Report to Congressional Committees

United States Government Accountability Office

GAO 

August 2005 MEDICARE 

CONTRACTING 

REFORM 

CMS’s Plan Has Gaps 

and Its Anticipated 

Savings Are Uncertain 

GAO-05-873 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

www.gao.gov/cgi-bin/getrpt?GAO-05-873.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Leslie G. 

Aronovitz at (312) 220-7600 or 

aronovitzl@gao.gov. 

Highlights of GAO-05-873, a report to 

congressional committees 

August 2005

MEDICARE CONTRACTING REFORM

CMS’s Plan Has Gaps and Its Anticipated 

Savings Are Uncertain 

CMS’s plan provides an appropriate framework to implement contracting 

reform in some critical areas but not in others. For example, the plan 

indicates the rationale for reform but lacks a detailed schedule to coordinate 

reform activities with other major initiatives CMS intends to implement at 

the MACs during the same period. Further, CMS’s plan does not 

comprehensively detail steps to address potential risks during the transitions 

of the claims workload from the current contractors, such as failing to pay 

providers or paying them improperly. These transitions will be complex to 

manage because they require moving multiple claims workloads from 

current contractors to a single MAC with new jurisdictional lines. As the 

figure shows, as many as nine separate segments of current contractors’ 

workload will be moved to the first A/B MAC. CMS has accelerated its 

schedule to transfer the current contractor claims workload to MACs by 

2009, more than 2 years ahead of the MMA’s time frame. This schedule 

leaves little time for CMS to adjust for any problems encountered. 

Part A and Part B Transitions That Will Occur in One MAC Jurisdiction 

CMS’s estimates of costs and savings are too uncertain to support decisions 

on contracting reform implementation. First, CMS’s internal cost estimate 

for a 6-year implementation period of about $666 million is based on 

reasonable data but questionable assumptions about contract awards. 

Second, its estimate of $1.4 billion in savings from reductions in improper 

payment by MACs depends on questionable evidence and assumptions that 

were never validated by knowledgeable CMS staff. However, the $1.4 billion 

estimate prompted CMS to accelerate its implementation schedule to accrue 

savings as rapidly as possible. While it is reasonable to assume that 

contracting reform will result in savings, the actual amount could differ 

greatly from the estimate. Basing an accelerated implementation schedule 

on uncertain savings raises concerns that CMS has unnecessarily created 

additional challenges to effectively managing the risk of these transitions. 

The Medicare Prescription Drug, 

Improvement, and Modernization 

Act of 2003 (MMA) significantly 

reformed contracting for the 

administration of claims for Part A, 

Medicare’s hospital insurance, and 

Part B, which covers outpatient 

services such as physicians’ care. 

The MMA required the Centers for 

Medicare & Medicaid Services 

(CMS)—the agency within the 

Department of Health and Human 

Services (HHS) that administers 

Medicare—to conduct full and 

open competition for all of its 

claims administration contracts 

and to transfer the work to 

Medicare administrative 

contractors (MAC) by October 

2011. The MMA required the 

Secretary of HHS to submit a 

report to the Congress and GAO on 

the plan for implementing Medicare 

contracting reform and for GAO to 

evaluate the plan. To address this 

mandate, GAO reviewed the extent 

to which (1) the plan provides an 

appropriate framework for 

implementing Medicare contracting 

reform and (2) the plan’s cost and 

savings estimates are sound 

enough to support decisions on 

implementation. 

What GAO Recommends

GAO recommends that CMS extend 

its implementation schedule from 

2009 to 2011, to be better prepared 

to manage contracting reform. 

CMS did not concur with the 

recommendation, but GAO believes 

that extending the time frame is the 

most prudent approach to manage 

contracting reform risks. 
Page i GAO-05-873 Medicare Contracting Reform 

Letter 1

Results in Brief 3 

Background 5 

CMS’s Plan Does Not Provide an Appropriate Implementation 

Framework in All Critical Areas 8 

Plan’s Cost and Savings Estimates Do Not Provide a Reasonable 

Basis for Decision Making 26 

Conclusions 35 

Recommendation for Executive Action 36 

Agency Comments and Our Evaluation 36 

Appendix I Documents CMS Officials Have Identified as 

Constituting the Agency’s Plan for Implementing 

Contracting Reform 40 

Appendix II Documents Used by GAO to Develop Criteria for 

Reviewing CMS’s Plan for Contracting Reform 42 

Appendix III GAO’s Criteria for Evaluating CMS’s Contracting 

Reform Plan 43 

Appendix IV Scope and Methodology 45 

Appendix V Comments from the Department of Health and 

Human Services 46 

Appendix VI CMS’s MAC Procurement and Transition Schedule 57 

Contents 
Page ii GAO-05-873 Medicare Contracting Reform 

Appendix VII Jurisdictional Map of the Current Fiscal 

Intermediaries 58 

Appendix VIII Jurisdictional Map of the Current Carriers 59 

Appendix IX Jurisdictional Map of the Current Regional Home 

Health Intermediaries 60 

Appendix X Jurisdictional Map of the Current Durable Medical 

Equipment Regional Carriers 61 

Appendix XI Jurisdictional Map of the 15 New Medicare 

Administrative Contractors 62 

Appendix XII Jurisdictional Map of the Four DME MACs and the 

Four HH MACs 63 

Tables 

Table 1: CMS’s Analysis of Restrictions or Weaknesses in Medicare 

Claims Administration Contracting and Their Associated 

Effects 10 

Table 2: Key Initiatives Affecting MAC Implementation 23 

Table 3: CMS’s Estimates of Administrative Costs for Medicare 

Contracting Reform, Fiscal Years 2006-2011, as of 

February 2005 28 

Table 4: CMS’s Estimates of Administrative Savings from Medicare 

Contracting Reform, Fiscal Years 2006-2011, as of 

February 2005 31 

Table 5: CMS’s Consultant’s Estimates of Savings to the Trust 

Funds from Medicare Contracting Reform, Fiscal Years 

2006-2011 33 
Page iii GAO-05-873 Medicare Contracting Reform 

Figures 

Figure 1: Areas of Detailed Information in CMS’s Contracting 

Reform Plan 9 

Figure 2: Part A and Part B Transitions That Will Occur in One 

MAC Jurisdiction 17 

Figure 3: Estimated Costs of Medicare Contracting Reform, Fiscal 

Years 2006-2011, as of February 2005 27 

Figure 4: CMS’s Annual Estimates of Administrative Costs and 

Savings from Medicare Contracting Reform, Fiscal Years 

2006-2011, as of February 2005 32 

Figure 5: CMS’s MAC Procurement and Transition Schedule 57 

Abbreviations 

BCC beneficiary contact centers 

CMS Centers for Medicare & Medicaid Services 

DME durable medical equipment 

DOD Department of Defense 

FAR Federal Acquisition Regulation 

HH home health and hospice 

HHS Department of Health and Human Services 

HIGLAS Healthcare Integrated General Ledger Accounting System 

IT information technology 

MAC Medicare administrative contractor 

MMA Medicare Prescription Drug, Improvement, and 

 Modernization Act of 2003 

PSC program safeguard contractor 

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Page 1 GAO-05-873 Medicare Contracting Reform 

August 17, 2005 

The Honorable Charles E. Grassley 

Chairman 

The Honorable Max Baucus 

Ranking Minority Member 

Committee on Finance 

United States Senate 

The Honorable Joe Barton 

Chairman 

The Honorable John D. Dingell 

Ranking Minority Member 

Committee on Energy and Commerce 

House of Representatives 

The Honorable William M. Thomas 

Chairman 

The Honorable Charles B. Rangel 

Ranking Minority Member 

Committee on Ways and Means 

House of Representatives 

Since the inception of the Medicare program in 1965, the contractors that 

process and administer medical claims have played a critical role in 

serving both beneficiaries and providers. For example, in fiscal year 2004, 

these contractors processed over 1 billion health care claims and provided 

customer service to about 36 million beneficiaries and over 1 million 

health care providers. The Medicare Prescription Drug, Improvement, and 

Modernization Act of 2003 (MMA)1

 significantly changed Medicare law 

covering contracting for claims administration services by the Centers for 

Medicare & Medicaid Services (CMS)2

—the agency within the Department 

of Health and Human Services (HHS) that administers the program. CMS 

 1

Pub. L. No. 108-173, § 911, 117 Stat. 2066, 2378—2386 (to be codified at 42 U.S.C. § 1395kk1). 

2

Until July 1, 2001, CMS was called the Health Care Financing Administration. We use the 

name CMS throughout this report. 

United States Government Accountability Office

Washington, DC 20548 
Page 2 GAO-05-873 Medicare Contracting Reform 

refers to these changes, which are intended to improve service to 

beneficiaries and health care providers, as Medicare contracting reform. 

The implementation of contracting reform will fundamentally change 

Medicare claims administration contracting practices. Since the beginning 

of the Medicare program, CMS has generally been exempt from 

requirements to competitively select claims administration contractors or 

follow certain other procedures that usually apply to the selection and 

management of government contractors. However, the MMA required CMS 

to use competitive procedures to select Medicare administrative 

contractors (MAC) and to follow the Federal Acquisition Regulation 

(FAR),3

 except where specific MMA provisions differ. The MMA required 

CMS to transfer the work of current claims administration contractors to 

MACs by October 2011. It also required the Secretary of HHS to submit a 

report to the Congress and GAO on HHS’s plan to implement the Medicare 

contracting reform provisions by October 1, 2004. This report was 

submitted on February 7, 2005.4

 CMS has designated the Report to 

Congress and related documents, taken together, as its plan for 

implementing Medicare contracting reform. These documents are listed in 

appendix I. 

The MMA also required GAO to evaluate and report on CMS’s contracting 

reform plan no later than 6 months after the date that CMS’s report was 

received. To address this mandate, as discussed with the committees of 

jurisdiction, we reviewed (1) the extent to which the plan provides an 

appropriate framework for implementing Medicare contracting reform and 

(2) the extent to which the plan’s cost and savings estimates are sound 

enough to support decisions on contracting reform implementation. 

In preparing this report, we reviewed relevant sections of the MMA, 

documents prepared to help CMS plan for contracting reform, and GAO 

guidance on assessing federal agencies’ procurement functions and 

improving how mission-critical work is accomplished. These documents 

are listed in appendix II. From these documents, we developed evaluation 

criteria and used them to review CMS’s contracting reform plan.5

 Our 

 3

48 C.F.R. ch. 1 (2004). 

4

Department of Health and Human Services, Report to Congress: Medicare Contracting 

Reform: A Blueprint for a Better Medicare (Washington, D.C.: Feb. 7, 2005). 

5

We reviewed the Report to Congress and additional documents that CMS designated as 

part of its contracting reform plan that the agency provided to us by June 3, 2005. 
Page 3 GAO-05-873 Medicare Contracting Reform 

evaluation criteria are presented in appendix III. We also reviewed the 

information and assumptions on which the plan’s cost and savings 

estimates were based. In addition, we interviewed officials at CMS’s 

headquarters and regional offices, four current Medicare claims 

administration contractors, and CMS’s actuarial contractor about the 

contracting reform plan and how it was developed. Appendix IV includes a 

more detailed discussion of our scope and methodology. We performed 

our work from November 2004 through July 2005 in accordance with 

generally accepted government auditing standards. 

CMS’s plan for contracting reform provides detailed information and an 

appropriate implementation framework in some critical areas but not in 

others. For example, the plan provides detailed information on the reasons 

for, and benefits expected from, contracting reform; the organization of 

current and future Medicare claims administration contractors; the MAC 

contracting implementation schedule; and CMS’s strategy for 

communicating information to potential contractors, providers, and 

beneficiaries. On the other hand, the plan does not provide detailed 

information on the risks of contracting reform and steps to mitigate them. 

Implementation of contracting reform is an inherently high-risk activity 

because it will involve complex transitions of claims workloads from 

current contractors to MACs. CMS has experience in transferring up to 

10 percent of the claims administration workload in a year. In 13 of the 

past 15 years, CMS has transferred at least one contractor’s workload, 

during transitions that took an average of 6 to 9 months, with some lasting 

as long as a year. However, the scale of the proposed transitions is much 

greater, since CMS plans to transfer as much as 91 percent of the annual 

Medicare claims processing workload—which represents an estimated 

$250 billion in payments to providers—to MACs in less than 2 years. 

Furthermore, CMS is proposing to transfer all work to MACs by July 2009, 

which is more than 2 years ahead of the MMA’s specified time frame. If 

these transitions go awry, physicians and other providers could 

experience payment delays and errors. Further, the plan does not fully 

detail how CMS intends to implement MAC contracting. For example, the 

plan does not fully explain CMS’s strategy for monitoring MACs’ 

performance. In addition, the plan does not fully explain how CMS will 

manage contracting reform while also implementing the Medicare 

prescription drug benefit and the expansion of options available to 

Medicare beneficiaries who enroll in private plans. Finally, it does not 

detail how CMS will coordinate the scheduling of contracting reform 

activities with other interrelated initiatives that must be implemented 

concurrently at the MACs, such as upgrades to CMS’s information and 

Results in Brief 
Page 4 GAO-05-873 Medicare Contracting Reform 

accounting systems. Having a schedule for implementing the interrelated 

initiatives is critical, because delays in one initiative could easily affect 

others. CMS officials have taken initial steps to deal with critical areas that 

are not fully developed, but they have not completed planning for them. 

For example, officials have identified some factors that may pose a risk to 

MAC implementation, but they have not decided on steps to mitigate them. 

