Report to Congressional Requesters

United States General Accounting Office

GAO

July 2001 MEDICARE

MANAGEMENT

CMS Faces Challenges

to Sustain Progress

and Address

Weaknesses

GAO-01-817
Page i GAO-01-817 Medicare Management

Letter 1

Results in Brief 2

Background 3

HCFA Has Had Mixed Success in Managing Medicare 5

Management Approach, Resource Limitations, and Statutory

Constraints Affect the Agency’s Ability to Improve Medicare

Operations 19

Concluding Observations 25

Agency Comments and Our Evaluation 26

Appendix I Centers for Medicare and Medicaid Services 28

Related GAO Products 30

Table

Table 1: Examples of CMS’ Responsibilities in Managing Selected

Medicare Program Activities 4

Abbreviations

BBA Balanced Budget Act

CMS Centers for Medicare and Medicaid Services

DOJ Department of Justice

HCFA Health Care Financing Administration

HIPAA Health Insurance Portability and Accountability Act of 1996

HHS Department of Health and Human Services

IT information technology

MIP Medicare Integrity Program

OIG Office of Inspector General

PPS prospective payment system

PSC program safeguard contractor

SCHIP State Children’s Health Insurance Program

SNF skilled nursing facility

Y2K Year 2000

Contents
Page 1 GAO-01-817 Medicare Management

July 31, 2001

The Honorable John D. Dingell

Ranking Minority Member

Committee on Energy and Commerce

House of Representatives

The Honorable Sherrod Brown

Ranking Minority Member

Subcommittee on Health

Committee on Energy and Commerce

House of Representatives

The Honorable Peter Deutsch

Ranking Minority Member

Subcommittee on Oversight

 and Investigations

Committee on Energy and Commerce

House of Representatives

Recently, the Congress has been examining reforms to address the

Medicare program’s uncertain, long-term fiscal sustainability. Discussions

have focused on strengthening and modernizing the program—one whose

size, complexity, and importance make it very challenging to manage.

Medicare is the nation’s largest health insurer, with nearly 1 million

hospitals, physicians, and other health care providers billing the program.

Together with tens of millions of beneficiaries, these providers and

suppliers constitute a vast universe of program stakeholders that are

directly affected by the way the program is administered.

As pressure mounts to ensure that the program will be well-managed now

and in the future, questions have been raised about the ability of the

Health Care Financing Administration (HCFA)—recently renamed the

Centers for Medicare and Medicaid Services (CMS)—to administer the

program and implement programmatic changes effectively.1

 These include

questions as to whether HCFA has adequately implemented payment

method changes mandated by the Congress, worked effectively to

 1

This report will refer to HCFA where our findings apply to the organizational structure and

operations associated with that name.

United States General Accounting Office

Washington, DC 20548
Page 2 GAO-01-817 Medicare Management

safeguard program payments, and provided adequate oversight of the

quality of care furnished to Medicare beneficiaries in nursing homes and

through other providers. Because of your interest in these issues, you

asked us to assess (1) HCFA’s record of managing certain key aspects of

the Medicare program and (2) factors that limit the agency’s ability to

improve operations. To respond to this request, we relied primarily on our

published studies and ongoing reviews of the agency’s operations and

Medicare program components. A list of related products is included in

this report.

Managing Medicare entails performing a broad range of complicated

activities, such as setting payment rates for Medicare-covered services;

overseeing companies that review, process, and pay about 900 million

claims annually; and contracting with and overseeing health plans to

provide beneficiaries choices in how they access their Medicare benefits.

Because Medicare is a highly visible public program touching the lives of

millions of citizens and directly affecting the health care marketplace,

CMS’ actions face close scrutiny. With such challenges, the agency’s

record of success has been mixed. On the plus side, HCFA has performed

some of its core missions well. It has developed payment systems that

were difficult to design and implement and that have helped constrain

program expenditures while ensuring beneficiary access to care. Further,

it has succeeded in ensuring that providers are paid promptly for the bulk

of submitted claims and at a low administrative cost. On the minus side,

however, the agency has experienced some difficulties in refining payment

methods that were developed to control Medicare spending, paying claims

properly, overseeing Medicare claims administration contractors, and

ensuring the quality of care delivered to Medicare beneficiaries. Further,

providers have become increasingly vocal about what they perceive as an

excessive regulatory burden placed on them by the Medicare program.

HCFA’s record of performance must be considered in light of factors that

may impede its progress in improving Medicare operations. These include

its lack of a performance-based approach to management. We recently

reported that, compared with other federal managers, relatively few HCFA

managers had performance measures to hold them accountable for

achieving results. In connection with its available resources and statutory

requirements, HCFA has worked to carry out its Medicare responsibilities

and to improve existing operations with an administrative budget that has

not increased in proportion to its growing workload. In addition, it is faced

with taking on new and challenging tasks with an aging workforce whose

skills do not always match the requirements of such new responsibilities.

Results in Brief
Page 3 GAO-01-817 Medicare Management

Furthermore, the agency has 49 senior executives to manage the two

biggest insurance programs in the country and activities accounting for

hundreds of billions of dollars in annual spending. In addition to its

resource challenges, the agency faces statutory constraints that inhibit it

from modernizing its management of fee-for-service claims

administration—the bulk of its Medicare business. Mismatches between

resources, authorities, and the agency’s responsibilities have hindered

HCFA’s efforts to acquire appropriate expertise, modernize outdated and

inefficient information systems, and conduct oversight activities.

In commenting on a draft of this report, CMS said it was pleased that we

had recognized its progress in a number of key areas. CMS agreed that

more could be done to strengthen the management of the Medicare

program.

CMS (formerly HCFA), an agency within the Department of Health and

Human Services (HHS), is responsible for administering much of the

federal government’s multibillion dollar investment in health care—

including the Medicare program. Medicare is a health insurance program

for people aged 65 years and older, some disabled people under 65 years

of age, and people with end-stage renal disease—which is permanent

kidney failure treated with dialysis or a transplant. Medicare covers a

variety of services. Part A services include inpatient hospital, skilled

nursing facilities (SNF), certain home health, and hospice care, while part

B services include physician and outpatient hospital services, diagnostic

tests, mental health services, and outpatient physical and occupational

therapy, including speech-language therapy, ambulance and other medical

services and supplies. Each year, Medicare serves about 40 million elderly

and disabled Americans and processes about 900 million claims submitted

by nearly 1 million hospitals, physicians, and other health care providers.

In fiscal year 2000, the program spent over $200 billion—about 11 percent

of the federal budget.

The Medicare program has two components—the traditional fee-forservice program and Medicare+Choice—its managed care option. Most

Medicare beneficiaries participate in the traditional program and receive

their health care on a fee-for-service basis, in which providers are

reimbursed for each covered service they deliver. CMS contracts with

about 50 insurance companies to process and pay these claims. The other

principal component—Medicare+Choice—covers about 14 percent of

beneficiaries who have enrolled in about 180 prepaid health plans that

Background
Page 4 GAO-01-817 Medicare Management

contract with the government to receive monthly payments in exchange

for providing needed Medicare services for enrollees.

