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74–849CC 2001

PATIENTS FIRST: A 21ST CENTURY PROMISE TO

ENSURE QUALITY AND AFFORDABLE HEALTH

COVERAGE

JOINT HEARING

BEFORE THE

SUBCOMMITTEE ON HEALTH

AND THE

SUBCOMMITTEE ON OVERSIGHT AND

INVESTIGATIONS

OF THE

COMMITTEE ON ENERGY AND

COMMERCE

HOUSE OF REPRESENTATIVES

ONE HUNDRED SEVENTH CONGRESS

FIRST SESSION

JUNE 28, 2001

Serial No. 107–52

Printed for the use of the Committee on Energy and Commerce

(

Available via the World Wide Web: http://www.access.gpo.gov/congress/house

COMMITTEE ON ENERGY AND COMMERCE

W.J. ‘‘BILLY’’ TAUZIN, Louisiana, Chairman

MICHAEL BILIRAKIS, Florida

JOE BARTON, Texas

FRED UPTON, Michigan

CLIFF STEARNS, Florida

PAUL E. GILLMOR, Ohio

JAMES C. GREENWOOD, Pennsylvania

CHRISTOPHER COX, California

NATHAN DEAL, Georgia

STEVE LARGENT, Oklahoma

RICHARD BURR, North Carolina

ED WHITFIELD, Kentucky

GREG GANSKE, Iowa

CHARLIE NORWOOD, Georgia

BARBARA CUBIN, Wyoming

JOHN SHIMKUS, Illinois

HEATHER WILSON, New Mexico

JOHN B. SHADEGG, Arizona

CHARLES ‘‘CHIP’’ PICKERING, Mississippi

VITO FOSSELLA, New York

ROY BLUNT, Missouri

TOM DAVIS, Virginia

ED BRYANT, Tennessee

ROBERT L. EHRLICH, Jr., Maryland

STEVE BUYER, Indiana

GEORGE RADANOVICH, California

CHARLES F. BASS, New Hampshire

JOSEPH R. PITTS, Pennsylvania

MARY BONO, California

GREG WALDEN, Oregon

LEE TERRY, Nebraska

JOHN D. DINGELL, Michigan

HENRY A. WAXMAN, California

EDWARD J. MARKEY, Massachusetts

RALPH M. HALL, Texas

RICK BOUCHER, Virginia

EDOLPHUS TOWNS, New York

FRANK PALLONE, Jr., New Jersey

SHERROD BROWN, Ohio

BART GORDON, Tennessee

PETER DEUTSCH, Florida

BOBBY L. RUSH, Illinois

ANNA G. ESHOO, California

BART STUPAK, Michigan

ELIOT L. ENGEL, New York

TOM SAWYER, Ohio

ALBERT R. WYNN, Maryland

GENE GREEN, Texas

KAREN MCCARTHY, Missouri

TED STRICKLAND, Ohio

DIANA DEGETTE, Colorado

THOMAS M. BARRETT, Wisconsin

BILL LUTHER, Minnesota

LOIS CAPPS, California

MICHAEL F. DOYLE, Pennsylvania

CHRISTOPHER JOHN, Louisiana

JANE HARMAN, California

DAVID V. MARVENTANO, Staff Director

JAMES D. BARNETTE, General Counsel

REID P.F. STUNTZ, Minority Staff Director and Chief Counsel

SUBCOMMITTEE ON HEALTH

MICHAEL BILIRAKIS, Florida, Chairman

JOE BARTON, Texas

FRED UPTON, Michigan

JAMES C. GREENWOOD, Pennsylvania

NATHAN DEAL, Georgia

RICHARD BURR, North Carolina

ED WHITFIELD, Kentucky

GREG GANSKE, Iowa

CHARLIE NORWOOD, Georgia

Vice Chairman

BARBARA CUBIN, Wyoming

HEATHER WILSON, New Mexico

JOHN B. SHADEGG, Arizona

CHARLES ‘‘CHIP’’ PICKERING, Mississippi

ED BRYANT, Tennessee

ROBERT L. EHRLICH, Jr., Maryland

STEVE BUYER, Indiana

JOSEPH R. PITTS, Pennsylvania

W.J. ‘‘BILLY’’ TAUZIN, Louisiana

(Ex Officio)

SHERROD BROWN, Ohio

HENRY A. WAXMAN, California

TED STRICKLAND, Ohio

THOMAS M. BARRETT, Wisconsin

LOIS CAPPS, California

RALPH M. HALL, Texas

EDOLPHUS TOWNS, New York

FRANK PALLONE, Jr., New Jersey

PETER DEUTSCH, Florida

ANNA G. ESHOO, California

BART STUPAK, Michigan

ELIOT L. ENGEL, New York

ALBERT R. WYNN, Maryland

GENE GREEN, Texas

JOHN D. DINGELL, Michigan,

(Ex Officio)

(II)

SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS

JAMES C. GREENWOOD, Pennsylvania, Chairman

MICHAEL BILIRAKIS, Florida

CLIFF STEARNS, Florida

PAUL E. GILLMOR, Ohio

STEVE LARGENT, Oklahoma

RICHARD BURR, North Carolina

ED WHITFIELD, Kentucky

Vice Chairman

CHARLES F. BASS, New Hampshire

W.J. ‘‘BILLY’’ TAUZIN, Louisiana

(Ex Officio)

PETER DEUTSCH, Florida

BART STUPAK, Michigan

TED STRICKLAND, Ohio

DIANA DEGETTE, Colorado

CHRISTOPHER JOHN, Louisiana

BOBBY L. RUSH, Illinois

JOHN D. DINGELL, Michigan,

(Ex Officio)

(III)

4

C O N T E N T S

Page

Testimony of:

Aronovitz, Leslie G., Director, Health Care Issues, U.S. General Accounting Office ........................................................................................................ 21

Chiplin, Alfred J., Managing Attorney, Health Care Rights Project, Center for Medicare Advocacy, Inc .................................................................... 53

Cullen, Timothy F., Chairman, United Government Services, LLC ............ 51

Mangano, Michael F., Acting Inspector General, Department of Health

and Human Services ..................................................................................... 12

Serota, Scott P., Acting President and CEO, Blue Cross and Blue Shield

Association ..................................................................................................... 44

Scully, Thomas, Administrator, Center for Medicare and Medicaid Services .................................................................................................................. 4

Material submitted for the record by:

American Dental Association, prepared statement of ................................... 66

Aronovitz, Leslie G., Director, Health Care Issues, U.S. General Accounting Office, letter dated August 17, 2001, enclosing response for the

record ............................................................................................................. 70

Mangano, Michael F., Acting Inspector General, Department of Health

and Human Services, letter dated August 15, 2001, enclosing response

for the record ................................................................................................. 82

Medical Device Manufacturers Association, prepared statement of ............ 67

(V)

(1)

PATIENTS FIRST: A 21ST CENTURY PROMISE

TO ENSURE QUALITY AND AFFORDABLE

HEALTH COVERAGE

THURSDAY, JUNE 28, 2001

HOUSE OF REPRESENTATIVES,

COMMITTEE ON ENERGY AND COMMERCE,

SUBCOMMITTEES ON HEALTH,

AND OVERSIGHT AND INVESTIGATIONS,

Washington, DC.

The subcommittees met, pursuant to notice, at 10 a.m., in room

2123, Rayburn House Office Building, Hon. Michael Bilirakis

(chairman) presiding.

Members present Subcommittee on Health: Representatives Bilirakis, Ganske, Norwood, Bryant, Brown, and Capps.

Members present Subcommittee on Oversight and Investigations:

Representatives Greenwood, Bilirakis, and DeGette.

