Testimony

Before the Committee on the Budget, House of

Representatives

United States General Accounting Office

GAO

For Release on Delivery

Expected at 10:00 a.m.

Wednesday, July 25, 2001 MEDICARE

Successful Reform

Requires Meeting Key

Management Challenges

Statement of William J. Scanlon

Director, Health Care Issues

GAO-01-1006T
Page 1 GAO-01-1006T

Mr. Chairman and Members of the Committee:

I am pleased to be here today as you discuss the long-term sustainability

and the more immediate management challenges of the Medicare program.

As noted in our companion statement today by the Comptroller General,

the Hospital Insurance trust fund is expected to run a cash deficit in 15

years.1

 This projection, while only a partial picture of Medicare’s fiscal

health, nevertheless sounds the alarm for the longer term, when it is

projected that, without meaningful reform, demographic and cost trends

will drive Medicare to fiscally unsustainable levels. As the Congress

examines large-scale reform proposals, it is also focusing on

improvements needed in Medicare program management to meet current

21st century needs and expectations.

In that spirit, the Committee asked us to report on the agency that runs

Medicare, newly named the Center for Medicare and Medicaid Services

(CMS) and formerly known as the Health Care Financing Administration

(HCFA).2

 My remarks today will focus on (1) the Medicare agency’s record

in carrying out selected program activities, (2) key factors affecting

program management, and (3) challenges the agency faces in running a

more modern Medicare program. My comments are based on our previous

and ongoing work.

In brief, against a backdrop of Medicare reform proposals, the

management of the Medicare program has come under close scrutiny. Our

past work shows that HCFA had some notable successes as Medicare’s

steward but also had serious shortcomings. The agency was successful in

developing payment methods that have helped contain Medicare cost

growth and in paying its fee-for-service claims quickly and at low

administrative cost. However, the agency’s efforts to ensure that claims

were paid appropriately achieved mixed results. In addition, the

performance of Medicare claims administration contractors in

communicating with Medicare providers was often substandard. For

example, in our ongoing work for the Committee, we find shortcomings in

how Medicare contractors provide information to physicians and respond

to their questions.

 1

Medicare: New Spending Estimates Underscore Need for Reform (GAO-01-1010T, July 25,

2001).

2

Our statement will refer to “HCFA” where our findings apply to the organizational

structure and operations associated with that name.
Page 2 GAO-01-1006T

HCFA took significant steps in recent years to address certain weak areas,

such as strengthening payment safeguards, but several factors deterred

improvements. The agency’s responsibilities for other programs and

activities and its new Medicare responsibilities emanating from recent

statutory changes are substantial. Its capacity to carry out these

responsibilities has not kept pace. Notably, the agency faces staff

shortages in both skills and numbers and is operating Medicare with

archaic information technology systems that are unsuited to meet requests

for basic management information within reasonable time periods. At the

same time, HCFA faltered in adopting a results-based approach to agency

management. In addition, constraints exist on the agency’s contracting

authority, limiting its use of full and open competition to choose claims

administration contractors and assign administrative tasks.

Stakeholder expectations for a modern Medicare program are putting

increased pressure on CMS to improve agency operations, particularly the

agency’s relationship with the Medicare beneficiary and provider

communities. Such improvements will require efforts by the agency to

implement a performance-based management approach that holds

managers accountable for accomplishing program goals. However, in

combination with agency actions, congressional attention also appears to

be warranted to meet the challenges associated with administering

Medicare in the 21st century.

The complexity of the environment in which CMS operates the Medicare

program cannot be overstated. It is an agency within the Department of

Health and Human Services (HHS) but has responsibilities over

expenditures that are larger than those of most other federal departments.

Medicare alone ranks second only to Social Security in federal

expenditures for a single program. Medicare is expected to spend nearly

$240 billion in fiscal year 2001; covers about 40 million beneficiaries;

enrolls and pays claims from nearly 1 million providers and health plans;

and has contractors that annually process about 900 million claims.

Among numerous and wide-ranging activities associated with the

Medicare program, CMS must monitor the roughly 50 claims

administration contractors that pay claims and establish local medical

coverage policies;3

 set tens of thousands of payment rates for Medicare-

 3

Most medical policies for determining whether claims for services provided are medically

necessary and covered by Medicare are established locally by the claims administration

contractor that serves the specific geographic area involved.

Background
Page 3 GAO-01-1006T

covered services from different providers, including physicians, hospitals,

outpatient and nursing facilities, home health agencies, and medical

equipment suppliers; and administer consumer information and

beneficiary protection activities for the traditional program component

and the managed care program component (Medicare+Choice plans).