As the agency that administers Medicare, CMS performs a wide array of

management activities. Principal among these are setting prices for

services and health plans based on legislatively prescribed guidelines,

ensuring prompt and accurate payment to providers and health plans,

educating beneficiaries and providers about the Medicare program,

ensuring the quality of fee-for-service and managed care services paid by

the program, and operating the Medicare+Choice program. See table 1 for

examples of these activities.

Table 1: Examples of CMS’ Responsibilities in Managing Selected Medicare

Program Activities

Program activity Example

Setting prices In accordance with legislatively prescribed guidelines, CMS sets

tens of thousands of fees or prices to pay suppliers for Medicarecovered items and to pay providers—including physicians,

hospitals, rehabilitation and nursing facilities, and home health

agencies—for Medicare-covered services. For example, CMS must

• develop rates for physicians that reflect the resources involved in

providing individual services as well as variations in their costs

across local markets and

• set rates for acute care hospitals reflecting services beneficiaries

will need based on diagnoses and adjust payments to reflect

geographic cost differences.

Overseeing feefor-service claims

administration

In monitoring about 50 Medicare claims administration contractors,

CMS must determine whether the contractors, among other things,

• meet performance standards for timeliness and accuracy of

claims processing;

• identify insurers that should have paid claims that were

mistakenly billed to Medicare;

• operate fraud units that explore leads and develop and refer

cases to law enforcement agencies;

• identify and investigate instances or patterns of inappropriate

billing that could result in unnecessary payments and serious

financial losses to the program; and

• collect overpayments.

Educating

beneficiaries

CMS is responsible for improving beneficiary understanding of the

Medicare program. To do this, CMS has launched a national

education campaign, Medicare & You, to provide Medicare

beneficiaries with information about Medicare and their health plan

choices. Information is made available to beneficiaries through a

variety of channels, including print materials mailed to all

beneficiaries, toll-free telephone service, and an Internet site.
Page 5 GAO-01-817 Medicare Management

Program activity Example

Ensuring that

institutional care

meets Medicare

requirements

To help ensure that Medicare beneficiaries receive quality care,

CMS

• contracts with state agencies to survey institutional providers,

such as SNFs, home health agencies, and dialysis facilities, and

certify that they meet Medicare’s conditions of participation and

associated standards;

• conducts training activities to help ensure that state surveyors

are qualified to enforce the federal quality standards for care; and

• is required, for certain providers, such as hospitals, to accept

accreditation by the Joint Commission on the Accreditation of

Health Care Organizations or other accrediting bodies.

Overseeing

Medicare+Choice

CMS contracts with managed care plans, requiring, among other

things, that they

• provide basic benefits to enrollees;

• comply with applicable provider requirements, including those

relating to certification and participation; and

• operate quality assessment and performance improvement

programs.

CMS must

• review for accuracy the promotional literature and membership

materials that each plan distributes to beneficiaries and

• ensure that plans have adequately informed beneficiaries of their

right to appeal adverse coverage or payment decisions.

Tasked with administering a highly complex program, HCFA has earned

mixed reviews from us and others on its performance in managing

Medicare. On one hand, the agency presides over a program that is

unparalleled in its popularity with beneficiaries and the general public.

HCFA has implemented a variety of payment methods that have helped

constrain the growth of program costs. It has also succeeded in ensuring

that Medicare claims are paid quickly and at little administrative cost. On

the other hand, HCFA has had difficulty making needed refinements to its

payment methods. The agency has also fallen short in its efforts to oversee

its Medicare claims administration contractors and to ensure that claims

are paid accurately and beneficiaries receive quality services. While in the

early 1990s HCFA came under increasing criticism for not adequately

protecting program payments, some providers have complained recently

that its safeguard efforts are unduly burdensome.

HCFA Has Had Mixed

Success in Managing

Medicare
Page 6 GAO-01-817 Medicare Management

The size and nature of the Medicare program make it inherently

challenging to develop payment methods that prudently reimburse

providers while protecting beneficiary access to services. As Medicare’s

steward, CMS cannot passively accept what providers want to charge the

program. However, because of its size, Medicare profoundly influences

health care markets. The agency is often the dominant payer for services

or products, and in such cases, it cannot rely on market prices to

determine appropriate payment amounts because its share of payments

distorts the market. In addition, HCFA has had difficulty relying on

competition to determine prices, because finding ways of encouraging

competition without excluding some providers has been problematic.2

This means that HCFA has had to administratively set payment amounts

for thousands of services in ways that encourage efficient delivery of, and

ensure beneficiary access to, needed health care services and equipment.

Adding to the complexity of setting payment amounts is Medicare’s status

as a highly visible public program with certain obligations that may not be

consistent with efficient business practices. For example, the agency is

constrained from acting swiftly to reprice services and supplies even when

prevailing market rates suggest that payments should be modified. As

Medicare is a public program, its enabling legislation provides that any

changes require public input. This minimizes the potential for

policymaking to have unintended consequences. However, seeking and

responding to public interests, including various provider and supplier

groups, can be a time-consuming process that can sometimes thwart

efficient program management.3

Recent changes in provider payment methods, as mandated by the

Congress, have constrained rates paid to some providers and slowed the

growth of payments to others. This has raised provider concerns about

payment adequacy. As Medicare’s payments have become less generous in

the aggregate, payment adjustments for cost differences of providers and

services become more important. HCFA’s successes in more closely

aligning payments to these differences have sometimes been obscured by

the concerns of those providers affected, who are adapting to a new

payment environment.

 2

Statutory constraints on excluding providers from participating in Medicare have resulted

in the program traditionally including all qualified providers who want to participate.

3

Medicare Payments: Use of Revised “Inherent Reasonableness” Process Generally

Appropriate (GAO/HEHS-00-79, July 5, 2000).

HCFA Succeeded in

Implementing Improved

Payment Methods, but

Refinements Are Still

Needed
Page 7 GAO-01-817 Medicare Management

Despite these challenges, over the last two decades HCFA has had broad

experience, and significant success, in developing payment methods that

seek to control spending by rewarding provider efficiency and

discouraging excessive service use. HCFA’s experience began in 1983

when the Congress passed legislation requiring the development of a

hospital inpatient prospective payment system (PPS), a method that pays

providers, regardless of their costs, fixed, predetermined amounts that

vary according to patient need.4 This approach, designed to reward

hospitals that could deliver care at lower cost than the predetermined

payment, succeeded in slowing the growth of Medicare’s inpatient hospital

expenditures. Growth in Medicare inpatient hospital expenditures

averaged over 15 percent per year prior to 1983, but was generally under

10 percent in subsequent years. HCFA’s next major effort to break the link

between providers’ charges and Medicare payments was implementing a

fee schedule for physicians, which was phased in during the 1990s. This

schedule was not designed to reduce the overall expenditure level, but to

redistribute payments for services based on the relative resources used by

physicians to provide different types of care. Its development and

implementation was complex because HCFA had to calculate payment

amounts for over 7,000 procedures, accounting for the three categories of

resources used to perform each procedure—physician work, practice

expenses, and malpractice insurance expenses.5

 While beneficiary access

to physician care was generally not affected, the fee schedule, as intended,

led to a shift in payments from surgical and nonsurgical services to

primary care and other evaluation and management services.

HCFA’s next challenge was to expand use of prospective payment

methods for postacute care services, such as those provided by SNFs and

home health agencies. In 1997, the Balanced Budget Act (BBA) mandated

that HCFA develop and implement four new PPS6

 from fiscal year 1998

through fiscal year 2001—a heavy workload for the agency. For each new

 4

Older payment methods reimbursed care providers for their costs (within certain limits)

for all services delivered.