Staff present: Erin Kuhls, majority counsel; Julie Corcoran, majority counsel; Kristi Gillis, legislative clerk; Amy Hall, minority

professional staff; Bridgett Taylor, minority professional staff; and

Karen Folk, minority professional staff; and Chris Knaur, minority

investigator.

Mr. BILIRAKIS. This joint hearing of the Subcommittees on

Health and Oversight and Investigations is the fourth in a series

held jointly by the Subcommittees on Health and Oversight and Investigations this year as part of our initiative to improve Federal

health care programs and to put patients first. To that end, we are

continuing our review of the programs, policies and operations of

the Centers for Medicare and Medicaid Services or as I like to refer

to it, as C-M squared S—it’s actually CMS—formerly known as the

Health Care Financing Administration.

Today we will examine Medicare’s existing contracting authority

and proposals to refine this authority with the goal of securing the

efficient and responsive delivery of high quality services to Medicare beneficiaries.

Medicare contractors play a critical role in the Medicare program. These contractors process and pay claims, identify potential

fraud, respond to inquiries, and educate beneficiaries and providers. The relationship between Medicare and its contractors and

the complexities of the current contracting system are important

factors to consider when discussing ways to protect and strengthen

the program for the future.

Today’s hearing presents a forum to discuss the current Medicare

contracting environment and the various reform proposals expected

2

to promote greater efficiency, enhance contractor performance, and

improve services to beneficiaries.

I am pleased to welcome our witnesses, and I want to thank

them all for joining us today. Our first witness is Tom Scully, the

Administrator of CMS, who will present the Administration’s contracting reform proposal and explain the need for such reform.

Michael Mangano, the Acting Inspector General of the Department of Health and Human Services, will testify about past contractor integrity issues and weaknesses in CMS’ oversight and

management of its contractors. He will be joined by Leslie

Aronovitz, director of health care issues for the General Accounting

Office, who will report on the merits and challenges of expanding

Medicare’s claims processing contracting authority.

I would also like to welcome Scott Serota, the Acting President

and CEO of the Blue Cross and Blue Shield Association, and Tim

Cullen, the Chairman of United Government Services, LLC, one of

Medicare’s largest claims administration contractors.

Finally, I am pleased to welcome Alfred Chiplin, the managing

attorney of the Health Care Rights Project at the Center for Medicare Advocacy. Representing Medicare beneficiaries, Mr. Chiplin

will testify about one of the most important contractor functions.

That is the beneficiary outreach and education.

I look forward to a productive hearing today, and I want to thank

our witnesses for their participation. I am hopeful that this discussion will lead to improvements in the administration of the Medicare program and ultimately, and most importantly, to improvements in the quality of care provided to Medicare beneficiaries.

I yield to Mr. Brown for his opening statement.

Mr. BROWN. Thank you, Mr. Chairman. I appreciate this hearing

today. I would like to thank Tom Scully, and welcome him to our

committee for the first time as the CMS, I guess, administrator. I

remember he was sort of hiding inconspicuously until we mentioned it in the back of the room when we had the four former

HCFA administrators. We all appreciate your being here for that

and listening to some old hands at this to help you do your job now.

We welcome you here.

Medicare contractors perform core functions for the biggest insurance company, biggest insurance program in the country. Their resources are limited. Their responsibilities are considerable. Because

of frequent statutory and regulatory changes, the program that

they administer is ever-changing. We should appreciate the important role that Blue plans and other contractors have played in the

program’s 36-year success. That is not to say we should maintain

the status quo. Contract reform is necessary and long overdue. But

it would be unfair to ignore the contributions made by contractors,

particularly given the immense challenges that they face.

A couple of years ago, I worked with a provider in my district

for nearly a year as that provider wrestled with its carrier over a

post-payment audit. It was an eye-opening experience. The carrier

lost records, used a new coverage standard to evaluate old claims.

By the way, that new and significantly different coverage standard

had never been approved by HCFA. Made sampling errors that inflated the overpayment by hundreds of thousands of dollars. It

3

would take longer than my 5 minutes to recount all those frustrations. No provider should have to go through that.

For the sake of providers and beneficiaries and the integrity of

the Medicare program, contractors need to be held to higher standards. They need additional resources. They require more oversight.

They should be held accountable not only for paying claims accurately and minimizing fraud and abuse, but for delivering high

quality consumer service to beneficiaries and to providers. That

means providing timely and accurate and consistent information. It

means treating providers with respect and fairness. It means coordinating and maintaining open communications with CMS.

CMS should be held accountable for making sure these goals are

met, which means hiring the right contractors and working more

closely with them to ensure that Medicare coverage is properly administered.

Congress, we should be held accountable for giving CMS the authority, the flexibility, and the funding it needs to manage and pay

contractors for Medicare properly. My guess, Mr. Chairman, is that

even more than CMS oversight, improving contractor performance

depends but increasing the resources we provide to these contractors. We cannot expect Medicare contractors to provide appropriate

customer service unless we give them the resources they need to

do the job. Fiscal intermediaries and carriers are Medicare’s frontline. If CMS truly wants to improve its image, it should fight for

those resources.

I thank the chairman.

Mr. BILIRAKIS. And I thank the gentleman, and I agree with him.

If they truly want an increase in those resources, they should be

presenting them and fighting for them. That is something that has

not been taking place.

The Chair is pleased to recognize the chairman of the Oversight

and Investigations Subcommittee, who has done a terrific job on

this issue, Mr. Greenwood.

Mr. GREENWOOD. Thank you, Mr. Chairman. I don’t have a formal statement, but would comment that when we first decided to

go into the issue of HCFA reform, one of the first things that this

committee did was to go to Baltimore to visit the HCFA, then

HCFA facility. We met with the acting director and many of the

senior staff. We sat around a table and said tell us what we should

be looking at when it comes to trying to improve the way this organization provides services. I think the very first comment that was

made was change the contractor system. That it is essentially a

relic that goes back to the origins of Medicare, and reflected the political and the other realities of that time and not the current situation.

So I am delighted that the Administration has submitted a plan,

and that it seems to be so far at least, relatively uncontroversial.

I look forward to working with you to enact it.

Thank you, Mr. Chairman. I yield back.

Mr. BILIRAKIS. The gentlelady from Colorado, Ms. DeGette.

Ms. DEGETTE. Thank you, Mr. Chairman. I don’t have a formal

opening statement either. I would just like to welcome Mr. Scully

and wish you godspeed on your challenges that lie ahead, and look

forward to working with you.

4

I yield back the balance of my time.

Mr. BILIRAKIS. Thank you, gentlelady.

The vice chairman of the subcommittee, the Health Subcommittee, Dr. Norwood.

Mr. NORWOOD. Thank you very much, Mr. Chairman. I ask

unanimous consent that my statement be placed in the record, and

take this opportunity to thank both of the chairmen here for having

this hearing. It is a subject of great interest to many Americans,

particularly those that are patients and treat patients. We are

right on the subject.

I want to thank Mr. Scully. I think we have got a good man at

the helm at times where we do need to make changes.

I look forward to hearing your testimony this morning, Mr.

Scully.

Mr. Chairman, I yield back.

Mr. GREENWOOD. I believe that concludes our opening statements.

Mr. Scully, as you are aware, this is a hearing, it’s a joint hearing between the Health and the Oversight and Investigations Subcommittee. It is the practice of the Oversight and Investigations

Subcommittee to swear in its witnesses. Do you have any objections

to testifying under oath?

Mr. SCULLY. No.

Mr. GREENWOOD. Okay. I should also inform you that you have

the right to an attorney. Do you with to be represented by counsel?

Mr. SCULLY. No, I do not.

Mr. GREENWOOD. You do not? You are a brave man, Mr. Scully.

