For Release on Delivery

Expected at

10 a.m.

Tuesday,

July 11, 2000

GAO/T-AIMD-00-240

FEDERAL HEALTH CARE

Comments on H.R. 4401,

the Health Care

Infrastructure Investment

Act of 2000

Statement of Joel C. Willemssen

Director, Civil Agencies Information Systems

and

Gloria L. Jarmon

Director, Health, Education, and Human Services

Accounting and Financial Management Issues

Accounting and Information Management Division

Testimony

Before the Subcommittee on Government Management,

Information and Technology, Committee on Government

Reform, House of Representatives

United States General Accounting Office

GAO
Page 1 GAO/T-AIMD-00-240

Mr. Chairman and Members of the Subcommittee:

Thank you for inviting us to participate in today’s hearing on H.R. 4401, the

Health Care Infrastructure Investment Act of 2000. As you know, this is a

companion to Senate bill S. 2312 of the same name. H.R. 4401 calls for the

establishment of an advanced informational infrastructure to immediately

process certain health benefits claims.

After briefly discussing the bill’s provisions, we will address the current

Medicare part B claims process and how it can be used to pay claims more

quickly. We will then provide our perspectives on (1) the development of

an immediate claim, administration, payment resolution, and data

collection system that would initially be applied to the Medicare part B

program; (2) applying this system to the Federal Employees Health

Benefits Program (FEHBP); and (3) the role and composition of a

proposed Health Care Infrastructure Commission. Finally, as requested,

we will point out some of the lessons drawn from a failed HCFA

information technology project in the mid-1990s that could pertain to the

systems development effort envisioned by this bill.

H.R. 4401 would establish a Health Care Infrastructure Commission within

the Department of Health and Human Services (HHS) to design, construct,

and implement an immediate claim, administration, payment resolution,

and data collection system that would initially be used by the Medicare

part B program.1 This system would (1) immediately advise each provider

and supplier of coverage determination; (2) immediately notify each

provider and supplier of any incomplete or invalid claims, including the

identification of missing data and coding errors; (3) immediately process

clean claims2 so that a provider or supplier may provide a written

explanation of medical benefits, including costs and coverage to any

beneficiary at the point of care; and (4) allow electronic payment of claims

for which payment is not made on a periodic payment basis. The bill also

calls for the commission to conduct and publicize a study, with final

recommendations, on the design and construction of such a system within

1Medicare is a combination of two insurance programs, hospital insurance (part A) and optional

supplementary insurance (part B), each with its own enrollment, coverage, and financing. The

Supplementary Medical Insurance trust fund covers part B claims payments for medical services

provided by physicians, laboratories, and an array of other providers and suppliers. In fiscal year 1999,

Medicare part B fee-for-service costs were about $61 billion.

242 U.S.C. 1395u(c)(2)(B)(i) defines a clean claim as one that has no defect or impropriety (including

the lack of any required substantiating documentation) or particular circumstance requiring special

treatment that prevents timely payment from being made on the claim.

H.R. 4401: The Health

Care Infrastructure

Investment Act of

2000
Page 2 GAO/T-AIMD-00-240

3 years and establishes a timetable with specific performance measures

for its initial, intermediate, and full implementation. Another key provision

of H.R. 4401 that relates to the Medicare program is the elimination of

section 1842(c)(3) of the Social Security Act (42 U.S.C. 1395u(c)(3)),

which prohibits the payment of claims until after 13 calendar days from

the date received if electronically submitted or until after 26 calendar days

if manually submitted.

In addition, H.R. 4401 would affect FEHBP—the federal government’s

health benefits program for employees and retirees—which is run by the

Office of Personnel Management (OPM). It would require OPM to adapt

the immediate claim, administration, payment resolution, and data

collection system for use by FEHBP and require FEHBP carriers to use

that system. H.R. 4401 also sets a timetable with specific performance

measures for initial, intermediate, and full implementation of the system.

Although H.R. 4401 is explicit in that the proposed system would cover the

Medicare part B program and FEHBP, it is unclear whether other federal

health programs would also be included in this system. H.R. 4401 calls for

the establishment of an advanced informational infrastructure for

“[f]ederal health benefits programs which consists of an immediate claim,

administration, payment resolution, and data collection system . . . that is

initially for use by carriers to process claims submitted by providers and

suppliers under part B of the [M]edicare program . . . .” (In a later section,

the bill requires that this system be applied to FEHBP.) The bill does not

define “federal health benefits programs,” and provides for inclusion of

only Medicare part B and FEHBP in the system. However, if in the future

the proposed system is intended to include other federal health benefits

programs such as Medicare part A, Medicaid, veterans’ health services, the

Department of Defense’s health services, and Indian health services,

development and implementation of the system envisioned by the bill

would be different and much more challenging.