The plan’s cost and savings estimates are too uncertain to support 

decisions on contracting reform implementation because they are based 

on future developments that are difficult to predict. CMS estimates that 

contracting reform would cost about $666 million to implement during a 

6-year period, a much higher amount than the one indicated in the Report 

to Congress, because that document did not include funding anticipated to 

be needed beyond 2006. CMS used its data on the costs of previous 

transitions of claims workloads from one contractor to another as a basis 

to develop a transition cost amount. However, to develop an overall cost 

estimate, CMS had to make assumptions about how many contractors will 

take on new claims workloads and the size of these workload transitions. 

Because CMS does not know which contractors will compete and win 

contracts for specific workloads, it is difficult to predict how much 

contracting reform implementation will cost. Second, the total savings 

estimate of over $1.9 billion for a 6-year implementation period relies on 

the expectation that MACs will reduce improper payments by over 

$1.4 billion through more effective medical reviews of claims. The 

$1.4 billion savings estimate, which was developed by an external 

consultant, is based on questionable evidence and assumptions that were 

not validated by the CMS staff who oversee medical reviews. While it is 

reasonable to assume that contracting reform will eventually lead to 

program savings, the exact level of savings is impossible to predict and 

could differ greatly from the consultant’s estimates. Despite this, in order 

to benefit from the projected savings as soon as possible, CMS accelerated 

its implementation schedule for contracting reform. Basing an accelerated 

implementation schedule on such uncertain savings raises concerns that 

CMS has unnecessarily created additional challenges to effectively 

managing the risks and complexities of contracting reform. As a result, we 

recommend that CMS extend its implementation schedule to complete its 

workload transitions by October 2011, so that the agency can be better 

prepared to manage its contracting reform activities. 

In its written comments on a draft of this report, CMS did not concur with 

our recommendation. (See app. V). CMS stated that it would be able to 

achieve savings to the Medicare trust funds and operational efficiencies 

more quickly by fully implementing MAC contracting in 2009. We believe 
Page 5 GAO-05-873 Medicare Contracting Reform 

that our recommendation to extend the time frame for implementation 

represents a prudent approach that would allow more time for planning 

and better enable CMS to manage complex transitions and make needed 

midcourse adjustments. 

Federal agencies are generally permitted to contract with any qualified 

entity for any authorized purpose so long as that entity is not prohibited 

from receiving government contracts and the contract is not for an 

inherently governmental function. Agencies are required to use 

contractors that have a satisfactory record of integrity and business ethics, 

a record of successful past performance, and the financial and other 

resources needed to perform the contract. The FAR generally requires 

agencies to conduct full and open competition for contracts. Under the 

FAR, a federal agency may terminate a contract either for the 

government’s convenience or if the agency determines that the contractor 

is in default. The contractor does not have similar rights to terminate its 

contract with the government. The FAR also provides agencies with 

several methods to pay contractors—some of which allow for financial 

incentives for meeting performance goals. 

Because of provisions in the Social Security Act, Medicare claims 

administration contracting had unique features that differed from most 

other federal contracting. Before Medicare was enacted in 1965, providers 

had been concerned that the program would give the government too 

much control over health care. To increase providers’ acceptance of the 

new program, the Congress ensured that health insurers like Blue Cross 

and Blue Shield, which already served as payers of health care services to 

physicians and hospitals, became the contractors paying providers for 

Medicare services. Medicare’s authorizing legislation specified that 

contractors called fiscal intermediaries would administer Part A and Part 

B claims paid to hospitals and other institutions, such as home health 

agencies.6

 Contractors called carriers would administer the majority of 

Part B claims for the services of physicians and other providers. By law, 

Medicare was required to choose its fiscal intermediaries from among 

organizations that were first selected by associations representing 

 6

Medicare Part A covers inpatient hospital care, skilled nursing facility care, some home 

health care services, and hospice care. Part B services include physician and outpatient 

hospital services, diagnostic tests, mental health services, outpatient physical and 

occupational therapy, ambulance services, some home health services, and medical 

equipment and supplies. 

Background 
Page 6 GAO-05-873 Medicare Contracting Reform 

providers, a process called provider nomination. Medicare was also 

required to choose health insurers or similar companies to serve as its 

carriers and, by statute, did not have to award the contracts through 

competition. In addition, Medicare contracts were generally renewed each 

year. As a result, since the inception of the program, most Medicare claims 

administration contracts have been awarded and renewed on a 

noncompetitive basis, with limited exceptions.7

 Contractors could not be 

terminated from the program unless they were first provided with an 

opportunity for a public hearing—a process not afforded under the FAR. 

Unlike other federal contractors, claims administration contractors could 

terminate their contracts. In addition, the contractors were paid on the 

basis of their allowable costs, generally without financial incentives to 

encourage superior performance.8

The MMA required CMS to significantly change its contracting 

arrangements and follow the FAR, except to the extent inconsistent with a 

specific requirement of the MMA. The MMA removed the specific 

procedures for selecting fiscal intermediaries and carriers, and unlike 

CMS’s existing contracts, MAC contracts must be fully and openly 

recompeted at least every 5 years. In addition, the new contracts will also 

contain performance incentives for contractors. Finally, MACs will not be 

permitted to default on their contracts or terminate their contracts as 

allowed under current contracting practices. Contract termination will 

follow the requirements of the FAR, which allow the government to 

terminate contracts for its convenience or for contractor default. 

MACs will assume work that is currently performed by 51 claims 

administration contractors. At present, there are 25 fiscal intermediaries 

and 18 carriers. In addition, four durable medical equipment (DME) 

regional carriers pay claims submitted by suppliers of DME, prosthetics, 

 7

For example, from 1977 through 1986, eight competitive contracts, which were designed to 

consolidate the workload of two or more small contractors, were established on an 

experimental basis. More recently, in 2004, CMS conducted a competitive procurement to 

replace the fiscal intermediary for Washington and Alaska. However, the competition was 

limited to Medicare fiscal intermediaries and carriers. 

8

The Social Security Act generally provided that Medicare use cost-based reimbursement 

contracts, under which contractors are reimbursed for necessary and proper costs of 

carrying out program activities. These contracts did not expressly provide for profit. 

Nevertheless, since the 1980s, CMS has had some limited authority to build financial 

incentives into contracts. See 42 U.S.C. § 1395h note (2000). 
Page 7 GAO-05-873 Medicare Contracting Reform 

orthotics, and supplies, and four regional home health intermediaries 

process home health and hospice (HH) claims. 

CMS plans to select 23 MACs to serve specific jurisdictions, including 

15 A/B MACs, which will process both Part A and Part B claims; 4 DME 

MACs, which will process claims for DME, prosthetics, orthotics, and 

supplies; and 4 HH MACs, which will process claims for HH care. CMS’s 

current schedule calls for the full fee-for-service contracting workload9

 to 

be transferred to MACs by July 2009.10 CMS plans to conduct competitions 

for existing Medicare contractor workloads beginning with a start-up 

acquisition and transition cycle for the 4 DME MACs and 1 A/B MAC. The 

start-up cycle will be followed by two additional acquisition and transition 

cycles. Appendix VI shows CMS’s schedule and timing for competing all of 

the MAC contracts. 

MACs will be responsible for most of the functions currently performed by 

fiscal intermediaries and carriers. They will process and pay claims, 

handle first-level appeals of denied claims,11 and serve as providers’ 

primary contact with Medicare. In addition, they will coordinate with 

CMS’s functional Medicare contractors that perform limited Medicare 

functions on a national or regional basis, such as answering the 

1-800-MEDICARE help line, coordinating Medicare and other insurance 

benefits, and conducting program safeguard activities. For example, the 

functional Program Safeguard Contractors (PSC) conduct activities to 

prevent or address improper payments—such as investigating potential 

fraudulent billing related to the claims paid by the claims administration 

contractors.12

 9

Workload is the total work performed by a Medicare claims administration contractor, 

with the amount usually expressed as the number of claims processed annually. 

10After the MAC contracts are awarded, the work performed by the outgoing Medicare 

claims administration contractors will be transferred to MACs. These transition activities 

include transferring data, records, and other functions to MACs. 

11Beneficiaries and Medicare providers, on behalf of their beneficiaries, can appeal denied 

claims for services. At the first appeal level, the Medicare claims administration contactor 

reexamines the claim along with any additional documentation provided by the appellant. 

If the contractor upholds the decision to deny the claim, the appellant may appeal the 

decision further. 

12CMS contracted for the PSCs as part of the Medicare Integrity Program, created by the 

Health Insurance Portability and Accountability Act of 1996. In addition to the activities 

cited above, PSCs conduct cost report audits and provider education related to program 

safeguard activities. 
Page 8 GAO-05-873 Medicare Contracting Reform 

MACs’ responsibilities for medical reviews of claims;13 benefit integrity, 

which involves the investigation of suspected fraud;14 and beneficiary 

inquiries will differ in some respects from those of the current claims 

administration contractors. Currently, three of the four DME regional 

carriers conduct their own medical reviews and benefit integrity activities 

for the claims they process.15 Under contracting reform, PSCs will be 

responsible for performing all medical reviews and benefit integrity 

activities related to the claims processed by the DME MACs. These 

responsibilities will be allocated differently for A/B MACs. All A/B MACs 

will conduct medical reviews of the Part A and Part B claims they will 

process, while PSCs will be responsible for conducting benefit integrity 

activities related to these claims.16 The current Medicare claims 

administration contractors respond to beneficiaries’ questions that are 

specific to their claims, while staff from 1-800-MEDICARE answer general 

questions on the telephone help line. In the future, staff at beneficiary 

contact centers (BCC) will answer calls placed to 1-800-MEDICARE and 

assume the role of responding to general and claims-specific questions. 

MACs will be responsible for responding to more complex inquiries from 

beneficiaries that require a more advanced understanding of Medicare 

claims processing or coverage rules. 

CMS’s plan for contracting reform provides detailed information—and an 

appropriate framework for implementation—in some, but not all, critical 

areas. For example, the plan presents detail on the proposed schedule for 

MAC implementation. Nevertheless, as figure 1 shows, the plan does not 

provide detailed information on the risks associated with contracting 

 13Medical reviews of submitted claims are conducted either before or after payment to 

determine if the claims should be, or should have been, paid. Claims are reviewed to see if 

the beneficiaries’ conditions meet the Medicare coverage criteria. If medical reviews 

identify claims that should not have been paid, the Medicare claims administration 

contractor that paid the claim is responsible for collecting overpayments. 

14Investigation of suspected fraud can involve conducting a more detailed analysis of 

claims and other investigative steps. Once a case has been developed, it is referred to 

HHS’s Office of Inspector General or to other law enforcement agencies for investigation or 

prosecution. 

15One PSC currently conducts medical reviews and benefit integrity activities for the claims 

processed by the remaining DME regional carrier. 

16PSCs currently conduct medical reviews of claims processed by 2 fiscal intermediaries 

and 2 carriers. The remaining 23 fiscal intermediaries and 16 carriers conduct their own 

medical reviews of the claims they process. 

CMS’s Plan Does Not 

Provide an 

Appropriate 

Implementation 

Framework in All 

Critical Areas 
Page 9 GAO-05-873 Medicare Contracting Reform 

reform, some aspects of CMS’s implementation approach, and the 

integration of reform activities with other initiatives. CMS has recently 

taken steps to address areas of the plan where details and complete 

information were lacking, as part of its ongoing planning efforts. However, 

key decisions relating to critical areas are yet to be made and incorporated 

into its plan. 

Figure 1: Areas of Detailed Information in CMS’s Contracting Reform Plan 

The plan provides detailed information on

the rationale for implementing contracting reform;

Source: GAO analysis of CMS's plan for contracting reform.

the organization of current and future claims administration services, including

the types of claims current claims administration contractors process and the

geographic areas they serve;

the proposed MAC implementation schedule; and

CMS's strategy for communicating information about contracting reform.

The plan does not provide detailed information on

the risks associated with implementing contracting reform and planned

risk mitigation steps;

some aspects of CMS's approach to implementing the MAC contracting

environment, including how MACs will coordinate their functions with those of 

other contractors; and

CMS's integration of ongoing contracting reform activities with other complex

and interrelated ongoing initiatives, such as modernizing CMS's information

and accounting systems.
Page 10 GAO-05-873 Medicare Contracting Reform 

CMS’s plan provides a clear discussion of the reasons for implementing 

contracting reform, including the restrictions and weaknesses in the 

current system, as shown in table 1. The plan also recognizes the benefits 

of improving Medicare contracting for beneficiaries and providers, such as 

providing a single point of contact for providers’ claims-related inquiries. 

Table 1: CMS’s Analysis of Restrictions or Weaknesses in Medicare Claims Administration Contracting and Their Associated 

Effects 

Restriction or weakness in current system Effects of current restriction or weakness 

Lack of full and open competition CMS lacks the flexibility to choose qualified organizations to process Medicare claims 

through full and open competition. Provider institutions, such as hospitals, nominate 

fiscal intermediaries to process Part A claims, which limits CMS’s ability to manage 

the program effectively. The Secretary of HHS is required, by law, to choose Part B 

carriers from health insurers or similar companies and did not have to compete these 

contracts. 

Separate processing of Part A and Part B 

claims 

Part A and Part B claims are generally processed by separate claims administration 

contractors and claims processing systems. For example, a beneficiary with a hospital 

stay followed by home health care will have hospital and some home health claims 

paid by a fiscal intermediary, while other home health and physician claims will be 

paid by a carrier. This division of responsibilities for claims payment sometimes 

makes it difficult for beneficiaries and providers to have their questions answered 

quickly. Providers also face increased expenses due to separate processing and are 

limited in their ability to understand and coordinate services on behalf of their patients.