In that case, if you will raise your right hand, I will give you the

oath of office.

[Witness sworn.]

You are now under oath. We look forward to your testimony.

TESTIMONY OF THOMAS SCULLY, ADMINISTRATOR, CENTER

FOR MEDICARE AND MEDICAID SERVICES

Mr. SCULLY. Thank you, Mr. Chairman, and Chairman Bilirakis,

Mr. Brown, and Ms. DeGette, and Mr. Norwood. I hope this is the

first of many cooperative and friendly reform appearances before

the committee. I have worked with the committee a lot in the past,

and I look forward to working on a lot of issues. As you mentioned,

I think this is one of the highest priority ones.

First, I would say that I have an agreement with the Secretary

that I have to pay him a buck every time I mention HCFA, so

maybe if I do that by accident, which I know it’s tough, during the

hearing, I will pass around a collection plate at the end.

I do have a written statement for the record. I would like to give

an abbreviated version of that. Let me start by in my written statement I have a quote from a former deputy administrator of what

was then HCFA, now is CMS, who once said there is substantial

evidence that the Medicare cost-based contracts do not contain sufficient incentives for efficient, innovative, and cost-effective operations. Since contractors are reimbursed for whatever reasonable

costs they incur, they have no financial motivation to be innovative

and attempting to improve service to beneficiaries or in saving

money. In other areas of the Federal procurement of this magVerDate 11-MAY-2000 08:36 Dec 16, 2001 Jkt 010199 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 E:\HEARINGS\74849 pfrm01 PsN: 74849
5

nitude, contractors are required to compete for the business, and

are rarely reimbursed under the kind of no risk, cost-based contracts which are used in Medicare.

Those are not my words, but from 1980, from Earl Collier, who

was the deputy HCFA administrator, deputy to Leonard Schaeffer,

I think, at the time, who some of you know. My point there is that

really nothing has changed in 21 years.

Twelve years ago, when I was at OMB, I pushed contractor reform. I think we had 72 contractors then. We are down now to 49.

But these issues have been around for a long time, through Democratic administrations, Republican administrations. There has been

a consistent belief in management circles that the right thing to do

is reform the contractor process. It has never happened. I think the

reason for that is it has always been a relatively low priority for

various administrations. It ended up just kind of dwindling in the

lower end of what was important, and never happened.

In this administration, it is absolutely the opposite. Secretary

Thompson, as you know, also spent a week at HCFA, excuse me,

CMS. There is the first buck.

Mr. GREENWOOD. It was HCFA then. That doesn’t count.

Mr. SCULLY. Thank you. He spent a week at the then HCFA,

now CMS, and learned a lot of things, and I think went from being

quite a skeptic about CMS to being very supportive of lots of our

efforts. But the one thing that really hit him as pretty outrageous

was the way the contractor system worked. He has prodded me virtually every day since to make this a top priority. It is a top priority for him as well, to get this fixed. I think that as all the members of this committee have talked to him, and I think all of them

have, realize, it’s hard to talk to him for more than 5 minutes without CMS contractor reform coming up.

So it is a very big personal issue for the Secretary, for this administration. I hope we can work cooperatively with all of our contractors to get this done this year. I will refer later to some of the

other testimonies, but I think in reading Scott’s testimony and

some of the other testimony from GAO, there may be a lot more

common ground than there has been in the past, and I think that

is terrific.

As you mentioned, Mr. Chairman, the design of the program is

really from 1965. It just doesn’t work, doesn’t make a lot of sense.

Our contractors do a great job. I won’t get into reevaluating our

budget request this year, but they do have a huge workload. Arguably in some cases, they do heroic jobs, and there are many concerns and many complaints, some Blue Cross complaints in their

testimony this morning about change orders. They are very legitimate. We will do our best to work some of those out.

But the existing contracting system gives CMS very little flexibility, allows us to have very little ways to encourage innovation

or accountability from the contractors. I think in any rational evaluation of it would say that it is very ripe for reform.

I think the angle we all have is to have higher quality customer

service for our beneficiaries and for providers, to make sure that

the 40 million people on Medicare get better quality services. That

is what we are trying to do today, every day at CMS, is to find

every way we can to fix the systems.

6

Just to run through the basic ideas in our bill, which in fact was

I believe submitted to Congress formally this morning, is first I

think we believe the Secretary needs to have the ability to find and

select the best qualified contractors to do the job through a full and

open contracting process. Today on the Part A side, for instance,

and this has been going on forever, from the beginning of the program, the hospitals have the ability to pick their fiscal intermediaries. As many of you know, I used to be in the hospital business, and I used to lobby myself to keep that every year. I always

thought it was pretty wild we got away with that, to be perfectly

honest. I don’t think that there’s really any rational reason why

hospitals in the current environment should be allowed to nominate individually their providers. It is a vestige of the 1965 law,

and I just don’t think that there really is a real substantive reason

for that to still occur.

Blue Cross Blue Shield Association is the prime contractor for

fiscal intermediaries. Out of the 28 fiscal intermediaries who process Medicare claims, we only have direct contracts with three.

Twenty five of them are subcontractors through the Blue Cross

Blue Shield Association. I think we have a very good relationship

with them, but the structure of the existing contract to go through

the association just doesn’t make sense.

We can’t contract directly, for instance, with one of your other

companies on the panel today, is United Wisconsin. Blue Cross of

Wisconsin, United Government Services, who is one of our bigger

contractors, we contract with them through the National Blue

Cross Blue Shield plan, which I don’t think makes much sense.

We need to have the freedom to contract more open and more

sensibly. We would like very much to work with the Blues to pull

this off. I think it is going to take a number of years. It is going

to have to be phased in. I read Scott Serota’s testimony last night.

I think that a lot of his ideas I agree with. We don’t want this to

be CMS trying to come in and push the Blues out of the program.

If we got to our eventual goal of 18 to 20 contractors in 5 years,

I think we could do that very cooperatively.

If you took our existing 49 contractors and consolidated them in

the overlaps of Part A and Part B, as you can see in those charts,

we would already be at 30. So our real goal here is to find the 18

to 20 best contractors over the next 5 years, and get from the 30

contractors we currently have overlapping down to a little less than

20, and be able to pick them a little more sensibly, and incentivize

them a little more sensibly. We would like to do that in partnership

with the Blues and the other carriers and FIs, and do it in a cooperative way. So I hope that no one perceives this as an adversarial

process, but hopefully a cooperative process.

As I said, there are 28 fiscal intermediaries and 20 carriers. Part

A is fiscal intermediaries, Part B is carriers to process current feefor-service Medicare claims. In 1989, when I first got involved, we

had 72, so there has been some contraction. On average in the last

10 years, we have lost—we have had four contractors a year pull

out of the program. So there is a natural contraction and consolidation going on in the program anyway. What we would like to do

is structure a little more rationally, push maybe a little quicker

7

consolidation, and cooperatively work with our contractors to get to

a more rational program.

We would also like, as a second step, to have legal authority to

contract on an incentive basis rather than a cost basis. I don’t

think there are many cost-based systems left in the government.

There certainly aren’t many left in Medicare. On the payment side,

we have gone to DRGs, PPS, virtually everything, and gotten away

from cost-plus contracts. I think the evidence in Medicare is abundant that cost-plus contracts aren’t rational and don’t work. Whether you go through hospitals, outpatient clinics, virtually every sector of Medicare, we can go into perspective payment or some type

of bundled payment. I believe we should do virtually the same type

of thing on the contractor side.

We need to start looking at contractors, the contracts based on

performance, whether they are cost-plus which is what a lot of people, including some of our contractors suggested, whether we start

to look at more fixed price per member per month contracts. I

think we need to start working with our contractors to be more innovative and come up with new ideas.