These other federal health programs are markedly different. In some

cases, the federal government acts like other large employers that contract

with insurance companies and health plans to offer health benefits to

employees and their dependents. In other cases, it acts like a large

insurance company that pays directly for health care services. In still other

instances, it acts like a large staff-model health maintenance organization3

that operates a network of hospitals and employs health care

professionals. Accordingly, if the proposed real-time claims processing

3In a staff-model health maintenance organization, physicians are salaried employees.
Page 3 GAO/T-AIMD-00-240

system were to later be intended to address the claims processing

requirements of any of these programs, it would have a significant impact

on the system’s design and complexity.

Administered by HHS’ Health Care Financing Administration (HCFA),

Medicare is the nation’s largest health insurer, covering almost 40 million

beneficiaries at a cost of over $200 billion annually. Medicare operates

through a complicated administrative structure. Its authorizing

legislation—title XVIII of the Social Security Act—required HCFA to

contract with the private sector for claims processing and payment

functions. This requirement has led to a large contractor network

comprised of insurance companies responsible for processing Medicare

claims in given states. These Medicare contractors are responsible for

claims processing and administration, including (1) receiving claims;

(2) judging their appropriateness; (3) paying appropriate ones promptly;

(4) identifying potentially fraudulent claims or providers, and withholding

payment, if necessary; and (5) recovering overpayments or inappropriate

payments. Contractors develop a set of criteria to determine which claims

to pay, guided by laws, regulations, the Medicare policy manuals, and

periodic agency directives.

For the Medicare part B program, HCFA uses 22 companies doing business

as carriers to process claims. Each carrier relies on one of four standard

systems to process its claims, adding its own front-end and back-end

processing systems. These systems interface with the common working

file (CWF)—a set of nine databases containing beneficiary information for

specific geographic regions—to authorize claims payments and determine

beneficiary eligibility. The CWF obtains information, such as beneficiary

enrollment data, from HCFA’s internal systems. Contractors pay approved

claims by check or by electronic funds transfers. Each day, contractors’

banks draw money from the Federal Reserve System sufficient to cover

the provider checks and electronic funds transfers expected to clear the

bank during the next business day. Figure 1 provides an overview of the

Medicare fee-for-service claims process for the part B program.

Current Medicare

Part B Claims Process
Page 4 GAO/T-AIMD-00-240

Figure 1: Overview of the Medicare Part B Fee-For-Service Claims Process

Note: The claims process also includes a data exchange with the Social Security

Administration, which is used to determine beneficiary eligibility.

Source: GAO, from HCFA documentation.

In fiscal year 1999, about 81 percent of part B claims that were completed

were submitted electronically by providers or billing services, which use

one of two standard electronic formats. As illustrated in figure 2, once

claims are submitted, carriers and HCFA use a variety of automated edits

to determine the validity of these claims.

Part B

provider

Part B

provider's

bank

Carrier's

bank

Part B

carrier

Federal

Reserve

System

HCFA

internal

systems

Common

Working

File

Medicare

Beneficiary

Medicare summary notice, check

Medicare claim

Approval, adjustment

or denial of claim

Medicare claim

Monthly reports to HCFA

Authorization for

funds to be drawn down

by the contractor's bank

Electronic funds

transfer or check Federal funds transfer

Payment authorization

Internal systems under HCFA's control

External systems under HCFA's control

External systems independent of HCFA

Primarily electronic data exchanges

Primarily paper data exchanges

External systems, Medicare claims processing contractor
Page 5 GAO/T-AIMD-00-240

Figure 2: Example of a Part B Claims Automated Edit Process

Note: This flowchart does not reflect claims payment adjustments that may occur.

Source: GAO, verified by officials from two carriers.

Other

payer

found?

Common

Working File

edits

Provider

notified of

rejection

Part B

Carrier

HCFA's

Common

Working

File

Claim denied

Front end

edits

Utilization/

medical

policy edits

Claim

payment

authorized

Returned to

carrier for

review

Claim denied

Claim

rejected

Second

payer edits

Provider

notified of

denial

Provider

notified of

denial

Provider

notified of

edit failure

Failed?