The providers billing Medicare—hospitals, general and specialty

physicians, and other practitioners—along with program beneficiaries and

taxpayers, create a vast universe of stakeholders whose interests vary

widely. Not surprisingly, then, the responsibility to be fiscally prudent has

made the agency that runs Medicare a lightening rod for those

discontented with program policies. For example, the agency’s

administrative pricing of services has often been contentious, even though

a viable alternative is not easily identifiable. It is impractical for the agency

to rely on competition to determine prices. The reason is that when

Medicare is the dominant payer for services or products, the agency

cannot use market prices to determine appropriate payment amounts,

because Medicare’s share of payments distorts the market. Moreover,

Medicare is prevented from excluding some providers to do business with

others that offer better prices.4

In addition, Medicare’s public sector status means that changing program

regulations requires obtaining public input. The solicitation of public

comments is necessary to ensure transparency in decision-making.

However, the trade-off to seeking and responding to public interests is that

it is generally a time-consuming process and can thwart efficient program

management. For example, in the late 1990s, HCFA averaged nearly 2

years between its publication of proposed and final rules.5

Consensus is widespread among health policy experts regarding the

growing and unrelenting nature of the Medicare agency’s work. The

Balanced Budget Act of 1997 (BBA) alone had a substantial impact on

HCFA’s workload, requiring, among other things, that the agency develop

within a short time frame new payment methods for different post-acute

and ambulatory services. It also required HCFA to preside over an

 4

Statutory constraints on limiting the providers from which Medicare beneficiaries may

obtain medical services or products have resulted in the program including all qualified

providers who want to participate.

5

This finding reflects the last half of 1997 and the first half of 1998 and an average of 631

days.
Page 4 GAO-01-1006T

expanded managed care component that entailed coordinating a neverbefore-run information campaign for millions of beneficiaries across the

nation and developing methods to adjust plan payments based partially on

enrollees’ health status.

The future is likely to hold new statutory responsibilities for CMS. For

example, some reform proposals call for expanding Medicare’s benefit

package to include a prescription drug benefit. As we have previously

reported, the addition of a drug benefit would entail numerous

implementation challenges, including the potential for the annual claims

processing workload to double to about 1.8 billion a year.

Tasked with administering this highly complex program, HCFA has earned

mixed reviews in managing Medicare. On one hand, the agency presided

over a program that is very popular with beneficiaries and the general

public. It implemented payment methods that have helped constrain

program cost growth and ensured that claims were paid quickly at little

administrative cost. On the other hand, HCFA had difficulty making

needed refinements to payment methods. It also fell short in its efforts to

ensure accurate claims payments and oversee its Medicare claims

administration contractors. In recent years, HCFA took steps to achieve

greater success in these areas. However, the agency now faces criticism

from the provider community for, in the providers’ view, a program that is

unduly complex and has burdensome requirements.

HCFA was successful in developing payment methods that have helped

contain Medicare cost growth. Generally, over the last 2 decades, the

Congress required HCFA to move Medicare away from reimbursing

providers based on their costs or charges for every service provided and to

use payment methods that seek to control spending by rewarding provider

efficiency and discouraging excessive service use. Payment development

efforts have been largely successful, but making needed refinements to

payment methods remains a challenge. For example, Medicare’s hospital

inpatient prospective payment system (PPS), developed in the 1980s, is a

method that pays providers fixed, predetermined amounts that vary

according to patient need. This PPS succeeded in slowing the growth of

Medicare’s inpatient hospital expenditures. Medicare’s fee schedule for

physicians, phased in during the 1990s, redistributed payments for services

based on the relative resources used by physicians to provide different

types of care and has been adopted by many private insurers.

Management of

Medicare Has Been a

Mixed Success

Medicare’s New Payment

Methods Have Helped

Contain Cost Growth
Page 5 GAO-01-1006T

More recently, as required by the BBA, HCFA worked to develop separate

prospective payment methods for post-acute care services—services

provided by skilled nursing facilities, home health agencies, and inpatient

rehabilitation facilities—and for hospital outpatient departments.

Prospective payment methods can help constrain the overall growth of

Medicare payments. But as new payment systems affected provider

revenues, HCFA often received criticism about the appropriateness and

fairness of its payment rates. HCFA had mixed success in marshaling the

evidence to assess the validity of these criticisms and in making

appropriate refinements to these payment methods to ensure that

Medicare was paying appropriately and adequately.