5

Each medical procedure is ranked on a scale based on three categories of resources used

to perform it— practice expense, physician work, and malpractice expenses. Practice

expenses include the costs of resources such as personnel (other than physicians),

equipment, supplies, and office space required to deliver a procedure. Physician work

resources are measured in terms of a physician’s time, intensity of effort, level of skill

required, and stress from risk of harm to the patient.

6

These include prospective payment methods for SNFs, hospital outpatient departments,

home health agencies, and inpatient rehabilitation facilities.
Page 8 GAO-01-817 Medicare Management

PPS, HCFA had to (1) design the payment system—which was based on

data-intensive studies—including factors that adjust payments based on

the health status of beneficiaries receiving care, (2) develop and issue

regulations that incorporated public comment, and (3) plan and program

computer system changes. Adding to its challenge, HCFA and its

contractors needed to make significant systems changes to implement the

new payment methods at the same time that they were renovating

information technology (IT) systems for Year 2000 (Y2K) date changes. As

a result of the priority HCFA had to give to Y2K systems changes, HCFA

moved more slowly than the law required to phase in its new PPS

methodologies for home health and hospital outpatient services.7

Each of these payment methods was an improvement over cost- and

charge-based methods, which often rewarded inefficient delivery and

excessive provision of unnecessarily costly services. PPS methods reward

providers for keeping their costs down, which in turn has helped constrain

the overall growth of Medicare payments. However, slower payment

growth requires further adjustment to better account for differences in

patient needs and the special circumstances of particular providers or

facilities to ensure that the program is paying appropriately and

adequately.

HCFA has had mixed success in refining some of its payment methods.

For example, HCFA partially addressed problems with its initial

methodology for introducing a resource-based practice expense

component into the physicians’ fee schedule when it issued a new

methodology in 1998. Overall, we considered HCFA’s new methodology to

be acceptable. The new methodology better defined practice expenses by

specialty and used a more straightforward and simple-to-understand

approach. Although HCFA developed the new methodology using the best

available data, the agency had limited data on resource use by some

specialties, and HCFA made a series of assumptions and adjustments

without confirming their reasonableness. As a result, questions remain

about whether payment is appropriate for certain procedures. To address

these issues, we recommended that HCFA refine its relative value

payments by identifying and then focusing on the areas where the data and

 7

HCFA implemented the PPS for SNFs on time—by July 1, 1998. The home health PPS was

mandated to begin October 1, 1999, and was delayed by later legislation until October 1,

2000. The hospital outpatient PPS was mandated to begin by calendar year 1999 and was

implemented in August 2000. The implementation of the inpatient rehabilitation PPS was

mandated by fiscal year 2001, but has been delayed.
Page 9 GAO-01-817 Medicare Management

methodology weaknesses have the greatest effect,8 but HCFA has done

little to target its refinement efforts. Similarly, we have pointed out design

flaws in the new payment methodology for SNFs and home health

agencies that could allow providers to increase payments by “gaming”

these payment methods.9

 HCFA has begun to address some, but not all, of

these weaknesses.

HCFA has been successful in performing one of its principal missions—

ensuring that claims are generally paid quickly and at little administrative

cost to the taxpayer. Medicare contractors process over 90 percent of

Medicare claims electronically and pay “clean” claims10 on average within

17 days after receipt.11 In contrast, commercial insurers generally take

longer to pay provider claims. Costs for processing Medicare claims are

roughly $1 to $2 per claim—much less than $6 to $10 or more per claim for

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

Defense’s managed health care program.12

Nevertheless, some Medicare contractors’ performance has been less than

exemplary, and HCFA’s lax and uneven oversight allowed performance

problems to continue undetected. In the 1990s, several contractors

defrauded the government or settled cases alleging fraud for hundreds of

millions of dollars, following allegations of serious problems. These

included deleting or destroying claims, failing to conduct proper audits,

 8

Medicare Physician Payments: Need to Refine Practice Expense Values During Transition

and Long Term (GAO/HEHS-99-30, Feb. 24, 1999).

9

Medicare: Refinements Should Continue to Improve Appropriateness of Provider

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

10These are claims that have been filled out properly and whose processing has not been

stopped by any of the systems’ computerized edits designed to check whether the claim is

appropriate to pay—for example, that it is a covered service for an eligible beneficiary.

According to HCFA data on claims processed during fiscal year 1999, about 81 percent of

Medicare part A and part B claims processed were paid, and, of those paid, over 99 percent

were processed as clean claims.

11Much of this time is due to the mandatory claim payment delay provisions, which prohibit

the payment of Medicare claims until after 13 days from the date received if electronically

submitted and after 26 days for those submitted on paper.

12Much 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).

Fee-for-Service Claims

Paid Promptly and

Inexpensively, but

Contractor-Related

Concerns Continue
Page 10 GAO-01-817 Medicare Management

falsifying documentation needed to prove claims were for medically

necessary services, and switching off the toll-free beneficiary inquiry lines

when staff members were unavailable to answer calls within the

prescribed amount of time. Many of these problems were discovered, not

through HCFA’s routine oversight efforts, but through whistleblowers

whose information sparked federal investigations that led to criminal and

civil settlements.

HCFA’s oversight of its contractors’ activities had several failings. The

agency relied on unverified performance information provided by

contractors and limited checking of each contractor’s internal

management controls. Furthermore, the agency’s reviews of its

contractors’ performance and treatment of identified performance

problems were inconsistent. To address these and other weaknesses, we

made a number of recommendations to improve the rigor and consistency

of HCFA’s oversight.13

HCFA has taken steps to improve its management and oversight of

contractors. It has adopted a more consistent and strategic approach for

overseeing contractor performance, which is directed by a management

board composed of senior executives.14 In addition, the agency has

clarified accountability for contractor oversight,15 assigned additional staff

to monitor and oversee contractors, and separated responsibility for

contractor management from contractor evaluation. However, some of our

recommendations for improvement have not been fully implemented,

including those to establish a policy for systematic validation of essential

contractor-reported data and to strengthen controls over accountability

and financial management,16 including improving debt collection

activities.17

 13Medicare Contractors: Despite Its Efforts, HCFA Cannot Ensure Their Effectiveness or

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

14The Medicare Contractor Oversight Board, which reports directly to the Administrator,

was established in December 1998.

15Medicare Contractors: Further Improvement Needed in Headquarters and Regional Office

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

16Medicare Financial Management: Further Improvements Needed to Establish Adequate

Financial Control and Accountability (GAO/AIMD-00-66, Mar. 15, 2000).

17Medicare: HCFA Could Do More to Identify and Collect Overpayments

(GAO/HEHS/AIMD-00-304, Sept. 7, 2000).
Page 11 GAO-01-817 Medicare Management

While HCFA has focused on specific contractor functions that it believes

need improvement, others may also need attention. For example, Medicare

contractors handle nearly 15 million telephone inquiries from beneficiaries

annually, but HCFA has not been able to adequately oversee contractor

performance in this area because it lacked performance data on

beneficiaries’ access to telephone customer service, the accuracy of

responses to inquiries, and caller satisfaction. To better measure

performance, the agency has begun to develop measures for telephone

service, set standards, and monitor contractor performance.