Failed?

Other

edits

failed?

In

suspense? Additional

review? Suspense

File

Manual

Review

Yes

Yes Yes

Yes

Yes

No

No

No No

No

A

A

Claim

submitted

No

Failed?

No

Yes

Yes
Page 6 GAO/T-AIMD-00-240

Carriers generally use three types of edits before authorizing the payment

of a claim. First, front-end edits are used to ensure that valid values are

used and appropriate fields are completed. Claims that fail the front-end

edits are rejected and returned to the provider. Second, carriers use

utilization/medical policy edits to check claims against the medicalnecessity criteria in medical policies. Utilization/medical policy edits are

particularly important because Medicare pays providers a fee for covered

medical services, which are identified through a complex, three-level

coding system, the HCFA Common Procedure Coding System. Using these

codes, utilization/medical policy edits flag indicators such as whether the

medical diagnosis was appropriate for the patient’s gender or age or

whether the medical procedure exceeded the threshold allowed during a

given year. These edits can result in (1) a claim passing to the next set of

edits, (2) a claim denial, (3) a claim being suspended until a manual review

by claims examiners (who may request additional documentation) is

conducted, or (4) a claim adjustment. The third type of carrier edits check

for other payers, which are other primary sources of payment, such as

employer-sponsored insurance or third-party liability settlements. If

another potential payer is identified, the claim is generally denied.

Once a claim passes the carrier edits, the claim is checked against one of

the nine CWFs that are processed at seven different computer sites around

the country. The CWF edits check for items such as beneficiary eligibility,

deductibles and limits, and duplicate claims. These edits can result in

(1) an authorized claim, (2) a claim returned to the carrier for further

review, or (3) a claim adjustment. The CWF also checks for other payers

and, if found, the claim is returned to the carrier for further review.

One outcome of developing an immediate claim, administration, payment

resolution, and data collection system would be faster Medicare part B

claims payments. However, most Medicare claims could be paid more

quickly using current processes by simply eliminating the mandatory delay

in paying claims. Specifically, by enacting the section of the bill that

eliminates the mandatory claims payments delay until after 13 calendar

days from the date of electronic submission (26 calendar days if submitted

manually), the mean time to pay claims would likely be substantially

reduced. The mean time for processing and paying a clean part B claim4

4In obtaining performance information from its carriers, HCFA defines a clean claim as one that did

not require the carrier to investigate or develop outside of the carrier’s Medicare operations on a

prepayment basis. Ninety-nine percent of all completed paid claims were designated as clean claims in

fiscal year 1999.

Medicare Part B

Claims Could Be Paid

Faster Using Current

Processes, But Less

Interest Would Be

Earned
Page 7 GAO/T-AIMD-00-240

that required minimal or no manual intervention was 17.3 days in fiscal

year 1999 (14.5 days for electronic submissions). However, HCFA

estimates that carriers process almost two-thirds of all claims within 5

days.5 Once processed and authorized for payment, the claims are held

until the next payment cycle after the 13- or 26-day requirement has been

met (carriers generally make payments every work day). The carrier then

issues a check or authorizes an electronic funds transfer to pay the claim.

One drawback to eliminating the mandatory payment delay is that the

Supplementary Medical Insurance trust fund, from which the Medicare

part B program is funded, would lose some of the interest it earns on its

balance if payments were made more quickly. Under HCFA’s current

claims processing environment, we estimate that the trust fund could lose

as much as about $140 million in interest revenue annually if the

mandatory payment delay were removed. This amount assumes (1) annual

part B outlays of $60 billion, (2) that the average time to pay claims would

drop from 17.3 days to 5 days, and (3) an average interest rate of about 7

percent on securities.6 The amount the trust fund could lose may be even

higher if a real-time claims processing system were implemented because

the average time to pay a claim could drop below 5 days. The Medicare

Supplementary Medical Insurance trust fund is financed by payments from

federal government general revenues and by monthly premiums charged

beneficiaries. Consequently, a decrease in interest earnings could prompt

the need for additional appropriations or increases in beneficiaries’

premiums to compensate for the interest that the trust fund would

otherwise have earned.

5HCFA does not keep statistics on how much of the average claims processing time is due to computer

processing; however, it estimated this time based on the time period from the date of claim receipt to

the date that the authorized claim is returned to the carrier from the CWF, and assumed that carrier

processing took an additional 2 days.

