplace, including both 
   
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  public-facing and administrative systems.  The Department must ensure, to the greatest extent possible, that the 
Government obtains specified products and services from its contractors on time and within budget.  In addition, 
problematic operations at some state Marketplaces have prompted questions regarding the use of Federal 
establishment grant funds, and the Department must ensure that these grants have been properly managed.  (For 
general information about challenges associated  with grants management and contract administration, see 
Management Challenge 9.)   
Security.  Protecting and ensuring the confidentiality and integrity of consumers sensitive personal information 
and Marketplace information systems is paramount.  Effective operation of the Marketplaces requires rapid, 
accurate, and secure integration of data from numerous federal and state sources, issuers, and consumers.  It also 
requires an established large-scale means of communication among many federal and state systems.  The 
Department  must  vigilantly  guard  against  intrusions  and  continuously  assess  and  improve  the  security  of 
Marketplace related systems, including, among others, the Data Services Hub.  OIG work found that selected 
Marketplaces  generally  protected  personally  identifiable  information,  but  could  improve  some  information 
security controls.  The Department also must ensure that non-automated systems used to process consumer 
enrollment information, such as the call center and paper application processes, incorporate effective security 
measures.   
Progress in Addressing the Challenge 
Since October 1, 2013, the Department has reported improvement in the operations of the federal Marketplace, as 
well as substantial enrollment figures.  Key progress reported by CMS includes:   
  changes to CMSs management of the federal Marketplace, including closer oversight by CMS leadership, 
designation of a systems integrator, use of cross-functional teams, and procurement of a new contractor 
for federal Marketplace construction and maintenance; 
  establishment  of  (1)  an  interim  process  for  resolving  data  inconsistencies  pending  automated 
functionality, (2) an interim process for paying issuers that are owed financial assistance payments 
pending automated functionality, and (3) functionality for reporting life change events; 
  an improved application on a redesigned HealthCare.gov intended to streamline the eligibility process and 
improve the consumer experience;  
  actions taken to address OIG recommendations to improve information technology (IT) security; and 
  screening of call center representatives and focused training on protecting sensitive information.   
 
CMS also reported regular communications with the IRS to validate payment information and the provision of 
technical and other support to the state Marketplaces.   
What Needs To Be Done 
The  Department  must  continue  to  improve  the  federal  Marketplace,  including  the  public-facing  consumer 
functions, as well as the back-end administrative and financial management functions.  The Department must 
ensure that alternate pathways for enrollment operate with integrity and that consumers personal information is 
secure.  The Department must operate a well-run second open enrollment period for individuals and small 
businesses, employing lessons learned, taking all steps practicable to avoid problems that marred the first open 
enrollment period and rapidly and effectively addressing any problems that arise.  Vigilant monitoring and testing 
and rapid mitigation of identified vulnerabilities are essential.  In addition, attention must be paid to sound 
operation  of  financial  assistance  and  premium-stabilization  programs.    The  Department  must  ensure  that 
consumers and issuers receive accurate Marketplace information, including information relevant for tax purposes, 
such as Form 1095A tax forms.   
   
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  As with other new programs, the Department must continue to work with its partners to develop program 
integrity measures and processes.  It must monitor for and address fraud, waste, and abuse risks to protect the 
federal investment in health care reform.  If fraud schemes are identified, the Department must respond quickly 
and effectively, working jointly with partners at the federal and state level to ensure program integrity and hold 
those involved accountable.  Further, the Department must continue to coordinate closely with states and others 
in federal government to monitor the operations and security of the Marketplaces and to implement Marketplace 
programs.   
Key OIG Resources 
  OIG Testimony, Failure To Verify:  Concerns Regarding PPACAs Eligibility System, July 2014, 
http://oig.hhs.gov/testimony/docs/2014/Daly_Greenleaf_testimony_07162014.pdf 
  OIG Report, Marketplaces Generally Protected Personally Identifiable Information but Could Improve 
Certain Information Security Controls, September 2014, 
http://oig.hhs.gov/oas/reports/region1/181430011.asp  
  OIG Report, Not All Internal Controls Implemented by the Federal, California, and Connecticut 
Marketplaces Were Effective in Ensuring That Individuals Were Enrolled in Qualified Health Plans 
According to Federal Requirements, June 2014, http://oig.hhs.gov/oas/reports/region9/91401000.asp 
  OIG Report, Marketplaces Faced Early Challenges Resolving Inconsistencies with Applicant Data, June 
2014, http://oig.hhs.gov/oei/reports/oei-01-14-00180.pdf   
  OIG Report, An Overview of 60 Contracts That Contributed to the Development and Operation of the 
Federal Marketplace, August 2014, http://oig.hhs.gov/oei/reports/oei-03-14-00231.asp  
  OIG 2015 Work Plan, http://oig.hhs.gov/reports-and-publications/archives/workplan/2015/FY15-Work-
Plan.pdf 
Management Challenge 2:  Ensuring Appropriate Use of Prescription Drugs in Medicare and Medicaid 
Why This Is a Challenge 
CMS provides prescription drug coverage for 37.4 million Medicare beneficiaries through Part D and 59.4 million 
Medicaid beneficiaries.  In 2012, combined Part D and Medicaid prescription drug expenditures totaled over $93 
billion.  Medicare Part D alone accounted for $66.9 billion of those expenditures.  Maintaining the integrity of 
these two programs is critical to ensuring patient safety; safeguarding the quality of care; protecting the programs 
from fraud, waste, and abuse; and protecting taxpayer dollars.   
OIG has extensively examined ongoing monitoring and oversight of the programs and the effectiveness of controls 
designed to ensure appropriate payment and patient safety.  In both the Medicare Part D and Medicaid programs, 
OIG has uncovered improper and potentially harmful prescribing practices, pharmacies billing for drugs not 
dispensed, and diversion of prescription drugs.   
Questionable Utilization and Billing Patterns.  A 2014 OIG report examining questionable utilization patterns for 
HIV drugs by beneficiaries revealed claims on behalf of many beneficiaries with no indication of HIV in their 
Medicare histories, claims for excessive doses or supplies of HIV drugs, claims for HIV drugs from a high number of 
pharmacies or prescribers, or claims for contraindicated drugs.  These patterns may indicate that beneficiaries are 
receiving  inappropriate  prescription  drugs  and  selling  them  illegally,  pharmacies  are  billing  for  drugs  that 
beneficiaries never received, or that beneficiaries Medicare identification numbers were stolen.  Medicare paid 
$32 million for HIV drugs for beneficiaries with questionable utilization patterns in 2012. 
   
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  Additional health care fraud schemes have involved providers submitting fraudulent claims to Medicare for 
deceased beneficiaries.  A 2013 report revealed that, in 2011, Part D inappropriately paid more than $1 million for 
prescription drugs for 5,101 deceased beneficiaries, including some beneficiaries who had died in 2009.   
Drug Diversion and Abuse of Controlled Substances.  The diversion and abuse of prescription drugs is an ongoing 
problem.  Drug diversion is the transfer of legitimate prescription drugs for unlawful purposes.  Controlled 
substances, such as opiate pain relievers, are potentially so dangerous that they require restrictions on their 
manufacture, possession, or use.  The Centers for Disease Control and Prevention (CDC) characterizes prescription 
drug abuse as an epidemic, reaching virtually all demographics and geographic locations.  As abuses of these drugs 
have increased over the past five years, OIG has also increased its investigations of abuses in this area, many of 
which involve harm to individual beneficiaries.  Diversion of these drugs may also result in profound public harm.  
In one noteworthy example, an OIG investigation found that a health care worker infected with Hepatitis C 
diverted a controlled prescription drug from a hospital for his own personal use.  In an attempt to remain 
undetected, the worker inserted saline solution into the vials to replace the diverted drugs.  Because the worker 
used his contaminated syringes to switch the fluids, several patients treated from these vials contracted the 
infectious disease.   
Drug Diversion and Abuse of Non-Controlled Substances.  A rapidly growing trend is the illegal billing and diversion 
of non-controlled medications (e.g., anti-psychotics), which presents a substantial financial vulnerability to federal 
health  care programs.    Many  cases  involve  pharmacies  billing  federal  programs  for  expensive  brand-name 
medications that were never dispensed.  Other common cases involve Medicare or Medicaid beneficiaries 
combining prescribed drugs with opioids to create an enhanced euphoria; such drugs are called potentiators.  
Some HIV drugs are examples of non-controlled substances that can be used as potentiators.   
Progress in Addressing the Challenge 
CMS has taken steps to strengthen oversight of appropriate drug utilization in Medicare Part D.  For example, CMS 
responded to an OIG recommendation that it strengthen the Medicare Drug Integrity Contractors (MEDIC) 
monitoring of pharmacies and its ability to identify pharmacies with questionable billing patterns and develop 
pharmacy risk scores.  In June 2013, CMS and the MEDIC developed pharmacy risk scores and released a list of 
high risk pharmacies to Part D plans.  CMS instructed Part D plans to use the risk score information in 
conjunction with their own data analysis to combat fraud, waste, and abuse.  CMS suggested that plans use the list 
of high risk pharmacies to target pharmacies for audits and further review.   
Moreover, OIG recommended that CMS require Part D sponsors to verify that prescribers have the authority to 
prescribe drugs.  Beginning June 1, 2015, physicians and eligible professionals must be enrolled in Medicare to 
prescribe Part D drugs.  In addition, to identify the prescribing physician or eligible professional, CMS will require 
that a pharmacy claim for a Part D drug contain the National Provider Identifier. This will enable CMS, Part D plans, 
and the MEDIC to verify that prescribers have the authority to prescribe Part D drugs before the claims are paid.   
What Needs To Be Done 
In addition to taking the steps described above, CMS must increase Part D plan sponsors abilities to limit 
questionable utilization of drugs, particularly drugs that are vulnerable to diversion and recreational abuse.  For 
example, CMS should expand sponsors' drug utilization review programs and use of beneficiary-specific controls.  
CMS should also restrict certain beneficiaries with questionable utilization patterns to a limited number of 
pharmacies or prescribers.   
   