I am planning to start some demonstration programs this fall,

hopefully with the agreement of the committee, to start looking at

some of these ways to come up with new, more innovative contracts, to make them better. I hope we will do that with you and

your staff’s support.

The only one agreement I would point out with some of the other

testimony you are going to hear later this morning is I do think

that whether we have a merged Part A or Part B in the program

payments, it doesn’t make much sense on the contractor’s side to

have different payments for fiscal intermediaries and carriers. I do

think that even though it should probably be done gradually and

gently, it is rational to merge the carrier NFI process to come up

with a merged Part A and Part B contractors payment system.

So in summary, let me just say that I think having read last

night the GAO testimony and the Blue Cross testimony, which are

the ones I had, I think our differences here are not that great. I

think the issue is we need change. Change is long overdue. It probably needs to be phased in to make sure it comes off in a rational,

productive way. I do think we need one system that is 15 to 20 contractors, with Part A and Part B merged.

Many of the complaints that Blue Cross has about change orders

and helter skelter direction from the agency at CMS, I am determined to fix. I think a lot of those complaints are legitimate, and

we will do the best we can to make the system work better. We

would like to have a friendly transition with our partners and ease

into a more rational system. We can find the best performancebased contractors, provide them with some risk and reward to be

better contractors for our beneficiaries and our providers, and come

up with a long-term, more rational, more incentive-based partnership.

So I was very happy to read the Blue Cross testimony and the

GAO testimony that you will hear later. I think there is a lot of

common ground to work with, and I hope we can work closely with

our contractors, GAO, the inspector general, and the committees to

8

make this a more rational system, hopefully this year, so I won’t

have to come back 12 years from now and give the same talk.

Thank you very much, Mr. Chairman.

[The prepared statement of Thomas Scully follows:]

PREPARED STATEMENT OF THOMAS SCULLY, ADMINISTRATOR, CENTERS FOR MEDICARE

AND MEDICAID SERVICES

Chairman Bilirakis, Chairman Greenwood, Congressman Brown, Congressman

Deutsch, distinguished subcommittee members, thank you for inviting me here to

testify about Medicare contracting reform.

A former Deputy Administrator in the Health Care Financing Administration,

now known as the Centers for Medicare and Medicaid Services (CMS), once said,

‘‘There is substantial evidence that the Medicare cost-based contracts do not contain

sufficient incentives for efficient, innovative and cost-effective operations. Since contractors are reimbursed for whatever ‘‘reasonable costs’’ they incur, they have no financial motivation to be innovative in attempting to improve service to beneficiaries

or in saving money. In other areas of federal procurement of this magnitude, contractors are required to compete for the business and are rarely reimbursed under

the kind of no-risk, cost based contracts which are used in Medicare.’’ These are not

my words, but words that were spoken in 1980 by Deputy Administrator Earl Collier at a Ways and Means Health Subcommittee hearing on fee-for-service contractors. My point is that contracting reform has been needed for decades, but nothing

has changed.

Efforts to reform Medicare’s contracting arrangements have been around for

years. When I was at the Office of Management and Budget from 1989 to 1993, I

pushed it without success. Let me assure you, however, that no Administration, Secretary, or Administrator, has been nearly as committed to fixing this situation than

this one.

When Secretary Thompson went to CMS (then HCFA) for a week in May, he was

briefed in depth on a wide variety of issues. He was already pretty worked up about

our outdated computer and accounting systems before that week. The single issue

that outraged him most during his intense week of Medicare and Medicaid briefings

was the crazy and antiquated way that the Medicare contracting system works. He

has been talking about the issue daily since, and he has been prodding me since,

almost daily, to fix it. I am not always a slow learner—so this is at the top of the

CMS reform list. In the past this has been low on the reform lists of prior administrations, from Carter and Reagan to Bush and Clinton. That is no longer the case.

A strong Medicare demands a rational contracting system. The Secretary’s intense

interest can be a strong spur to drive this long overdue change—and we are excited

to work with you, and our contractors, to fix the system.

Today, the Administration is proposing legislation to reform the current system,

and I am pleased to discuss the details of that proposal. I look forward to working

with the Committee in the coming months to achieve this important objective.

BACKGROUND

Since Medicare was created in 1965, the government has used private health insurance company contractors to process Medicare claims and perform related administrative services for beneficiaries and health care providers. Today, CMS uses 49

contractors, across the country, including the contract with the Blue Cross Blue

Shield Association of America, to process nearly a billion claims each year, from

over one million health care providers, and provide customer services to 33 million

Medicare beneficiaries. These contractors employ over 21,000 people. This year,

Medicare contractors will pay out more than $175 billion for beneficiary health care

services, the vast majority of these transactions occurring electronically.

The fee-for-service contractors are governed by Medicare laws that impose outdated requirements and diverge from general federal acquisition laws in several respects. The current Medicare statute restricts the Secretary from competing the feefor-service claim processing contracts to the most qualified entities. Rather, institutional providers, such as hospitals and nursing facilities, nominate the contractor,

or fiscal intermediary, that processes and pays their Medicare Part A claims. While

the statute does not require the Secretary to accept the nominations, it effectively

ties the Secretary’s hands because it also does not allow the Secretary to contract

outside the nomination process. In 1965, the American Hospital Association nominated the Blue Cross Blue Shield Association of America to be the fiscal intermediary contractor, who subcontracts with local Blue Cross plans. That arrangement continues today. At the time, some providers nominated other commercial inVerDate 11-MAY-2000 08:36 Dec 16, 2001 Jkt 010199 PO 00000 Frm 00012 Fmt 6633 Sfmt 6621 E:\HEARINGS\74849 pfrm01 PsN: 74849
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surers to serve as their fiscal intermediaries. Mutual of Omaha is the only major

commercial insurer among that original group that continues as an intermediary

today. The statute was amended in 1977 to allow the Secretary to designate regional

or national intermediaries for administering home health claims. These intermediaries, referred to as Regional Home Health Intermediaries (RHHIs), must already be fiscal intermediaries in order to participate.

For most Part B claims processing, the law is more prescriptive and requires that

the Secretary select and use health insurers, referred to as carriers, to process

claims and make payments to physicians, ambulance companies, and other suppliers. Similar to the RHHIs, the statute was amended in 1987 to permit the Secretary to designate regional carriers to process claims for durable medical equipment, prosthetics, orthotics, and supplies. These durable medical equipment regional carriers, or DMERCs, also must be health insurers.

CURRENT CONTRACTOR ENVIRONMENT

Today, there are 28 fiscal intermediaries and 20 carriers processing Medicare feefor-service claims. Twenty-six of the fiscal intermediaries are Blue Cross plans and

two are commercial insurance companies. On the Part B side, fifteen of the current

carriers are Blue Shield plans and the remaining five are commercial insurance

companies.

As you can see in Chart 1, some contractors, such as Nebraska Blue Cross, serve

only one State. By contrast, many contractors serve multiple and sometimes noncontiguous states, resulting in a patchwork of coverage and service across the country. For example, on the Part A side, Wisconsin Blue Cross (known outside Wisconsin as United Government Services) serves Wisconsin and Michigan, as well as

California and Nevada. The same holds true on the Part B side of Medicare as indicated in Chart 2. Some contractors are both fiscal intermediaries and carriers, for

example, South Carolina Blue Cross/Blue Shield, also known as Palmetto, is a fiscal

intermediary, carrier, DMERC and RHHI. This patchwork of coverage is a result

of the large number of transitions by insurers out of the Medicare program. Since

1994, an average of four contractors has left the program each year (Chart 3).