6We derived this interest rate by taking the weighted average of the interest rates of the outstanding

bonds in the Supplementary Medical Insurance trust fund as of September 30, 1999.
Page 8 GAO/T-AIMD-00-240

While the development of an immediate claim, administration, payment

resolution, and data collection system to be used by the Medicare part B

program might be feasible, it would significantly change the government’s

current processes because it would require the real-time processing of

certain elements of the claims process that are currently performed in

batch mode or manually.7 In the abstract, a real-time Medicare part B

claims process could be achievable if appropriate systems development

policies and techniques are used. Although more beneficiaries might have

to pay their copayments immediately, it could provide health care

providers and beneficiaries with several benefits—primarily the immediate

notification of approved or denied claims. However, without appropriate

safeguards, a real-time claims processing system could involve serious

risks because it opens the process to a possible rise in the number of

improper Medicare payments.8 In addition, the technical and cost risks

associated with developing a real-time claims processing system could be

considerable.

We have long identified Medicare as a high-risk program that is vulnerable

to fraud, abuse, and payment errors.9 Many of Medicare’s vulnerabilities

stem from its size and decentralized administrative structure, which make

it a perpetually attractive target for exploitation and make payment errors

more likely. Because wrongdoers are continually finding new ways to

dodge program safeguards, HCFA and its contractors periodically revise

their pre-payment edit and post-payment audit routines. As a result, the

proposed real-time claims processing system must include appropriate

internal controls to help ensure that operational problems are minimized

and program integrity protected. Key to the design of appropriate controls

is the effective assessment of both external and internal risks that an

agency faces in achieving its objectives, as well as determining how risks

should be minimized.10

7Real-time mode relates to processing that responds to an external event within a short and

predictable time frame. Batch mode relates to processing application programs and their data

individually, with one being completed before the next is started.

8HHS’ Office of the Inspector General estimated improper Medicare fee-for-service payments at

$13.5 billion for fiscal year 1999.

9High-Risk Series: An Update (GAO/HR-99-1, January 1999), High-Risk Series: Medicare (GAO/

HR-97-10, February 1997) and High-Risk Series: Medicare Claims (GAO/HR-93-6, December 1992).

10The Comptroller General’s Standards for Internal Control in the Federal Government provides a

useful framework when considering the types of essential control activities that should be

incorporated into a fully integrated information technology system.

Actions to Minimize

Risks Necessary

Before Developing an

Immediate Claim,

Administration,

Payment Resolution,

and Data Collection

System

A Real-Time Medicare

Claims Processing System

Should Include Controls to

Minimize Improper

Payments
Page 9 GAO/T-AIMD-00-240

A major internal control challenge that a real-time claims processing

system would have to overcome is ensuring that prepayment processes

currently performed manually are adequately addressed. Any new realtime claims process applied to all claims would have to find a way to

accommodate existing manual processes (e.g., postpone until after claims

payment or provide tentative claims approval in certain circumstances),

such as in the case of claims examiners’ reviews of claims that are

suspended because they did not pass utilization/medical policy edits or in

cases that involved claims in which Medicare should be the secondary,

rather than primary, payer. This latter issue is particularly problematic

because determining another insurer’s liability can be a time-consuming

process of discovering whether insurance coverage overlaps and, if so,

ascertaining Medicare’s liability. If issues such as these are not adequately

addressed, additional improper Medicare payments can result.

It is also essential that current program safeguards, such as the edit

process illustrated in figure 2, not be compromised. The

utilization/medical policy edits that address the often complex art of

coding claims are a particular area of concern. As previously mentioned,

HCFA’s Common Procedure Coding System uses three levels of codes:

• Level 1, the American Medical Association’s Physicians’ Current

Procedural Terminology, consists of a list of 5-digit codes for most of the

services performed by physicians. These codes are used to bill for most

procedures and services but have limited selections for describing

supplies, materials, and injections.

• Level 2 are national codes that supplement the level 1 codes and are used

to bill for a range of services and supplies such as vision services and

surgical supplies. These codes have a uniform description nationwide, but

due to what is known as “carrier discretion,” their processing and

reimbursement are not necessarily uniform.

• Level 3 are local codes developed by individual Medicare carriers. The

codes are often used to describe new services, supplies, and materials, as

well as to report procedures and services that have been deleted from

Current Procedural Terminology codes but are still recognized and

reimbursed by the carrier.