In addition to sharing information with beneficiaries, contractors also play

a major role in communicating with providers. How well they do this has

become more of a concern, which is understandable given that providers

have had to adjust to numerous program changes and increased attention

is focused on potential improper payments. We have begun reviewing how

CMS and other parts of HHS communicate with physicians to assess how

Medicare program instructions are conveyed and whether communication

efforts could be improved.

Medicare is one of the federal government programs that we consider at

high risk of improper payment because of its size and complex

administrative structure.18 Safeguarding Medicare program payments has

become an increased focus of HCFA’s activities in the last few years.

Although HCFA and its contractors have taken a number of steps to

address improper payment, program vulnerabilities remain. Recent

concerns have focused on three program integrity issues—improperly paid

claims, the integrity of HCFA’s new payment methods, and difficulties that

providers face in understanding and complying with payment rules.

Since 1996, the Office of Inspector General (OIG) in HHS has repeatedly

estimated that Medicare contractors inappropriately paid claims worth

billions of dollars annually. These claims successfully passed through

Medicare’s highly automated claims processing systems because the

claims appeared valid on their face. Claims were disputed only after the

OIG obtained the underlying patient medical records from providers and

reviewed them in detail. The OIG and contractor staff could then

determine that some services were not properly documented to support

the claims, not medically necessary, coded improperly, or not covered.

 18High-Risk Series: An Update (GAO-01-263, Jan. 2001).

Safeguarding Program

Payments Remains

Challenging

Estimates of Large Improper

Payments Underscore

Importance of Integrity Efforts
Page 12 GAO-01-817 Medicare Management

Such labor-intensive and detailed review of even a significant fraction of

the millions of fee-for-service claims is not practical or efficient. It would

involve significant administrative cost and impose a considerable burden

on providers required to submit patient medical records. As more than 90

percent of the improper payments the OIG identified were for claims that

contained no visible errors and individual fee-for-service claims typically

involve small amounts of money, the returns from an investment in such a

review may not be cost effective.

Nevertheless, these large improper payment estimates reinforce the

importance of having the agency and its contractors develop and

implement effective strategies to prevent or detect such payments. The

Congress aided HCFA in this effort by creating the Medicare Integrity

Program (MIP) and giving HCFA a stable source of funding for program

safeguard activities as part of the Health Insurance Portability and

Accountability Act of 1996 (HIPAA). In fiscal year 2000, HCFA used its

$630 million in MIP funding to support a wide range of efforts. These

included conducting antifraud activities, provider and managed care

organization audits, targeted medical review of claims, and awarding a

competitive contract to a coordination of benefits contractor, which will

help safeguard Medicare dollars by identifying when other companies

should pay claims as the primary insurer instead of Medicare.

Concentrating audit efforts on providers and reimbursement areas in

which program dollars are most at risk has been a cost-effective approach

in identifying overpayments. Based on HCFA’s estimates, in fiscal year

2000, MIP saved the Medicare program more than $16 for each dollar

spent. In addition to activities funded through the MIP program, HCFA has

been conducting a range of other stewardship activities, such as revising

its process for enrolling providers in Medicare to ensure that only

legitimate providers are billing the program.

The agency now has additional options for conducting safeguard activities

because HIPAA gave it new authority to contract with entities other than

the Medicare claims administration contractors to perform specific

payment safeguard functions. Through a competitive bidding process,

HCFA selected 12 entities to act as its program safeguard contractors

(PSC) and has assigned them a variety of tasks. These have ranged from

doing specific focused assignments to supplement the work of the claims

administration contractors to conducting most of the program safeguard
Page 13 GAO-01-817 Medicare Management

activities for a contractor.19 PSCs are also conducting nationwide

safeguard activities. This incremental approach to assigning work to PSCs

is a prudent first step that will allow the agency to test how best to

integrate these specialized contractors into Medicare program integrity

efforts.

The agency has faced difficulties, however, in determining where its

safeguard activities could be improved. The reason is that it lacked

detailed information on payment accuracy by claims administration

contractor and by type of provider or service. To develop a more refined

understanding of how and why payment errors occur, the agency has an

initiative to measure the error rate for each claims administration

contractor. A PSC “validation” contractor has begun to randomly sample

claims paid by contractors and to recheck the processing and payment

decisions made. From the results, CMS will be able to target contractors

whose best practices should be emulated by others and those that need

improvement.

Moving a larger share of program payments to methods that pay a global

fee for a set of services creates new integrity challenges. Under global

payment methods, providers face the risk of financial loss if their costs

exceed their payments, while those who can furnish care for less than the

global fee retain the difference. This provides incentives for providers to

skimp on services, which may compromise patients’ quality of care. For

example, managed care organizations participating in Medicare+Choice

have incentives to inappropriately maximize the gains from their global

payment by skimping on the delivery of services. Similarly, home health

agencies are now paid a global payment for services provided during a 60-

day episode of care, rather than being paid for each individual service.

Thus, home health agencies can increase profits by reducing the number

of visits provided during the payment period. In addition, no standards

 19For example, a PSC is supplementing the work of the claims administration contractors

by conducting field audits at the home offices of large SNF and other provider chains. A

PSC is also supporting the efforts of fraud unit activities for several claims administration

contractors by performing postpayment data analysis. However, some PSCs have been

given more extensive tasks, such as performing all of the program integrity functions for a

durable medical equipment regional carrier. PSCs are also maintaining the system of

automated edits used by all claims administration carriers to identify certain types of

inappropriate claims, conducting a national needs assessment, and developing a

comprehensive plan for educating Medicare providers. For a discussion of PSC contracting

authority implementation, see Medicare: Opportunities and Challenges in Contracting for

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

Revised Payment Methods

Raise New Integrity Challenges
Page 14 GAO-01-817 Medicare Management

exist for what is the right amount of home health care for specific types of

patients—particularly for home health aide care—a major share of home

health visits. To reduce the system’s vulnerability to exploitation, we have

recommended that HCFA adopt a risk-sharing provision, whereby the

government shares in a home health agency’s excessive losses, but

protects the program from an agency’s excessive gains.20 However, HCFA

was concerned that any additional change to payment policy would be too

confusing for home health agencies and has not agreed to implement the

recommendation.

Depending on their design, these global payment methods are not immune

to being gamed by increasing services provided. This is because the link

between amount of service provided—as determined by a provider—and

payment has not been entirely broken. For example, payments to SNFs for

serving beneficiaries are adjusted by a number of factors, including the

amount of therapy services provided. This gives facilities incentives to

raise their payment rates by providing more therapy services to

beneficiaries than they would otherwise. Similarly, home health agencies

have incentives to inappropriately increase the number of episodes of care

provided, which could escalate, rather than constrain, Medicare spending.

To protect program dollars, CMS needs information to monitor provider

responses to payment changes and their effect on beneficiaries.

Monitoring global payment methods is particularly important to ensure

that providers do not skimp on services in ways that could negatively

affect beneficiaries’ health. However, HCFA’s efforts to systematically

gather and evaluate program data to monitor the impact of its SNF and

home health payment reforms on providers and beneficiaries have not

been sufficient to identify desirable or undesirable consequences.