Medicare’s fee-for-service contractors are responsible for a wide range of Medicare

program activities. The fiscal intermediaries and carriers receive and control Medicare claims from hospitals and other providers, as well as perform edits on these

claims to determine whether the claims are complete and should be paid. In addition, the fiscal intermediaries and carriers calculate Medicare payment amounts and

remit these payments to the appropriate party.

The role of the intermediaries and carriers goes beyond claims processing. For example, they conduct reviews and hold hearings on appeals of claims from physicians

and providers; they respond to beneficiary inquiries; they make coverage decisions

for new procedures and devices in local areas; and they conduct a variety of different provider services, such as enrolling new providers in the program, and educating them on Medicare’s rules and regulations and billing procedures. The fiscal

intermediaries and carriers also staff Medicare’s provider toll-free lines across the

country to answer a wide-range of provider questions. In addition, the fiscal intermediaries and carriers perform a variety of functions to ensure the financial integrity of the Medicare program. Currently, all fee-for-service contractors—the fiscal

intermediaries and the carriers ‘‘are governed by cost reimbursement contracts. By

broadening the type of contracts available for use in Medicare contracting and taking greater advantage of competition and other contracting principles in the Federal

Acquisition Regulation, the Secretary would be allowed to maximize incentives to

encourage more efficient, innovative, and cost-effective contractor operations.

MANAGING FOR RESULTS

CMS has taken a variety of steps over the last several years to improve oversight

and management of Medicare’s fee-for-service contractors. One of the first, and

among the most important, steps we took was to restructure and consolidate CMS’s

management of the contractors. One individual, the Deputy Director for Medicare

Contractor Management, now is directly responsible for all Medicare contractor

management activities within the Agency. When the Agency restructuring plan I announced earlier this month is fully implemented, this position will be located in the

Center for Medicare Management. We have created direct lines of communication

between the contractors and the Deputy Director through our Consortium Contractor Management Officers. These groups are located in each of our four regional

consortia and serve as the ‘‘eyes and ears’’ of the Agency for the contractors. Our

goal is to be more consistent in our management of fee-for-service contractor perVerDate 11-MAY-2000 08:36 Dec 16, 2001 Jkt 010199 PO 00000 Frm 00013 Fmt 6633 Sfmt 6621 E:\HEARINGS\74849 pfrm01 PsN: 74849
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formance and to open the lines of communication between our Agency and our contractor partners.

The groups regularly monitor the contractors’ performance; provide management

and guidance; work with technical experts in the Agency to approve budgets, establish Corrective Action Plans; and help to eliminate Agency obstacles in obtaining answers, feedback, and guidance from CMS’s central office and the regions. Furthermore, the Medicare Contractor Oversight Board provides executive leadership and

establishes guiding principles for CMSs oversight of the Medicare fee-for-service

contractor network.

We also have made substantial improvements to our contractor evaluation processes. In 1999, we revamped our Contractor Performance Evaluation process to ensure greater consistency and objectivity in our review of the contractors. We have

incorporated specific, objective standards on a wide-range of contractor functions

into our annual review plan. These standards help provide consistent guidance to

contractors as to what is expected of them and what improvements are needed.

Through accountability and leadership at the senior level of the Agency, we have

developed nationally based review protocols and created national review teams for

monitoring and reviewing contractor performance. These national review teams,

which include experts in Agency business functions, come from every region and the

central office. They help to ensure that performance reviews are consistent from region to region and contractor to contractor. In establishing our review of the contractors’ performance, we use risk assessment tools to help focus our monitoring and

target our resources most appropriately. In addition, in an effort to ensure consistency in our review process, we have increased our educational training and sponsored several national conferences for our reviewers. Our current evaluations are focused on the greatest risk—financial integrity. In the future, we plan to focus our

reviews more on customer service. This will include feedback from providers and

beneficiaries. Without contractor reform, however, our ability to provide strong incentives to reward improvements in performance is quite limited.

LOOKING TOWARDS THE FUTURE

In conjunction with this new approach to contractor management and oversight,

we are developing a long-term business strategy for Medicare fee-for-service contractor operations, taking into account both our past experience and current factors,

including the changing business environment. There are several key factors driving

the need for this strategic business plan. Our primary concerns are the need to prepare the Medicare program for the future, to ensure that the Medicare fee-for-service program and its contractors are both responsive to providers and, above all, contribute to providing high-value services for beneficiaries; and to protect the trust

funds from needless error and waste while also remaining accountable to taxpayers.

Our strategic business plan will provide us with a framework for decision-making

and articulating our business vision to our contractors. It also will assist us in improving our management and oversight and stabilizing our business relationships

with them. Our goal is to promote organizational learning and innovation within the

Agency as well as with our contractors. We know, for example, that there is a growing need for flexibility in administering the fee-for-service program. And we have

learned a great deal about the need to respond quickly and think in innovative ways

to adapt to changes following the passage of the Balanced Budget Act, Balanced

Budget Refinement Act, and subsequent legislation. Our business plan will help ensure that our contractor systems have the operational capacity to respond to these

complex and multiple programmatic changes, such as modifications to Medicare coverage or the addition of new and complex payment systems, and to meet future programmatic challenges.

Our business plan also is focused on our continuing to meet the needs of our beneficiary, provider, and contractor stakeholders. This includes the transition of claims

processing work from a contractor leaving the program to one assuming additional

work with minimal disruption to providers and beneficiaries, improving educational

services provided to beneficiaries and providers by our contractors, and compensating contractors appropriately for the work they do. At the same time, we must

strive to improve the financial management of the Medicare program by minimizing

the potential for abuse and errors, considering cost-effective ways to implement program and system changes, and improving the integrity of the provider enrollment

process.

CONTRACTING REFORM

We must continue to manage the Medicare program efficiently and effectively and

to fully implement our business strategy. To do that, we must fundamentally change

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our relationship with the Medicare fee-for-service contractors. I firmly believe that

the Medicare fee-for-service contracting work should be awarded competitively to

the best-qualified entities, using performance-based service contracts that include

appropriate payment methodologies. This is something that current law will not

allow.

I believe these contracts should result in contractors receiving payment when they

deliver something of value, and profit only when they perform at or above the satisfactory level. We must be able to maximize economies of scale and improve the level

of service to our beneficiaries and providers. We would like to work cooperatively

with our existing contractors to get to this goal, but these changes require legislative action. As I mentioned, today we are proposing legislation to address these differences and we want to work with this Committee and the Congress on a viable,

sensible solution.

Through these legislative changes, CMS hopes to accomplish the following:

• Provide flexibility to CMS and its contractors to work together more effectively

and better adapt to changes in the Medicare Program.

• Promote competition, leading to more efficiency and greater accountability.

• Establish better coordination and communication between CMS, contractors and

providers.

• Promote CMS’s ability to negotiate incentives to reward Medicare contractors that

perform well.

These changes will enhance the Agency’s ability to more effectively manage claims

processing for the Medicare program in the future, and ensure that the future

changes to the Medicare program’s operating structure are free from unnecessary

constraints.

We are continuing to proceed with the implementation of our long-range business

strategy. To capture the benefits of integrated data processing, we have begun to

consolidate our claims processing workload among our existing contractors, and are

moving to consolidate and standardize contractor claims systems. Our goal is to

have one system for intermediary claims, one for carrier claims, and one for durable

medical equipment claims. And we will continue to establish more direct control of

our data centers, which should reduce costs and improve efficiency. This consolidation will allow us to make changes efficiently and consistently, and help streamline

our information technology infrastructure. Over time, based on the results of ongoing risk and cost benefit analysis, we anticipate expanding our current pool of contractors to include those who can perform specific functions, such as program integrity and coordination of benefits. In addition, we will continue to build the systems

interfaces needed to ensure the full integration of Medicare’s contractor operations

with the new integrated general ledger accounting system initiative to enhance the

contractors’ financial management, and protect the Medicare trust funds for the future.