The Medicare coding system is difficult to use because it (1) attempts to

identify codes for all accepted medical procedures, including codes to

describe minor procedures that are components of more comprehensive

procedures, and (2) changes every year. For example, the fee for surgery

often includes the cost of related services for the global service period,
Page 10 GAO/T-AIMD-00-240

that is, for a set number of days before and after the surgery. To prevent

overpayment in these cases, Medicare carriers need to identify when

claims for surgery include codes that represent related services and

reduce the payment accordingly. These complexities can inadvertently

lead providers to submit improperly coded claims. They also make the

Medicare program vulnerable to abuse from providers or billing services

that attempt to maximize reimbursement by intentionally submitting

claims containing inappropriate combinations of codes.

Because a real-time claims processing system can be particularly

vulnerable to code manipulation (e.g., through repeated submission of

fraudulent claims until they pass the system’s edits), it would be prudent

to exclude problem providers from participating in a real-time system and

require that new providers complete a probationary period before they

become eligible to participate. In another situation—agency “fast pay”

initiatives (when payment authorization is made prior to verifying receipt

and acceptance of goods or services)—we have similarly stated that

agencies should limit its use to those cases in which suppliers have had

and continue to have good ongoing business relationships with the

agency.11 While the system proposed by H.R. 4401 is not a “fast pay”

situation, it would be prudent to employ these same controls since

Medicare has areas in which mispayment and fraud have been particular

problems. For example, medical equipment supply is an area vulnerable to

fraud, as indicated by its the high payment error rate. Indeed, according to

fiscal year 1997 and 1998 Department of Justice reports, a few medical

equipment suppliers were able to enroll in the Medicare program and

obtain millions of dollars in fraudulent payments before post-payment

reviews and utilization analyses were able to identify the fraudulent

activity.12

Further, ensuring that adequate documentation controls (e.g., detailed

history files and/or logs) are in place and enforced to ensure that the

electronic trail is not lost or tampered with would be particularly

important in a Medicare real-time processing environment. The

importance of maintaining detailed Medicare payment histories and

medical records is demonstrated by the results of HHS’ Office of the

Inspector General’s fiscal year 1999 claims review. The Office of the

11Streamlining the Payment Process While Maintaining Effective Internal Control (GAO/AIMD-21.3.2,

May 2000).

12Department of Justice, Health Care Fraud Report, Fiscal Year 1997 and Department of Justice,

Health Care Fraud Report, Fiscal Year 1998.
Page 11 GAO/T-AIMD-00-240

Inspector General found that claim payment histories and provider

medical records were essential to identifying the payment errors it found.

In addition to the Medicare part B improper payment implications of H.R.

4401, other considerations to be taken into account are the technical and

cost risks associated with the development and implementation of a realtime claims processing system. The Clinger-Cohen Act requires agency

heads to design and implement a process for maximizing the value and

assessing and minimizing the risks of information technology acquisitions.

Guidance prepared by the Office of Management and Budget and by us on

how to implement such a process calls on agencies to assess projects’

benefits, costs, and risks.13 Items to consider before undertaking an

information technology project include the project’s return on investment,

its link to the business’ objectives or strategic plan, and evidence of

compliance with the organization’s overall systems architecture. Without

such analyses, it is risky to require that this system be implemented.

Response times, which can be slowed by the amount and type of

telecommunications involved and the complexity of processing, are a

critical factor in the success of real-time systems. An example of a systems

development that failed, in part due to a response time problem, is the

Bureau of Land Management’s Automated Land and Mineral Record

System Initial Operating Capability. As we testified in March 1999, during

an operational assessment test and evaluation, users reported that system

response time problems were severe or catastrophic at all test sites.14

Because of this and other problems and after obligating over $67 million,

the Bureau of Land Management decided that the Initial Operating

Capability was not deployable. While a high-quality system design would

reduce the risk of slow response times, hundreds of thousands of

providers could be submitting millions of transactions daily (carriers

completed action on almost 718 million Medicare part B claims in fiscal

year 1999). Moreover, it is critical that system controls (such as the many

and varied edits previously discussed) not be compromised in an effort to

achieve reasonable response times.

13Evaluating Information Technology Investments: A Practical Guide (OMB, November 1, 1995) and

Assessing Risks and Returns: A Guide for Evaluating Federal Agencies’ IT Investment Decision-Making

(GAO/AIMD-10.1.13, February 1997).