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  Additionally, CMS should improve existing safeguards to prevent improper payments in Part D.  CMS needs to 
ensure that the MEDIC routinely analyzes billing data to detect pharmacies and providers with questionable billing 
patterns, including billing for deceased beneficiaries.   
Key OIG Resources 
  OIG Report, Part D Beneficiaries with Questionable Utilization Patterns for HIV Drugs, August 2014, 
http://oig.hhs.gov/oei/reports/oei-02-11-00170.pdf 
  OIG Testimony, Medicare Program Integrity:  Screening Out Errors, Fraud, and Abuse, June 2014, 
https://oig.hhs.gov/testimony/docs/2014/cantrell_testimony_06252014.pdf 
  OIG Report, Medicare Payments Made on Behalf of Deceased Beneficiaries, October 2013, 
http://oig.hhs.gov/oei/reports/oei-04-12-00130.pdf   
Management Challenge 3:  Protecting an Expanding Medicaid Program From Fraud, Waste, and Abuse   
Why This Is a Challenge 
Protecting the integrity of Medicaid takes on heightened urgency as the program continues to grow in spending 
and in the number of people it serves.  As of October 2014, 27 states and the District of Columbia (28 states) are 
expanding Medicaid coverage to include qualifying adults earning up to 133 percent of the federal poverty level, 
pursuant to Affordable Care Act and Medicaid waivers.  Further, states that have not expanded eligibility have seen 
increases in Medicaid enrollment.  In addition to facing the challenges in implementing expanded eligibility in the 
28 states, Medicaid programs face long-standing program integrity challenges.  These include improving the 
effectiveness  of  Medicaid  data;  preventing  and  addressing  fraud,  waste,  and  abuse,  including  avoiding  or 
recovering Medicaid improper payments; ensuring access to care in Medicaid managed care programs; and 
curbing state Medicaid policies that inflate federal costs.  (See Management Challenge 5 for more information on 
Medicaid issues related to nursing homes and benefits provided in home- and community-based settings.)   
Expansion of Medicaid Eligibility.  As of August 2014, CMS reported that enrollment in Medicaid and the Childrens 
Health Insurance Program (CHIP) had increased by 8.7 million people since individuals became eligible to apply 
under the Affordable Care Acts expanded eligibility criteria in October 2013.  For individuals in expansion states 
who are newly eligible under the Affordable Care Acts expanded income limits, the Federal Government will pay 
the full costs of medical assistance through 2016, after which the federal share gradually falls to 90 percent by 
2020 and continues at 90 percent thereafter.  For Medicaid beneficiaries who are not newly eligible, the Federal 
Government  will  continue  to  share  costs  with  states  according  to  its  standard  Federal  Medical  Assistance 
Percentage (FMAP), which currently ranges by state from 50 to 74 percent.  Updating eligibility systems and 
ensuring  appropriate  eligibility  determinations  and  FMAP  designations  for  each  beneficiary  present 
implementation challenges.   
Improving the Effectiveness of Medicaid Data.  As Medicaid expands, implementing a functional, national Medicaid 
database is essential to effective oversight of Medicaid payments and services.  OIG continues to find that the 
existing national Medicaid data are not complete, accurate, or timely and that additional data are needed to 
conduct national Medicaid program integrity activities.  CMS has attempted to improve the access and quality of 
Medicaid data, most recently through the Transformed Medicaid Statistical Information System (T-MSIS) initiative.  
OIG found that as of January 2013, CMS and 12 volunteer states had made some progress in implementing T-MSIS; 
however, early T-MSIS implementation outcomes raised questions about the completeness and accuracy of T-MSIS 
data upon national implementation.   
Identifying and Recovering Improper Payments.  In 2013, CMS reported that Medicaids improper payment rate 
was 5.8 percent.  The projected federal share of the $24.9 billion improper payments was $14.4 billion; almost 97 
   
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  percent of these improper payments were overpayments.  Payments made on behalf of individuals who should not 
have been enrolled in the program were the main source of error.  CMS is developing a Unified Program Integrity 
Contractor model in which program integrity work at the federal level will be consolidated so that each contractor 
will  conduct  Medicare,  Medicaid,  and  Medicare-Medicaid  Data  Match  (Medi-Medi  Program)  work  within 
designated geographic areas; CMS expects to implement this strategy starting in FY 2015.  OIG has found that 
CMSs national Medicaid integrity programsMedicaid Audit Program and Medi-Medi Programhave had limited 
success  identifying  Medicaid  overpayments  and  potential  fraud.    (See  Management  Challenge  8  for  more 
information on error rate measurement and reporting.)   
Program Integrity and Beneficiary Access in Managed Care Programs.  CMS reports that, as of 2011, almost three-
quarters of all Medicaid beneficiaries were enrolled in some type of managed care system.  The private plans and 
Medicaid share financial risk from fraud, waste, and abuse by health care providers or beneficiaries.  Such fraud, 
waste, and abuse drives up costs for both the plans and Medicaid.  Fraud or abuse by the managed care plan (e.g., 
manipulating its bids) can further increase Medicaid costs.  In a 2011 report, OIG work revealed that the 
predominant concerns of both states and plans were provider fraudbilling for services that were not provided, 
were medically unnecessary, or were upcodedand beneficiary fraud, including prescription drug abuse.   
Ensuring that beneficiaries enrolled in managed care plans have sufficient access to providers and services is 
paramount.  OIG has found that standards for access to care vary widely across states.  For example, standards 
range from requiring 1 primary care provider for every 100 enrollees to 1 primary care provider for every 2,500 
enrollees.  States do not commonly use "direct tests," such as making calls to providers, to identify whether plans 
are meeting access-to-care-standards.  Further, CMS provides limited oversight of state access standards.   
State Policies That Inflate Federal Costs.  OIG has raised long-standing concerns, as noted in our Compendium of 
Priority Recommendations, about states Medicaid policies that result in the Federal Governments paying a 
greater share of Medicaid costs than the FMAP percentages would dictate.  Medicaid permits states to provide 
enhanced payments that qualify for federal reimbursement to non-state-owned government providers, such as 
county or local publicly owned nursing facilities and hospitals.  But some states have required such facilities to 
transfer the funds to the states to be put to other uses, leaving the facilities underfunded.  Misalignment of costs 
and payments at certain state-operated facilities can also inflate federal costs; for example, in New York, Medicaid 
payments to state-run developmental centers exceeded actual costs by more than $1 billion during New Yorks 
State FY 2009.  In another example, Pennsylvania used a state tax on Medicaid managed care plans to draw down 
almost $1 billion in federal funds over a three-year period.   
Progress in Addressing the Challenge 
CMS has reported that it is working to promote program integrity with respect to the Medicaid expansion by 
providing tools and technical assistance to the states, developing new procedures and practices for ensuring 
eligibility  determination  and  payment  accuracy,  and  training  state  staff  on  reporting  and  accounting  for 
expenditures associated with newly eligible individuals.   
CMS has taken action to improve its data and technology capabilities with respect to Medicaid program integrity.  
Beginning in July 2014, all states were expected to demonstrate operational readiness to submit T-MSIS files to 
CMS.  As of October 2014, CMS stated that over 38 states are engaged in testing with CMS regarding the transfer 
of their T-MSIS files.  CMS stated that it will continue to monitor, evaluate, and improve the quality and 
consistency of T-MSIS data submissions.   
CMS has also reported actions to improve the Medicaid Audit Program and the Medi-Medi Program consistent 
with OIG recommendations, such as assigning more Medicaid audits through a collaborative process, which 
   
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  showed greater success than the traditional process.  In addition, CMS stated that it will continue working with 
states and third parties to address problems identified by states with identification and collection from liable third 
parties.   
In a June 2014 status update to OIG, CMS indicated that it is working with states to protect against fraud, waste, 
and abuse in managed care.  Specifically, CMS is working to update guidelines to states on program integrity in 
Medicaid managed care.  In addition, CMS indicated that it will advise states to work with their managed care 
entities to identify and implement effective strategies for verifying billed services in managed care settings.  CMS 
also agreed with OIGs recommendations to strengthen oversight of managed care access standards, and it 
described plans to provide guidance and technical assistance to states.   
CMS  is  continuing  to  work  with  New  York  to  revise  its  methodology  for  Medicaid  payments  to  state-run 
developmental centers to better align them with costs.  CMS has approved a State Plan Amendment, issued a 
disallowance letter to New York for $1.25 billion for 2010-2011, and plans to review two subsequent fiscal years.  
Finally, CMS has issued guidance on Medicaid upper payment limits and is requiring all states to demonstrate 
annually the upper payment liability to the Federal Government for services that are subject to these limits.  In 
addition, CMS recently issued a State Health Officials letter on the treatment of health-care-related taxes and their 
effect on federal matching funding, following OIGs audit work in Pennsylvania.   
What Needs To Be Done 
CMS should continue its efforts to develop robust oversight for the Medicaid expansion.  CMS must be vigilant in 
addressing program integrity risks associated with the expansion, including monitoring states compliance with 
eligibility requirements and FMAP expenditures.   
CMS should continue to work with states to ensure the submission of complete, accurate, and timely T-MSIS data.  
If states fail to submit timely T-MSIS data, CMS should use its statutory enforcement mechanisms or seek 
legislative authority to employ alternative tools to compel state participation.   
CMS should continue to build on its progress addressing Medicaid Integrity Contractors (MIC) and Medi-Medi 
performance in identifying Medicaid overpayments.  In particular, CMS should expand its use of collaborative 
audits to ensure that all states and the District of Columbia are actively engaged with the MICs in identifying and 
auditing providers.   
Given that concerns about identifying fraud and abuse remained among states and plans, particularly with respect 
to provider and beneficiary fraud, CMS should update guidance to states to reflect these concerns.  CMS should 
work with states to ensure that contracts with managed care organizations contain adequate provisions for the 
identification and referral of potential fraud cases.  CMS should also implement its plans to work with states to 
ensure adequate access to care for Medicaid beneficiaries enrolled in managed care plans.   
OIG has long recommended that Medicaid payments to public providers be based on the costs of providing 
services.  In 2008, CMS issued a final rule that, among other things, would limit Medicaid payments to public 
providers to their costs of providing care, but the rule was ultimately vacated by Federal District Court.   
Key OIG Resources 
  OIG Report, State Standards for Access to Care in Medicaid Managed Care, September 2014, 
http://oig.hhs.gov/oei/reports/oei-02-11-00320.asp 
  OIG Compendium of Priority Recommendations, March 2014,  
http://oig.hhs.gov/reports-and-publications/compendium/files/compendium2014.pdf 
   