HCFA also had success in paying most claims within mandated time

frames and at little administrative cost to the taxpayer. Medicare

contractors process over 90 percent of the claims electronically and pay

“clean” claims6

 on average within 17 days after receipt. In contrast,

commercial insurers generally take longer to pay provider claims.

Under its tight administrative budget, HCFA kept processing costs to

roughly $1 to $2 per claim—as compared to the $6 to $10 or more per

claim for private insurers, or the $7.50 per claim paid by TRICARE—the

Department of Defense’s managed health care program.7

 Costs for

processing Medicare claims, however, while significantly lower than other

payers, are not a straightforward indicator of success. We and others have

reported that HCFA’s administrative budget was too low to adequately

safeguard the program. Estimates by the HHS Inspector General of

payments made in error amounted to $11.9 billion in fiscal year 2000,

which, in effect, raises the net cost per claim considerably. At the same

time, HCFA estimated that, in fiscal year 2000, program safeguard

expenditures saved the Medicare program more than $16 for each dollar

 6

These are claims that have been filled out properly and whose processing has not been

stopped by any of the systems’ computerized edits. According to HCFA data on claims

processed in fiscal year 1999, about 81 percent of Medicare claims were processed and paid

as clean claims.

7

Much of the cost difference appears attributable to differences in program design and

processing requirements, but we and others believe that TRICARE has opportunities to

reduce this administrative cost. See Defense Health Care: Opportunities to Reduce

TRICARE Claims Processing and Other Costs (GAO/T-HEHS-00-138, June 22, 2000).

Medicare Processes

Claims Inexpensively, but

Greater Scrutiny Over

Payments Needed
Page 6 GAO-01-1006T

spent.8 Taken together, these findings indicate that increasing the

investment in CMS’ administrative functions is a cost that can ultimately

save program dollars.

However, HCFA’s payment safeguard activities have raised concerns

among providers about the clarity of billing rules and the efforts providers

must make to remain in compliance. To fulfill the program’s stewardship

responsibilities, claims administration contractors conduct medical

reviews of claims and audits of providers whose previous billings have

been questionable. These targeted reviews have been a cost-effective

approach in identifying overpayments.

Providers whose claims are in dispute, however, have complained about

the burden of reviews and audits and about the fairness of some specific

steps the contractors follow. Their concerns about fairness may also

emanate from the actions of other agencies involved in overseeing health

care—such as the HHS Office of Inspector General and the Department of

Justice—which, in the last several years, have become more aggressive in

pursuing health care fraud and abuse.

CMS faces a difficult task in finding an appropriate balance between

ensuring that Medicare pays only for services allowed by law and making

it as simple as possible for providers to treat Medicare beneficiaries and

bill the program. While an intensive claims review is undoubtedly vexing

for the provider involved, very few providers actually undergo such

reviews. In fiscal year 2000, Medicare contractors conducted complex

medical claims reviews of only 3/10 of 1 percent of physicians—1,891 out

of a total of more than 600,000 physicians who billed Medicare that year.9

We are currently reviewing several aspects of the contractors’ auditing and

review procedures for physician claims to assess how they might be

improved to better serve the program and providers.

 8

As part of the Health Insurance Portability and Accountability Act of 1996 (HIPAA), the

Congress created the Medicare Integrity Program (MIP), which gave HCFA a stable source

of funding for program safeguard activities. In fiscal year 2000, HCFA used its MIP funding

to support a wide range of anti-fraud-and-abuse efforts, including provider and managed

care organization audits and targeted medical reviews of claims.

9

Complex medical reviews are in-depth reviews of claims by clinically trained staff based

on examination of medical records. In contrast, routine medical reviews may be carried out

by nonclinical staff and do not involve review of patient records.
Page 7 GAO-01-1006T

Congressional concern has recently heightened regarding the regulatory

requirements that practitioners serving Medicare beneficiaries must meet.

Of the several studies we have under way to examine the regulatory

environment in which Medicare providers operate, one study, conducted

at the request of this Committee, examines ways in which explanations of

Medicare rules and other provider communications could be improved.

The preliminary results of our review of several information sources from

selected carriers—the contractors that process physicians’ claims—

indicate a disappointing performance record. In particular:

• Bulletins. Contractor bulletins, which are newsletters from carriers to

physicians outlining changes in national and local Medicare policy, are

viewed as the primary source of communication between the agency and

providers. However, providers have complained that the information in

these bulletins is often difficult to interpret, incomplete, and untimely. We

reviewed the bulletins issued since February 2001 by nine carriers to

determine, among other things, whether they included notices about four

new billing procedures that were going into effect in early July 2001. The

bulletins of five carriers either did not contain notices about the billing

procedures until after the procedures had gone into effect or had not

published this information as of mid-July. We also found that many of the

bulletins contained lengthy discussions with significant technical and

legalistic language.