Specialization restrictions CMS is limited in its ability to award separate contracts for individual claims 

administration activities in which certain companies may excel, such as operating data 

centers or educating providers about program rules. 

Absence of performance-based incentives Contractors work under cost-based reimbursement contracts through which they are 

reimbursed for the necessary and proper costs of carrying out Medicare activities, but 

do not have financial incentives to improve their performance. 

Cumbersome termination procedures Contractors are allowed to terminate their contracts without cause, simply by providing 

180 days notice. CMS, on the other hand, has to demonstrate that a poorly performing 

or unresponsive contractor has failed substantially to carry out its contract, or that 

continuation of the contract is disadvantageous or inconsistent with the effective 

administration of Medicare before it is able to terminate a contract. CMS is also 

required to provide the contractor an opportunity for a hearing before termination. 

Outdated information technology (IT) Medicare’s IT infrastructure is inadequate for the program’s expanding needs and 

does not take advantage of current technologies (e.g., use of the Internet to submit 

and track claims) that would improve customer service and result in additional cost 

savings. 

Source: GAO analysis of CMS’s Report to Congress. 

CMS’s Plan Provides 

Useful Information about 

Some Aspects of 

Implementation 
Page 11 GAO-05-873 Medicare Contracting Reform 

The plan also provides maps of the current jurisdictions of Medicare 

contractors and future jurisdictions of MACs. A CMS official told us that 

the agency took beneficiaries’ patterns of care into account when drawing 

jurisdictional lines. In addition, according to the plan, CMS designed the 

new MAC jurisdictions, which were based on state boundaries, to achieve 

operational efficiencies, promote competition, and better balance the 

allocation of workloads. For example, there are one fiscal intermediary 

and three carriers currently serving New York, as well as two fiscal 

intermediaries and one carrier serving Connecticut. Under contracting 

reform, one A/B MAC will administer Part A and Part B claims for 

beneficiaries residing in these two states. 

Currently, different claims administration contractors handle Part A and 

Part B claims in the majority of states.17 For example, in Michigan, United 

Government Services processes Part A claims, and Wisconsin Physicians 

Service Insurance Company processes Part B claims. In addition, while 

some current contractors serve one state, others serve several—

sometimes noncontiguous—states. For example, Blue Cross Blue Shield of 

Arizona processes Part A claims exclusively in Arizona, while National 

Heritage Insurance Company processes Part B claims on the East Coast in 

Maine, New Hampshire, Vermont, and Massachusetts and, on the West 

Coast, in California. The varying jurisdictions for contractors that process 

Part A and Part B claims have resulted in what CMS’s plan terms “a 

patchwork of responsibility and service.”18 CMS has developed 15 distinct, 

nonoverlapping geographic jurisdictions for the A/B MACs.19 Appendixes 

VII, VIII, IX, X, XI, and XII show the jurisdictional maps for the current 

fiscal intermediaries, the current carriers, the current regional home 

health intermediaries, the current DME regional carriers, the 15 new A/B 

MACs, and the 4 new DME MACs and 4 new HH MACs. A CMS official 

stated that while the A/B MACs’ jurisdictions continue to vary somewhat 

in size and workload, they are reasonably balanced in terms of the 

numbers of fee-for-service beneficiaries and providers served.20 However, 

 17As of October 1, 2004, different contractors processed Part A and Part B claims in 39 

states and the District of Columbia, and the same contractor processed both Part A and 

Part B claims in 11 states. 

18Department of Health and Human Services, Report to Congress, I-2. 

19CMS aligned the jurisdictions so that the 15 A/B MAC jurisdictions fit within the 

boundaries of the 4 DME MACs and the 4 HH MACs. Jurisdictions are identical for the DME 

MACs and the HH MACs. 

20According to CMS, the new MAC jurisdictions will include from 1.1 million to 3.4 million 

beneficiaries and from 21,000 to 76,000 physicians. 
Page 12 GAO-05-873 Medicare Contracting Reform 

CMS officials have stated that companies might be able to win more than 

one MAC contract, and, if so, their workloads in multiple jurisdictions 

would potentially be greater than those of companies that win contracts 

for a single jurisdiction. 

In addition to providing information on MACs’ jurisdictions, CMS’s plan 

provides timelines for implementing MAC contracting, including 

anticipated contract award dates for the start-up cycle and two subsequent 

cycles. CMS plans to monitor each cycle, including transitions, and to 

adjust the implementation schedule if necessary. The start-up cycle, which 

will result in the award of four contracts to DME MACs and one contract 

to an A/B MAC, should provide CMS with experience that can be applied 

to the next two cycles. For example, the start-up cycle will allow new CMS 

personnel to obtain additional expertise, if needed, on contracting 

activities. It will also allow CMS to examine its acquisition and transition 

efforts and apply lessons learned to future cycles. 

Recognizing that open communication with stakeholders is important to 

the successful implementation of contracting reform, CMS’s plan 

incorporates a written strategy to provide information and solicit 

questions, comments, and feedback on Medicare contracting reform from 

potential MACs, providers, and beneficiaries. This communication strategy 

includes periodically holding open meetings and establishing a Medicare 

contracting reform Web site.21 For example, CMS hosted a series of open 

meetings in 2004 and 2005 to share information and seek input on aspects 

of its contracting reform plan, including MAC jurisdictions, draft 

statements of work,22 and proposed performance standards.23 In addition, 

CMS’s Web site is routinely updated to provide answers to questions about 

contracting reform and provide access to important documents, such as its 

Report to Congress. The Web site also provides a link to a federal 

procurement Web site,24 where draft and final versions of MAC statements 

of work can be found. Interested parties, including organizations 

 21The Web site’s address is www.cms.hhs.gov/medicarereform/contractingreform/. It was 

established on March 15, 2004. 

22A statement of work is the portion of a contract that describes the actual work to be done 

by the contractor by means of specifications, performance dates, and quality requirements. 

23The MMA required that CMS consult with providers, beneficiary organizations, and others 

on the development of performance requirements and standards for MACs. 

24The Web site’s address is http://www.fedbizopps.gov/. It provides information on federal 

government procurement opportunities over $25,000. 
Page 13 GAO-05-873 Medicare Contracting Reform 

interested in competing for MAC contracts, provided feedback on these 

drafts through CMS’s open meetings and its Web site. In developing certain 

areas of the contracting reform plan, CMS also sought input from its 

headquarters and regional office staff. For example, CMS teams worked 

collaboratively to develop the draft statements of work for A/B MACs and 

DME MACs. 

While CMS’s contracting reform plan provides detailed information in 

some areas, it does not comprehensively address (1) contracting reform 

risks and how the agency plans to mitigate them; (2) the intended 

approach for implementing certain aspects of MAC contracting, including 

details on how CMS will monitor MACs’ performance; and 

(3) coordination of contracting reform activities with other complex 

initiatives that CMS is implementing. While a comprehensive contracting 

reform plan was due in October 2004, we found that the plan was still 

incomplete as of June 2005. The agency has begun to develop, but has not 

completed, a more detailed plan in critical implementation areas. 

Nevertheless, without having all of the critical elements of its plan in 

place, the agency is undertaking an accelerated schedule and intends to 

transfer all claims processing work to MACs by July 2009, more than 

2 years ahead of the MMA’s time frame. 

CMS’s plan does not comprehensively address three major risks and 

indicate the steps that the agency plans to take to mitigate them. These are 

CMS’s proposed implementation schedule, the volume and complexity of 

anticipated claims processing workload transitions, and the potential for 

voluntary contractor withdrawals. Each of these risks has the potential to 

disrupt claims administration services, resulting in delayed or improper 

payments to providers. 

The Report to Congress—one of the documents in CMS’s contracting 

reform plan—briefly noted that the anticipated implementation schedule 

“will require substantial risk management and schedule precision to 

minimize possible operational disruption.”25 CMS’s proposed 

implementation schedule calls for all work to be transferred to MACs by 

July 2009—more than 2 years ahead of the MMA’s time frame. The initial 

 25Department of Health and Human Services, Report to Congress, III-3. 

CMS’s Contracting Reform 

Plan Does Not Fully 

Address Three Critical 

Implementation Areas 

Plan Does Not Fully Address 

Implementation Risks 
Page 14 GAO-05-873 Medicare Contracting Reform 

start-up acquisition cycle26 is taking place in a 27-month period—from 

April 2005 to July 2007—during which about 9 percent of the national 

claims possessing workload will be transferred to MACs. If CMS chooses 

current contractors that are administering claims in the MAC jurisdictions, 

the percentage of the workload transferred would be less. In the first 

phase of the start-up cycle, CMS will select and transfer workload to 4 

DME MACs. In the second phase, CMS will select and transfer workload to 

1 A/B MAC. Following the initial start-up cycle, CMS is planning two 

acquisition cycles, which will last from September 2006 to July 2009, 

during which it will select and transfer the remaining current contactors’ 

work to 14 A/B MACs and 4 HH MACs. As part of these two cycles, in the 

22 months from September 2007 to July 2009, CMS plans to manage 

transitions of as much as 91 percent of the annual Medicare claims 

processing workload, which represent an estimated $250 billion in 

payments to providers.27 The transition period for cycle one is 1 year, from 

September 2007 to September 2008, and the transition period for cycle two 

is 10 months, from September 2008 to July 2009. In 13 of the past 15 years, 

CMS has transferred at least one contractor’s workload. These transitions 

took an average of 6 to 9 months, with some lasting as long as a year. 

CMS decided on a more compressed schedule after initially considering a 

longer implementation period. In November 2004, CMS officials told us 

that they were planning to move to MAC contracting using six acquisition 

cycles to be completed around April 2011. According to the Report to 

Congress, CMS officials believed that the potential savings from 

contracting reform suggested that transferring larger portions of the 

workload to MACs in a shorter time frame would allow savings to accrue 

more quickly to the Medicare program. 

Despite the ambitious time frame for implementation, CMS’s plan does not 

provide detailed information on the risks involved in transferring large 

segments of Medicare’s claims processing workload on an accelerated 

 26Each acquisition cycle begins with the issuance of the request for proposals, which 

announces CMS’s intent to award a contract. The cycle also includes a transition period, 

which begins with the award of the contract and ends when all work has been transferred 

to the MAC from the prior claims administration contractor. 

27The first acquisition cycle will affect about 44 percent of the claims processing workload 

and the second acquisition cycle will affect about 47 percent. However, a smaller 

percentage of the claims workload may need to be transferred, since some of the current 

contractors may become MACs for jurisdictions that include part of their current service 

areas. 
Page 15 GAO-05-873 Medicare Contracting Reform 

schedule or outline contingency plans for the transitions to MACs. CMS’s 

accelerated schedule for cycles one and two leaves little time for CMS to 

examine its acquisition and transition efforts, apply lessons learned, and 

resolve disagreements about the agency’s award process with companies 

that were not selected. Furthermore, due to the accelerated cycle, 

interested companies—some of which may be among the best qualified to 

perform as MACs—may decide not to compete to win multiple MAC 

contracts because developing concurrent proposals or assuming the 

workload for more than one jurisdiction simultaneously might strain their 

resources. In addition, it may prove difficult for CMS staff to evaluate 

proposals, award contracts, and manage concurrent transitions within the 

proposed time frame. 

CMS’s plan does not provide details on its strategy for managing these 

compressed transitions with its anticipated staff resources. CMS officials 

expressed concerns to us that many of the staff most experienced in 

handling transitions were, or were close to being, eligible to retire and that 

CMS might have to manage these transitions with less experienced staff. In 

addition, CMS staff have never had to manage as many simultaneous 

transitions, which is likely to add to the challenge of managing them so 

that they are as smooth as possible for providers. As we reported 

previously, the lack of sufficient staff resources has hampered other 

transitions.28

The volume and complexity of claims workload transitions is a second risk 

that CMS’s plan does not adequately address. Although CMS has regularly 

managed the transitions of claims administration contractors’ workloads 

and functions and has much experience in doing so, recent transitions 

have affected only about 10 percent of the claims for Part A and Part B in 

any year. Nevertheless, CMS is planning to transfer 91 percent of current 

contractors’ workload to MACs in less than 2 years. Furthermore, the MAC 

transitions will be more complex than past contractor transitions because 

both Part A and Part B workloads will be transferred from multiple 

contractors to a single MAC in a new jurisdiction. These changes mean, for 

example, that under the initial A/B MAC contract that is awarded—one 

that involves less than 3 percent of the national workload in a six-state 

 28For example, lack of staff resources dedicated to transition efforts contributed to a slow 

implementation of updated telecommunications services to federal agencies, which led to 

increased costs and difficulties in holding service contractors accountable for their 

performance. See GAO, FTS2001: Contract Transition Delays and Their Impact on Program 

Goals, GAO-01-544T (Washington, D.C.: Apr. 26, 2001). 
Page 16 GAO-05-873 Medicare Contracting Reform 

jurisdiction—CMS will simultaneously transfer as many as nine separate 

segments of current contractors’ workload to the new MAC.29 Figure 2 

illustrates the transitions that will occur to consolidate the Part A and Part 

B workload in the first contract to be awarded for an A/B MAC 

jurisdiction. These transitions will also involve transferring some portions 

of the work currently being done by the carriers and fiscal intermediaries 

to functional contractors. For example, CMS will be transferring medical 

review and benefit integrity work from DME regional carriers to PSCs at 

the same time that the claims workload transfers to DME MACs. While the 

start-up cycle transitions are complex, they are planned to affect only 1 

A/B MAC and the 4 DME MACs. CMS will be conducting a much greater 

number of transitions for cycles one and two, as the rest of claims 

administration work is transferred from current contractors to 14 A/B 

MACs and 4 HH MACs. 