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    OIG Testimony, Examining the Federal Governments Failure to Curb Wasteful State Medicaid Financing 
Schemes, July 29, 2014, http://oversight.house.gov/wp-content/uploads/2014/07/Hagg-HHS-OIG-
Final.pdf 
  OIG Report, Early Outcomes Show Limited Progress for the T-MSIS, September 2013, 
https://oig.hhs.gov/oei/reports/oei-05-12-00610.asp  
  OIG Testimony, Saving Taxpayer Dollars by Curbing Waste and Fraud in Medicaid, June 14 2012, 
http://oig.hhs.gov/testimony/docs/2012/Maxwell_testimony_06142012.pdf 
  OIG Testimony, Examining the Administrations Failure to Prevent and End Medicaid Overpayments, 
September 20, 2012, https://oig.hhs.gov/testimony/docs/2012/Hagg_testimony_09202012.pdf  
  OIG Report, Medicaid Managed Care: Fraud and Abuse Concerns Remain Despite Safeguards, December 
2011, https://oig.hhs.gov/oei/reports/oei-01-09-00550.asp  
Management Challenge 4:  Fighting Waste and Fraud and Promoting Value in Medicare Parts A and B 
Why This Is a Challenge 
To secure the future of health care for Medicare beneficiaries, the Department must be vigilant in reducing 
wasteful spending and promoting better health outcomes at lower costs.  The Institute of Medicine estimated that 
30 percent of U.S. health spending (public and private) in 2009roughly $750 billionwas wasted.1 
Waste in health care programs is a multi-dimensional problem.  Key areas of focus for reducing waste in Medicare 
Parts A and B include reducing improper payments, fighting fraud, fostering economical payment policies, and 
transitioning from volume to value in health care.  HHS faces challengesand opportunitiesin each of these 
areas.   
Reducing Improper Payments.  CMS reported an error rate of 10.1 percent for Medicare fee for service (Parts A and 
B), corresponding to an estimated $36 billion in improper payments in FY 2013.  This measure includes payments 
for unnecessary services, billing or coding errors, and payments for claims that did not meet documentation or 
other Medicare coverage requirements.  Medicares pending transition to a new system of diagnosis codes, the 
ICD-10, may bring implementation challenges or potential increases in improper billing as providers transition to 
the new codes.  (See Management Challenge 8 for more information on error rate measurement and reporting.)   
Challenges affect every stage of the payment process, from making the initial payment accurately to adjudicating 
overpayment recoveries.  OIG has documented high Medicare improper payment rates for various services, 
including home health services and evaluation and management services.  OIG audits of hospitals have uncovered 
and sought to remedy improper billing and payments for a myriad of issues, such as incorrect billing for transfers 
to post-acute care and inaccurate patient diagnosis codes.  Accurate billing by hospitals for short inpatient stays 
versus outpatient observations has been an area of considerable challenge and concern for the Department, 
hospitals, and beneficiaries.   
CMS  relies  on  contractors  for  most  of  these  crucial  functions; however,  OIG has  identified  deficiencies  in 
contractor performance and in CMSs oversight of contractors that process Medicare claims and that audit and 
recover overpayments.  Finally, the Department is facing significant challenges in adjudicating provider appeals of 
Medicare overpayment recoveries, including (1) a substantial backlog of appeals at the administrative law judge 
(ALJ) level (third level of appeals), (2) inconsistent determinations among the ALJs and between the ALJs and 
                                                                 
1 Institute of Medicine, "Best Care at Lower Cost: The Path to Continuously Learning Health Care in America," 
September 6, 2012. 
   
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  Qualified Independent Contractors (second level of appeals), and (3) insufficient CMS participation in the appellate 
process.   
Preventing and Responding to Fraud.  Curbing fraud is vital to conserving scarce health care resources and 
protecting beneficiaries.  Fraud schemes shift over time, but certain Medicare services have been consistent 
targets.  For example, OIG investigations continue to uncover fraud schemes and questionable billing patterns by 
durable medical equipment (DME) suppliers, home health agencies, community mental health centers, clinical 
laboratories, ambulance transportation suppliers, and outpatient therapy providers.  CMSs contractors play a key 
role in fighting Medicare fraud.  However, CMS is not realizing the full potential of this oversight tool.  For example, 
OIG found that CMS contractors program integrity efforts were limited with respect to home health and 
community mental health services, even though these services are known as fraud risk areas.   
Fostering Economical Payment Policies.  As a result of certain payment policies that OIG has identified, Medicare 
pays significantly different amounts for the same services for similar patients in different settings.  For example, 
Medicare pays significantly more for services performed in an outpatient hospital department than for the same 
services performed in an ambulatory surgical center (ASC).  While not all patients can safely receive services in an 
ASC, for low-risk patients that do not need hospital-level care at an outpatient hospital department, Medicare 
could save billions of dollars by paying for their services at ASC rates.  In another example, Medicare generally 
reduces payments to hospitals for patients with early discharges to post-acute care, such as care provided in a 
skilled nursing facility, to avoid overlapping payments for the hospital care and the post-acute care.  However, 
Medicare does not reduce hospital payments if a patients early discharge is to hospice care.   
Transitioning From Volume- to Value-Based Payment.  Experts generally agree that the incentives created by 
paying for health care on the basis of the volume of items or services furnished, as in Medicares fee-for-service 
program, contribute to waste by encouraging unnecessary utilization and fragmented, poor quality care.  HHS is 
transitioning to value-based payments in Medicare, which are intended to produce better quality of care at lower 
costs by rewarding high-quality care, penalizing low-quality care, or enhancing care coordination.  Models involve, 
for example:  accountable care organizations (ACOs), value-based payments for hospitals, penalties for hospital 
readmissions, pay-for-performance systems, shared savings programs, gainsharing, care coordination payments, 
and bundled payments.   
Designing bundled payment methodologies that reimburse for items and services across separate provider settings 
will pose additional challenges.  Many value-based payment mechanisms rely on complex data, electronic health 
information, and sophisticated quality and performance measures.  To be effective, the data must be correct and 
timely, the metrics meaningful, and the information usable.   
Progress in Addressing the Challenge 
Overall, the Department has implemented many of OIGs recommendations for combating waste and fraud in 
Medicare, resulting in cost savings, improved program operations, and enhanced protections for beneficiaries.  In 
FY 2013, OIG audits and investigations resulted in expected recoveries of $5.8 billion in stolen or misspent funds 
across Department programs.  In addition, OIG reported estimated savings of more than $19 billion resulting from 
legislative and regulatory actions supported by OIG recommendations.  The Health Care Fraud and Abuse Control 
Program (a joint program of the Department, CMS, OIG, and the Department of Justice (DOJ) to fight waste, fraud, 
and abuse in Medicare and Medicaid) returned more than $8 for every $1 invested.  Medicare Fraud Strike Forces, 
led by OIG and DOJ, have demonstrated success in investigating and prosecuting fraud and shutting down criminal 
networks.   
   
Department of Health and Human Services    FY 2014 Agency Financial Report     9 
 
  CMS has taken actions intended to improve the integrity and accuracy of billing for numerous types of services.  
For example, CMS implemented (1) a provision of the Affordable Care Act that practitioners who certify Medicare 
patients as eligible for home health services must document their face-to-face encounters with those patients and 
(2) a demonstration project that requires prior authorization for scooters and power wheelchairs in seven states 
with high incidences of fraud and improper payments for these items.  CMS is working with home health service 
providers and practitioners to improve the low initial rates of compliance with this requirement.  CMS continues to 
work to address hospital billing for short inpatient stays and outpatient observation stays, which has significant 
impacts on Medicare spending, beneficiary cost-sharing, and hospital revenue.   
OIG has also noted reductions in Medicare billing and payments for certain services and geographic areas with 
known fraud risks.  For example, following high-intensity law enforcement activities and administrative actions by 
CMS, billing and payments for home health services and community mental health services declined significantly in 
fraud hot spots.  CMS has also instituted temporary moratoria on the enrollment of new home health agencies in 
the Miami, Chicago, Fort Lauderdale, Detroit, Dallas, and Houston areas and ambulance transportation suppliers in 
the Houston and Greater Philadelphia areas.  Additionally, CMS continues to develop its Fraud Prevention System 
(FPS).  OIG certified CMSs reported $54 million in actual savings and $210 million in unadjusted savings resulting 
from year 2 of the FPS, representing a positive return on investment of $1.34 for every $1.   
CMS has reported improvements to its oversight and measurement of its contractors performance and its follow-
up on improper payment vulnerabilities that contractors identify.  The Department also continues to focus on 
resolving the backlog of Medicare appeals by providers.   
CMS has implemented and is administering ACO programs,  value-based purchasing programs, the Bundled 
Payment for Care Improvement initiative, the Health Care Innovation Awards program, the State Innovation Model 
program, and others.  In September 2014, CMS reported first performance year results for the Medicare Shared 
Savings Program (MSSP) showing that 53 MSSP ACOs earned shared savings payments of more than $300 million 
and held spending $652 million below their targets; in total, the Medicare Trust Fund will save approximately $345 
million.   
What Needs To Be Done 
Despite progress in key areas, further actions are needed to protect Medicare from waste and fraud.  CMS needs 
to better ensure that Medicare makes accurate and appropriate payments.  When Medicare improper payments 
occur, CMS needs to identify and recover them in a timely manner.  CMS must also implement safeguards, as 
needed, to prevent recurrence.  CMS relies on contractors for most of these crucial functions; therefore, ensuring 
effective contractor performance is essential.  Finally, the Medicare appeals system needs fundamental changes to 
resolve issues about improper payments efficiently, effectively, and fairly.  OIG has recommended numerous 
actions to advance these outcomes.   
With respect to promoting value in Medicare, the Department should continue to prioritize the effective transition 
to value-based payment mechanisms and the development and refinement of quality, outcomes, and performance 
metrics.  Data systems supporting programs that link payment to quality and value must be scrutinized for 
timeliness, accuracy, and completeness.  CMS should continue to strengthen its program integrity tools and apply 
them as needed to  ensure integrity in new  models.    As demonstration programs continue to unfold, the 
Department should carefully monitor for successes and benefits that can be scaled and replicated, as well as for 
potential  problemsincluding  inefficiencies,  misaligned  incentives,  or  abuses.    As  with  any  innovation  and 
experimentation, missteps may occur; it is critical that the Department take effective and appropriate actions to 
address such missteps and prevent their recurrence.   
   