• Telephone call centers. Call centers are intended to serve as another

important information source for providers on a variety of matters,

including clarification of Medicare’s billing rules. Contractors maintain

these call centers to respond to the roughly 80,000 provider inquiries made

each day. We placed about 60 calls to 5 carrier call centers to obtain

answers to common questions (those found on the “Frequently Asked

Questions” Web pages at various carriers’ web sites). For 85 percent of the

calls placed, the answers that call center representatives provided were

either incomplete (53 percent) or inaccurate (32 percent).

• Web sites. A third source of information for Medicare providers is the

Internet. The agency imposes minimum requirements on carriers to

maintain Web sites. Of 10 carrier Web sites we examined, 8 did not meet

all of the Web site requirements, which include, among others, the

inclusion of a frequently-asked-questions Web page and the capability for

providers to send e-mail inquiries to customer service. These 8 also lacked

the required links to both the CMS and Medicare Web sites. Many lacked

user-friendly features: 7 did not have “site maps,” which list the Web site’s

contents, and although 6 sites had search functions, only 4 worked as

intended. Five sites contained outdated information.

Communications With

Providers Were Poor
Page 8 GAO-01-1006T

Although these results cannot be generalized to all carriers, the carriers we

reviewed serve tens of thousands of physicians and the results are

consistent with some of the concerns recently expressed by physicians in

the Medical Group Management Practice Association.10

Our study, to be issued this fall, seeks to identify the actions CMS can take

to ensure that carriers improve the consistency and accuracy of their

communications with providers; it will also assess the adequacy of

carriers’ budgets to conduct these activities.

CMS faces several limitations in its efforts to manage Medicare effectively.

These include divided management focus, limited capacity, lack of a

performance-based management approach, and constraints impeding the

agency’s ability to hold Medicare contractors accountable.

CMS’ management focus is divided across multiple programs and

responsibilities. Despite Medicare’s estimated $240-billion price tag and

far-reaching public policy significance, there is no official whose sole

responsibility it is to run the Medicare program. In addition to Medicare,

the CMS Administrator and senior management are responsible for

oversight of Medicaid and the State Children’s Health Insurance Program.

They also are responsible for individual and group insurance plans’

compliance with standards in the Health Insurance Portability and

Accountability Act of 1996 in states that have not adopted conforming

legislation. Finally, they must oversee compliance with federal quality

standards for hospitals, nursing homes, home health agencies, and

managed care plans that participate in Medicare and Medicaid, as well as

all of the nation’s clinical laboratories. The Administrator is involved in the

major decisions relating to all of these activities; therefore, time and

attention that would otherwise be spent meeting the demands of the

Medicare program are diverted.

A restructuring of the agency in July 1997 inadvertently furthered the

diffusion of responsibility across organizational units. The intent of the

 10These concerns are contained in a June 2001 letter from Medical Group Management

Practice Association to the House Budget Committee staff.

Various Constraints

Complicate Efforts To

Manage Medicare

Effectively

Agency Focus Is Divided

Across Multiple Programs

and Responsibilities
Page 9 GAO-01-1006T

reorganization was to better reflect a beneficiary-centered orientation

throughout the agency by dispersing program activities across newly

established centers. However, after the reorganization, many stakeholders

claimed that they could no longer obtain reliable or timely information. In

addition, HCFA’s responsiveness was slowed by the requirement that

approval was needed from several people across the agency before a

decision was final.

The recent change from HCFA to CMS reflects more than a new name. It

consolidates major program activities: the Center for Medicare

Management will be responsible for the traditional fee-for-service

program; the Center for Beneficiary Choices will administer Medicare’s

managed care program. We believe that this new structure is consistent

with the desire to be more responsive to program stakeholders.

As we and others have consistently noted, the agency’s capacity is limited

relative to its multiple, complex responsibilities. Human capital limitations

and inadequate information systems hobble the agency’s ability to carry

out the volume of claims administration, payment, and pricing activities

demanded of it.

Staff shortages—in terms of skills and numbers—beset the agency that

runs Medicare. These shortages were brought into sharp focus as HCFA

struggled to handle the number and complexity of BBA requirements.