14Land Management Systems: Major Software Development Does Not Meet BLM’s Business Needs

(GAO/T-AIMD-99-102, March 4, 1999). Other problems that the operational assessment test and

evaluation discovered were that the system did not meet requirements and that data converted from

legacy databases were not accurate.

Technical and Cost Risks

Should Also Be Considered
Page 12 GAO/T-AIMD-00-240

Security, already a major concern in the Medicare program, must also be

adequately addressed in any proposed real-time claims processing system.

H.R. 4401 requires that the real-time claims processing system include

strict security measures that guard system integrity, including protecting

the privacy of patients and the confidentiality of personally identifiable

health insurance data. Implementing such requirements, however, is not

easy.

Both HHS’ Office of the Inspector General15 and we16 have reported that

HCFA’s computer controls do not effectively prevent unauthorized access

to, and disclosure of, sensitive Medicare information. This problem could

be compounded if appropriate security controls are not designed into the

proposed system. In particular, without appropriate controls, electronic

connections can provide a path that can be used by hackers and others to

gain access to databases that contain sensitive information or to simply

disrupt operations.

Recent experiences with the Melissa and “ILOVEYOU” computer viruses

demonstrate the formidable challenge the federal government faces in

protecting its information technology assets and sensitive data.17 Although

key government services remained largely operational, these viruses were

disruptive and provided evidence that computer attack tools and

techniques are becoming increasingly sophisticated. Moreover, if the

design for the real-time claims processing system includes a World Wide

Web-based system, the possibility of other types of attacks must also be

considered and addressed. For example, a “denial-of-service” attack (e.g.,

a web site is flooded with fake requests for pages) can make it difficult or

even impossible for legitimate customers to access a web site or cause the

targeted system to crash.18 Computer attacks are also a cause for broader

15Report on the Financial Statement Audit of the Department of Health and Human Services for Fiscal

Year 1999, Report No. A-17-99-00002, February 2000.

16Financial Management: Agencies Face Many Challenges in Meeting the Goals of the Federal

Financial Management Improvement Act (GAO/T-AIMD-00-178, June 6, 2000); and Medicare Financial

Management: Further Improvements Needed to Establish Adequate Financial Control and

Accountability (GAO/AIMD-00-66, March 15, 2000).

17Information Security: The Melissa Computer Virus Demonstrates Urgent Need for Stronger

Protection Over Systems and Sensitive Data (GAO/T-AIMD-99-146, April 15, 1999); Information

Security: “ILOVEYOU” Computer Virus Emphasizes Critical Need for Agency and Governmentwide

Improvements (GAO/T-AIMD-00-171, May 10, 2000); and Critical Infrastructure Protection:

“ILOVEYOU” Computer Virus Highlights Need for Improved Alert and Coordination Capabilities

(GAO/T-AIMD-00-181, May 18, 2000).

18Information Security: Recent Attacks on Federal Web Sites Underscore Need for Stronger

Information Security Management (GAO/T-AIMD-99-223, June 24, 1999).
Page 13 GAO/T-AIMD-00-240

information security concerns across government because of the inability

to detect, protect against, and recover from computer attacks;

inadequately segregated duties, which increase the risk that people can

take unauthorized actions without detection; and weak configuration

management processes.

Because Medicare part B and FEHBP are substantially different programs,

it would be difficult to design and implement a single system to process

claims under both programs, as called for by H.R. 4401. Specifically, H.R.

4401 requires that (1) OPM adapt the immediate claim, administration,

payment resolution, and data collection system for use by the FEHBP and

(2) carriers participating in FEHBP use the system to satisfy certain

minimum requirements for claim submission, processing, and payment.

Under FEHBP, the government contracts with private plans to finance or

provide care to federal workers and retirees for negotiated annual

premiums. The government runs no plans, pays no claims, and its financial

obligations are limited to its share of the cost of the private plan premiums

and certain administrative costs. For 2000, federal employees could select

from seven nationwide fee-for-service plans,19 six fee-for-service plans

open to specific groups, and hundreds of health maintenance organization

plans available throughout the nation.

As we explained in August 1998, Medicare and FEHBP are significantly

different.20 For example, HCFA and its carriers authorize claims payments

and monitor abuse or fraud, while these roles are delegated to the

hundreds of health plans that are enrolled under FEHBP.21 In addition,

traditional Medicare covers the same standard package of services and

requires the same deductibles, coinsurance, and copayment requirements

for all beneficiaries. In contrast, FEHBP does not require participating

plans to cover a standard or core benefits package. Although all plans

offer inpatient hospital and outpatient medical coverage as well as certain

OPM-required services, specific benefits vary. These differences would

make it challenging and costly to design and implement a real-time claims

processing system for both programs. Moreover, FEHBP carriers may balk

at being forced to implement a system that was not developed with their

19Three of these plans have two options (standard and high).