Department of Health and Human Services    FY 2014 Agency Financial Report     10 
 
  Key OIG Resources 
  OIG Testimony, Medicare Program Integrity:  Screening Out Errors, Fraud, and Abuse, June 2014, 
https://oig.hhs.gov/testimony/docs/2014/cantrell_testimony_06252014.pdf 
  OIG Testimony, Medicare Mismanagement:  Oversight of the Federal Government Efforts to Recapture 
Misspent Funds, May 2014, http://oig.hhs.gov/testimony/docs/2014/Ritchie_testimony_05202014.pdf 
  OIG Compendium of Priority Recommendations, March 2014,  
http://oig.hhs.gov/reports-and-publications/compendium/files/compendium2014.pdf 
 
Management Challenge 5:  Ensuring Quality in Nursing Home, Hospice, and Home- and Community-Based Care  
 
Why This Is a Challenge 
As the median age of Americans continues to rise and as more Americans live with chronic medical conditions, the 
Department faces challenges in ensuring that beneficiaries who require nursing home, hospice, or home- and 
community-based services (HCBS) receive high quality care.  It is critical that these services be available, allowing 
beneficiaries to receive the care they need in the setting that best serves their needs and preferences.  High quality 
nursing home and HCBS programs are important for the continued well-being of people who need ongoing 
assistance with daily living, as well as those who need additional help recuperating from hospital stays or other 
acute care.  Hospice care provides comfort for terminally ill beneficiaries by reducing pain and addressing physical 
and other needs.  High quality nursing home, hospice, and HCBS personal care services can often prevent the need 
for disruptive and costly hospitalizations.   
 
OIG continues to identify various problems with nursing home and hospice care.  For example, in reports on 
nursing homes, OIG raised concerns about the frequency of preventable adverse events due to substandard care, 
the extent to which nursing homes comply with federal regulations for reporting abuse and neglect, and the lack of 
monitoring of nursing homes resident hospitalization rates.  With respect to hospice care, OIG has raised concerns 
about insufficient monitoring of hospice service use, as well as inadequate oversight of hospice certification 
surveys and hospice-worker licensure requirements.   
 
It is critical to ensure effective oversight of HCBS programs and Medicaid-paid personal care services.  HCBS 
programs are important, in part, because they allow beneficiaries whose needs and preferences are better served 
by remaining in their own homes or other community-based settings to avoid or delay institutionalization.  These 
programs offer many advantages for promoting beneficiary choice and preferences, but OIG efforts have revealed 
persistent payment, compliance, and quality vulnerabilities.    
 
Progress in Addressing the Challenge 
The Department continues to take steps to improve the quality of nursing home, hospice, and HCBS programs.  
Through its Web site and in various outreach strategies, CMS is providing guidance to nursing homes on how to 
meet newly expanded quality assessment and performance improvement (QAPI) activities required under the 
Affordable Care Act.  Adding to this effort is a recent proposed rule that outlines actions CMS intends to take to 
remove  obsolete  or  unnecessary  provisions  affecting  nursing  homes  ability  to  carry  out  these  and  other 
requirements.  CMS also published rules strengthening nursing home requirements in areas such as emergency 
preparedness, dementia care, and infection control.   
 
The Department has also taken steps to improve the quality of services beneficiaries receive in hospice settings 
and from HCBS programs.  To improve hospice care, CMS proposed rules that would update the hospice quality 
reporting program and reform hospice payment methodologies.  For HCBS programs, CMS finalized rules covering 
   
Department of Health and Human Services    FY 2014 Agency Financial Report     11 
 
  minimum quality expectations for providers, new administrative flexibilities for states running HCBS programs, 
requirements for person-centered planning in these services, and enforcement actions CMS can take against HCBS 
programs out of compliance with requirements.  The Department also entered into a contract with the National 
Quality Forum to begin work on the development of a national quality measure set for HCBS.   
 
OIG continues to pursue enforcement actions against nursing homes, hospices, and HCBS providers that render 
substandard care.  CMS and OIG work closely with law enforcement partners at DOJ and through the federal Elder 
Justice Interagency Working Group to promote better care for older adults and to prosecute providers committing 
abuse or neglect.  Additionally, state Medicaid Fraud Control Units (MFCUs), which receive oversight and funding 
from OIG, devote substantial resources to the investigation and prosecution of abuse and neglect in Medicaid-
funded facilities, such as nursing homes and board-and-care homes.   
 
The decision to force a nursing home to shut down or stop serving federal health care program beneficiaries is 
never taken lightly, as the experience of being transferred is traumatic to displaced beneficiaries, and locating 
nearby facilities to adequately serve them can be challenging.  Therefore, OIG invests substantial efforts in helping 
facilities improve.  OIG has developed an innovative quality-oriented corporate integrity agreement process to 
work with nursing home providers so they may better serve beneficiaries.  OIG has placed nearly 40 nursing home 
companies  (covering  more  than  750  facilities)  under  corporate  integrity  agreements  that  include  quality-
monitoring provisions designed to ensure that beneficiaries receive the care they deserve.   
 
What Needs To Be Done 
The Department should continue to prioritize quality of nursing home, hospice, and HCBS.  OIG has offered 
recommendations to assist the Department in this mission.  For example, OIG recommended that the Department 
monitor how often nursing home residents are hospitalized and develop resources that can be used to help 
nursing home staff reduce the incidence of adverse events in nursing homes.  OIG has also recommended that the 
Department seek to link payments for services to meeting quality-of-care requirements and work with OIG to hold 
providers that have rendered substandard care accountable, thereby preventing additional harm to vulnerable 
beneficiaries.  Further, the Department should promulgate the regulations mandated under section 6102 of the 
Affordable Care Act concerning compliance and ethics programs for nursing homes.   Such regulations could assist 
nursing homes in preventing and detecting fraud, waste, and abuse and promoting quality of care.   
 
Recently, Congress passed two laws that gave the Department new tools to improve the quality of care in nursing 
homes and other post-acute care providers.  The Protecting Access to Medicare Act of 2014 (PAMA) establishes a 
value-based  payment  program  for  nursing  homes  under  which  incentive  payments  will  be  made  to  high 
performing providers.  The Improving Medicare Post-Acute Care Transformation Act of 2014 (IMPACT) includes 
new reporting requirements for nursing homes and other post-acute care providers, including standardized 
admission and discharge patient assessments.  IMPACT also includes requirements that hospice programs be 
surveyed at least once every 36 months and that oversight entities perform chart reviews, in some cases, of 
hospice episodes longer than 180 days.  The Department should use these tools to improve the care people 
receive in these settings.   
 
Lastly, the Department should ensure the integrity of Medicaid-funded personal care services by establishing 
minimum federal qualification standards for providers; improving CMS's and states' ability to monitor billing and 
care quality; and issuing operational guidance for claims documentation, beneficiary assessments, plans of care, 
and supervision of personal care attendants.  The Department should also issue guidance to states regarding 
adequate prepayment controls and help states access data necessary to identify overpayments. 
   
Department of Health and Human Services    FY 2014 Agency Financial Report     12 
 
  Key OIG Resources 
  OIG Report, Adverse Events in Skilled Nursing Facilities:  National Incidence Among Medicare Beneficiaries, 
February 2014, http://oig.hhs.gov/oei/reports/oei-06-11-00370.pdf 
  OIG Portfolio, Personal Care Services: Trends, Vulnerabilities, and Recommendations for Improvement, 
November 2012, http://oig.hhs.gov/reports-and-publications/portfolio/portfolio-12-12-01.pdf 
 
Management Challenge 6: The Meaningful and Secure Exchange and Use of Electronic Health Information  
Why This Is a Challenge 
The  American  health  care  system  increasingly  relies  on  health  information  technology  (health  IT) and  the 
electronic exchange and use of health information.  Health IT, including electronic health records (EHRs), offers 
opportunities for improved patient care, more efficient practice management, and improved overall public health.  
The Health Information Technology for Economic and Clinical Health Act of 2009 (HITECH) provided for Medicare 
and Medicaid incentive payments to eligible professionals, eligible hospitals, and critical access hospitals (CAHs) for 
adopting, implementing, upgrading, or demonstrating meaningful use of EHRs and established a variety of grant 
programs to encourage widespread adoption of EHRs.  HITECH also included requirements for public reporting of 
breaches of unsecured protected health information.  Although participation in the Medicare and Medicaid EHR 
Incentive Programs is high and has led to widespread adoption among eligible providers, significant challenges 
exist with respect to overseeing the EHR Incentive Programs, achieving interoperability of EHRs, and keeping 
sensitive health information secure.  Additionally, as the Department works to link payments with care quality, 
health outcomes, or performance as part of health care delivery system reforms, it will need to ensure that EHR 
and  other  health  information  data  are  accurate  and  reliable  and  are  protected  from  misuse.    (For  more 
information on linking health care payments to value, see Management Challenge 4.)   
Medicare and Medicaid EHR Incentive Programs.  As of September 2014, the EHR Incentive Programs have paid out 
$25.4 billion in incentive payments.  Although program interest has been high among those eligible, recent data 
suggest that not all those currently participating will continue in the programs.  If the number of program 
participants were to decrease, fewer eligible professionals, eligible hospitals, and CAHs would progress to Stage 2 
meaningful use, which includes a focus on health information exchange.  For example, a recent Office of the 
National  Coordinator  for  Health  Information  Technology  (ONC)  report, 
http://dashboard.healthit.gov/quickstats/pages/FIG-Medicare-Professionals-Stage-One-Meaningful-Use-
Attestation-Cohort-2011.php, shows that a substantial number of the first cohort of participants may be dropping 
out of the Medicare EHR Incentive Program.  Of those that received a payment in 2011, 16 percent did not return 
for 2012.  Further, 19 percent of participants dropped out of the Medicare EHR Incentive Program in 2013.   
 