When the BBA expanded the health plan options in which Medicare

beneficiaries could enroll, HCFA’s staff had little previous experience

overseeing these diverse entities, such as preferred provider organizations,

private fee-for-service plans, and medical savings accounts. Few staff had

experience in dealing with the existing managed care option—health

maintenance organizations. Half of HCFA’s regional offices lacked

managed care staff with clinical backgrounds—important in assessing

quality of care issues—and few managed care staff had training or

experience in data analysis—key to assessing plan performance against

local and national norms and monitoring trends in plan performance over

time.11

 11HHS Office of the Inspector General, Medicare’s Oversight of Managed Care: Implications

for Regional Staffing (OEI-01-96-00191, April 1998).

Agency Capacity Limited

Relative to Multiple,

Complex Responsibilities
Page 10 GAO-01-1006T

At the same time, CMS faces the potential loss of a significant number of

staff with valuable institutional knowledge. In February 2000, the HCFA

Administrator testified that more than a third of the agency’s current

workforce was eligible to retire within the next 5 years and that HCFA was

seeking to increase “its ability to hire the right skill mix for its mission.” As

we and others have reported, too great a mismatch between the agency’s

administrative capacity and its designated mandate could have left HCFA,

and now CMS, unprepared to handle Medicare’s future population growth

and medical technology advances.12 To assess its needs systematically,

CMS is conducting a four-phase workforce planning process that includes

identifying current and future expertise and skills needed to carry out the

agency’s mission.13 HCFA initiated this process using outside assistance to

develop a comprehensive database documenting the agency’s employee

positions, skills, and functions. Once its future workforce needs are

identified, CMS faces the challenge of attracting highly qualified

employees with specialized skills. Due to the rapid rate of change in the

health care system and CMS’ expanding mission, the agency’s existing

staff may not possess the needed expertise.

Another constraint on agency effectiveness has been inadequate

information systems for running the Medicare program. Ideally, program

managers should be able to rely on their information systems to monitor

performance, develop policies for improvement, and track the effects of

newly implemented policies. In reality, most of the information technology

HCFA relied on was too outdated to routinely produce such management

information. As a result, HCFA could not easily query its information

systems to obtain prompt answers to basic management questions. Using

its current systems, CMS is not in a position to report promptly to the

Congress on the effects of new payment methods on beneficiaries’ access

to services and on the adequacy of payments to providers. It cannot

expeditiously determine the status of debt owed the program due to

uncollected overpayments.

 12Gail Wilensky and others, “Crisis Facing HCFA & Millions of Americans,” Health Affairs,

Vol. 18, No. 1 (Jan./Feb. 1999).

13HCFA’s workforce planning efforts were in line with our guidance in Human Capital: A

Self-Assessment Checklist for Agency Leaders (GAO/GGD-99-179, Sept. 1999).
Page 11 GAO-01-1006T

To encourage a greater focus on results and improve federal management,

the Congress enacted the Government Performance and Results Act of

1993 (GPRA)—a results-oriented framework that encourages improved

decision-making, maximum performance, and strengthened

accountability. Managing for results is fundamental to an agency’s ability

to set meaningful goals for performance, to measure performance against

those goals, and to hold managers accountable for their results. As late as

January 1998, we reported that HCFA lacked an approach consistent with

GPRA to develop a strategic plan for its full range of program objectives.

Since then, the agency developed a plan, but it did not tie global objectives

to management performance.

Last month, we reported on the results of our survey of federal managers

at 28 departments and agencies on strategic management issues. The

proportion of HCFA managers who reported having output, efficiency,

customer service, quality, and outcome measures was significantly below

that of other government managers for each of the performance measures.

HCFA was the lowest-ranking agency for each measure—except for

customer service, in which it ranked second from the lowest. In addition,

the percentage of HCFA managers who responded that they were held

accountable for results to a great or very great extent—42 percent—was

significantly lower than the 63 percent reported by the rest of the

government.

Constraints on the agency’s flexibility to contract for claims

administration services have also frustrated efforts to manage Medicare

effectively. Under these constraints, the agency is at a disadvantage in

selecting the best performers to carry out Medicare’s claims

administration and customer service functions.

At Medicare’s inception in the mid-1960s, the Congress provided for the

government to use existing health insurers to process and pay physicians’

claims and permitted professional associations of hospitals and certain

other institutional providers to “nominate” their claims administration

contractors on behalf of their members. At that time, the American

Hospital Association nominated the national Blue Cross Association to

serve as its fiscal intermediary.14 Currently, the Association is one of

 14Intermediaries primarily review and pay claims from hospitals and other institutional

providers, while carriers review and pay claims from physicians and other outpatient

providers.