Furthermore, in Medicare+Choice, rather than developing proactive

methods to monitor beneficiaries’ access to services, HCFA sometimes

relied on complaints as the main indicator that enrolled beneficiaries may

be experiencing problems in getting access to needed care. This is a weak

mechanism because beneficiaries do not always understand the benefits

that plans are expected to provide. We have made several

recommendations that HCFA improve plan marketing and the appeals

process literature so beneficiaries can understand their benefits and

 20Medicare Home Health Care: Prospective Payment System Will Need Refinement as Data

Become Available (GAO/HEHS-00-9, Apr. 7, 2000).
Page 15 GAO-01-817 Medicare Management

appeal rights.21 The agency has implemented some of our

recommendations and has established work groups to consider others.

While we and the OIG have continued to encourage the agency to close

programmatic loopholes that can lead to improper payment, CMS’

safeguard efforts are viewed differently by some provider groups.

Providers whose claims are in dispute have complained about the burden

of medical review audits and about the fairness of some specific steps the

contractors follow. CMS faces a difficult task in finding an appropriate

balance between ensuring that Medicare pays only for services allowed by

law while making it as simple as possible for providers to treat Medicare

beneficiaries and bill the program. While an extensive claims review is

undoubtedly vexing for the provider involved, relatively few providers

actually undergo them. In fiscal year 2000, HCFA’s contractors conducted

medical claims review audits of only three tenths of 1 percent of

physicians—or 1,891 out of a total of more than 600,000 physicians who

billed Medicare that year. We are beginning work to review several aspects

of the agency’s auditing and review procedures for physician claims.

Providers’ concerns about fairness may also emanate from the actions of

others who oversee federal health care—such as the HHS OIG and the

Department of Justice (DOJ)—which, in the last several years, have

become more aggressive in pursuing possible health care fraud and abuse.

In the mid-1990s, the OIG initiated a series of audits that targeted the

billing practices of physicians at teaching hospitals. As we reported, the

OIG intended to audit the major teaching hospital or facility practice plan

affiliated with each of the nation’s 125 medical schools.22 The OIG chose

these institutions because, of the nation’s 1,200 teaching hospitals, they

had the largest number of residents and had received the most Medicare

revenue—not because the OIG had reason to suspect that their billing

activities were inappropriate. The medical community considered the

audits costly and burdensome. We suggested to the OIG that a risk-based

approach that focused on the most problem-prone institutions would be a

more effective use of federal resources and less burdensome to compliant

 21Medicare+Choice: New Standards Could Improve Accuracy and Usefulness of Plan

Literature (GAO/HEHS-99-92, Apr. 12, 1999) and Medicare Managed Care: Greater

Oversight Needed to Protect Beneficiary Rights (GAO/HEHS-99-68, Apr. 12, 1999).

22Medicare: Concerns With Physicians at Teaching Hospitals (PATH) Audits

(GAO/HEHS-98-174, July 23, 1998).

Safeguard Efforts Have Raised

Concerns by Providers
Page 16 GAO-01-817 Medicare Management

institutions.23 The OIG agreed, but said that the office could not do so in its

ongoing work because it did not have techniques for narrowing the

selection to the most problem-prone institutions.

Providers have also charged that DOJ was overzealous in its use of the

False Claims Act—a powerful enforcement tool with substantial damages

and penalties. DOJ’s efforts included a series of nationwide investigations

of hospitals known as national initiatives.24 These initiatives—particularly

the Laboratory Unbundling initiative25—which began in 1994, have

provoked considerable controversy. For example, the hospital community

alleged that DOJ subjected many of the nation’s hospitals to unwarranted

investigations, resulting in large penalties for unintentional errors.

Concerns with the Laboratory Unbundling initiative centered on the basis

for selecting hospitals for audit, the reliability of the data used by the U.S.

Attorneys’ Offices, and the manner in which hospitals were treated.

Ultimately, several of these offices acknowledged that the data they had

relied on contained errors that could not be corrected. As a result, these

offices withdrew from the initiative, and all the hospitals in these areas

that had entered into settlement agreements had their settlement amounts

returned.

In June 1998, DOJ issued guidance to all its attorneys, including those in

its U.S. Attorneys’ Offices, that emphasizes fair and responsible use of the

act in all civil health care matters. It instructs DOJ attorneys to

determine—before they allege violations of the act—that the facts and the

law sufficiently establish that a claimant knowingly submitted false claims.

At first, as we reported in August 1999, implementation of the guidance

varied among U.S. Attorneys’ Offices and some had taken steps in their

investigations prior to the issuance of DOJ guidance in June 1998 that

were, to varying degrees, inconsistent with the issued guidance.26

However, U.S. Attorneys’ Offices had largely addressed their shortcomings

 23See GAO/HEHS-98-174.

24DOJ defines a national initiative as a nationwide investigation stemming from an analysis

of national claims data, indicating that numerous similarly situated health care providers

have engaged in similar conduct to improperly bill government health care programs.

25Unbundling is the practice of submitting bills piecemeal to maximize the reimbursement

for various tests that are required to be billed together and therefore at a reduced cost.

26Medicare Fraud and Abuse: DOJ’s Implementation of the False Claims Act Guidance in

National Initiatives Varies (GAO/HEHS-99-170, Aug. 6, 1999).
Page 17 GAO-01-817 Medicare Management

in implementing the guidance by 2000.27 In our more recent March 2001

report, we found that DOJ’s two newer initiatives are being conducted

consistent with the guidance and that DOJ had improved its oversight of

its U.S. Attorneys’ Offices.28

A major responsibility of CMS is to oversee federal quality standards for

the services delivered to Medicare beneficiaries. Because many of these

quality checks are actually carried out by the states, a key CMS mission is

working with the states to oversee the care provided by nursing homes,

home health agencies, end-stage renal dialysis centers, and psychiatric and

certain Medicare-certified hospitals.29 We and the OIG have been studying

the effect of HCFA’s oversight of nursing home quality for several years

and have found significant weaknesses in federal and state survey and

oversight activities designed to detect and correct quality problems in

nursing homes. For example, in 1999, we reported that about 1 in 4 of the

nation’s 17,000 nursing homes—an unacceptably high number—had care

problems that caused actual harm to residents or placed them at risk of

death or serious injury.30 Complaints by residents, family members, or staff

alleging harm to residents remained uninvestigated for weeks or months.

State surveys understated the extent of serious care problems, both

because of procedural weaknesses in the surveys and their predictability.

Federal mechanisms for overseeing state monitoring of nursing home

quality were limited in their scope and effectiveness. In addition, when

serious deficiencies were identified, federal and state enforcement policies

did not ensure that they were corrected and remained corrected.

 27Medicare Fraud and Abuse: DOJ Has Made Progress in Implementing False Claims Act

Guidance (GAO/HEHS-00-73, Mar. 31, 2000).

28Medicare Fraud and Abuse: DOJ Has Improved Oversight of False Claims Act Guidance

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

29State surveyors review whether nursing homes, home health agencies, end-stage renal

dialysis centers, and laboratories comply with applicable federal standards for health,

safety, and quality of care. About 80 percent of Medicare-certified hospitals have their

quality overseen through the Joint Commission on the Accreditation of Health Care

Organizations—the others have their quality reviewed by state surveyors. Most psychiatric

hospitals are accredited through the Joint Commission, but state surveyors must check

whether they meet a few specific requirements.