Challenges in program oversight also leave the EHR Incentive Programs vulnerable to inappropriate payments to 
participants that do not meet program requirements.  OIG work has demonstrated vulnerabilities in oversight 
controls for EHR incentive payments, as well as the accuracy of EHR incentive payment calculations.  OIG also 
found that CMS and states did not implement strong prepayment controls and relied primarily on postpayment 
audits of high-risk participants to confirm that payments were appropriate.  Additionally, OIG found that CMS and 
states lacked adequate data to verify participants self-reported attestations about their eligibility and meaningful 
use of EHRs.  ONC requires EHRs to generate audit reports for some, but not all, meaningful use measures; this 
requirement may create some oversight obstacles for CMS to verify payment during postpayment audits.   
An OIG audit of Medicaid EHR incentive payment accuracy in Louisiana found that the state did not always pay 
Medicaid EHR incentive payments, in accordance with federal and state requirements.  OIG found incorrect 
incentive payments including both overpayments and underpayments, totaling $4.4 million.   
   
Department of Health and Human Services    FY 2014 Agency Financial Report     13 
 
  Interoperability.  Those who adopt health IT must be able to use their systems to exchange and meaningfully use 
health information in order to achieve the broader policy objectives and cost savings to the health care system.  
Health information is still not commonly exchanged between groups of health care providers that use different 
EHR products.  For example, most Health Resources and Services Administration (HRSA) health centers had the 
capability to capture data, but few were able to meet the Stage 1 meaningful use standard for sharing data.  As of 
September 2014, only 93 hospitals and 2,282 doctors had successfully progressed to Stage 2 meaningful use, which 
includes functionalities related to exchanging data, including for transitions of care between inpatient, outpatient, 
and postacute care providers.  This may mean that patients electronic health information is not shared across 
organizational,  vendor,  and  geographic  boundaries.    A  June  2014  study, 
http://jamia.bmj.com/content/21/6/1060.full.pdf+html?sid=30b4ae26-1916-4b0d-ac5a-0afd31e2cc95,  published 
in the Journal of the American Medical Informatics Association found that customized health history documents in 
certified EHRs lead to errors in transmissions between EHR systems, often necessitating manual data entrya 
counterproductive outcome.  Sharing of data may be impeded by several factors, including costs to establish the 
capability to share data, complex federal and state privacy and security rules, and system variation.   
Further, many health care delivery system reform initiatives envision providers, suppliers, and others coming 
together in new or enhanced ways to better coordinate patient care and increase efficiency.  These reform 
initiatives include the Medicare Shared Savings Program, the Pioneer ACO Model, and the Bundled Payments for 
Care Improvement initiative, among others.  To improve care coordination and meet performance goals, many 
participants in these and other reform initiatives will share data across settings and use data received from outside 
their own systems.  A lack of data exchange and incompatibility across systems presents challenges to achieving 
the benefits promised by EHRs and other health IT and could undermine the goals of some reform initiatives.  Data 
created, maintained, or transmitted using EHRs or other health IT are used to ensure correct Medicare and 
Medicaid payments, including value-based payments.  Participants in some of these payment initiatives also 
receive Departmental data for their use in improving the care they furnish.  Those data similarly must be accessible 
and accurate.   
Protecting Sensitive Information.  Safeguarding privacy and data security is, and should remain, a top priority in 
health IT adoption and health data exchange, storage, and use efforts.  Health care data breaches can have serious 
consequences, including medical identity theft, misdiagnoses, delays in treatment, and mistreatment of illness.  
Following HITECHs enhancements of breach notification requirements, HHSs database of major breach reports 
affecting 500 people or more has tracked nearly 950 incidents affecting the personal information of about 30.1 
million people.  OIG consistently finds gaps in adherence to security standards set by the Health Insurance 
Portability and Accountability Act and the National Institute of Standards and Technology.  During our audits of 
hospitals and covered entities, we identified weaknesses that included inadequacies in access controls, patch 
management,  encryption  of  data,  and  Web  site  security  vulnerabilities.    Such  weaknesses  could  result  in 
unauthorized access to sensitive health information.  
Safeguarding EHRs From Fraud.  Some of the beneficial characteristics of EHRs, including efficiency and ease of 
storage and access, may also make them tools for fraud.  OIG work in examining fraud safeguards in EHRs found 
that protections designed to improve validity, accuracy, and integrity in EHRs were not being used to their full 
extent.  Only about one-quarter of hospitals have policies regarding the use of copy-paste, a feature that could be 
used inappropriately to add documentation to a patients record to support a fraudulent bill for services that were 
never provided.  Deleting or disabling audit logs could make it harder to prevent and detect fraud.  Furthermore, 
CMS and its program integrity contractors have done little to update their practices to address EHR vulnerabilities.   
   
Department of Health and Human Services    FY 2014 Agency Financial Report     14 
 
  Progress in Addressing the Challenge 
The Department has made great strides in developing a foundational health IT infrastructure by making inroads 
with EHR adoption, establishing privacy and security guidance and standards, and offering services to support 
health information exchanges (HIE) and interoperability.  As of September 2014, 95 percent of eligible hospitals 
and CAHs and 92 percent of physicians and other eligible professionals have registered to participate in the EHR 
Incentive Programs, amounting to more than 500,000 eligible professionals, eligible hospitals, and CAHs.  
With respect to oversight of the EHR Incentive Programs, CMS has audited Medicare providers who received EHR 
incentive payments to gauge the accuracy of, among other things, attestations that risk analyses designed to 
protect electronic health information were conducted. CMS also reports that it began conducting pre-payment 
audits in 2013.  If the Department continues to takes steps to ensure that meaningful use requirements include 
necessary safeguards, these audits will be a helpful oversight and enforcement tool.   
 
ONC has issued a document entitled Connecting Health and Care for the Nation:  A 10-Year Vision to Achieve an 
Interoperable  Health  IT  Infrastructure  (10-Year  Vision  Paper), 
http://healthit.gov/sites/default/files/ONC10yearInteroperabilityConceptPaper.pdf, which describes future efforts 
to expand the sharing of information for health beyond EHRs and identifies privacy and security protections for 
health information as a building block for a nationwide interoperable health information infrastructure.   
 
What Needs To Be Done 
The 10-Year Vision Paper states that, [b]y 2024, individuals, care providers, communities, and researchers should 
have an array of interoperable health IT products and services that allow the health care system to continuously 
learn and advance the goal of improved health care.  The desired learning health system should, according to 
the 10-Year Vision Paper, also enable lower costs, improved population health, and other benefits.  To fully realize 
the  value  of  an  over  $24  billion  investment,  the  Department  must  do  more  to  ensure  that  systems  are 
interoperable in order to realize these goals.   
 
As the Department progresses through the development and implementation of meaningful use stages, it should 
continue to consider feedback from stakeholders to ensure that adopted policies advance the Nation towards the 
Departments stated goals,  while appropriately reflecting the changing health IT landscape.  Guidance and 
technical assistance should be issued to address adoption, meaningful use, and interoperability barriers and 
program integrity safeguards.  It is also essential that privacy, security, and fraud prevention remain at the 
forefront of the Departments, ONCs, and CMSs health IT efforts.   
Finally, given the magnitude of the investment in EHRs and other health IT programs, it will become increasingly 
important to demonstrate and measure the extent to which EHRs and health IT have actually achieved the 
Departments goals, which include improved health care and lower costs.  Ongoing OIG work is examining the 
accuracy of Medicare and Medicaid EHR incentive payments for the first stage of meaningful use and attempting 
to determine whether Medicaid safeguards prevent improper payments.  Future work may examine health IT 
interoperability across providers, across HHS, and between providers and patients, as well as examine outcomes 
from health IT investments.   
Key OIG Resources 
  OIG Reports on EHR Incentive Program Oversight, January 2014, http://oig.hhs.gov/oei/reports/oei-09-
11-00380.pdf; August 2014, http://oig.hhs.gov/oas/reports/region6/61200041.pdf; November 2012, 
http://oig.hhs.gov/oei/reports/oei-05-11-00250.pdf; July 2011, http://oig.hhs.gov/oei/reports/oei-05-10-
00080.pdf; December 2013, http://oig.hhs.gov/oei/reports/oei-01-11-00570.pdf  
   
Department of Health and Human Services    FY 2014 Agency Financial Report     15 
 