 29Subsequent transitions in the next two cycles will transfer workload to the new MACs 

from two to as many as seven current fiscal intermediaries and carriers. Furthermore, 

transitions may involve transferring some work to functional contractors, such as the 

contractor that will be responsible for handling beneficiary inquiries. 
Page 17 GAO-05-873 Medicare Contracting Reform 

Figure 2: Part A and Part B Transitions That Will Occur in One MAC Jurisdiction 

Additional factors may add to the complexity of the transitions. For 

example, if current fiscal intermediaries and carriers choose not to 

compete or lose competitions for MAC contracts in the jurisdictions where 

they currently process claims, they may have little incentive to be highly 

cooperative in the transition activities. In these cases, their knowledgeable 

staff who would facilitate transitions may seek employment elsewhere. 

Further, MAC transitions may involve the transfer of workloads to 

companies new to Medicare operations, which would add complexity to 

the process. 

Another risk that CMS’s plan has not fully addressed is the potential 

impact that voluntary contractor withdrawals may have on the planned 

transition schedule. CMS has not developed mitigation strategies to deal 

with these potential withdrawals. Several CMS officials told us that they 

were concerned that some contractors might voluntarily withdraw before 

the agency’s planned competition for jurisdictions that included their 

Source: GAO.

This new MAC jurisdiction 

will consolidate the 

six current Part A 

contracts and the three 

current Part B contracts.

BCBS Montana

BCBS 

Wyoming

Noridian

Cahaba

Regence

BCBS 

Arizona

BCBS Montana

Regence

Noridian

Noridian

Noridian

Noridian

Part A

Part B

New MAC jurisdiction
Page 18 GAO-05-873 Medicare Contracting Reform 

current service areas because the contractors did not intend to compete as 

MACs. In addition, contractors that lose competitions may opt to leave the 

Medicare program before transitions to new MACs have been completed. 

CMS has the option of paying contractors’ staff retention bonuses, so that 

key contractor staff can work through transitions, but that may not be 

enough to convince contractors to stay in the program. Voluntary 

withdrawals could force CMS to conduct competitions and manage 

transitions for the affected jurisdictions on a different or more accelerated 

schedule than originally planned. CMS could elect to choose a Medicare 

claims administration contractor to briefly perform the withdrawing 

contractor’s work until a MAC is chosen for the affected jurisdiction, but 

this could be perceived as limiting competition by favoring one company 

over others. 

The ultimate risk from transitions that do not proceed smoothly or on 

schedule is that providers might not receive payment for the items or 

services they furnished to beneficiaries or could be paid inappropriately. 

Interrupting providers’ cash flow by failing to pay them can create 

significant problems in their operations. On the other hand, any increase in 

improper payments would create a further drain on the Medicare trust 

funds. In fiscal year 2004, CMS estimated that Medicare claims 

administration contractors’ net improper payments amounted to 

$19.9 billion. 

CMS has not completed a comprehensive risk mitigation plan to address 

the risks associated with contracting reform, but the agency has taken 

some initial steps to manage the risks. CMS has developed a procedure for 

identifying, analyzing, responding to, and monitoring and controlling risks. 

As part of this procedure, CMS has identified certain risks that may have 

an impact on implementation, including the availability of resources to 

complete scheduled procurement tasks and the difficulty of developing a 

clear, complete statement of work that minimizes the need for future 

contract modifications. The agency is currently working on developing a 

document that lists proposed actions that could mitigate these and other 

identified risks. However, CMS’s descriptions of proposed mitigation 

actions lack specificity. For example, to address the risk that CMS may not 

have the funding to conduct transition activities as scheduled, the 

proposed mitigation action is to “monitor federal appropriations,” but the 

document does not indicate how the agency might redeploy resources or 

restructure its transitions, should a funding gap occur. Further, CMS has 

not developed mitigation actions for some serious risks, including the 

failure to create internal processes for managing MACs. Without such 
Page 19 GAO-05-873 Medicare Contracting Reform 

internal processes, CMS may not be able to effectively administer MAC 

contracts. 

Although CMS has done extensive work toward developing a strategy that 

outlines how it intends to implement MAC contracting, the agency’s plan 

lacks important implementation information in some areas. For example, 

CMS has made final decisions concerning certain elements of the MAC 

contracting strategy, such as paying performance incentives to encourage 

contractor innovation, efficiency, and cost effectiveness. However, for A/B 

MACs, the plan does not provide complete and definitive information on 

the contract type, performance measures and incentive structure, proposal 

evaluation criteria, and methods for maintaining a competitive 

environment and conducting market research to gather information on the 

number and size of companies that may submit proposals. CMS’s MAC 

acquisition strategy, which will provide information on these areas, is not 

yet complete. The agency planned to finalize this strategy in July 2005 and 

to issue the A/B MAC request for proposals in September 2005.30 Knowing 

such critical contracting information well in advance of the issuance of the 

request for proposals would make it easier for interested parties to 

develop specific plans for competing to win A/B MAC contracts. Having a 

robust pool of potential contractors with good proposals would make it 

easier for CMS to choose applicants likely to be effective as MACs. 

CMS’s contracting reform plan states that some MAC functions will be 

integrated with those of other types of Medicare contractors, but the 

agency has not fully developed the details of this integration. For example, 

the plan states that CMS expects that PSCs will continue to perform 

activities such as medical reviews and fraud investigations in the future 

and will coordinate closely with MACs. In addition, the statements of work 

for DME MACs and A/B MACs require that they sign agreements with PSCs 

to define respective roles and responsibilities. Among their 

responsibilities, DME MACs and A/B MACs will be expected to coordinate 

with PSCs in referring potential fraud cases when, for example, MACs 

identify claim forms that have been altered to obtain a higher payment or 

when it appears that a supplier or provider may have attempted to obtain 

duplicate payments. MACs’ coordination with PSCs is critical because 

findings of fraud could affect payments to providers. Coordination with 

 30The request for proposals announces CMS’s intent to award a contract and specifies the 

service or product to be delivered, the criteria to be used, applicant qualifications, deadline, 

and other relevant information. 

Plan Lacks Detailed 

Information on MAC 

Contracting Strategy and 

Management and Oversight 

Approach 
Page 20 GAO-05-873 Medicare Contracting Reform 

PSCs is also discussed in “concept of operations” documents for DME 

MACs and A/B MACs. These documents provide high-level information on 

how MACs will be expected to work with PSCs and other contractors that 

focus on particular Medicare program functions, such as claims appeals. 

However, CMS has yet to develop many details, including information on 

the specific steps that will be used to facilitate contractor coordination. 

In addition, CMS’s plan does not fully outline how the agency intends to 

evaluate and manage MACs. CMS’s plan incorporates a strategy paper on 

evaluating MACs’ performance, which was developed for the agency by a 

support services contractor. The strategy paper makes a number of 

recommendations, including establishing a specific office within CMS to 

gather, validate, and score contractor performance data and to share this 

information with agency management. CMS officials are currently 

considering these and other recommendations that were contained in the 

strategy paper. However, as of June 2005, they had not decided whether to 

implement any of these recommendations and had not completed their 

design of an approach for overseeing and evaluating MAC performance. 

Contractor oversight is an area of considerable concern, because, in the 

past, CMS’s failure to monitor Medicare claims administration contractors 

left the Medicare program vulnerable to fraud, waste, and abuse.31 For 

example, CMS did not always detect activities, such as the falsification of 

reports on contractor performance and the improper screening, 

processing, and paying of claims, that led to additional costs to the 

Medicare program. 

In developing the MAC oversight strategy paper, CMS’s contractor drew on 

the work of a cross-component work group within CMS that was 

established in April 2003.32 The work group reported in June 2004 that CMS 

lacked an integrated and coordinated framework to guide a wide range of 

evaluation activities and that the agency had difficulty in compiling a 

 31GAO, Medicare: HCFA Oversight Allows Contractor Improprieties to Continue 

Undetected, GAO/T-HEHS/OSI-99-174 (Washington, D.C.: Sept. 9, 1999); Medicare: HCFA 

Should Exercise Greater Oversight of Claims Administration Contractors, 

GAO/T-HEHS/OSI-99-167 (Washington, D.C.: July 14, 1999); Medicare: Improprieties by 

Contractors Compromised Medicare Program Integrity, GAO/OSI-99-7 (Washington, D.C.: 

July 14, 1999); and Medicare Contractors: Despite its Efforts, HCFA Cannot Ensure Their 

Effectiveness or Integrity, GAO/HEHS-99-115 (Washington, D.C.: July 14, 1999). 

32CMS’s Medicare fee-for-service contractor evaluation work group was established to 

compile an inventory of all internal and external contractor assessments and to research 

alternative frameworks to integrate contractor evaluation, reporting, and follow-up 

activities. 
Page 21 GAO-05-873 Medicare Contracting Reform 

comprehensive view of individual contractor performance.33 The work 

group also noted that complete and accurate information on contractor 

performance will be imperative as contracts for MACs are periodically 

recompeted and determinations about their records of performance 

become part of the qualification criteria. This information could also be 

critical in determining the amounts CMS pays to MACs as performance 

incentives. 

The plan also lacks detailed information on organizational changes to 

better realign agency personnel to support the management and oversight 

of new MAC contracts because CMS has not made final decisions in this 

area. While CMS currently administers some types of contracts that are 

governed by the FAR,34 MAC contracts generally will be larger, more 

complex, and more challenging to administer. CMS’s past oversight of 

claims administration contractors was hindered by organizational 

weaknesses,35 and at present, multiple central office components and 

regional offices have responsibilities to help oversee and manage claims 

administration contractors.36 Having an organizational structure that is 

appropriately aligned for CMS to manage and oversee MACs will make it 

easier for the agency to routinely evaluate its contractors on the basis of a 

 33We found similar problems in 1999. We reported that CMS’s headquarters office had not 

set contractor oversight priorities, leaving such decisions almost entirely to regional office 

reviewers. This led to inconsistent contractor evaluations by regional reviewers, which 

made it more difficult for CMS to determine which contractors were performing effectively. 

See GAO/HEHS-99-115. 

34CMS’s contracts that are governed by the FAR include those with quality improvement 

organizations and PSCs and for Medicare systems maintenance and data centers. 

35We reported in 2000 that while responsibility for overseeing contractor performance was 

dispersed among central office components and the agency’s 10 regional offices, lines of 

accountability had not been clearly established. The regional office staff who were 

responsible for overseeing contractors were not directly accountable to the central office 

group responsible for contractor oversight activities. GAO, Medicare Contractors: Further 

Improvement Needed in Headquarters and Regional Office Oversight, GAO/HEHS-00-46 

(Washington, D.C.: Mar. 23, 2000). CMS took steps to address this issue. While the agency 

was reviewing a draft version of our report, it announced that it was making organizational 

changes to improve regional accountability. 

36For example, while the Center for Medicare Management’s Medicare Contractor 

Management Group has overall responsibility for managing claims administration 

contractors, the Office of Financial Management has significant responsibilities for the 

contractors’ financial and program integrity activities, and the Office of Information 

Systems is responsible for oversight and security of the information systems used to pay 

claims. In addition, regional staff are currently responsible for monitoring the claims 

administration contractors’ activities and helping to evaluate their performance. 
Page 22 GAO-05-873 Medicare Contracting Reform 

variety of newly established performance measures. CMS has reorganized 

the central office component that will be responsible for awarding MAC 

contracts and has been considering ways to use regional offices’ staff 

expertise to support MAC contracting efforts. However, CMS has not 

completed its plan for organizational changes, including the division of 

labor and responsibilities for management and oversight of Medicare 

contractors among CMS components and between the central and regional 

offices. 

CMS has not developed an approach that fully integrates the planning and 

scheduling of Medicare contracting reform with other initiatives that will 

affect Medicare contractors, beneficiaries, and providers over the next 

several years. As CMS works toward implementing contracting reform, it 

is also focusing on several critical initiatives that must be integrated, or 

implemented concurrently, with Medicare contracting reform. These 

include the Medicare prescription drug benefit and the expansion of the 

existing options available to Medicare beneficiaries who enroll in private 

health plans. According to CMS officials, these initiatives may compete 

with contracting reform for agency resources. Other key planned 

initiatives, such as major systems upgrades or replacement, will directly 

affect Medicare claims administration operations and are anticipated to be 

fully or partially implemented between now and 2009 in conjunction with 

contracting reform. Information on these interrelated initiatives is 

provided in table 2. As we have previously reported, planning for IT 

system transitions has often been problematic in federal agencies.37

Coordinating the schedule for implementing these initiatives in 

conjunction with Medicare contracting reform is crucial to ensuring that 

claims administration operates smoothly during the transition to MACs. 

 37GAO, Business Systems Modernization: Internal Revenue Service Needs to Further 

Strengthen Program Management, GAO-04-438T (Washington, D.C.: Feb. 12, 2004), and 

Information Technology: DOD’s Acquisition Policies and Guidance Need to Incorporate 

Additional Best Practices and Controls, GAO-04-722 (Washington, D.C.: July 30, 2004). 

Plan Does Not Fully Integrate 

Scheduling of Contracting 

Reform Activities with Other 

Initiatives 
Page 23 GAO-05-873 Medicare Contracting Reform 

Table 2: Key Initiatives Affecting MAC Implementation 

Initiative Description 

Implementation schedule and integration issues related to MAC 

implementation 

Standard front end This initiative will standardize the way 

that electronic claims enter the 

automated processing system. 