Strategic Management

Approach Lacks

Performance Component

Agency Has Difficulty

Holding Claims

Administration

Contractors Accountable
Page 12 GAO-01-1006T

Medicare’s five intermediaries and serves as a prime contractor for

member plans that process over 85 percent of all benefits paid by fiscal

intermediaries. Under the prime contract, when one of the local Blue plans

declined to renew its Medicare contract, the Association—rather than

HCFA—chose the replacement contractor. This process effectively limited

HCFA’s flexibility to choose the contractors it considered most effective.

HCFA also considered itself constrained from contracting with non-health

insurers for the various functions involved in claims administration

because it did not have clear statutory authority to do so. As noted, the

Congress gave HCFA specific authority to contract separately for payment

safeguard activities, but for a number of years the agency has sought more

general authority for “functional contracting,” that is, using separate

contractors to perform functions such as printing and mailing and

answering beneficiary inquiries that might be handled more economically

and efficiently under one or a few contracts. HCFA sought other Medicare

contracting reforms, such as express authority for the agency to pay

Medicare contractors on an other-than-cost basis, to provide incentives

that would encourage better performance.15

Although the health care industry has grown and transformed significantly

since Medicare’s inception, neither the program nor the agency that runs it

has kept pace. Nevertheless, CMS is expected to make Medicare a prudent

purchaser of services using private sector techniques and improve its

customer relations.

Private insurance has evolved over the last 40 years and employs

management techniques designed to improve the quality and efficiency of

services purchased. In a recent study, an expert panel convened by the

National Academy of Social Insurance (NASI) suggested that Medicare test

private insurers’ practices designed to improve the quality and efficiency

of care and determine whether these practices could be adapted for

Medicare.16 Private insurers have taken steps to influence utilization and

 15For a discussion of this issue, see Chapter 3 in Medicare Contractors: Despite Its Efforts,

HCFA Cannot Ensure Their Effectiveness or Integrity (GAO/HEHS-99-115, July 14, 1999).

16From a Generation Behind to a Generation Ahead: Transforming Traditional Medicare,

Final Report of the Study Panel on Fee-for-Service Medicare, National Academy of Social

Insurance (Washington, D.C.: January 1998).

Key Hurdles Exist as

Agency Seeks To

Move Forward

Agency Faces Challenges

in Adopting Modern

Management Strategies
Page 13 GAO-01-1006T

patterns of service delivery through efforts such as beneficiary education,

preferred provider networks, and coordination of services. They are able

to undertake these efforts, in part, because they have wide latitude in how

they run their businesses. In contrast, federal statutory requirements and

the basic obligation to be publicly accountable have hampered agency

efforts to incorporate private sector innovations.

Medicare’s efforts to encourage use of preferred providers is a case in

point. The Medicare statute generally allows any qualified provider to

participate in the program. This is significant in light of HCFA’s

experiment related to coronary artery bypass graft surgery in which

certain hospitals—identified as those with the best outcomes for these

surgeries—were designated to receive bundled payments for hospitals and

physicians delivering certain expensive procedures.17 The experiment cut

program costs by 10 percent for the 10,000 coronary artery bypass

surgeries performed and saved money for beneficiaries through reduced

coinsurance payments. HCFA began a similar experiment at selected

acute-care hospitals, which involves bundling payments for hospital,

physician, and other health care professionals’ services provided during a

beneficiary’s hospital stay for selected cardiovascular and orthopedic

procedures. However, more wide-scale Medicare implementation of such

hospital and physician partnership arrangements may be difficult.

Providers have raised concerns about government promotion of certain

providers at the expense of others, thus creating a barrier to this and other

types of preferred provider arrangements.

Efforts to facilitate disease management provide another example of the

potential limitations of adapting private sector management strategies to

Medicare. HCFA was able to implement broad-based education efforts to

encourage the use of Medicare-covered preventive services, but the agency

could be deterred in approaches targeting individual beneficiaries most

likely to need the help. For example, the agency has overseen the

dissemination of more than 23,000 posters with tear-off sheets that

beneficiaries can hand to physicians to facilitate discussions of colon

cancer screening that otherwise might be avoided because of unfamiliar

terms and sensitive issues. It has also been involved in a multifaceted

effort to increase flu vaccinations and mammography use. However, the

 17A number of studies prior to this experiment have found that hospitals with the greatest

volume of these procedures generally had better outcomes, as measured by mortality and

complications.
Page 14 GAO-01-1006T

agency may be less able to undertake the more targeted approaches of

some private insurers, such as mailing reminders to identified enrollees

about the need to obtain a certain service. Because targeting information

would require using personal medical information from claims data, CMS

could encounter opposition from those who would perceive such

identification to be government intrusion. Providers might also object to a

government insurance program advocating certain medical services for

their patients.