20Federal Health Programs: Comparison of Medicare, the Federal Employees Health Benefits Program,

Medicaid, Veterans’ Health Services, Department of Defense Health Services, and Indian Health

Services (GAO/HEHS-98-231R, August 7, 1998).

21A single company can administer multiple health plans.

Developing a Single

Real-Time Claims

Processing System for

Both Medicare Part B

and FEHBP Would Be

Challenging
Page 14 GAO/T-AIMD-00-240

particular systems and processes in mind, and it could cause them to drop

out of the program.

The implications of having a real-time claims processing system that

would initially be used by Medicare part B carriers and be developed and

implemented by the seven-member Health Care Infrastructure

Commission instead of HCFA should be carefully considered.22

Specifically, the bill charges the commission, which does not include

HCFA, with designing, constructing, and implementing a real-time claims

processing system. Adding another organization to the already

complicated Medicare process would compound the project’s complexity.

Moreover, any system related to processing Medicare part B claims would

greatly affect HCFA’s current systems as well as its future systems

development. Further, the bill is silent on whether the commission would

also be responsible for maintaining the system, which raises additional

uncertainties about the commission’s and HCFA’s respective roles.

The commission could elect to use HCFA for the development,

implementation, and maintenance of the system. In such a case, if a realtime claims processing system is to be developed, it may be more fitting

for the proposed commission to oversee HCFA’s actions, rather than

develop and implement the system itself. Such oversight could include

evaluating the system design and monitoring HCFA’s development and

implementation actions.

Aside from its role, the composition of the commission also needs to be

carefully considered. In particular, having health care and financial

management expertise on the commission would be critical. As currently

conceived, though, the commission includes several officials from federal

agencies with expertise in advanced information technology but not health

care or financial management. Specifically, the bill explicitly calls for each

official appointed to the commission to “be an expert in advanced

information technology” but does not address health care or financial

management expertise. If a real-time claims processing system is to be

developed, as envisioned by the bill, consideration should be given to

including key HCFA and carrier officials with health care claims

22The commission would be chaired by the Secretary of Health and Human Services and have

members from the Department of Defense’s Defense Advanced Research Projects Agency, the

Department of Veterans Affairs, the National Aeronautics and Space Administration, the National

Science Foundation, the Office of Management and Budget, and the Office of Science and Technology

Policy. The bill also allows the chairman of the commission to appoint an executive director and other

personnel and to procure temporary and intermittent services.

Role and Composition

of the Health Care

Infrastructure

Commission Should

Be Carefully

Considered
Page 15 GAO/T-AIMD-00-240

processing, program integrity, and financial management expertise on the

commission.

One reason it is important for HCFA and its contractors to be part of the

commission is that the development of a real-time claims processing

system could overlap—and possibly conflict with—ongoing and planned

HCFA initiatives, which could be costly and disruptive to both efforts. For

example, HCFA plans to transition from four to two standard Medicare

part B systems (one is only for durable medical equipment carriers) by

fiscal year 2003. Initiatives such as this would clearly affect, and be

affected by, a real-time claims processing system.

Other entities that should be considered for membership in the

commission if the real-time claims processing system set out in the bill is

to be developed are OPM and providers. A representative from OPM

should be considered as a member of the commission since, as currently

called for in the bill, any system developed would be applied to the

FEHBP. Moreover, it may be desirable to have a representative from the

provider community on the commission, since a real-time claims

processing system would also significantly affect providers.

A past HCFA system development failure could provide valuable lessons

in the type of approach that could be taken to determine whether a costeffective, real-time claims processing system can be built. In the mid-1990s

HCFA attempted to improve the efficiency and effectiveness of its

Medicare operations by developing one unified computer system—the

Medicare Transaction System (MTS)—to replace its existing standard

systems. This single system would have integrated data from Medicare

part A and part B and managed care and provided a comprehensive view

of billing practices. As we previously reported, the MTS project

encountered problems from the very beginning.23 It was plagued with

schedule delays, cost overruns, and the lack of effective management and

oversight. Ultimately, in August 1997, HCFA terminated the MTS contract

on which it had spent over 3 years and about $80 million. Although about

$50 million of this amount was for software development (the other

$30 million went to internal HCFA costs), this failed project did not

produce integrated claims processing software. As we testified in

September 1997, MTS provided HCFA with a huge learning experience

23Medicare: New Claims Processing System Benefits and Acquisition Risks (GAO/HEHS/AIMD-94-79,

January 25, 1994) and Medicare Transaction System: Strengthened Management and Sound

Development Approach Critical to Success (GAO/T-AIMD-96-12, November 16, 1995).