    OIG Report, Not All Recommended Fraud Safeguards Have Been Implemented in Hospital EHR Technology, 
December 2013, http://oig.hhs.gov/oei/reports/oei-01-11-00570.pdf 
  OIG Report, CMS and Its Contractors Have Adopted Few Program Integrity Practices To Address 
Vulnerabilities in EHRs, January 2014, http://oig.hhs.gov/oei/reports/oei-01-11-00571.pdf 
  OIG Report, The Office of the National Coordinator for Health Information Technologys Oversight of the 
Testing and Certification of Electronic Health Records, August 2014, 
http://oig.hhs.gov/oas/reports/region6/61100063.pdf 
Management Challenge 7:  Effectively Operating Public Health and Human Services Programs To Best Serve 
Program Beneficiaries 
Why This Is a Challenge 
The Department funds and operates public health and human services programs that promote health and 
economic and social well-being.  These include, among others, programs to prevent, track, and treat acute and 
chronic diseases; respond to natural and man-made disasters; and protect, care for, and educate children.  Many 
of these programs target vulnerable populations.  Effective management of these programs is essential to ensure 
that they achieve their goals and best serve the programs intended beneficiaries.  Key challenges include (1) 
ensuring effective preparedness and response to current and future public health emergencies, (2) protecting the 
health and safety of Americas vulnerable populations, and (3) ensuring access for intended beneficiaries and 
delivery of quality services such that beneficiaries needs are met.   
Public Health Preparedness and Emergency Response.  Recent natural disasters, such as Hurricane Sandy, and 
disease  outbreaks,  such  as  the  Ebola  virus  outbreak,  highlight  the  importance  of  an  agile  public  health 
infrastructure that can rapidly and capably respond to emergencies at home and abroad.  The ability to effectively 
communicate and coordinate with federal, state, local, tribal, and private entities, as well as with international 
partners, is critical.  OIGs recent review of hospitals experiences during Hurricane Sandy revealed that the vast 
majority of hospitals in affected areas reported substantial challenges, including infrastructure breakdown and 
communication failures.  The recurrence of similar problems as experienced during prior disasters highlights the 
need to apply knowledge gained from past experience to anticipate and prepare for new problems going forward.   
The Department is also responsible for ensuring that select agents (e.g., anthrax and smallpox), which have the 
potential to pose a severe threat to human, animal, or plant health, are handled safely and stored securely.  Earlier 
work by OIG identified security vulnerabilities at many Department research facilities, and recent testimony and 
news accounts attest to continuing problems with how these agents are inventoried and handled.   
Access to and Quality of Services.  To achieve program goals, the Department must ensure that qualified 
beneficiaries have access to high quality services.  OIG work has uncovered situations in which beneficiaries could 
not access key services and situations in which beneficiaries received substandard services.  For example, OIG 
found that many HRSA-funded health centers, which provide primary care for millions of patients, failed to fully 
adopt CDC-endorsed practices for routine HIV testing that are recommended to help combat spread of the virus.  
In another example, OIG found that vaccines intended for use in the Vaccines for Children (VFC) program had 
expired or had been improperly stored in ways that could compromise their safety or efficacy.  Additional 
challenges arise in ensuring that children in foster care receive required health screenings.   
Protecting Vulnerable Populations.  OIG work has revealed potential threats to the health and safety of children 
served by the Child Care and Development Fund (CCDF) program of the Administration for Children and Families.  
CCDF provides financial assistance for child care, each month serving approximately 1.45 million children from low 
   
Department of Health and Human Services    FY 2014 Agency Financial Report     16 
 
  income families.  OIG work identified vulnerabilities in states standards for and monitoring of child care providers 
and suggested efforts the Department should undertake to better serve this vulnerable population.   
Since first assuming responsibility for unaccompanied children in 2003, the Office of Refugee Resettlement (ORR) 
has cared  for  more  than  100,000 such  children,  through  the  end  of  FY  2013.    This  year,  the  number  of 
unaccompanied  children  arriving  in  the  United  States  without  lawful  immigration  status  has  dramatically 
increased.  In 2014, the Department estimates that the total number of such unaccompanied children will reach 
nearly 60,000, more than double the number from the prior year.  ORR faces substantial demands in adequately 
caring for this influx of children in an environment of heightened public and media scrutiny. 
Progress in Addressing the Challenge 
The Department reports that it has made progress in improving physical security and employee training related to 
secure storage and safe handling of select agents; however issues related to inventory control in HHS laboratories 
remain.   
 
CMS is developing more comprehensive emergency preparedness requirements for Medicare providers and 
suppliers.  The Department is currently undertaking several initiatives, including a technical assistance center, to 
support collaboration among federal, state, and community entities in disaster response.  Similarly, in response to 
OIGs recommendations, the Department has established new training materials for its grantees and providers to 
ensure that VFC vaccines are stored according to requirements.   
What Needs To Be Done 
The Department must effectively deploy its resources and expertise to combat communicable diseases, such as 
Ebola.  The Department should continue to promote federal, state, tribal, and community collaboration in major 
disasters and public health exigencies.  While it may not be possible to predict when and where disasters will 
strike, the Department should prepare for a range of potential emergency scenarios and be ready to rapidly and 
effectively respond.  Similarly, the Department must plan for, and meaningfully assist health care providers in 
planning for, a range of public health emergencies.  Additionally, improvements in adoption and interoperability of 
health IT can facilitate medical care for displaced patients or patients with communicable diseases by ensuring 
continuity of access to health records.  (For additional discussion on issues related to the secure exchange of 
health care information, see Management Challenge 6.)   
 
The Department should also fully implement OIG recommendations to ensure that HRSA-funded health centers 
follow CDC recommendations regarding routine HIV testing to prevent disease transmission.  Improved program 
operation will better serve beneficiaries and help prevent future public health emergencies.   
 
Given the recent unprecedented surge in unaccompanied children, the Department must be prepared to meet 
future demand for services for additional children.  OIG continues to recommend that the Department establish a 
memorandum of understanding with the Department of Homeland Security to clearly delineate the roles and 
responsibilities  of  each  Department  and  facilitate  gathering  and  exchange  of  information  regarding 
unaccompanied children.   
The Department should also fully implement OIG recommendations regarding CCDF to ensure compliance with 
state requirements related to the health and safety of children, implementation of controls for determining 
eligibility for receiving assistance payments, and ensuring that states implement better controls for regulating and 
monitoring childcare providers.  OIG has also recommended strengthened health and safety requirements and use 
of provider background checks to reduce health and safety risks to children served by the programs.   
   
Department of Health and Human Services    FY 2014 Agency Financial Report     17 
 
  The Department will need to take swift action to significantly improve its inventory control policies and procedures 
for select agents in light of recent news reports identifying significant issues with inventory controls, which the 
Department has confirmed.   
Key OIG Resources 
  OIG Report, Hospital Emergency Preparedness and Response During Superstorm Sandy, November 2014, 
http://oig.hhs.gov/oei/reports/oei-06-13-00260.asp  
  OIG Testimony, The Foundation for Success:  Strengthening the Child Care and Development Block Grant 
Program, March 25, 2014, http://oig.hhs.gov/testimony/docs/2014/jarmon-testimony-0314.pdf 
  OIG Report, HIV Testing in HRSA-Funded Health Center Sites, November 2013, 
http://oig.hhs.gov/oei/reports/oei-06-10-00290.asp 
  OIG Report, Vaccines for Children:  Vulnerabilities in Vaccine Management, April 2012, 
http://oig.hhs.gov/oei/reports/oei-04-10-00430.asp  
  OIG Report, Division of Unaccompanied Children's Services:  Efforts To Serve Children, March 2008, 
http://oig.hhs.gov/oei/reports/oei-07-06-00290.pdf   
Management Challenge 8:  Ensuring Effective Financial and Administrative Management 
Why This Is a Challenge 
The Department manages health care insurance, public health, social services, and research programs designed to 
enhance the health, safety, and well-being of all Americans.  Responsible stewardship of these programs is vital.  
Underpinning such stewardship should be a financial management and administrative infrastructure that employs 
appropriate internal controls to minimize risk to the programs and safeguard resources.   
 
Financial statement audits.  Financial statement audit results provide an important assessment of financial 
management challenges an agency faces.  For FY 2013, independent auditor Ernst & Young identified a material 
weakness in the Departments financial management systems related to IT security and a significant deficiency in 
its financial reporting systems, analyses, and oversight.  Specifically, Ernst & Young recommended that the 
Department bolster IT security in its financial management systems and take steps to improve internal control 
deficiencies that impact HHSs ability to report accurate financial information on a timely basis.   
The financial statement audit also revealed challenges the Department continues to face in addressing violations of 
certain provisions of the Anti-Deficiency Act.   These violations highlight weaknesses in an agencys control over 
budgetary resources.  Prior OIG audits of National Institutes of Health contracts revealed instances of improper 
funding in 11 of 18 contracts reviewed.  Follow-up work is underway to assess the effectiveness of the remedial 
actions outlined by the Department in its 2011 report of Anti-Deficiency Act violations.   
Improper payments.  Improper payments cost federal programs billions of dollars annually.  For FY 2013, the 
Department reported improper payments totaling almost $50 billion in the Medicare program and $65 billion 
overall.  Pursuant to the Improper Payments Information Act of 2002 (IPIA), as amended, federal agencies are 
required to provide uniform, annual reporting on improper payments and their efforts to reduce them.  Inspectors 
General are required to report annually to Congress and The President regarding agency compliance with IPIA.  
Although the Department met many requirements of the IPIA in FY 2013, it did not fully comply.  The greatest 
challenges in this area are to report on all programs deemed susceptible to significant improper payments and 
minimize improper payments to acceptable levels.  The Department has not published an improper payment 
estimate and other required information for the Temporary Assistance for Needy Families (TANF) program.  For 
the Medicare fee-for-service program, the Department reported an improper payment rate that exceeded 10 
percent of program outlays in FY 2013.   
   
Department of Health and Human Services    FY 2014 Agency Financial Report     18 
 
  Administrative Oversight.  Careful coordination of Departmental staff, contract staff, grantees, and other partners 
is essential to achieve mission objectives in accordance with federal, departmental, and agency requirements.  
Many grantees receive multiple awards from HHS.  The discontinuation of the Department-wide Alert List in 2007 
may pose challenges for awarding agencies to share concerns with one another regarding grantees abilities to 
handle federal funds.  Moreover, OIG found that only one of four agencies within HHS that awarded Small Business 
Innovation Research (SBIR) funds checked for duplicative funding within the Department, and none of the four 
completed a required check for duplicative awards across other federal agencies.  OIG is currently evaluating the 
extent to which HHS programs maintain and share information about grantees vulnerable to fraud, waste, and 
abuse.    (For  more  information  on  specific  issues  associated  with  grantee  and  contractor  oversight  and 
effectiveness, see Challenge 9.)   
Progress in Addressing the Challenge 
The  Department  has  been  taking  steps  to  address  outstanding  financial  management  challenges.    Most 
significantly, to help address a number of shortcomings, it has scheduled an upgrade of its accounting systems, 
which the Department expects to complete in 2016, to alleviate internal control deficiencies it has reported in the 
financial statement audits.   
 