In its study, NASI concluded that these and other innovations could have

potential value for Medicare but would need to be tested to determine

their effects as well as how they might be adapted to reflect the

uniqueness of Medicare as both a public program and the largest single

purchaser of health care. In addition, CMS would likely need new statutory

authority to broadly implement many of the innovations identified in the

NASI study.

Congressional concern has heightened recently regarding the regulatory

burden on the practitioners that serve Medicare beneficiaries. In his

testimony before the Senate Committee on Finance, the Secretary of HHS

emphasized the importance of communication between CMS and

providers, stating, “When physicians call us...we need to respond quickly,

thoroughly and accurately.”

18 Under the spotlight held by both the

Congress and the Administration, CMS is expected to improve its

customer service to the provider community.

Concern about regulatory burden is not limited to providers in Medicare’s

traditional fee-for-service program. Policymakers are also concerned

about the regulatory burden on health plans that participate in the

Medicare+Choice program. During each of the last 3 years, substantial

numbers of health plans reduced the geographic areas they served or

terminated their Medicare participation altogether. Cumulatively, these

withdrawals affected more than 1.6 million beneficiaries who either had to

return to the fee-for-service program or switch to a different health plan.

Industry representatives have attributed the withdrawals, in part, to

 18Statement Before the Senate Committee on Finance, Hearing on Medicare Governance:

Perspectives on the Centers for Medicare and Medicaid Services (formerly HCFA) (June 19,

2001).

Agency Seeks To Meet

Expectations for Improved

Customer Service for

Providers
Page 15 GAO-01-1006T

Medicare+Choice requirements that they characterize as overly

burdensome.19

HCFA took steps to address plans’ regulatory concerns modifying some

requirements or delaying their implementation. It also launched an

initiative designed to help the agency better understand plans’ concerns,

assess them, and recommend appropriate regulatory changes. At the

request of the House Ways and Means Subcommittee on Health, we are

evaluating Medicare+Choice requirements. Our study will compare

Medicare+Choice requirements with the requirements of private

accrediting organizations and those of the Office of Personnel

Management for plans that participate in the Federal Employees Health

Benefits Program. The study’s objective is to document differences in

these sets of requirements and determine whether these differences are

necessary because of the unique nature of the Medicare program and the

individuals it serves.

CMS is also expected to improve communications with beneficiaries,

particularly as the information pertains to Medicare+Choice health plan

options. The agency has made significant progress in this regard but

continues to face challenges in meeting the sometimes divergent needs of

plans and beneficiaries.

As required by the BBA, HCFA began a new National Medicare Education

Program (NMEP).20 For 3 years the agency has worked to educate

beneficiaries and improve their access to Medicare information. It added

summary health plan information to the Medicare handbook and increased

the frequency of its distribution from every few years to each year. It also

established a telephone help line and an Internet Web site with

comparative information on health plans, Medigap policies, and nursing

homes and sponsored local education programs.

 19Industry representatives have also cited Medicare’s payment rates as a cause of the

withdrawals. They believe that Medicare payments are inadequate for the services health

plans provide. However, our studies have estimated that such payments exceed what

Medicare would have spent if beneficiaries enrolled in health plans instead received

services through the traditional fee-for-service program. See Medicare+Choice: Payments

Exceed Cost of Fee-for-Service Benefits, Adding Billions to Spending (GAO/HEHS-00-161,

Aug. 23, 2000).

20We have reviewed the agency’s NMEP activities to date and will soon release a report

discussing our findings.

Agency Strives To Improve

Beneficiary Education
Page 16 GAO-01-1006T

Beginning this fall, it will become more important for beneficiaries to be

aware that Medicare+Choice health plan alternatives to the traditional feefor-service program may be available in their area and to understand each

option and its implications. As required by the BBA, Medicare will now

have an annual open enrollment period each November when beneficiaries

must select either the fee-for-service program or a specific

Medicare+Choice plan for the following calendar year. Beneficiaries will

have strictly limited opportunities for changing their selection outside of

the open enrollment period, a provision known as “lock-in.”