Implementation of this initiative will occur within the DME MACs and 

the A/B MACs at the same time they are implemented. Changing 

claims administration contractors can require providers and billing 

agents to adapt to a new front end, which is why standardizing the 

front end as part of MAC implementation could minimize future 

disruption for providers and billers. 

Data center 

consolidation 

CMS plans to consolidate its current 

14 operational data centers that 

conduct claims processing functions 

into 2 data centers. 

CMS had initially planned to begin consolidating the data centers in 

fiscal year 2006 to overlap with MAC implementation, but in May 

2005, the agency postponed the initiative for about 2 months, due to 

the extent of public comments received on the draft request for 

proposals for data center contracts. Future consolidation of data 

centers will affect MACs because they are required to work with their 

respective data centers to maintain electronic information. As a 

result, delays or difficulties in transferring workload to the chosen 

data centers could increase the risks of claims payment problems 

during MAC transitions. 

BCCs CMS plans to establish two to three 

BCC contracts, which will be 

responsible for handling beneficiaries’ 

telephone and written inquiries. 

BCC implementation overlaps with MAC implementation. CMS plans 

to award the first BCC contract in the summer of 2006 and transfer 

the workload in the summer of 2007. The second BCC contract will 

be awarded in fall 2007, and the workload will be transferred in 

2008. While BCCs will assist beneficiaries by answering claimsrelated inquires, they will need to coordinate with MACs because 

MACs will be responsible for answering more complex questions. 

Healthcare Integrated 

General Ledger 

Accounting System 

(HIGLAS) 

HIGLAS is a major CMS initiative to 

modernize Medicare’s accounting and 

financial management systems. CMS’s 

current accounting systems are 

fragmented and overlapping and will 

be replaced with HIGLAS—a single, 

integrated financial accounting system.

HIGLAS implementation overlaps with MAC implementation. 

HIGLAS is expected to be fully operational in 2007. In the future, all 

MACs will be required to use HIGLAS. However, several current 

contractors have begun to use HIGLAS, and other fiscal 

intermediaries and carriers will have begun to use HIGLAS before 

MAC competitions get under way. For jurisdictions where transitions 

to HIGLAS are not complete, CMS will need to coordinate its 

scheduling of MAC and HIGLAS implementation because CMS 

wants all MACs to use HIGLAS as their financial accounting system.

PSCs PSCs focus on program safeguard 

activities, such as the review of 

provider activities, including medical, 

utilization, and fraud reviews; cost 

report audits; Medicare secondary 

payer determinations; and provider 

and beneficiary education. 

PSC transitions overlap with MAC implementation. The medical 

review and benefit integrity work will transfer from three DME 

regions to PSCs simultaneously with the transition to DME MACs. 

The work conducted under three PSC medical review contracts for 

A/B claims will transfer to the A/B MACs in the affected jurisdictions 

at the same time that the A/B MACs assume their other contractual 

responsibilities. 

Recovery Audit 

Contractor initiative 

This initiative is a demonstration 

initiative required by the MMA. It 

includes two Medicare secondary 

payer recovery audit contractors and 

three claims review recovery audit 

contractors. 

The implementation of this initiative overlaps with MAC 

implementation. This demonstration will run through mid-2008 and 

will affect California, New York, and Florida. MACs will not perform 

any postpay medical reviews for prior fiscal years for claims paid to 

providers in these states, but must coordinate with the contractors 

tasked with this assignment. MACs processing claims for these 

three states must also complete some additional administrative work 

related to debt collection. 

Source: GAO analysis of CMS documents. 
Page 24 GAO-05-873 Medicare Contracting Reform 

HIGLAS, in particular, provides an example of why effective integration is 

essential. Most outgoing contractors will not be utilizing HIGLAS at the 

time their workloads are transferred to MACs. Therefore, CMS will have to 

coordinate HIGLAS transition activities, including data preparation and 

data conversion testing, between the MACs that will be using HIGLAS and 

the outgoing contractors that have been using the existing financial 

management systems. Given that the HIGLAS implementation strategy 

calls for “just in time” data conversion to HIGLAS format by outgoing 

contractors at the time the work is transferred to the MACs, problems or 

delays in this conversion could delay MAC transitions. Therefore, the 

scheduling for HIGLAS will have to be carefully managed to allow 

sufficient time for the data conversion. 

Although CMS has begun initial efforts to integrate the planning and 

scheduling of several major initiatives that will affect contractors, an 

agency official told us that there are no planning documents to provide a 

detailed integration framework and that he did not know when such 

documents would be available.38 He said that CMS is attempting to 

determine the appropriate sequencing and interdependencies of the 

multiple initiatives occurring in the agency. To focus its sequencing 

efforts, CMS has designated the contracting reform implementation 

schedule as the anchor around which it will schedule the implementation 

of HIGLAS and other critical initiatives. For example, since CMS plans call 

for MACs moving to HIGLAS either before or with MAC claims workload 

transitions, the MAC implementation plan will be pivotal in determining 

when the HIGLAS transitions will be accomplished. CMS is also examining 

each project’s resource requirements to help ensure that the agency is able 

to fund the initiatives in the sequence planned. 

Delays in the implementation of MAC-related initiatives could potentially 

have a significant impact on the timing, scope of work, costs, and ultimate 

success of MAC implementation. For example, CMS has already begun to 

experience schedule slippage for its initiative to consolidate the 

contractors’ data centers. These data centers, which are provided by 

current carriers and fiscal intermediaries, conduct the physical processing 

of Medicare claims and as a result, play a crucial role in efficient and 

accurate claims administration. The agency had intended to award 

 38The official told us that the agency’s integration planning efforts had been delayed until 

the agency’s Report to Congress was issued in February 2005, in part because of the 

concern that procurement-sensitive information might be prematurely made public. 
Page 25 GAO-05-873 Medicare Contracting Reform 

contracts for four data centers that would consolidate the work of 14 

current centers before awarding the DME MAC contracts, which are 

anticipated to be awarded in December 2005. However, it suspended the 

request for proposals on May 3, 2005, because it was unable to consider 

the large number of comments that were received on its draft request. It 

reissued its solicitation on June 27, 2005, for two, instead of four, data 

centers. Delays or other problems in implementing the consolidation of its 

data centers could affect the efficiency and effectiveness of MACs’ claims 

processing transitions. CMS’s Report to Congress stated that having the 

new data centers would be critical to achieving the greatest efficiency 

from the MAC transitions, in part because some of the information 

services and support to be provided by MACs would depend on the 

modernized platform.39 Currently, CMS expects that one of the new DME 

MACs will be managing a data center for all of the DME MACs as a 

stopgap measure and plans to award the contract for the two data centers 

in February 2006. Implementation of the data centers is planned to 

coincide with implementation of the first A/B MAC selected. 

The data center consolidation effort faces some of the same complexities 

that might occur during the transition of the claims processing contracts. 

If claims administration contractors operating data centers opt to leave the 

program before the conclusion of their contracts, CMS will have to find 

other data center contractors to temporarily take over that workload. 

Furthermore, because the data center consolidation is planned to occur 

during the MAC transition period, the two data center contractors will 

have to support claims administration contractors moving in or out of the 

program, while also integrating some of the prior data center contract 

work into their new data center responsibilities. CMS generally envisioned 

multiple data center transitions overlapping, but the schedule for data 

center consolidation is uncertain. CMS has not indicated how it intends to 

handle the risks associated with moving data center work at the same time 

claims processing workload is being transferred to MACs. 

 39Department of Health and Human Services, Report to Congress, III-7 and III-8. 
Page 26 GAO-05-873 Medicare Contracting Reform 

CMS’s plan includes estimated costs and savings for Medicare as a result 

of contracting reform, but the estimates are too uncertain to provide a 

reasonable basis for making implementation decisions. Because CMS has 

never undertaken an effort comparable to full-scale contracting reform, 

the plan’s cost and savings projections were based on questionable 

evidence and assumptions about a contracting environment that differs 

considerably from its current one. As a result, the costs to implement 

contracting reform and the savings generated from it could be significantly 

greater or less than CMS has anticipated. 

In its plan, CMS estimated that the costs to implement contracting reform 

from 2006 to 2011 would total about $666 million.40 The plan’s cost 

estimate is higher than indicated in the Report to Congress, which 

included only the fiscal year 2006 budget request of $58.8 million to 

support a single year of contracting reform implementation costs. CMS 

opted not to include its estimates for funds that would likely be requested 

in its budgets for fiscal years 2007 through 2011. The Report to Congress

indicated that contracting reform would require “substantial additional 

investment in subsequent years.”41 The costs CMS anticipates incurring 

each year are shown in figure 3. 

 40To be able to negotiate yearly costs with the MACs prior to the beginning of the contract 

period, CMS plans to request adjustments to its budget authority to change the period of 

performance for MACs to coincide with the calendar year, instead of the current fiscal year 

basis. Changing the period of performance will not increase or decrease overall or net 

administrative outlays and is not included in the administrative cost estimate. 

41Department of Health and Human Services, Report to Congress, IV-3. 

Plan’s Cost and 

Savings Estimates Do 

Not Provide a 

Reasonable Basis for 

Decision Making 

Cost Estimates Depend on 

Uncertain Outcomes 
Page 27 GAO-05-873 Medicare Contracting Reform 

Figure 3: Estimated Costs of Medicare Contracting Reform, Fiscal Years 2006-2011, 

as of February 2005 

Note: The costs for each year are adjusted for inflation, using 2004 as the base year. 

The estimated $666 million in costs is divided into four categories, as 

noted in table 3.42 The largest cost component is for the termination and 

transition of the current Medicare contractors, which CMS has estimated 

at $331.5 million. When a Medicare contract is terminated, contractors can 

have costs for items such as lease termination, equipment depreciation, 

and severance pay for contractors’ employees. The current Medicare 

contracts may require CMS to pay many of these termination costs when 

contractors leave the Medicare program. Similarly, when a Medicare 

contract workload is transferred from an outgoing contractor to another 

one, transition costs are incurred. Such transition costs include expenses 

related to transferring Medicare records and updating records related to 

 42The MMA mandates that contracting reform be completed before October 1, 2011, the 

first day of fiscal year 2012. Although all of the transitions to MACs are planned to be 

completed by July 2009, some of the costs—such as IT enhancement and oversight—will 

be incurred through fiscal year 2011. 

Dollars in millions

Source: GAO analysis of CMS cost estimates.

0

50

100

150

200

250

2006 2007 2008 2009 2010 2011

Fiscal year

$169.1

$213.3

$60.8

$81.4 $82.9

$58.8
Page 28 GAO-05-873 Medicare Contracting Reform 

Medicare benefit payments, including overpayments and other accounts 

receivable, so they are ready for the incoming contractor to use. 

Table 3: CMS’s Estimates of Administrative Costs for Medicare Contracting Reform, 

Fiscal Years 2006-2011, as of February 2005 

Dollars in millions 

Type of cost Estimated cost 

Termination and transition costs $331.5

Performance incentives 190.6

IT and other costsa 132.5

Provider satisfaction surveys 11.7

Total $666.3

Source: GAO analysis of CMS cost estimates. 

a

CMS informed us on July 29, 2005, that it had updated this cost estimate, but the updated estimate 

was not available to be included in this report. 

Although CMS’s estimate for termination and transition costs is based on 

cost data from prior years, it is impossible to predict with certainty the 

termination or transition costs that will be incurred through implementing 

contracting reform. CMS’s estimate for termination and transition costs is 

based on the agency’s experience with both types of costs from 1995 to 

2001. The estimate assumes that current contractors will win the majority 

of the MAC contracts and retain about 60 percent of their current 

workload. However, CMS officials do not know how many of the existing 

contractors will win MAC contracts for particular jurisdictions, so this 

assumption is speculative. Additionally, some of CMS’s prior contractor 

transitions were “turnkey” operations, in which an incoming contractor 

simply assumed the prior contractor’s business arrangement and staff 

without needing to incur some of the usual start-up costs, such as 

equipment purchases. Likewise, in turnkey transitions, CMS did not have 

to cover severance pay, because the outgoing contractor’s existing staff 

could be employed by the incoming contractor. As a result, the prior 

transitions may have cost less than the transitions that will occur during 

contracting reform because CMS is not requiring MACs to retain outgoing 

contractors’ work sites or staff. 

Contracting reform will allow CMS to pay performance incentives that are 

designed to reward MACs with exceptional performance. However, it is 

impossible to know the amount of incentive fees contractors will earn in 

the full-scale MAC environment until the contracts are awarded and CMS 

has more experience with contractor performance. These performance 
Page 29 GAO-05-873 Medicare Contracting Reform 

incentives are projected to cost 5.5 percent of the total estimated costs of 

the MAC contracts, or $190.6 million for fiscal years 2006 through 2011. 

CMS based this estimate on its prior experience in managing contractor 

incentive programs on a much smaller scale. 

Several IT modernization projects designed to support MACs by 

facilitating electronic claims processing are included in CMS’s estimate of 

contracting reform costs.43 These IT project costs include CMS’s planned 

consolidation of its current data centers. However, delays in the data 

consolidation initiative may affect the amount of these costs.44 The IT 

modernization costs also include plans to standardize the front end, or the 

way that electronic claims enter the DME MACs’ automated processing 

systems. CMS did not include similar costs for A/B MACs, because the 

agency had not made a decision to standardize the A/B MAC front ends at 

the time these estimates were made.45 CMS’s $132.5 million estimate for IT 

and other costs included $78.7 million in IT costs needed to support 

Medicare contracting reform, primarily the cost of data center 

consolidations.46

The final type of costs CMS estimated was for surveys of providers to 

assess their opinions about MAC performance. The MMA required that 

MAC performance be assessed in part based on provider satisfaction. CMS 

plans to begin surveying providers to measure their satisfaction with their 

MAC’s performance after MACs begin operating. The cost estimate for 

these surveys is $11.7 million and was based on an internal CMS analysis. 