With respect to Anti-Deficiency Act violations related to systemic contract funding problems, the Department 
continues to provide its contracting workforce with an online reference tool for contract funding, formation, and 
appropriations law compliance.  The Department conducts appropriations law compliance reviews of all contract 
actions exceeding certain thresholds, depending on the type of requirement reviewed and the awarding Operating 
Division (OpDiv) or Staff Division (StaffDiv).  HHS has also revised its contract funding guidance to more accurately 
describe appropriations law and policy; these revisions incorporated best practices and lessons learned.  Further, 
in its FY 2013 Agency Financial Report, the Department stated that it released a major update to its internal grants 
policies, featuring enhanced guidance on grants closeout, suspension and debarment, grants systems, and grants 
payments.   
With regard to improper payments, the Head Start program had reported a consistently low improper payment 
rate which has been below the mandated threshold for reporting, and Office of Management and Budget (OMB) 
granted the Department relief from reporting annual error rate estimates in FY 2013.  Further, between FY 2012 
and FY 2013, the Department reduced the improper payment rate for Medicare Advantage from 11.4 percent to 
9.5 percent, for Medicaid from 7.1 percent to 5.8 percent, for the Child Care and Development Fund from 9.4 
percent to 5.9 percent, and for the Foster Care program from 6.2 percent to 5.3 percent.   
HHS is drafting regulations to implement OMBs new Uniform Guidance: Administrative Requirements, Cost 
Principles, and Audit Requirements for Federal Awards, commonly referred to as the Uniform Guidance.  The 
Uniform Guidance consolidates eight federal regulations into a single guide to ease administrative burdens and 
strengthens oversight of federal awards to reduce the risk of fraud, waste, and abuse.   
What Needs To Be Done 
To ensure better financial management across all program areas, the Department should resolve weaknesses 
identified across all financial management systems currently in operation, as recommended by internal and 
external auditors.  To bring the Department into full compliance with the IPIA, it should continue to reduce error 
rates in all programs via appropriate corrective action plans.  However, full compliance would also require the 
Department to publish an improper payment estimate for the TANF program.  To do this for TANF, the Department 
reports it needs legislative changes to require states to report information necessary to calculate and report 
improper payment estimates for TANF.  The Department should actively seek such legislative changes.  CMS should 
   
Department of Health and Human Services    FY 2014 Agency Financial Report     19 
 
  work  to  improve  its  oversight  of  corrective  action  plans  to  ensure  their  relevance  to  contractors  error 
measurement.   
Grant-making agencies, including HHS, are scheduled to implement OMBs new Uniform Guidance by the end of 
calendar year 2014.  In accordance with the new guidance, the Department will need to implement robust new 
processes, including enhancements to processing the Single Audit reports.  OIG will monitor the Departments 
implementation of these new processes and future reform efforts.  OIG will also continue to examine existing 
administrative controls and grants management practices across the Department.   
The Department should continue to leverage technology to further prevent improper payments and ensure 
responsible program stewardship.  The Department should also continue to expand its education efforts for 
providers, grantees, staff, contractors, and other partners.  Implementation of planned program integrity efforts, 
such as evaluating and mitigating risks, identifying and addressing cross-cutting issues, resolving reported grantee 
audit findings, and sharing best practices across HHS, will help the Department integrate program integrity into all 
aspects of its operations and culture and fortify the financial and administrative infrastructure.   
Key OIG Resource 
  OIG Report, U.S. Department of Health and Human Services Met Many Requirements of the Improper 
Payments Information Act of 2002 but Did Not Fully Comply for Fiscal Year 2013, April 2014, 
https://oig.hhs.gov/oas/reports/other/171452000.asp 
  OIG Report, Medicare Claims Administration Contractors Error Rate Reduction Plans, January 2014, 
http://oig.hhs.gov/oei/reports/oei-09-12-00090.asp   
Management Challenge 9:  Protecting HHS Grants and Contract Funds From Fraud, Waste, and Abuse 
Why This Is a Challenge 
HHS is the largest grant-making organization in the Federal Government; over 79,000 grants totaling $389 billion 
were awarded in FY 2014.  That amount comprised $47 billion in discretionary awards and the remaining amount 
in formula/block grant and entitlement awards.   
 
HHS is also the third largest contracting agency in the Federal Government.  In FY 2013, HHS awarded over $20 
billion in contracts across all program areas.  The Government Accountability Office (GAO) and OIG both have 
identified weaknesses in HHS contracting processes and contract management throughout the Department.  
Oversight is a particular concern.  An OIG audit of CDC contracts revealed poor execution of required contractor 
performance assessments by HHS.  A recent GAO report, http://www.gao.gov/products/GAO-14-694, identified 
ineffective contract planning and management as one cause of the problematic rollout of HealthCare.gov.  In 
addition, recent OIG work identified the large number of contractors responsible for aspects of the federal 
Marketplace and requiring appropriate oversight and management.  Under the Affordable Care Act, contractors 
have a vital role in building, maintaining, and fixing the systems that underpin the federal Marketplace.  HHS faces 
a challenge to ensure proper management and oversight of these and other contracts.  (See Management 
Challenge 1 for more information on management and oversight of the Marketplaces.)   
The size and scope of departmental awards make vigilant oversight by the Department crucial to the success of 
programs designed to improve the health and well-being of the public.  Yet OIG has noted weaknesses in the 
oversight of grantees, as demonstrated by late or absent financial and related reports, insufficient documentation 
on progress toward meeting program goals, and failure to ensure that grantees obtain required annual financial 
audits.   
   
Department of Health and Human Services    FY 2014 Agency Financial Report     20 
 
  A common problem uncovered by our reviews at the grantee level is that grantees have lacked robust financial 
management systems.  Many grantees still do not account for specific costs on a grant-by-grant basis, making it 
difficult to reliably monitor and account for costs associated with specific grant awards.  When combined with 
frequent findings of significant unallowable expenses, these conditions support the need for more purposeful and 
consistent oversight.   
HHS is the second largest payer under the SBIR and Small Business Technology Transfer (STTR) programs.  HHS 
awarded $13 million in SBIR contracts and $463,000 in STTR contracts in FY 2013.  OIG has noted two significant 
issues with the programs:  inconsistent collection of information needed to evaluate commercial success and 
failures to check for duplicative funding within the Department and across other agencies.  (See Management 
Challenge 8 for more information on administrative oversight of HHS grants and contracts.)   
Progress in Addressing the Challenge 
HHS has strengthened its program integrity efforts by working with OpDivs and StaffDivs to implement a uniform 
risk management approach that encompasses developing strategies, plans, and metrics.  The Department has 
established a Program Integrity Coordinating Council, which identifies common program challenges and explores 
solutions.   
The Department has sponsored training for HHS grant and contracting officials to aid them in identifying potential 
fraud, waste, and abuse, including encouraging contractors to self-report contract fraud and overpayments.  
Training has also taken place on best practices for investigating fraud in HHS grants and contracts.     
The Department has made progress in its Suspension and Debarment program by conducting training, finalizing 
the HHS Suspension and Debarment Guidance and accompanying Desk Reference, creating a Department-wide 
referral tracking system, and working with the Office of the General Counsel to streamline the referral review 
process.  The total number of suspension and debarment referrals according to the Office of Recipient Integrity 
Coordination (ORIC) has increased from 22 in FY 2012 to 42 in FY 2013, and the total number of actions taken by 
the Suspension and Debarment Officer (SDO) has increased from 0 suspensions or debarments in FY 2012 to 8 
debarments and 8 suspensions in FY 2013.  The Department is on track to increase the number of suspensions and 
debarments in FY 2014.   
What Needs To Be Done 
Sustained focus by the Department is needed to address vulnerabilities in its grant programs and contract 
administration.  For instance, although the Department designed internal controls with features specified by OMB 
Memorandum M-13-07, this effort must be followed by diligent monitoring to ensure that qualified individuals 
have access to grants and that recipients use the funds according to the award terms and in a manner consistent 
with the Disaster Relief Appropriations Act of 2013.     
HHS could improve federal contracting by aligning more closely with the Office of Federal Procurement Policy 
(OFPP) strategy of improving contractor source selection decisions.  A key part of OFPPs strategy is contractor 
performance monitoring.  HHS has improved its rate of monitoring from 10 percent to 24 percent in the last two 
years.  However, according to a recent GAO report, http://www.gao.gov/products/GAO-14-707, that rate is less 
than half the FY 2014 government-wide rate of 49 percent.   
OpDivs must be vigilant in monitoring grant resources and take appropriate actions, including:  implementing 
planned program integrity efforts, such as evaluating and mitigating risks and identifying and addressing cross-
cutting issues; resolving grantee audit findings; and sharing best practices across the Department to better position 
HHS to integrate program integrity into all aspects of its operations and culture.   
   