30Nursing Homes: Additional Steps Needed to Strengthen Enforcement of Federal Quality

Standards (GAO/HEHS-99-46, Mar. 18, 1999).

Quality of Care Continues

to Be a Concern
Page 18 GAO-01-817 Medicare Management

We have made a number of recommendations to address these problems.31

HCFA generally concurred with our recommendations, and, in response,

in 1998 the Administration introduced a series of initiatives focused on

federal and state efforts to improve nursing home care quality. Certain

initiatives seek to strengthen the rigor with which states conduct their

required annual surveys of nursing homes. Others focus on the timeliness

and reporting of complaint investigations and the use of management

information to guide federal and state oversight efforts.

To realize the potential of these nursing home quality initiatives, sustained

efforts by CMS and the states are essential. Because the agency is phasing

in the initiatives and states began their efforts from different starting

points, much unfinished work remains. In September 2000, we reported

that—following state efforts to use new survey methods to better spot

serious deficiencies—the proportion of nursing homes nationwide with

such deficiencies increased slightly.32 This could be due to better

identification of problems by surveyors, but it could also be due to facility

staff shortages during that period. Better detection and classification of

serious deficiencies through the standard survey process will require

further refinement of survey methods and more unpredictability in survey

dates, which would limit the opportunities for nursing homes to prepare

for them. States whose nursing home inspection activities we most

recently reviewed33 had improved investigation and follow-up to

complaints, but were still not meeting HCFA’s standard of investigating

certain serious complaints within 10 days. These states also differed in

how far they had progressed in establishing procedures to make it easier

to file complaints or developing tracking systems to improve their

oversight of investigations by local district offices. As for the application

of strengthened federal enforcement policies, more time must elapse

before progress in this area can be assessed, although referral of problem

homes to the agency is on the rise. Similarly, with respect to improved

federal oversight, the effectiveness of recent internal agency

 31California Nursing Homes: Care Problems Persist Despite Federal and State Oversight

(GAO/HEHS-98-202, July 27, 1998); GAO/HEHS-99-46; Nursing Homes: Complaint

Investigation Processes Often Inadequate to Protect Residents (GAO/HEHS-99-80, Mar. 22,

1999); and Nursing Home Care: Enhanced HCFA Oversight of State Programs Would Better

Ensure Quality (GAO/HEHS-00-6, Nov. 4, 1999).

32Nursing Homes: Sustained Efforts Are Essential to Realize Potential of the Quality

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

33These states were California, Missouri, Tennessee, and Washington.
Page 19 GAO-01-817 Medicare Management

reorganizations to ensure more consistent oversight and management

information reporting enhancements can only be judged in the months to

come.

While recent attention has focused on quality of care in nursing homes,

they generally get more scrutiny than other providers do. Nursing homes

are generally surveyed at least yearly. Other facilities are surveyed much

less frequently. For example, home health agencies were once reviewed

annually, but now are reviewed every 3 years. The OIG has also

documented gaps in surveillance of psychiatric hospitals and kidney

dialysis facilities. In addition, our work has shown that the number of

HCFA-funded inspections of dialysis facilities has declined significantly.

These unannounced inspections, which are the agency’s primary tool for

ensuring that facilities meet standards protecting health and safety, were

conducted at only 11 percent of the dialysis facilities eligible for Medicare

recertification in 1999, compared with 52 percent in 1993. When such

surveys were conducted, they showed that noncompliance was a problem.

To illustrate, in 1999, 15 percent of the facilities surveyed had deficiencies

severe enough, if uncorrected, to warrant terminating their participation in

Medicare.

No examination of HCFA’s record of Medicare management successes and

shortcomings would be complete without recognizing the importance of

the agency having the necessary tools to carry out its mission. Critical to

the agency’s success are an organizational focus on results and

accountability, coupled with adequate resources and the flexibility to

effectively deploy them.

CMS has not yet developed an effective performance-based culture—a key

factor that limits ongoing efforts to manage effectively. Managing for

results is fundamental to an agency’s ability to set meaningful goals for

performance, measure performance against those goals, and hold

managers accountable for their results. It is part of the direction set for

federal agencies by the Congress through the Government Performance

and Results Act of 1993.

Management

Approach, Resource

Limitations, and

Statutory Constraints

Affect the Agency’s

Ability to Improve

Medicare Operations

Management Approach

Lacks Strong Performance

Focus
Page 20 GAO-01-817 Medicare Management

In May 2001, we reported on the results of our survey of federal managers

at 28 departments and agencies on strategic management issues.34 Overall,

HCFA fared poorly on this survey. For example, HCFA was the second

lowest among the agencies we surveyed in the percentage of managers

who reported that they were held accountable for results to at least a great

extent. In addition, the percentage of the agency’s managers who reported

having performance measures for the programs they were involved with

was significantly below that of other government managers. The agency

ranked lowest in terms of the percentage of managers who reported

having four key performance measures—output, efficiency, quality, and

outcome measures—and it ranked second lowest in having a customer

service measure. Measuring performance in assessing a program’s efforts

to achieve its goals is essential to fostering a performance-based culture

and managing for results. For example, such measures could be used to

demonstrate whether intended results are being achieved and to gauge if

programs are operating efficiently.

In addition to an organizational focus on managing for results, sufficient

resources—in terms of both dollars and human capital—are vital to

fulfilling the agency’s multiple management responsibilities. These

responsibilities include key oversight and stewardship activities and

modernization of the agency’s IT systems. However, CMS faces many

competing priorities when trying to fund and staff Medicare-related

activities.

Over the years, HCFA’s administrative dollars have been stretched thinner

as the agency’s mission has grown. For many years, budget pressures

forced the Congress to make difficult decisions to limit discretionary

spending. Like many other federal agencies, the agency has been operating

with a discretionary administrative budget that has increased slowly. But,

during the last decade, mandatory spending on Medicare benefit payments

has doubled. Further, this was a period when the agency’s workload

increased appreciably as it sought to fulfill BBA Medicare mandates and to

take on new non-Medicare programmatic responsibilities, such as

implementing the State Children’s Health Insurance Program (SCHIP).

 34Managing for Results: Federal Managers’ Views on Key Management Issues Vary Widely

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

Resource Limitations

Affect Medicare-Related

Activities

Budget Constraints at the

Agency
Page 21 GAO-01-817 Medicare Management

We and others have contended that too great a mismatch between the

agency’s administrative capacity and its designated mandate has affected

HCFA’s responsiveness and will leave the agency unprepared to handle

Medicare reforms and future enrollment growth. In fiscal year 2000,

Medicare’s operating costs represented less than 2 percent of the

program’s benefit outlays. Although private insurers seek to earn a profit

and incur other costs, such as those for advertising, they would not

attempt to manage such a large and complex program with so

comparatively small an administrative budget.

Examples from the recent past show that sufficient resources are

particularly important to support key oversight activities, such as ensuring

proper payment of claims. In recent years, we have found that because of

resource limits, claims administration contractors checked a smaller

percentage of claims, audited a smaller percentage of cost reports from

institutional providers, and were unable to identify and collect some

overpayments promptly. In order to ensure that program safeguards were

strengthened, the Congress created MIP, which provided—among other

things—stable funding of safeguard activities. Although MIP began in

fiscal year 1997, funding for safeguard activities did not increase until

fiscal year 1998, when the MIP budget increased from $440 million to $550

million.35 Total program safeguard appropriations are slated to increase

annually until fiscal year 2003, when the appropriation will total $720

million.