 43CMS is simultaneously implementing other IT-related initiatives, which are not considered 

to be part of contracting reform and are not included in the contracting reform costs. 

44CMS had planned to begin consolidating the data centers in fiscal year 2006, so this cost is 

reflected in its estimated costs for contracting reform. However, in May 2005, the data 

center consolidation initiative was postponed for about 2 months. CMS anticipates 

awarding the data center contracts in February 2006, about 5 months later than originally 

planned. 

45CMS currently plans to consolidate the A/B MACs’ front ends, to coincide with the 

beginning of the cycle one A/B MAC implementation. The agency is developing 

requirements for the A/B MAC standardized front end. It plans to award a contract in early 

fiscal 2007 and be ready to implement the standardized front end by the fall of 2007. 

46In its technical comments on a draft of this report, CMS stated that it has updated its IT 

cost estimate to reflect the adjustments to the data center consolidation initiative and to 

include the standard front end initiative. This updated estimate is somewhat higher than 

CMS’s original estimate and was not available as of July 29, 2005. CMS plans to make its 

estimate final and public through the official budget process. 
Page 30 GAO-05-873 Medicare Contracting Reform 

A potential operational cost not part of CMS’s implementation estimate is 

funding for MAC contract modifications. Under the current contract 

arrangements, CMS is able to develop new tasks for contractors to 

complete. The agency may pay more for these tasks to be completed, 

regardless of the initial requirements set for the year, or may direct the 

contractor to do the work within its existing budget, if CMS’s review of the 

contractor’s spending pattern indicates that new funding is not needed to 

complete the new tasks. In the MAC environment, unless they become part 

of the statement of work, CMS will not be able to add new tasks to the 

MAC contracts without negotiating payment for them. Because 

contractors will submit proposals based on the tasks described in the 

original statement of work, work required after the contract is awarded 

could require CMS to negotiate with MACs. This could be the case, for 

example, if new legislation requires CMS to implement a major program 

change that was not anticipated in the established MAC contract costs. For 

example, in 2001, we reported that the Department of Defense (DOD) was 

not including contract adjustments when budgeting for its contracts with 

the insurers delivering health care to DOD employees.47 We warned that 

this approach could become quite costly, because in fiscal year 2001, it led 

to a $500 million shortfall in the DOD budget. When an agency is 

negotiating changes with an existing contractor, the competitive aspect of 

the negotiations is lost. As a result, the federal government may not always 

receive the best price. If CMS has to negotiate new tasks with the MACs 

for greater payment, contracting costs could rise above the agency’s 

estimates. To address this concern, CMS has instructed companies 

interested in becoming DME MACs to assume a level of effort for a 

specific number of changes. As long as the extra work to implement 

program changes does not exceed the level of effort in the statement of 

work, the Medicare program would not incur additional operational 

expenses. 

Based on estimates generated both internally and by a consultant, CMS 

expects that contracting reform will generate significant savings to 

Medicare’s administrative budget and to the Medicare trust funds. While it 

is rational to assume some level of savings, these estimates are highly 

uncertain because they project the outcome of contracting processes and 

protocols that CMS has not used before. Furthermore, the consultant’s 

 47GAO, Defense Health Care: Continued Management Focus Key to Settling TRICARE 

Change Orders Quickly, GAO-01-513 (Washington, D.C.: Apr. 30, 2001). 

Savings Estimates Depend 

on Contractor 

Performance in Reducing 

Improper Payments 
Page 31 GAO-05-873 Medicare Contracting Reform 

estimates relied on questionable evidence and were not reviewed by CMS 

program staff with the expertise to confirm whether the assumptions upon 

which they are based are realistic. 

CMS’s estimate of savings from 2006 to 2011 for the administrative budget 

totals $459.5 million, as shown in table 4. These savings are estimated to 

come from two sources. First, CMS anticipates that the competed MAC 

contracts will cost less than the current agreements and encourage more 

innovative efforts among contractors, which will allow them to operate at 

lower cost. CMS estimates that the introduction of competition will lower 

the contractor budget for awarded MAC contracts by 6 percent in the first 

year and 12 percent in each succeeding year. Second, CMS anticipates that 

the consolidation of its 14 Medicare data centers will lower operating 

costs.48 Both of the savings estimates shown in table 4 will be highly 

dependent upon contractor performance and the outcome of the 

competitive process. For instance, any savings CMS incurs from 

competing the MAC contracts will substantially depend on their final 

costs. 

Table 4: CMS’s Estimates of Administrative Savings from Medicare Contracting 

Reform, Fiscal Years 2006-2011, as of February 2005 

Dollars in millions 

Source of savings Estimated savings 

Competition for MAC contracts $376.3

Consolidation of Medicare data centersa 83.2

Total $459.5

Source: GAO analysis of CMS savings estimates. 

a

CMS informed us on July 29, 2005, that it had updated this savings estimate and it is now higher, but 

the updated estimate was not available to be included in this report. 

CMS’s annual estimates of savings for the administrative budget increase 

significantly from fiscal year 2006 to fiscal year 2011. As shown in figure 4, 

these estimated savings would begin to outpace CMS’s estimated 

 48In its technical comments on a draft of this report, CMS stated that it has updated its IT 

savings estimate to reflect the adjustments to the data center consolidation initiative and to 

include the standard front end initiative. This updated estimate is somewhat higher than 

CMS’s original estimate and was not available as of July 29, 2005. CMS plans to make its 

estimate final and public through the official budget process. 
Page 32 GAO-05-873 Medicare Contracting Reform 

administrative costs in 2009, and by 2011, they would exceed estimated 

costs by $100 million. 

Figure 4: CMS’s Annual Estimates of Administrative Costs and Savings from 

Medicare Contracting Reform, Fiscal Years 2006-2011, as of February 2005 

CMS anticipates that the bulk of the savings from Medicare contracting 

reform will occur through funds it can avoid spending from the Medicare 

trust funds, but the basis for this estimate is uncertain. CMS’s consultant 

estimated the total projected savings to the trust funds through fiscal year 

2011 to be over $1.4 billion.49 The savings to the trust funds are expected to 

come from the three main sources shown in table 5. The consultant who 

created these savings estimates explained that while it is logical to assume 

some level of savings to the Medicare program, there are “enormous 

uncertainties” at this stage of the implementation process, which make it 

 49The Report to Congress noted an estimated savings of $900 million to the Medicare trust 

funds by the end of fiscal year 2010. 
Page 33 GAO-05-873 Medicare Contracting Reform 

difficult to project the savings with much accuracy. Ultimately, each of 

these sources of savings assumes that contracting reform will lead to a 

lower rate of improperly paid claims. Further, while the estimate for each 

of the three sources is based on a different methodology and formula, the 

basis for each is similar enough that the savings accrued through each may 

overlap, resulting in possible double counting. Therefore, whether 

contracting reform will actually achieve the $1.4 billion savings is highly 

uncertain. 

Table 5: CMS’s Consultant’s Estimates of Savings to the Trust Funds from 

Medicare Contracting Reform, Fiscal Years 2006-2011 

Dollars in millions 

Source of savings 

Fiscal year 2006-

2010 estimated 

savings 

Fiscal year 2011 

estimated 

savings 

Total fiscal years 

2006-2011 

estimated 

savings 

Combining Medicare 

contracts for Part A and 

Part B, resulting in more 

comprehensive medical 

reviews of claims $350 $220 $570

Higher claims denial rates, 

because MACs will perform 

more effective medical 

reviews, to remain 

competitivea 160 100 $260

Greater incentive for MACs 

to operate efficiently and 

adopt industry innovations in 

automated review of claims 

to remain competitive 390 260 $650

Total estimated savings $900 $580 $1,480

Source: GAO analysis of CMS’s consultant’s savings estimates. 

Note: The Report to Congress stated savings for 2006 through 2010, but the consultant’s complete 

estimates were calculated through 2011. 

a

The consultant assumed that a portion of claims denial rates can be associated with contractor 

performance and that contractors would have an incentive for higher performance in the new 

competitive contracting environment. As a result, the savings estimate includes projected savings 

from higher claims denial rates. 

The consultant’s estimate anticipates that MACs could detect a larger 

amount of improper payments because they will be examining both Part A 

and Part B claims, but there is little evidence to support the amount of 

savings assumed. Currently, Part A and Part B medical reviews are 

generally conducted by different contractors, which lessens their focus on 
Page 34 GAO-05-873 Medicare Contracting Reform 

problematic billing that spans both parts. The consultant estimated that 

having MACs conduct joint Part A and Part B medical reviews would 

lower the amount of improperly paid Medicare claims by 0.08 percent. 

However, CMS’s senior medical review staff indicated that they had no 

prior knowledge of this actuarial estimate until we showed it to them. The 

staff told us that there is no evidence to realistically estimate the amount 

of savings that may result from consolidating the medical review 

responsibility for both parts. Furthermore, according to CMS staff, the 

greatest savings would likely come through computerizing medical 

reviews to automatically examine and compare Part A and Part B claims 

before they are paid. However, this capability is not currently possible, 

because Part A and Part B claims are processed on different payment 

systems, and developing a combined Part A and Part B claims processing 

system that could automatically compare Part A and Part B claims before 

payment would take years to complete.50

Potential savings from improved fraud detection are also impossible to 

quantify, based on current information. The PSCs currently conduct fraud 

detection activities for both Part A and Part B in 40 states, the District of 

Columbia, Puerto Rico, and the Virgin Islands. As CMS implements 

contracting reform, the jurisdictions in which PSCs will conduct fraud 

detection for both parts may change. While CMS considers having a single 

PSC handling both Part A and Part B fraud detection a way to make its 

contractors more efficient, a senior official acknowledged that the agency 

had no evidence with which to determine whether having the PSCs 

conduct combined fraud reviews has been more effective in detecting 

fraud than having these reviews conducted by separate contractors for 

Part A and Part B. 

The consultant’s estimate also anticipated that MACs will be able to pay 

claims more accurately than the current Medicare contractors, due to 

more effective medical review of claims, thus increasing claims denial 

rates. While noting that some elements of claim denials are not associated 

with contractor performance, the consultant assumed that better 

contractor performance could be equated with increased claims denial 

rates. The calculation for this assumption was based on the projection that 

 50CMS’s goal is to have a unified claims processing system in 2011, but the consultant’s 

estimate assumes that savings will be generated from combined medical reviews much 

sooner. 
Page 35 GAO-05-873 Medicare Contracting Reform 

contractor denial rates would increase51 and that half of these increased 

denials would lead to program savings. However, CMS program staff told 

us that they do not consider denial rates in their evaluation of contractor 

performance but instead evaluate claims administration contractors’ rates 

of paying claims properly. The CMS program staff told us that they were 

not sure of the basis for the consultant’s calculations, and one senior 

official stated that it was unclear whether more denials would occur with 

new MACs. 

Finally, the consultant projected that if CMS awards contracts 

competitively, contractors will have an incentive to operate more 

efficiently and to adopt the leading industry innovations that improve 

performance. The consultant expected these efforts to result in lower 

levels of improperly paid claims. This projection was based on a 1995 GAO 

report that estimated that if Medicare contractors adopted the technology 

and capabilities used by private insurers to detect improper payments 

through automated claims reviews, Medicare payments for physicians’ 

services and supplies could be reduced by 1.8 percent. Since that report 

was issued, CMS has made additional efforts to reduce improper 

payments. In addition, CMS was not certain that GAO’s assumed savings 

were achievable. Recognizing this, the consultant reduced this portion of 

the savings estimate to a 0.09 percent reduction in Medicare fee-for-service 

payments. In the consultant’s opinion, this adjusted for current error rates 

and CMS’s opinion that the initial 1995 GAO estimate was too high. 

However, when we followed up with CMS in April 2005, a senior official 

stated that while it would be realistic to expect some level of savings in the 

new competitive contracting environment, she did not know how the 

amount could be accurately quantified. 

The millions of dollars in savings that CMS envisions achieving through 

contracting reform in the early years of implementation are largely based 

on questionable estimates. However, these anticipated savings have been 

the driving force behind the agency’s decision to accelerate its schedule 

for contracting with MACs. The agency has opted to transfer the entire 

current contractor workload to MACs 2 years ahead of the MMA time 

frame, in the hope of garnering savings to Medicare as quickly as possible. 

 51The consultant calculated this expected increase in denials by dividing all current carriers 

and fiscal intermediaries into quartiles, based on their current claims denial rate. Then, the 

consultant assumed that the denial rate for the bottom half of contractors in each quartile 

could be expected to increase to the median denial rate for that quartile. 

Conclusions 
Page 36 GAO-05-873 Medicare Contracting Reform 

The accelerated schedule raises concerns for a number of reasons. First, 

CMS has never before undertaken a project of this scope and magnitude—

one that affects more than 35 million beneficiaries and 1 million health 

care providers. If transitions do not run smoothly, operational disruptions 

could lead to delayed payments to providers and increased improper 

payments by contractors. With Medicare net improper payments estimated 

to be almost $20 billion annually, any potential increase is cause for 

concern. Second, while CMS’s plan provides detailed information in some 

areas, other critical areas of the agency’s plan are still being developed. 