CONCLUSION

I appreciate the opportunity to appear before you today and share our vision for

reforming the Centers for Medicare and Medicaid Services’ administration of Medicare’s fee-for-service claims processing contractors. Together, we can take aggressive

action to reform Medicare’s current contracting arrangement. We must build on the

strengths of our current contracting relationships and foster a environment of accountability, innovation, and flexibility. We already have a strong business strategy

in place. Through the implementation of this plan, and the realization of our contracting reform objectives as set forth in our legislative proposal, I am confident the

Medicare program will be strengthened and better prepared to meet future challenges. I look forward to working with this Committee and the Congress on a bipartisan basis to enact this critical reform legislation. Thank you and I am happy to

answer your questions.

Mr. GREENWOOD. Thank you, Mr. Scully. It is my understanding

that you will stay with us.

Mr. SCULLY. Yes.

Mr. GREENWOOD. We will have the next two witnesses give their

testimony. Then the three of you will take questions as a panel. So

we call forward Mr. Michael Mangano, who the Acting Inspector

General, Department of Health and Human Services, and Ms. Leslie Aronovitz.

Did I say that right, Aronovitz?

12

Ms. ARONOVITZ. That’s okay.

Mr. GREENWOOD. You are both aware that the Oversight and Investigations Subcommittee has the practice of having its witnesses

give their testimony under oath. Do either of you object to testifying under oath? Under the rules of the committee and the House,

you are entitled to counsel. Do either of you wish to be advised by

counsel today? In that case, if you will raise your right hand.

[Witnesses sworn.]

You are both under oath. We will hear first from Mr. Mangano.

TESTIMONY OF MICHAEL F. MANGANO, ACTING INSPECTOR

GENERAL, DEPARTMENT OF HEALTH AND HUMAN SERVICES; AND LESLIE G. ARONOVITZ, DIRECTOR, HEALTH CARE

ISSUES, U.S. GENERAL ACCOUNTING OFFICE

Mr. MANGANO. Thank you very much, Mr. Chairman, and members of the subcommittee. I really appreciate this opportunity to

testify before you this morning on the Medicare program, and on

the importance of the Medicare contractors who actually operate

this particular program.

As we all know, these Medicare contractors function well when

providers are promptly paid, beneficiaries receive the health care

services that they are entitled to, and the trust funds are protected

against wasteful spending. When they don’t, the entire program is

in jeopardy.

Since the inception of the Medicare program, numerous legislative changes have been made and amendments added to the Social

Security Act, which have led to substantial changes.

Mr. BILIRAKIS. Why don’t you pull that mike closer, please, sir?

Mr. MANGANO. Yet the way the Centers for Medicare and Medicaid Services, CMS, actually has decided to select its contractors

and organize its contractors has really remained much the same

over the years, primarily due to the laws.

CMS needs to be given greater flexibility in the methods it uses

to select, organize, and supervise its Medicare contractors. With

this, we believe that it needs to have authorities to use entities

other than insurance companies, select them competitively, pay

them on an other than cost basis, organize them according to the

function and benefit areas, and hold them accountable for performance.

Over the years, we have identified numerous problems with contractor operations. Perhaps most troubling of all has involved

lapses in the contractor’s own integrity and involvement in such

things as misusing government funds while concealing their actions, altering documents and falsifying statements of specific work

that was performed, preparing bogus documents to falsely demonstrate superior performance, which then led to bonuses being

paid by the Medicare program or additional contracts being given

to that particular contractor, and adjusting their claims processing

so that systems edits, designed to prevent inappropriate payments

were turned off, thus resulting in misspent Medicare trust fund

dollars. Since 1993, we have entered into civil settlements with 14

Medicare contractors, resulting in total settlements in excess of

$350 million.

13

We have also encountered problems associated with financial

management and accounting procedures. For several years, we

have reported serious errors in contractor reporting of accounts receivable that resulted from weak financial controls. It is quite clear

that the root cause of these problems has been the lack of an integrated dual entry accounting system, less than adequate oversight

and internal controls that would have prevented these problems

from occurring in the first place.

CMS also relies on extensive electronic data processing operations to administer the Medicare program and to process and account for Medicare expenditures. Here we found numerous general

control weaknesses, primarily with Medicare contractors. About 80

percent of the 124 problems that we found in our review of the last

financial statement of the Medicare program identified three general types of controls that we felt were insufficient, namely, access

controls, entry-wide security programs and systems software controls.

The ability to prevent or correct the problems just described stem

at least in part from the way that CMS is required to contract with

its claims administrators. The Medicare statute places substantial

limits on how CMS can obtain contractor assistance to administer

the Medicare program, including limiting CMS to choosing only

certain types of companies to process claims and restricting them

to a cost-based reimbursement method.

Although most of government contracts require competitive bidding, using full and open competition with very few prohibitions on

who can be awarded the government contract, CMS typically contracts with fiscal intermediaries and carriers without using full and

open competition restricted to health care companies sometimes selected by health care providers, and is required to use cost reimbursed contracts where the government assumes all the risk.

To promote innovations and efficiencies from the private sector,

legislation is needed that would increase their flexibility in how it

contracts by allowing it to contract competitively and with entities

that are not necessarily insurance companies, allow it to contract

with one entity to perform both contractor and intermediary functions, permit the Secretary to follow normal government procurement regulations, and reimburse contractors on a fixed-fee basis

when needed. These changes would provide CMS with greater flexibility, promote competition, increase CMS’ ability to negotiate incentives, and improve their contractor performance evaluation process.

We believe these common sense approaches are long overdue and

have consistently testified in their support. CMS needs to have sufficient flexibility in its authorities to contract with companies best

able to carry out the needed functions, hold these companies accountable when they fall short, and reward them when they perform well. Beneficiaries and providers will be better served when

that happens, and CMS will get a better value for the contracting

dollar.

Thank you very much, Mr. Chairman. I will look forward to answering your questions at the appropriate time.

[The prepared statement of Michael F. Mangano follows:]

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1Medicare Secondary Payer activities identify other sources of payment, such as employersponsored insurance or other third-party payer that may cover health claims for Medicare beneficiaries. These payers are primary and Medicare is secondary with respect to responsibility for

paying a claim.

PREPARED STATEMENT OF MICHAEL F. MANGANO, ACTING INSPECTOR GENERAL, U.S.

DEPARTMENT OF HEALTH AND HUMAN SERVICES

Good morning Mr. Chairmen and members of the Subcommittees. I appreciate the

invitation to testify today on the important issue of improving Medicare contractor

operations.

Medicare contractors are the heart of the Medicare program. When they function

well, providers are paid promptly, beneficiaries receive the health care services they

need, and the Trust Fund is protected against wasteful spending. When they don’t

function properly, the entire program is jeopardized—those who benefit from it,

those who provide care, and those who pay for it all suffer the consequences.

Since the inception of Medicare, numerous legislative changes have been made

and amendments added to the Social Security Act which have led to substantial

changes in the Medicare program.

For example, the way Medicare pays for health care has changed through time,

from primarily cost/charge based payment systems to new fee-schedule and prospective based arrangements. While the Medicare program as a whole has seen significant change, the way that the Centers for Medicare and Medicaid Services (CMS)

is allowed to select and organize its contractors has remained much the same as

it has since the inception of the program.

CMS needs to be given greater flexibility in the methods it uses to select, organize, and supervise the contractors who handle the day-to-day operations of the

Medicare program. This includes authorities to use entities other than insurance

companies, select them competitively, pay them on other than a cost basis, organize

them according to functions or benefits areas, and hold them accountable for performance.