Department of Health and Human Services    FY 2014 Agency Financial Report     21 
 
  Training on identifying and pursuing misconduct in HHS grants and contracts should continue.  HHS contract and 
grant officers should more actively coordinate with, and refer potential grant and contract fraud to, OIG for 
investigation.  The Department needs to implement a program to actively pursue fraud under the Program Fraud 
Civil Remedies Act (PFCRA).  The Department also needs to continue to refine its suspension and debarment 
procedures by further streamlining the referral and decision process, continuing to provide training and decreasing 
the processing time of referrals.  Although HHS has begun to take suspension and debarment actions largely in 
response to conviction-based actions, OpDivs, StaffDivs, OIG, and the SDO need to make effective use of fact-
based debarments and suspensions.   
Key OIG Resources 
  OIG Hurricane Sandy Grants and Contracts Training Videos, 
http://oig.hhs.gov/newsroom/podcasts/2014/sandy/  
  OIG Report, The Department of Health and Human Services Designed Its Internal Controls Over Hurricane 
Sandy Disaster Relief To Include Elements Specified by the Office of Management and Budget, July 2014, 
http://oig.hhs.gov/oas/reports/region2/21302010.asp  
  OIG Report, Vulnerabilities in the HHS Small Business Innovation Research Program, April 2014, 
http://oig.hhs.gov/oei/reports/oei-04-11-00530.asp   
Management Challenge 10:  Ensuring the Safety of Food, Drugs, and Medical Devices 
Why This Is a Challenge 
The Department, through the Food and Drug Administration (FDA), is responsible for protecting public health by 
ensuring the safety, efficacy, and security of drugs, medical devices, biologics, dietary supplements, tobacco, and 
much of our Nations food supply.  The Department must ensure that once a drug, biologic, or device has been 
approved for use, it conducts effective post-market monitoring.  During a food emergency, the Department is 
responsible for finding the contamination source and overseeing the removal of these products from the market.  
However, OIG work has revealed weaknesses in FDA's ability to adequately oversee the safety of drugs, biologics, 
medical devices, and food.  It has also revealed failures by industry participants to follow processes designed to 
ensure the safety and efficacy of food, drugs, biologics, and medical devices.  These high risk areas include:   
Drug  Compounding.    A  fall  2012  nationwide  fungal  meningitis  outbreak  associated  with  contaminated 
compounded sterile drug injections raised major concerns about the quality of drugs supplied by compounders 
and FDAs ability to effectively oversee these entities.  OIG reviewed hospitals use of compounded drugs and 
found that in 2012, 92 percent of hospitals used compounded sterile preparations (CSPs).  Additionally, we found 
that 56 percent of hospitals made changes or planned to make changes to CSP sourcing practices in response to 
the 2012 outbreak.  After the meningitis outbreak, in November 2013, President Obama signed the Drug Quality 
and Security Act (DQSA), Public Law 113-54.  Among other things, the DQSA added a new section to the Federal 
Food, Drug, and Cosmetic Act, section 503B, that provides a new pathway for entities called outsourcing facilities 
to legally compound human drugs.  FDA also continues to identify serious deviations from acceptable practices for 
the production of compounded sterile drugs, as evidenced by the lists of inspectional observations issued to 
compounders at the conclusion of FDA inspections; the numerous recalls of compounded drugs because of 
contamination or lack of sterility assurance; and the warning letters issued to compounders addressing, in part, 
unsanitary conditions at their facilities.  Implementation of the DQSA poses new challenges for the Department.   
Imported Drugs.  Medications imported from foreign or unlicensed suppliers may be unapproved by FDA and may 
be ineligible for reimbursement by Medicare, Medicaid, and other federal health care programs.  Such drugs may 
also be counterfeit, contaminated, ineffective, and/or unsafe.  FDAs Office of Criminal Investigations (OCI), OIG, 
and  our  law  enforcement  partners  have  investigated  many  instances  in  which  physician  practices,  drug 
   
Department of Health and Human Services    FY 2014 Agency Financial Report     22 
 
  distributors, and suppliers have imported such drugs.  Among other consequences, importation of such drugs can 
lead to patient safety issues, the submission of improper claims to federal health care programs, and the 
circumvention of FDA drug approval and facility inspection processes.   
Food Safety.  Protecting the American public from food-borne illness, such as those caused by salmonella and E. 
coli, is an ongoing challenge.  In the past, OIG has found that food facilities' failures to comply with FDAs 
requirements impede the Department's ability to ensure the safety of the Nation's food supply.  Since September 
2009, FDA has required food facilities to report to a new registry all instances when there is a reasonable 
probability that a food might cause serious adverse health consequences and to investigate the causes of any 
adulteration  reported  if  the  adulteration  may  have  originated  with  the  food  facility.    The  Food  Safety 
Modernization Act (FSMA), signed into law in January 2011, provides FDA important authorities to better protect 
the  Nations  food  supply.    However,  implementing  these  authorities  could  prove  difficult  given  the  broad 
preventive controls framework envisioned in FSAM, including establishing the new import oversight program and 
the training needed to ready both FDA and the states to conduct preventive control inspections.   
Marketing Requirements.  Manufacturers of drugs, biologics, and medical devices gain approval for sale of their 
products for specific uses once FDA determines that the products are safe and effective for those uses.  Once 
approved for sale, qualified medical providers may prescribe them for any use on the basis of their medical 
judgment.  However, manufacturers are prohibited from promoting products for uses for which FDA has not 
specifically approved them (known as off-label uses).  OIG, in conjunction with its law enforcement partners, 
including FDAs OCI, has investigated many instances in which manufacturers illegally promoted products for off-
label uses.  Off-label promotion can undermine the system intended to ensure that drugs are safe and effective 
and can put patients at risk.  Additionally, this illegal off-label promotion may lead to fraudulent claims for 
payment submitted to federal health care programs, including Medicare and Medicaid.  (See Management 
Challenge 2 for more information on drug diversion and appropriate use of prescription drugs in Medicare and 
Medicaid.)   
FDA  faces  ongoing  concerns  regarding  dietary  supplements  and  the  structure/function  claims  made  by 
manufacturers.  Structure/function claims describe the role of a dietary supplement in the structure and function 
of human bodies, but the claims may not explicitly or implicitly claim to prevent, treat, mitigate, cure, or diagnose 
a disease.  Manufacturers must have competent and reliable scientific evidence to show that dietary supplement 
claims are truthful and not misleading, but they do not have to submit the substantiation to FDA, and FDA has only 
voluntary  standards  for  it.   OIG found  that  substantiation  documents  for  the  supplements  reviewed  were 
inconsistent with FDA guidance on competent and reliable scientific evidence.  OIG also found that FDA could not 
readily determine whether manufacturers had submitted the required notification for their claims.  These results 
raise questions about the extent to which structure/function claims are truthful and not misleading.   
Progress in Addressing the Challenge 
To address risks associated with imported drugs, FDA has engaged in both outreach and enforcement actions.  FDA 
has undertaken significant efforts to warn consumers, medical practitioners, and others about the risks associated 
with buying drugs from foreign sources.  In addition, FDA has continued to work with OIG and other law 
enforcement partners to investigate and prosecute individuals and businesses (e.g., physicians and drug suppliers) 
that import unapproved drugs.  In July 2013, three physicians previously associated with McLeod Cancer and Blood 
Center entered into civil settlement agreements and agreed to pay more than $4.25 million to resolve allegations 
that they purchased misbranded, unapproved chemotherapy drugs from foreign sources; used the drugs to treat 
their Medicare, Medicaid, and other patients; and billed federal health care programs for the drugs.  Dr. William 
Kincaid, the managing partner, pled guilty to receiving misbranded drugs with intent to defraud and mislead.  Dr. 
   
Department of Health and Human Services    FY 2014 Agency Financial Report     23 
 
  Kincaid was sentenced to 2 years in prison and was excluded from participating in federal health care programs for 
10 years.   
With regard to drug compounding, FDA increased inspection and enforcement efforts, while developing the 
regulatory framework to implement the DQSA.  In FY 2014, FDA conducted over 85 inspections of compounding 
pharmacies and outsourcing facilities and issued 29 warning letters.  FDAs inspection and enforcement efforts are 
continuing.  In addition, since the DQSA was enacted in November, 2013, FDA issued numerous policy documents 
to implement both section 503A (concerning pharmacy compounding) as well as the new section 503B (concerning 
outsourcing facilities) and continues to work on additional rules and guidance.  FDA has made progress in 
addressing OIG recommendations.  For example, as a result of OIGs identifying vulnerabilities in FDAs oversight of 
regulatory decisions, FDA implemented new operating procedures for resolving scientific disagreements.  In 
response to OIG recommendations regarding oversight of dietary supplements, FDA stated that it is considering 
whether to seek explicit statutory authority to review substantiation for structure/function claims beyond its pre-
existing authorities.   
What Needs To Be Done 
The Department and FDA will need to continue issuing rules and guidance documents to fully implement the 
various provisions in the July 2012 Food and Drug Administration Safety and Innovation Act (FDASIA) and in DQSA.  
FDA will need to continue to conduct inspections of compounding pharmacies and pursue regulatory action, as 
needed to protect public health, when deficiencies are identified.  In addition, FDA will need to continue its efforts 
to  fully  implement  FSMA  to  better  protect  the  Nations  food  supply.    FSMA  addresses  many  of  OIG's 
recommendations; however, we continue to recommend that FDA remedy identified weaknesses in its inspections 
and recall procedures.  FDA should also ensure that states properly conduct contracted food facility inspections.  
The Department also needs to continue its efforts to eliminate off-label promotion and reduce the importation of 
unapproved drugs from foreign sources to protect patients and HHS health care programs.  Moreover, the 
Department  and  FDA  will  need  to  continue  implementing  the  provisions  under  the  2009  Family  Smoking 
Prevention and Tobacco Control Act to protect public health.   
Key OIG Resources 
  OIG Report, High-Risk Compounded Sterile Preparations and Outsourcing by Hospitals That Use Them, 
April 2013, https://oig.hhs.gov/oei/reports/oei-01-13-00150.asp  
  OIG Report, Dietary Supplements:  Structure/Function Claims Fail To Meet Federal Requirements, October 
2012, http://oig.hhs.gov/oei/reports/oei-01-11-00210.asp 
  OIG Report, Vulnerabilities in FDAs Oversight of State Food Facility Inspections, December 2011, 
http://oig.hhs.gov/oei/reports/oei-02-09-00430.asp 
  DOJ press release, sentencing of William Kincaid, M.D., June 11, 2013, 
http://www.justice.gov/usao/tne/news/2013/June/061113%20Kincaid%20Sentencing%20Misbranded%2
0Drugs.html#top  
 
 
   
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