Although the agency is employing a start-up cycle that will provide an 

opportunity to gain valuable FAR contracting experience, the ambitious 

schedule for the subsequent two cycles leaves little time for the agency to 

learn from the experience and resolve problems that might arise. Finally, 

attempting complex transitions of almost all of the claims administration 

workload in less than 2 years, in conjunction with changes in the data 

centers and financial management systems, significantly increases the risk 

that providers’ claims will be paid improperly or not be paid at all. As CMS 

undertakes this important challenge, it is critical that the agency proceed 

at a prudent pace in order to apply lessons learned from early 

implementation experiences to future contracting cycles. 

To better ensure the effective implementation of Medicare contracting 

reform, we recommend that CMS extend its implementation schedule to 

complete its workload transitions by October 2011, so that the agency can 

be better prepared to manage this initiative. 

In its written comments on a draft of this report, CMS noted that 

implementing Medicare contracting reform would enable the agency to 

improve the efficiency of the services delivered to Medicare beneficiaries 

and providers. CMS agreed that implementing contracting reform was a 

significant undertaking, but did not concur with our recommendation to 

extend its implementation schedule. CMS stated that by fully 

implementing MAC contracting 2 years earlier than required, it would 

achieve savings to the trust funds and operational efficiencies more 

quickly. In addition, CMS stated that extending the transition schedule 

would increase the risk of current contractors leaving the program before 

MAC contracts are awarded and eliminate the agency’s flexibility to adjust 

its schedule in response to unforeseen changes and still meet the 

mandated implementation date. We believe that by accelerating its 

implementation schedule to transfer the entire Medicare claims processing 

workload to MACs by July 2009, CMS is assuming an unnecessary risk. 

Recommendation for 

Executive Action 

Agency Comments 

and Our Evaluation 
Page 37 GAO-05-873 Medicare Contracting Reform 

While it is true that lengthening the implementation schedule could 

increase the possibility that one or more contractors might withdraw from 

Medicare prematurely, we see greater risk in attempting complex 

transitions without sufficient time for adequate planning and midcourse 

adjustments. When the considerable risk associated with accelerated 

implementation is considered in light of uncertain savings, a more prudent 

approach would be to use the time frame established in the MMA to fully 

develop implementation plans, evaluate lessons learned, and apply them to 

future acquisition cycles. In recommending that CMS extend its 

implementation schedule, we assume that the agency would allow 

sufficient time at the end of the final transition to adjust for problems and 

unforeseen circumstances and still meet the mandated implementation 

date of October 1, 2011. CMS agreed that it would need sufficient time for 

this kind of adjustment and has not developed plans for all contingencies. 

For example, CMS responded to a relatively short schedule slippage for its 

enterprise data center implementation by including in contract language 

the option for one of the DME MACs to run a data center on an interim 

basis. However, CMS will still have to develop the details of the contract 

and choose the most appropriate company to perform this work. This is 

one example of the many adjustments that will undoubtedly have to be 

made before all of the transitions are finished. 

CMS also stated that it disagreed with our conclusion about its readiness 

to conduct transitions to MACs. Our report did not conclude that CMS 

would not be ready to conduct transitions according to its proposed 

schedule. However, having a fully developed plan in place would assist 

CMS in conducting these transitions as smoothly as possible. As we stated 

in the report, CMS has recognized that it needs to develop certain critical 

areas in its plan and is taking steps to address them. For example, it is 

clear from its comments that the agency is very concerned about the risks 

involved in the complex transitions of claims workload and is planning 

mitigation actions—such as hiring a contractor to help manage the effort. 

CMS’s comments provide additional information on other steps that it is 

taking to reduce or mitigate significant risks, coordinate the schedule for 

MAC implementation with other agency fee-for-service initiatives, develop 

detailed integrated implementation schedules, and address other GAO 

concerns. Nevertheless, the additional information provided by the agency 

generally reinforces our point that the agency’s implementation plan, 

which was due to the Congress and to us in October 2004, is still a work in 

progress. For example, as we pointed out in the report, CMS’s comments 

indicate that it has not completed its integrated implementation schedule 

and that it is leaving details concerning contractor coordination to MACs 

and other contractors. In addition, CMS has not finalized important 
Page 38 GAO-05-873 Medicare Contracting Reform 

implementation information, such as key performance measures or its 

MAC evaluation strategy and evaluation criteria for A/B MACs, or 

completed its proposal for a new organizational structure to oversee and 

manage the MACs. While CMS does have a risk management process, its 

current identification of risks and mitigation strategies lacks specificity 

and the agency has not completed a comprehensive risk mitigation plan. 

CMS also disagreed with our assessment of the quality of its cost and 

savings estimates. CMS said that its estimates of implementation costs 

were well informed by program experience and were the best available 

predictions of future costs. As we reported, CMS used information from 

previous transitions of contractor workload to help estimate its 

administrative costs. This grounded the estimate in the agency’s past 

experience. However, CMS had to make assumptions about the amount of 

claims workload to be transferred and transition costs to be paid, which 

might turn out to be inaccurate. Unlike previous workload transitions, 

CMS is not requiring MACs to maintain staff and facilities from the former 

contractors. This should allow the MACs to gain efficiencies in operations, 

but CMS may end up paying more in severance pay or for start-up costs 

than estimated. Similarly, CMS’s experience informed its estimate of 

administrative savings, but the estimate depends on assumptions about the 

efficiencies MACs will achieve that are difficult to predict with certainty. 

While CMS’s assumptions about administrative costs and savings might 

appear reasonable, if the assumptions are inaccurate, the estimates will 

not reflect the real costs and savings over time. In addition, CMS indicated 

that because the costs of contract modifications were for operations after 

the transfer of claims workload, they should not be included in the 

implementation cost estimate. As CMS noted, its DME statement of work 

includes a provision for implementing a specific number of programmatic 

changes after the contract is awarded, to reduce the possibility that CMS 

would have to negotiate contract modifications that incurred additional 

costs. We modified our draft to clarify our discussion of the potential costs 

of contract modifications. 

Our greatest concern relates to CMS’s consultant’s estimate of savings to 

the trust funds. As we indicated in our report, the estimate of savings to 

the trust funds is generally based on little evidence and its underlying 

assumptions may not be reasonable, yet it played a significant role in 

CMS’s decision to compress its implementation schedule. While CMS 

suggested that the savings estimate is conservative, the consultant who 

generated this estimate indicated that there were “enormous 

uncertainties” in estimating savings at this point in the implementation 

process. In its comments, CMS noted that our report highlighted the lack 
Page 39 GAO-05-873 Medicare Contracting Reform 

of direct evidence to support the amount of estimated savings. In 

response, CMS stated that the savings estimate was the best available, 

given that the changes proposed are unprecedented. CMS indicated that 

each of the three elements of the estimate of savings to the trust funds 

addresses a different aspect of the claims process. However, each of the 

three elements actually addresses the same aspect—MACs improving their 

medical and other claims review to increase denials of improper claims. 

CMS’s comments indicate that its technical staff agree that the 

assumptions underlying this estimate are reasonable. We discussed these 

estimates with CMS officials most knowledgeable about medical and other 

claims review and they did not agree that the assumptions were based on 

evidence and were reasonable. Further, because each element in the 

savings estimate assumes improvement in claims review and improper 

claims denial, we think it is likely that CMS is double counting its potential 

savings. For example, the consultant estimated that the MACs would have 

higher claims denial rates, but also separately estimated savings from 

other aspects of claims review that—if conducted more efficiently—would 

lead back to higher claims denial rates. 

We are sending copies of this report to the Secretary of HHS, the 

Administrator of CMS, appropriate congressional committees, and other 

interested parties. We will also make copies available to others upon 

request. This report is also available at no charge on GAO’s Web site at 

http://www.gao.gov. 

If you or your staff have any questions about this report, please contact me 

at (312) 220-7600 or aronovitzl@gao.gov. Contact points for our Offices of 

Congressional Relations and Public Affairs may be found on the last page 

of this report. GAO staff who made major contributions to this report are 

Sheila K. Avruch, Assistant Director; Sandra D. Gove; Joy L. Kraybill; 

Kenneth Patton; and Craig Winslow. 

Leslie G. Aronovitz 

Director, Health Care 
Appendix I: Documents CMS Officials Have 

Identified as Constituting the Agency’s Plan 

for Implementing Contracting Reform 

Page 40 GAO-05-873 Medicare Contracting Reform 

The Centers for Medicare & Medicaid Services (CMS) has designated its 

report, entitled Report to Congress: Medicare Contracting Reform: A 

Blueprint for a Better Medicare, and the documents underlying this report 

as its plan for implementing Medicare fee-for-service contracting reform. 

Documents include the following:1

• maps of jurisdictions for A/B Medicare administrative contractors (MAC), 

durable medical equipment (DME) MACs, and home health and hospice 

MACs; 

• CMS’s estimates for savings to the Medicare trust funds, administrative 

costs and savings, provider and beneficiary savings, and supporting 

narrative and information; 

• MAC transition timelines; 

• DME and A/B MAC project schedules; 

• requests for information for A/B MACs and DME MACs, as published on 

FedBizOpps, including concepts of operations, draft statements of work, 

draft performance standards, and workload implementation handbooks; 

• DME MAC request for proposals and related documents, including the 

final statement of work, as published on FedBizOpps; 

• materials on beneficiary and provider customer service; 

• materials concerning work on reengineering Medicare fee-for-service 

contract management processes; 

• BearingPoint, Inc., Health Services Research & Management Group, 

Contractor Evaluation Improvement Project (CEIP) Strategy Paper, Final 

Report (McLean, Va.: Mar. 18, 2005); 

• Centers for Medicare & Medicaid Services, Medicare Contracting Reform: 

Acquisition Strategy for Medicare Administrative Contractors, draft 

(Baltimore, Md.: Feb. 28, 2005); 

• Centers for Medicare & Medicaid Services, MAC Implementation Project, 

Risk and Issue Management Process, Schematic (Baltimore, Md.: Jan. 24, 

2005); 

• Centers for Medicare & Medicaid Service, MCMG Risk Management Plan 

for the Medicare Administrative Contractor Implementation Project, draft 

(Baltimore, Md.: Dec. 7, 2004); 

• Centers for Medicare & Medicaid Services, Medicare Contracting Reform, 

Communication Plan (Baltimore, Md.: Nov. 10, 2004); 

• LMI Government Consulting, Medicare FFS Contracting Reform: Level 

Five Work Breakdown Structure and Master Project Plan (McLean, Va.: 

October 2004); 

 1

Where documents were prepared by support services contractors and contain 

recommendations, CMS may have chosen not to adopt all recommendations or not to 

adopt them in full. 

Appendix I: Documents CMS Officials Have 

Identified as Constituting the Agency’s Plan 

for Implementing Contracting Reform 
Appendix I: Documents CMS Officials Have 

Identified as Constituting the Agency’s Plan 

for Implementing Contracting Reform 

Page 41 GAO-05-873 Medicare Contracting Reform 

• LMI Government Consulting, Medicare Fee-for-Service Contracting 

Reform: Assessment of Planning Needs (McLean, Va.: August 2004); 

• Centers for Medicare & Medicaid Services, Report to the Medicare 

Contractor Oversight Board: Integration Issues in Modernizing Medicare, 

Final Report, submitted by CMS’s fee-for-service project integration team 

(Baltimore, Md.: July 2, 2004), and related briefing documents; and 

• Logistics Management Institute, Sensitive Assessment Center, Medicare 

Fee-for-Service Contracting Reform: Key Challenges (McLean, Va.: 

December 2003). 

Also see documents found at the following Web sites: 

http://www.cms.hhs.gov/medicarereform/contractingreform/ and 

http://www.cms.hhs.gov/medicarereform/contractingreform/whats_new/ 
Appendix II: Documents Used by GAO to 

Develop Criteria for Reviewing CMS’s Plan 

for Contracting Reform 

Page 42 GAO-05-873 Medicare Contracting Reform 

Selected provisions of section 1874A of the Social Security Act, added by 

section 911 of the Medicare Prescription Drug, Improvement, and 

Modernization Act of 2003 (MMA), Pub. L. No. 108-173, 117 Stat. 2066, 

2378—2386 (to be codified at 42 U.S.C. § 1395kk-1). 

Centers for Medicare & Medicaid Services, Contractor Reform—Update, 

September 22, 2004. 

Medicare fee-for-service contractor (unnamed), Contractor Suggestions 

Regarding Implementation of Medicare Administrative Contracts. 

Comments submitted to CMS by a current Medicare fee-for-service 

contractor. December 22, 2004. 

GAO, Business Process Reengineering Assessment Guide, GAO/AIMD10.1.15 (Washington, D.C.: May 1997). 

GAO, An Evaluation Framework for Improving the Procurement Function: 

A Guide for Assessing Strengths and Weaknesses of Federal Agencies’ 

Procurement (Exposure Draft), (Washington, D.C.: October 2003). 

LMI Government Consulting, Medicare Fee-for-Service Contracting 

Reform: Assessment of Planning Needs (McLean, Va.: August 2004). 

Appendix II: Documents Used by GAO to 

Develop Criteria for Reviewing CMS’s Plan 

for Contracting Reform 
Appendix III: GAO’s Criteria for Evaluating 

CMS’s Contracting Reform Plan 

Page 43 GAO-05-873 Medicare Contracting Reform 

Element Subelement Criteria 

Contracting reform planning 

and implementation 

Contracting reform objectives Does the plan explain contracting reform objectives, such as 

promoting competition and establishing better communication 

between contractors and beneficiaries? 