Resource issues have affected other oversight activities. In the area of

nursing home quality, HCFA has made negligible use of its most effective

oversight technique—an independent survey performed by HCFA

employees following completion of a state’s survey—for assessing state

agencies’ abilities to identify serious deficiencies in nursing homes.

Conducting a sufficient number of these comparisons is important

because of concerns that some state agencies may miss significant

problems, but HCFA lacked sufficient staff and resources to perform these

checks. In addition, limited resources affected HCFA’s ability to oversee

Medicare contractors. In fiscal year 2001, the agency requested and

received funding for 100 additional positions to focus on key activities

such as overseeing claims processing activities, monitoring payments to

providers and suppliers, and using computer-based auditing techniques.

 35This included an additional $50 million in supplemental program safeguard funds made

available by the HHS fiscal year 1998 appropriation.
Page 22 GAO-01-817 Medicare Management

Resource issues have also affected HCFA’s ability to make capital

investments in its information systems for managing Medicare.36 For

example, partly because resources were funneled to Y2K and other highpriority activities, HCFA has had to postpone much-needed IT

enhancements that could help the agency and its contractors conduct

Medicare program monitoring and policy development activities more

efficiently. Resource limitations have delayed HCFA from developing a

database using modern technology that could help the agency monitor

health care quality and the appropriateness of provider payments. Some of

Medicare’s vital information systems are decades old and operate on

software no longer commonly used. The agency has recently begun to

focus on developing systems that are easier to maintain and that can

increase the agency’s ability to translate its data into useful management

information. The agency’s current and planned IT projects include

developing a set of databases using more modern technology,

consolidating Medicare’s claims processing systems, and improving the

systems that maintain the program’s managed care enrollment and

payment data. However, the immediate pressing priorities to maintain

systems, keep the program operating, and respond to congressional

mandates leave less to spare for IT investments that could help the agency

better manage Medicare.

CMS’ capacity for managing Medicare is also closely tied to the quality and

strength of the agency’s human capital. CMS has a reservoir of staff who

are highly skilled in many aspects of health care and its financing.

However, our prior and current work suggests that the agency lacks

sufficient staff with expertise in some key areas, such as managed care

arrangements, financial management, data analysis, rate-setting

methodology, and IT.37 These shortages have affected the agency’s ability

to take on new and challenging tasks. For example, although GAO has

identified information security as a governmentwide risk38 that has been

recognized as a particular problem for CMS, the agency’s Chief

Information Officer told us that some IT security projects have been

delayed primarily because of a lack of staff with requisite skills.

 36Medicare: 21st Century Challenges Prompt Fresh Thinking About Program’s

Administrative Structure (GAO/T-HEHS-00-108, May 4, 2000).

37GAO/T-HEHS-00-108, HCFA Management: Agency Faces Multiple Challenges in Managing

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

GAO/AIMD-00-66.

38GAO-01-263.

CMS’ Human Capital

Challenges
Page 23 GAO-01-817 Medicare Management

Furthermore, the agency has faced the challenge of dealing with increased

responsibilities with fewer people. The BBA had 335 provisions requiring

HCFA to make substantial changes to the Medicare program, and during

1998—-a key implementation year39—the agency was doing this work with

about 1,000 fewer employees than it had in 1980.

Compounding human capital concerns, CMS has a total of 49 senior

executives to manage program activities accounting for billions of dollars

in annual spending. In fiscal year 2002, federal benefit outlays for

Medicare, Medicaid, and SCHIP are expected to reach approximately $400

billion. In fact, CMS’ corps of senior executives is smaller than that of

most other civilian agencies that have significantly smaller annual

expenditures. CMS’ senior-level executives play a vital role in focusing

staff on current mission priorities and guiding the agency on a strategic

path to its future. They manage about 4,600 agency employees and also

oversee the efforts of Medicare claims administration contractors, who

have about 22,000 employees. However, despite Medicare’s size and

importance, there is no official whose sole responsibility is to run the

program. In addition to Medicare, top-level managers have oversight,

enforcement, and credentialing responsibilities for other major healthrelated programs and initiatives, such as the Medicaid and SCHIP

programs, and for all of the nation’s clinical laboratories. These other

programmatic responsibilities naturally require time and attention that

would otherwise be spent meeting the demands of the Medicare program.

Adding to concerns about current staffing, CMS is facing a potential loss of

human capital with managerial and technical expertise through an

impending wave of retirements. The agency has estimated that about 35

percent of its current workforce will be eligible to retire over the next 5

years.40 Upcoming retirements heighten concerns we raised in both 1998

and 1999 about HCFA’s loss of technical and managerial expertise due to

its aging workforce.41 For example, in the 5 years prior to 1998, almost 40

percent of HCFA’s employees had left the agency. To its credit, to respond

 39In 1998, HCFA published 92 regulations and Federal Register notices implementing

congressional directives in BBA.

40A retirement analysis by HCFA showed that about 22 percent of HCFA employees eligible

to retire in a given year actually do so and that the average length of time between

eligibility for regular retirement and actual retirement is 3 years.

41Medicare: HCFA Faces Multiple Challenges to Prepare for the 21st Century

(GAO/T-HEHS-98-85, Jan. 29, 1998) and GAO/T-HEHS-99-58.
Page 24 GAO-01-817 Medicare Management

to this human capital challenge, CMS is working on a human resources

planning effort to support the agency in strategic staffing, development,

and recruitment planning decisions. Part of CMS’ challenge for planning its

future workforce is to determine the right balance between work

performed by CMS employees and work contracted out.

In addition to its resource challenges, CMS faces statutory constraints that

inhibit the agency from modernizing its management of fee-for-service

claims administration—the bulk of its Medicare business. At Medicare’s

inception in the mid-1960s, the Congress authorized the government to use

existing health insurers to process and pay claims. It also permitted

professional associations of hospitals and certain other institutional

providers to “nominate” their claims administration contractors on behalf

of their members. When the program began, the American Hospital

Association nominated the national Blue Cross Association to serve as its

fiscal intermediary.42 Currently, the association is one of Medicare’s three

intermediaries and serves as a prime contractor for 26 local member plan

subcontractors that process about 86 percent of all benefits paid by fiscal

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

declines to renew its Medicare contract, the association—rather than

CMS—nominates the replacement contractor. This process effectively

limits CMS’ flexibility to choose the contractors it considers most

effective. The agency has also considered itself constrained from

contracting with nonhealth insurers for the various functions involved in

claims administration.

The Congress gave HCFA specific authority to contract separately for

payment safeguard activities and for claims administration for home

health and durable medical equipment. Nevertheless, for a number of

years the agency has sought more general authority for functional

contracting and other Medicare contracting reforms. We recently testified

that Medicare could benefit from the Congress’ removal of limitations on

CMS’ contracting authority and use of full and open competition in the

selection of claims administration contractors.43 We have also suggested

 42Fiscal intermediaries primarily review and pay claims from hospitals and other

institutional providers covered under Medicare part A, while carriers review and pay part B

claims, which are submitted by physicians and other outpatient providers.