CMS recently announced that it would fund a $35 million advertising

campaign this fall to help beneficiaries learn about Medicare’s new

features—such as the proposed discount prescription drug card program,

coverage for preventive services and medical screening examinations, and

the annual enrollment and lock-in provisions—and provide general

information about Medicare+Choice plans and the availability of

Medicare’s Web site and telephone help line. The agency will also extend

the operating hours of the help line and add an interactive feature to the

Web site designed to help beneficiaries select the Medicare option that

best fits their preferences.

CMS has made other decisions about the fall information campaign that

illustrate the sometimes difficult trade-off between accommodating plans

and serving beneficiaries. To encourage health plan participation in the

Medicare+Choice program, CMS has allowed plans additional time to

prepare their 2002 benefit proposals. This extension will hamper the

ability of CMS and health plans to disseminate information before the

BBA-established November open enrollment period. CMS will not, for

example, include any information about specific health plans in the annual

handbook mailed to Medicare households.21 To reduce the potentially

adverse effects of an abbreviated fall information campaign, the agency

will allow health plans to distribute marketing materials with proposed

benefit package information marked “pending Federal approval.” CMS will

also extend the open enrollment period through the end of December.

 21As a result of these decisions, the Secretary of HHS is now the subject of a lawsuit that

claims he did not have the authority to change the benefit filing date and that the BBA

requires an annual mailing containing comparative health plan information.
Page 17 GAO-01-1006T

Medicare is a popular program that millions of Americans depend on to

cover their essential health needs. However, the management of the

program is not always responsive to beneficiary, provider, and taxpayer

expectations. CMS, while making improvements in certain areas, may not

be able to meet these expectations effectively without further

congressional attention to the agency’s multiple missions, limited capacity,

and constraints on program flexibility. The agency will also need to do its

part by implementing a performance-based management approach that

holds managers accountable for accomplishing program goals. These

efforts will be critical in preparing the agency to meet the management

challenges of administering a growing program and implementing future

Medicare reforms.

Mr. Chairman, this concludes my prepared statement. I will be happy to

answer any questions you or other Committee Members may have.

For more information regarding this testimony, please contact me at (202)

512-7114, Leslie G. Aronovitz at (312) 220-7600, or Laura Dummit at (202)

512-7119. Under the direction of James Cosgrove and Geraldine RedicanBigott, contributors to this statement were Susan T. Anthony, Carolyn

Manuel-Barkin, Hannah Fein, William Hadley, Don Kittler, Christie Turner,

and Margaret Weber.

Concluding

Observations

GAO Contact and

Acknowledgments
Page 18 GAO-01-1006T

Medicare Management: Current and Future Challenges (GAO-01-878T,

June 19, 2001.

Medicare Reform: Modernization Requires Comprehensive Program View

(GAO-01-862T, June 14, 2001).

Managing for Results: Federal Managers’ Views on Key Management Issues

Vary Widely Across Agencies (GAO-01-592, May 25, 2001).

Medicare: Opportunities and Challenges in Contracting for Program

Safeguards (GAO-01-616, May 18, 2001.)

Medicare Fraud and Abuse: DOJ Has Improved Oversight of False Claims

Act Guidance (GAO-01-506, Mar. 30, 2001).

Medicare: Higher Expected Spending and Call for New Benefit Underscore

Need for Meaningful Reform (GAO-01-539T, Mar. 22, 2001).

Major Management Challenges and Program Risks: Department of Health

and Human Services (GAO-01-247, Jan. 2001).

High Risk: An Update (GAO-01-263, Jan. 2001).

Nursing Homes: Sustained Efforts Are Essential to Realize Potential of the

Quality Initiatives (GAO/HEHS-00-197, Sept. 28, 2000).

Medicare: Refinements Should Continue to Improve Appropriateness of

Provider Payments (GAO/T-HEHS-00-160, July 19, 2000).

Medicare: 21st Century Challenges Prompt Fresh Thinking About

Program’s Administrative Structure (GAO/T-HEHS-00-108, May 4, 2000).

Medicare Contractors: Further Improvement Needed in Headquarters and

Regional Office Oversight (GAO/HEHS-00-46, Mar. 23, 2000).

Medicare Contractors: Despite Its Efforts, HCFA Cannot Ensure Their

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

Related GAO Products
Page 19 GAO-01-1006T

HCFA Management: Agency Faces Multiple Challenges in Managing Its

Transition to the 21st Century (GAO/T-HEHS-99-58, Feb. 11, 1999).

Medicare: HCFA Faces Multiple Challenges to Prepare for the 21st Century

(GAO/T-HEHS-98-85, Jan. 29, 1998).

(290102)