 Scope Does the plan present an overview of how MAC implementation fits 

into broader agency plans? 

 Schedule Does the plan state when major events will take place, including 

announcing MAC jurisdictions, issuing proposed performance 

measures for inclusion in A/B MAC contracts and requests for 

proposals, selecting DME MACs and A/B MACs, and completing 

the transition to MAC contracting? 

 Budget Does the plan provide key information on budget and costs for 

contracting reform, such as estimated termination costs for current 

contractors, MAC operational costs, and performance incentives? 

 Performance measures for 

contracting reform 

Does the plan provide high-level information on performance 

measures—that is, what constitutes success in contracting reform 

and how will progress be measured? 

Contracting reform 

management and oversight 

Risk management Does the plan identify a contingency or risk mitigation strategy for 

potential problems as contracting reform is being implemented? 

 Transition planning Does the plan address transition concerns and contingency 

planning for the transitions? 

 CMS staffing Does the plan explain how CMS staff will be organized and who will 

have specific roles and responsibilities in managing contracting 

reform? 

 Management and oversight 

structure 

Does the plan provide information on CMS’s intended contractor 

management and oversight structure for MACs? 

 Human capital Does the plan provide an approach for ensuring that the agency 

has the right staff in the right numbers with the right skills in the 

right places to accomplish its mission effectively? This approach 

requires that an agency devote adequate resources to provide its 

acquisition workforce with the training and knowledge necessary to 

perform their jobs. It also requires long-range planning, including 

succession planning, to ensure the workforce has the necessary 

skills and qualifications to perform the procurement function into 

the future. 

Implementation of MAC 

contracting 

Jurisdictions Does the plan provide information on MAC jurisdictions, including 

number and geographic areas? 

 Rollout plan Does the plan provide information on the jurisdictional rollout plan, 

and how this timeline might be affected by voluntary contractor 

withdrawals? 

 A/B strategy Does the plan discuss the strategy for combining Part A and Part B 

and associated implications or risks? 

 Contract acquisition Does the plan address the acquisition process for new contracts? 

 Eligibility of contractors Does the plan describe the eligibility criteria expected of MACs? 

Appendix III: GAO’s Criteria for Evaluating 

CMS’s Contracting Reform Plan 
Appendix III: GAO’s Criteria for Evaluating 

CMS’s Contracting Reform Plan 

Page 44 GAO-05-873 Medicare Contracting Reform 

Element Subelement Criteria 

 MAC functions Does the plan describe the functions that MACs will perform, such 

as developing local coverage decisions, determining payment 

amounts, making payments, educating beneficiaries, and 

communicating with providers? 

 Non-MAC functions Does the plan provide information on functions that will be 

assigned to non-MAC contracts? 

 Coordination concerning program 

integrity functions 

Is the plan clear in defining the roles of MACs and other contractors 

that conduct program integrity functions, so that program integrity 

efforts are not duplicative? Does the plan explain how MACs and 

other contractors will interface and coordinate their different 

program integrity activities? 

 Chains Does the plan provide information on how MACs will deal with 

chain providers, which is a concern for those with establishments in 

multiple MAC jurisdictions? 

 Performance requirements Does the plan address the establishment and definition of 

performance measures for MACs? 

 Policies and processes Does the plan provide clear, transparent, and consistent policies 

and processes that provide a basis for the planning, award, 

administration, and oversight of procurement efforts? 

Source: GAO analysis of documents used to develop criteria for reviewing CMS’s plan for contracting reform. 

Note: Documents used to develop criteria are listed in app. II. 
Appendix IV: Scope and Methodology 

Page 45 GAO-05-873 Medicare Contracting Reform 

To conduct this evaluation, we consulted CMS to determine the 

documents included in its plan for contracting reform. Appendix I lists the 

documents that were identified by agency officials as included in CMS’s 

contracting reform plan, including its Report to Congress, that were 

provided to us through June 3, 2005. We developed evaluation criteria to 

assess the extent to which CMS’s plan provides an appropriate framework 

to implement Medicare contracting reform. To develop these criteria, we 

analyzed the statutory provisions added by section 911 of the MMA, 

documents and related information prepared to help CMS plan for 

contracting reform, and GAO guidance on assessing federal agencies’ 

procurement functions. We also reviewed GAO’s guidance on changing the 

approach through which mission-critical work is accomplished. These 

documents are listed in appendix II. The evaluation criteria we developed 

address contracting reform planning and implementation, contracting 

reform management and oversight, and CMS’s contracting strategy for 

MACs and are listed in appendix III. We used these criteria to evaluate 

CMS’s plan. In addition to this assessment, we also conducted interviews 

with officials at CMS headquarters and regional offices concerning the 

process for developing the plan, the implementation schedule, the 

challenges that CMS faces in implementing contracting reform, lessons 

learned that have prepared CMS for moving to the MAC environment, and 

the risks and benefits involved in the transition to MAC contracting. We 

also interviewed officials from four current Medicare contractors to obtain 

their views on CMS’s contracting reform plan and the challenges, risks, 

and benefits involved in undertaking this effort. 

To assess the extent to which the plan’s cost and savings estimates were 

sound enough to support decision making on implementation, we 

reviewed CMS’s estimates for administrative costs and savings, savings to 

the Medicare trust funds, and supporting documentation. We evaluated the 

assumptions associated with the estimates. We conducted interviews with 

CMS officials who have been involved in developing estimates for the 

costs and savings related to Medicare contracting reform in order to 

understand the rationale upon which the estimates were based. We 

interviewed other CMS officials who work in program areas that will be 

affected by contracting reform to learn how they expect contracting 

reform to generate costs or savings in their program areas. We also 

interviewed a representative of CMS’s actuarial contractor, which 

developed the savings estimates for the Medicare trust funds. We did not 

verify the reliability of CMS’s data that were used to generate financial 

estimates. We performed our work from November 2004 through July 2005 

in accordance with generally accepted government auditing standards. 

Appendix IV: Scope and Methodology 
Appendix V: Comments from the Department of Health and 

Human Services 

 Page 46 GAO-05-873 Medicare Contracting Reform 

Appendix V: Comments from the Department 

of Health and Human Services 
Appendix V: Comments from the Department of Health and 

Human Services 

 Page 47 GAO-05-873 Medicare Contracting Reform 
Appendix V: Comments from the Department of Health and 

Human Services 

 Page 48 GAO-05-873 Medicare Contracting Reform 
Appendix V: Comments from the Department of Health and 

Human Services 

 Page 49 GAO-05-873 Medicare Contracting Reform 
Appendix V: Comments from the Department of Health and 

Human Services 

 Page 50 GAO-05-873 Medicare Contracting Reform 
Appendix V: Comments from the Department of Health and 

Human Services 

 Page 51 GAO-05-873 Medicare Contracting Reform 
Appendix V: Comments from the Department of Health and 

Human Services 

 Page 52 GAO-05-873 Medicare Contracting Reform 
Appendix V: Comments from the Department of Health and 

Human Services 

 Page 53 GAO-05-873 Medicare Contracting Reform 
Appendix V: Comments from the Department of Health and 

Human Services 

 Page 54 GAO-05-873 Medicare Contracting Reform 
Appendix V: Comments from the Department of Health and 

Human Services 

 Page 55 GAO-05-873 Medicare Contracting Reform 
Appendix V: Comments from the Department of Health and 

Human Services 

 Page 56 GAO-05-873 Medicare Contracting Reform 
Appendix VI: CMS’s MAC 

Procurement and Transition 

Schedule 

Page 57 GAO-05-873 Medicare Contracting Reform 

Figure 5 shows CMS’s procurement and transition schedule for MACs, as 

of June 2005. During one start-up cycle and two additional transition 

cycles, CMS will conduct competitions to select a total of 23 MACs. In the 

first phase of the start-up cycle, CMS will select four MACs that will be 

administering claims for DME, prosthetics, orthotics, and supplies—called 

DME MACs. In the second phase of the start-up cycle, CMS will select one 

of the MACs that will be responsible for paying Part A and Part B claims—

called A/B MACs. During cycle one, CMS will select seven A/B MACs. 

During cycle two, CMS will select seven A/B MACs and four MACs that 

will be responsible for administering claims for home health and hospice 

(HH) care, called HH MACs. 

Figure 5: CMS’s MAC Procurement and Transition Schedule 

Notes: Based on information from CMS. The request for proposals (RFP) announces CMS’s intent to 

award a contract and specifies the service or product to be delivered, the criteria to be used, applicant 

qualifications, deadline, and other relevant information. In this figure, the date under RFP indicates 

when it was, or will be, first issued. The date under award indicates when CMS intends to announce 

publicly that the contract has been awarded. Cutover occurs when all work has been transferred to 

the MAC from the prior claims administration contractors. The date under cutoff indicates when CMS 

anticipates the transfer of work for these contracts to be completed. 

Appendix VI: CMS’s MAC Procurement and 

Transition Schedule 

Source: GAO.

CMS will select four DME MACs in phase one of the start-up 

cycle. CMS will select one A/B MAC in phase two of the startup cycle.

CMS will select seven A/B MACs in cycle one.

CMS will select seven A/B MACs and four HH MACs in 

cycle two.

RFP

4/2005

Award

12/2005

Cutover

7/2006

1/2005 1/2006 1/2007 1/2008 1/2009 1/2010

MAC procurement

MAC transitions

RFP

9/2005

Award

6/2006

Cutover

7/2007

RFP

9/2007

Award

9/2008

Cutover

7/2009 Cycle two

RFP

9/2006

Award

9/2007

Cutover

9/2008 Cycle one

Start-up

cycle

Source: GAO.
Appendix VII: Jurisdictional 

Map of the Current Fiscal 

Intermediaries 

Page 58 GAO-05-873 Medicare Contracting Reform 

Notes: Fiscal intermediaries administer Part A and Part B claims paid to hospitals and other 

institutions, such as home health agencies. The figure indicates jurisdictions of companies that serve 

as fiscal intermediaries. Mutual of Omaha also serves as a fiscal intermediary to providers in all 

states except New York and Puerto Rico. 

Appendix VII: Jurisdictional Map of the 

Current Fiscal Intermediaries 

Source: CMS.

Anthem ME

Trailblazer

BCBS ND

(Noridian)

Empire

BCBS SC (Palmetto)

Highmark

Anthem (AdminaStar)

Regence

BCBS TN (Riverbend)

BCBS AR

BCBS AZ

BCBS MT

BCBS WY

BCBS AL (Cahaba) 

BCBS NE 

BCBS KS 

BCBS MS 

UGS

Anthem NH

BCBS OK (Group Health)

Cooperativa

Carefirst

BCBS GA 

BCBS FL (First Coast)
Appendix VIII: Jurisdictional 

Map of the Current Carriers 

Page 59 GAO-05-873 Medicare Contracting Reform 

Note: Carriers administer the majority of Part B claims for the services of physicians and other 

providers. 

Appendix VIII: Jurisdictional Map of the 

Current Carriers 

Source: CMS.

WPS

NHIC

Trailblazer

CIGNA

Empire

HealthNow

Highmark

Anthem (AdminaStar)

Regence

Triple S, Inc.

GHI

BCBS AR

BCBS KS

BCBS AL (Cahaba)

BCBS FL (First Coast)

BCBS SC (Palmetto)

BCBS ND (Noridian)

BCBS MT
Appendix IX: Jurisdictional Map 

of the Current Regional Home 

Health Intermediaries 

Page 60 GAO-05-873 Medicare Contracting Reform 

Note: Regional home health intermediaries process Medicare home health and hospice claims. 

Appendix IX: Jurisdictional Map of the 

Current Regional Home Health 

Intermediaries 

Source: CMS.

UGS

UGS

UGS

UGS

BCBS AL

(Cahaba) BCBS AL

(Cahaba)

Anthem

ME

UGS

BCBS SC

(Palmetto)
Appendix X: Jurisdictional Map 

of the Current Durable Medical 

Equipment Regional Carriers 

Page 61 GAO-05-873 Medicare Contracting Reform 

Note: DME regional carriers pay claims for DME, prosthetics, orthotics, and supplies. 

Appendix X: Jurisdictional Map of the 

Current Durable Medical Equipment Regional 

Carriers 

Source: CMS.

Anthem/

AdminaStar

HealthNow

BCBS SC

(Palmetto)

BCBS SC

(Palmetto)

Connecticut

General

(CIGNA)

Connecticut

General

(CIGNA)
Appendix XI: Jurisdictional Map 

of the 15 New Medicare 

Administrative Contractors 

Page 62 GAO-05-873 Medicare Contracting Reform 

Notes: This map shows the jurisdictions for the MACs that will pay Part A and Part B claims, other 

than claims for HH care and for DME, prosthetics, orthotics, and supplies. These MACs will be called 

A/B MACs. 

Appendix XI: Jurisdictional Map of the 15 

New Medicare Administrative Contractors 

6

8

9

10

11

13

5 1

2

2

3

4

7

15

12

14

1

Source: CMS.
Appendix XII: Jurisdictional 

Map of the Four DME MACs and 

the Four HH MACS 

Page 63 GAO-05-873 Medicare Contracting Reform 

Note: This figure indicates the jurisdictions for MACs that will pay some specific types of claims. The 

DME MACs will pay claims for DME, prosthetics, orthotics, and supplies. The HH MACs will pay 

claims for HH care. 

Appendix XII: Jurisdictional Map of the Four 

DME MACs and the Four HH MACs

(290427) 

Source: CMS.

B

C

D A
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