Past HCFA Failure

Could Provide Useful

Lessons for Proposed

System
Page 16 GAO/T-AIMD-00-240

about the difficulty of acquiring such a large system under a single

contract and a better understanding of the requirements for developing a

Medicare claims processing system.24

The learning experience HCFA gained from MTS can provide lessons for

the proposed real-time claims processing system. In particular, as we

reported in May 1997, MTS was not adequately managed as an

investment.25 HCFA had not followed practices that are essential if

management is to make informed information technology decisions. Such

practices include preparing a valid cost-benefit analysis, considering viable

alternatives and assessing risks, and evaluating how the proposed

technology will contribute to improvements in mission performance.

While H.R. 4401 requires the commission to perform a study on the design

and construction of the proposed real-time claims processing system, the

bill does not require that analyses such as these be performed, which can

reduce risks and help ensure that information technology projects achieve

maximum return on investment. Accordingly, the proposed system could

benefit from the completion of investment management analyses before a

decision is made about whether the system should be implemented. These

analyses could determine whether cost-effective ways to address the

issues that we have outlined exist.

Another lesson that can be learned from the MTS project is that a phased

approach can reduce the financial, schedule, and technical risks of a

project. The original MTS schedule was developed on the basis of a grand

design approach, in which the complete system would be implemented at

one time.26 A phased approach can reduce the risks inherent in any large

computer development effort—cost overruns, schedule delays, and the

system’s failure to perform as expected. Accordingly, it might also be

desirable to take a phased approach to the proposed real-time claims

processing system, which could reduce its risks.

In summary, H.R. 4401 has worthwhile objectives and would offer benefits

to providers and beneficiaries in that decisions on authorized and denied

claims would be provided immediately. Nevertheless, Medicare part B

24Medicare Automated Systems: Weaknesses in Managing Information Technology Hinder Fight

Against Fraud and Abuse (GAO/T-AIMD-97-176, September 29, 1997).

25Medicare Transaction System: Success Depends Upon Correcting Critical Managerial and Technical

Weaknesses (GAO/AIMD-97-78, May 16, 1997).

26HCFA later changed its implementation plan to a phased approach.
Page 17 GAO/T-AIMD-00-240

claims could be paid more quickly using HCFA’s current processes

without such a system. Paying claims faster, however, may not be

desirable because Medicare’s Supplementary Medical Insurance trust fund

would lose interest revenue.

Before an implementation decision is made, it is particularly important to

demonstrate that a real-time claims processing system can be designed

that provides the safeguards necessary to minimize improper payments.

Moreover, because of the complexity of the Medicare process, additional

analyses of the technical and cost risks of a real-time claims processing

system would be prudent before requiring that it be developed and

implemented. In addition, the administrative and benefits differences

between Medicare and FEHBP would make the development and

implementation of a system applicable to both programs difficult. Further,

the role and makeup of the commission should be carefully considered to

help ensure that any such system would take into account the current

Medicare environment, as well as health care and financial management

issues. Finally, lessons learned in HCFA’s MTS failure demonstrate that it

is important that critical analyses be performed before implementation

decisions are made. Accordingly, it may be premature to require

implementation of the system envisioned by the bill until such analyses are

completed.

Mr. Chairman, this concludes our statement on H.R. 4401. We have also

provided additional technical comments on the bill to your staff. We would

be pleased to respond to any questions that you or other members of the

Subcommittee may have at this time.

For information about this testimony, please contact Joel Willemssen at

(202) 512-6253 or by e-mail at willemssenj.aimd@gao.gov or Gloria Jarmon

at (202) 512-4476 or by e-mail at jarmong.aimd@gao.gov. Individuals

making key contributions to this testimony included Naba Barkakati, Kay

Daly, Michael Fruitman, Donald Hunts, Linda Lambert, Wayne Marsh, and

Margaret Mills.

(511858/916364)

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