BACKGROUND

The Medicare program provides health insurance for 39.5 million elderly and dis- abled Americans at a cost of over $220 billion in fiscal year 2001. Although beneficiaries have a growing number of options under the Medicare+Choice program, the

majority of beneficiaries are still covered by traditional fee-for-service Medicare. The

fee-for-service program is administered by the CMS with the help of approximately

50 contractors that handle claims processing and administration.

Since the Medicare program was created, the government has contracted with private health insurance companies for claims processing and related administrative

services. There are two primary types of contractors. Fiscal intermediaries (FIs)

process claims filed under Part A of the Medicare program by institutions, such as

hospitals and skilled nursing facilities. Carriers process claims under Part B of the

program filed by other health care providers such as physicians and medical equipment suppliers. In addition to these two types, Durable Medical Equipment Regional Carriers (DMERCs) pay suppliers of durable medical equipment, prosthetics,

and orthotics; and, Regional Home Health Intermediaries (RHHIs) process home

health claims.

Contractor tasks for the Medicare program fall into 5 functional areas: 1) claims

processing, 2) payment safeguards, 3) fiscal responsibility, 4) beneficiary services,

and 5) administrative activities. Claims processing involves receiving claims,

promptly paying those that are appropriate, taking necessary action to identify inappropriate or potentially fraudulent claims and either withholding payment or recovering overpayments. Payment safeguard activities require additional actions to

further safeguard the integrity of the Medicare program and protect against fraudulent and abusive billing. Safeguard activities include medical review to determine

the medical necessity of procedures and services, Medicare Secondary Payer (MSP)

review 1, audits, and investigations by fraud units. Fiscal responsibilities by the contractors include all actions to ensure a full and accurate reporting of Medicare accounts receivable and financial reconciliations.

In 1996, the Health Insurance Portability and Accountability Act (HIPAA) enacted

the Medicare Integrity Program, which provided CMS with new authorities to contract with entities beyond, but also including, current carriers and fiscal intermediaries to perform specific payment safeguard functions. Such contractors can

take on some, all, or any subset of the work associated with current contractor payment safeguard functions including medical and utilization review, cost report audits and provider education.

15

Unfortunately, we have identified numerous problems in contractor operations

over the last few years. I will highlight some of these problems for you now.

INTEGRITY PROBLEMS

Perhaps the most troubling of all the problems that the Office of the Inspector

General (OIG) has observed has involved lapses in contractors’ own integrity—misusing government funds and actively trying to conceal their actions, or altering documents and falsifying statements that specific work was performed. In some cases,

contractors prepared bogus documents to falsely demonstrate superior performance

for which Medicare rewarded them with bonuses and additional contracts. In other

examples, contractors adjusted their claims processing so that system edits designed

to prevent inappropriate payments were turned off, resulting in misspent Medicare

Trust Fund dollars.

Since 1993, a number of criminal and civil actions have been taken against carriers and intermediaries in connection with their performance under CMS contracts,

and we have entered into civil settlements with 14 Medicare contractors with total

settlements exceeding $350 million. OIG has imposed 8 corporate integrity agreements in connection with these settlements. Corporate integrity agreements are

mandatory compliance and reporting requirements agreed to by the contractor to

avoid exclusion or debarment. In addition, two contractors have entered into guilty

pleas to the charge of obstruction of a federal audit.

The following examples illustrate the egregiousness of the problems which can

occur and the consequent exposure to financial losses. Unfortunately, they are not

isolated cases. At any given time, several contractors may be under investigation

by our office. Presently, we have 24 former or current contractors actively under investigation.

Health Care Service Corporation

In July of 1998, Health Care Service Corporation, the Medicare carrier for Illinois

and Michigan, agreed to pay $140 million to resolve its civil liability under the Civil

False Claims Act and the Civil Monetary Penalties Law. On an annual basis, CMS

evaluates the performance of its carriers, relying, in large part, on information, data

and certifications provided by the carriers. Carriers that demonstrate poor performance on these annual reviews are subject to contract termination or other adverse

action by CMS. Between 1985 and 1997, Health Care Service Corporation altered

documents and manipulated data in order to improve its score on these annual reviews. During our investigation, we found the following problems: improper processing of Medicare Secondary Payer claims, bypassing the system generated audits

and edits during the processing of Part B claims, and improper deletion of claims

from the system.

In addition to the civil settlement, the corporation pleaded guilty to obstructing

a federal audit, conspiracy to obstruct a federal audit and six counts of making false

statements to CMS. Health Care Service Corporation paid a $4 million criminal fine

in connection with these charges. Two of the corporation’s managers pleaded guilty

and five others were indicted on various criminal charges related to this scheme.

CMS terminated the Medicare contracts with Health Care Service Corporation as

of September 30, 1998. This case resulted in the largest civil fraud settlement

against a Medicare contractor to date.

XACT Medicare Services of Pennsylvania

In August of 1998, a Medicare carrier located in Pennsylvania agreed to pay $38.5

million to resolve its liability for misconduct in its performance as a carrier. A joint

investigation by the OIG and other Federal agencies found that during the years

1988 through 1996, the carrier engaged in the following misconduct: failing to properly process or take appropriate action to recover improper payments related to

Medicare secondary payer claims; obstructing the carrier performance evaluation

program by rigging samples for CMS audits; failing to recover overpayments; failing

to monitor End Stage Renal Disease laboratory claims; and overriding payment

safeguards to by-pass electronic audits or edits when processing Part B claims. As

part of the settlement, the carrier agreed to enter into an extensive corporate integrity program to ensure proper training for its employees and external reviews of its

performance under its contract with Medicare.

Blue Cross/Blue Shield of Michigan

On January 10, 1995, Blue Cross/Blue Shield of Michigan, a Medicare carrier,

agreed to pay $27.6 million to settle a qui tam suit under the False Claims Act initiated by a former employee. At the time that the suit was filed, in June 1993, Blue

Cross/Blue Shield of Michigan was also the fiscal intermediary for the Medicare

16

Part A program in Michigan and was the carrier for the Medicare Part B program.

As of September 30, 1994, CMS terminated both contracts and Blue Cross/Blue

Shield of Michigan no longer serves as intermediary or carrier. As the intermediary,

Blue Cross/Blue Shield of Michigan was responsible for auditing participating hospitals’ cost reports to ensure accuracy. An Office of Inspector General (OIG) investigation showed that they performed inadequate, cursory audits in which they disregarded significant overpayments. They later gave CMS fraudulent work papers in

an attempt to show that complete and accurate audits were performed. The precise

amount of loss to the Government could not be determined because it would have

required auditing more than 200 hospitals. As part of the settlement, the Blue

Cross/Blue Shield of Michigan agreed to repay the entire amount CMS had paid to

perform audits over a 4 year time period, approximately $13 million. Blue Cross/Blue Shield of Michigan also agreed to pay an additional $24 million

to settle charges of violating Medicare secondary payer laws. Under these laws, private insurers are required to act as the primary benefits payer under certain circumstances when an individual has medical insurance under both Medicare and an

employer health plan. An OIG audit determined that in its capacity as the Medicare

contractor in Michigan, Blue Cross/Blue Shield of Michigan paid thousands of dual

coverage claims from Medicare trust funds rather than from its own funds in cases

where there was overlapping coverage.