43Medicare Contracting Reform: Opportunities and Challenges in Contracting for Claims

Administration Services (GAO-01-918T, June 28, 2001).

Constraints on Flexibility

to Improve the Medicare

Program
Page 25 GAO-01-817 Medicare Management

that, should the Congress modify the Medicare claims administration

contracting authorities, it should consider requiring that HCFA report on

its progress in implementing these new authorities. Further, we

recommended that HCFA develop a strategic plan for managing claims

administration contractors in this new contracting environment.44

In June 2001, the Administration proposed legislation to modify the

Medicare claims administration contracting authority that, among other

things, would permit—but not require—full and open competition. The

proposal would allow CMS to select any entity it chooses, award separate

contracts to perform specific claims administration functions, and use

other than cost contracts. However, CMS would not have to use

competitive procedures to select initial claims administration contractors

or to renew contracts under the proposal. We are concerned that if CMS is

not required to use such competition, it may not identify and contract with

the best entities to perform claims administration services.

Certain innovative approaches in contracting for services could be difficult

to implement in a public program such as Medicare. Medicare was

designed so that beneficiaries would have the freedom to choose among

providers and that any qualified provider who was willing to serve

Medicare’s beneficiaries could do so. Even though approaches such as

developing a network of providers chosen for their quality and willingness

to accept discounted fees could be advantageous for beneficiaries and

taxpayers, CMS would face obstacles in implementing them. In a 1998

study, an expert panel concluded that the agency could benefit from a

more focused effort to test and adapt such innovations in the program.

However, broadly implementing the experimental innovations that prove

successful may require new statutory authority.45

Considering Medicare’s complexity, size, and statutory constraints, some

contend that HCFA’s management of Medicare has—on balance—been

satisfactory, while others argue that it has not been acceptable. There is

evidence that HCFA’s success has been mixed and that the agency’s

challenges are growing. Effective governance of Medicare depends on

finding a balance between flexibility and accountability—that is, granting

 44GAO/HEHS-99-115.

45Medicare Reform: Modernization Requires Comprehensive Program View (GAO-01-862T,

June 14, 2001).

Concluding

Observations
Page 26 GAO-01-817 Medicare Management

the agency adequate flexibility to act prudently while ensuring that it can

be held accountable for its decisions and actions.

Moreover, because Medicare’s future will play such a significant role in the

nation’s fiscal future, we believe it prudent to make an adequate

investment to ensure that Medicare is professionally and efficiently

managed. Achieving such a goal will require that the day-to-day operations

of Medicare’s traditional program are modernized and maintained, and

that achieving program efficiency and effectiveness remains paramount.

In written comments on a draft of this report, CMS said it was pleased that

we had recognized the agency’s progress in a number of key areas,

including developing and implementing payment systems and

strengthening oversight of Medicare contractors. However, CMS disagreed

with our contention that—despite Medicare’s size and importance—there

is no official whose sole responsibility it is to run the program. The agency

noted that the Administrator of CMS has that responsibility. However, as

we have pointed out, the Administrator also has many far-reaching

responsibilities for oversight, enforcement, and credentialing for other

major programs and initiatives. CMS has reorganized to centralize the

management of the Medicare fee-for-service and managed care programs

into two centers. Nevertheless, under the reorganization discussed in CMS’

comments, CMS did not indicate that it planned to designate one senior

official whose sole responsibility will be the management of the Medicare

program.

In its comments, CMS agreed that more could be done to strengthen

management of the Medicare program. CMS also discussed its plans for

increasing emphasis on responding to beneficiaries and providers,

improving the quality of care for Medicare and Medicaid beneficiaries, as

well as how restructuring the agency based on the its major lines of

business could help it achieve its mission. In addition, CMS provided

technical comments, which we incorporated as appropriate. CMS’ written

comments are reprinted in appendix I.

As agreed with your offices, unless you publicly announce its contents

earlier, we plan no further distribution of this report until 30 days after its

issue date. At that time, we will send copies of this report to the Secretary

of the Department of Health and Human Services, the Administrator of the

Centers for Medicare and Medicaid Services, appropriate congressional

Agency Comments

and Our Evaluation
Page 27 GAO-01-817 Medicare Management

committees, and others who are interested. We will also make copies

available to others on request.

If you or your staffs have any questions, please call me at (312) 220-7600 or

Sheila Avruch at (202) 512-7277. Other key contributors to this report were

Hannah Fein and Sandra Gove.

Leslie G. Aronovitz, Director

Health Care—Program

 Administration and Integrity Issues
Appendix I: Centers for Medicare and Medicaid Services

Page 28 GAO-01-817 Medicare Management

Appendix I: Centers for Medicare and

Medicaid Services
Appendix I: Centers for Medicare and Medicaid Services

Page 29 GAO-01-817 Medicare Management
Related GAO Products

Page 30 GAO-01-817 Medicare Management

Medicare Contracting Reform: Opportunities and Challenges in

Contracting for Claims Administration Services (GAO-01-918T, June 28,

2001).

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

June 19, 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 Series: 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 Home Health Care: Prospective Payment System Could Reverse

Recent Declines in Spending (GAO/HEHS-00-176, Sept. 8, 2000).

Medicare+Choice: Plan Withdrawals Indicate Difficulty of Providing

Choice While Achieving Savings (GAO/HEHS-00-183, Sept. 7, 2000).

Medicare: Refinements Should Continue to Improve Appropriateness of

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

Medicare Payments: Use of Revised “Inherent Reasonableness” Process

Generally Appropriate (GAO/HEHS-00-79, July 5, 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).

Related GAO Products
Related GAO Products

Page 31 GAO-01-817 Medicare Management

Medicare: HCFA Faces Challenges to Control Improper Payments (GAO/THEHS-00-74, Mar. 9, 2000).

Medicare: Lessons Learned From HCFA’s Implementation of Changes to

Benefits (GAO/HEHS-00-31, Jan. 25, 2000).

Nursing Home Care: Enhanced HCFA Oversight of State Programs Would

Better Ensure Quality (GAO/HEHS-00-6, Nov. 4, 1999).

Medicare Post-Acute Care: Better Information Needed Before Modifying

BBA Reforms (GAO/T-HEHS-99-192, Sept. 15, 1999).

Medicare: Program Safeguard Activities Expand, but Results Difficult to

Measure (GAO/HEHS-99-165, Aug. 4, 1999).

Medicare Contractors: Despite Its Efforts, HCFA Cannot Ensure Their

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

Balanced Budget Act: Any Proposed Fee-for-Service Payment

Modifications Need Thorough Evaluation (GAO/T-HEHS-99-139, June 10,

1999).

Medicare+Choice: New Standards Could Improve Accuracy and

Usefulness of Plan Literature (GAO/HEHS-99-92, Apr. 12, 1999).

Medicare Managed Care: Greater Oversight Needed to Protect Beneficiary

Rights (GAO/HEHS-99-68, Apr. 12, 1999).

Medicare Physician Payments: Need to Refine Practice Expense Values

During Transition and Long Term (GAO/HEHS-99-30, Feb. 24, 1999).

HCFA Management: Agency Faces Multiple Challenges in Managing Its

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

Medicare: HCFA’s Use of Anti-Fraud-and-Abuse Funding and Authorities

(GAO/HEHS-98-160, June 1, 1998).

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

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

(290050)
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