Anthem Blue Cross and Blue Shield of Connecticut

In December of 1999, Anthem Blue Cross and Blue Shield of Connecticut (Anthem), Connecticut’s former Medicare fiscal intermediary, agreed to pay the Govern- ment $74.3 million to resolve allegations of wrongdoing by its predecessor corporation. The company allegedly falsified hospital cost reports to meet Government performance standards as a Medicare fiscal intermediary. The company’s misconduct

led several Connecticut hospitals to improperly receive Medicare overpayments and

enabled the company to obtain a better performance evaluation from CMS than it

would have otherwise received. This settlement represents the largest civil settlement in a health care fraud case in the State and the second largest Medicare contractor settlement nationwide. As part of the settlement, the company, which is no

longer an intermediary, agreed to the imposition of a corporate integrity agreement

for 5 years for its Medicare+Choice health maintenance organization contract, which

it still operates.

FRAUD UNIT PERFORMANCE

As part of their payment safeguard activities, Medicare contractors are required

to have Fraud Units which are designed to detect and deal with problems of fraud

and abuse within the provider community. The types of problems detected range

from individual cases of suspected fraud, to patterns of fraud or questionable activity which may represent a broader program vulnerability.

As we work closely with these units, we in the OIG are keenly interested in their

operations and effectiveness. In 1996, we reviewed the functions of the carrier fraud

units, and in 1998 we reviewed the fiscal intermediary fraud units. Overall, we

found that their effectiveness varies considerably and often their performance is not

directly related to the size of the unit or the total number of resources allocated.

Total case loads among the Fraud Units varied considerably, from zero to over 600

for the intermediaries. In reviewing carrier case files, we also found that some allegations of fraud were being lost during the overpayment adjustment process and

were not properly developed as potential fraud cases. In addition to complaints received, Fraud Units are encouraged to proactively develop their own cases for potential referral to our office. Unfortunately, we found that less than one-half were actively engaged in developing their own cases. Similarly, less than one-half of the

fraud units were active in identifying program vulnerabilities.

A key factor is a contractor management’s commitment and attention to fraud

matters overall. The most successful Fraud Units are those given significant prominence in the contractor’s organizational structure, reporting to the highest levels of

corporate management. Overall, however, effectiveness of the Fraud Units has been

hampered by staff turnover, lack of proper background and training, and an overall

lack of uniformity and understanding of key fraud terms and definitions.

As mentioned earlier, HIPPA provided CMS with new authorities to contract with

entities separate from current carriers and fiscal intermediaries to perform specific

program integrity functions. These new Program Safeguard Contractors will supplement, and in some cases replace, the work of fiscal intermediary and carrier fraud

units. It is too early to evaluate the performance of these safeguard contractors;

however, as I will discuss in more detail later, their structure provides a model on

which to base broader contractor reforms.

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FINANCIAL MANAGEMENT PROBLEMS

We have also encountered problems associated with financial management and

accounting procedures and longstanding weaknesses in internal controls, including

deficiencies related to the receivable amounts reported in CMS’ financial statements

and electronic data processing.

Financial Systems and Processes

Along with its Medicare contractors, CMS is responsible for managing and collecting many billions of accounts receivable each year. Medicare accounts receivable

are primarily overpayments made to health care providers by contractors that must

be repaid to Medicare, and funds due from other entities when Medicare is the secondary payer. For FY 2000, the contractors reported about $30 billion in accounts

receivable activity which resulted in an ending gross balance of approximately $7.1

billion—over 87 percent of CMS’ total receivable balance.

For several years, we have reported serious errors in contractor reporting of accounts receivable that resulted from weak financial controls. Control weaknesses

were noted again in our FY 2000 audit. Because the claim processing systems used

by the contractors lacked general ledger capabilities, obtaining and analyzing financial data was a labor-intensive exercise requiring significant manual input and reconciliations between various systems and ad hoc spreadsheet applications. This situation increases the risk that contractors could report inconsistent, incomplete, or erroneous information.

To address previously identified problems in documenting and reporting accounts

receivable and to accurately determine receivable balances, CMS began contracting

with independent public accountants in FY 1999. This year, the accountants noted

significant improvement in the CMS central office’s analysis of information included

in its financial statements, along with the improvement in contractors’ processing

and reporting of receivables. Over the 2-year period, however, the independent public accountants identified about $590 million in non-Medicare Secondary Payer recorded debt that the Medicare contractors could not document. While all of these

receivables were written off because of the lack of documentation, some may have

represented actually debt due to Medicare that should have been collected.

Although it is quite clear that the root cause of the accounts receivable problem

is the lack of an integrated, dual-entry accounting system, better oversight or implementation of compensating internal controls could ensure that the receivables will

be properly accounted for and reflected in their future financial reports. For instance, had CMS regional offices been required to conduct reviews similar to those

conducted by the independent public accountants, many problems could have been

detected earlier or prevented and the need to hire outside accountants would have

been obviated. Similarly, stronger regional office oversight of the contractors would

have helped to ensure that essential controls, such as reconciliations, were in place

to prepare accurate and complete financial reports. Of the 10 contractors in our

sample, 9 did not reconcile the monthly expenditures reported to CMS to the actual

paid claims tape as CMS requires. Failing to conduct this reconciliation increases

the risk of material misstatements in the financial statements.

To address its systems problem, CMS plans to develop a state-of-the-art Integrated General Ledger Accounting System. However, the system will not be fully

operational until 2007. Until then, stronger internal controls and oversight of the

Medicare contractors are critically needed.

Electronic Data Processing

The CMS relies on extensive electronic data processing (EDP) operations at both

its central office and Medicare contractors to administer the Medicare program and

to process and account for Medicare expenditures. Internal controls over these operations are essential to ensure the integrity, confidentiality, and reliability of critical

data and sensitive information while reducing the risk of improper Medicare payments disruption of critical operations, and malicious changes that could interrupt

data processing or destroy data files.

However, we again found numerous EDP general control weaknesses, primarily

at the Medicare contractors. About 80 percent of the 124 weaknesses that we noted

involved three types of controls:

• Access controls ensure that critical systems assets are physically safeguarded,

that logical (e.g. electronic) access to sensitive computer programs and data is

granted only when authorized and appropriate, and that only authorized staff

and computer processes access sensitive data in an appropriate manner. Weaknesses in these controls represented the largest problem area. At several conVerDate 11-MAY-2000 08:36 Dec 16, 2001 Jkt 010199 PO 00000 Frm 00021 Fmt 6633 Sfmt 6621 E:\HEARINGS\74849 pfrm01 PsN: 74849
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2Social Security Act, Sections 1842 (42 U.S.C. 1395u) and 1816 (42 U.S.C. 1395h).

3Social Security Act, Section 1893, 42 U.S.C.1395ddd.

tractors, for example, programmers had inappropriate access to beneficiary history files, and passwords were not properly administered. • Entry-wide security programs ensure that security threats are identified, risks

are assessed, control techniques are developed, and management oversight is

applied to ensure the overall effectiveness of security measures. At several sites,

we found that contractors lacked fully documented, comprehensive entity-wide

security plans. • Systems software controls help to prevent unauthorized individuals from using

software to read, modify, or delete critical information and programs. We noted

problems in managing routine changes to systems software to ensure their appropriate implementation and in configuring operating system controls to ensure their effectiveness.

In addition, the prior control weaknesses concerning the Medicare data centers’ access to the software program coding of the ‘‘shared’’ system used by certain Medicare contractors remains unresolved. This weakness has been expanded to include

the Common Working File system, which all shared systems use to obtain authorization to pay claims and to coordinate Medicare Parts A and B. Access to source

code renders the Medicare claim processing system vulnerable to abuse, such as the

implementation of unauthorized programs.

CURRENT STRUCTURAL BASIS FOR MEDICARE CONTRACTING

The ability to prevent or correct the problems just described stem in part from

the way CMS is required to contract with its claims administrators. The Medicare

statute places substantial limits on how CMS may obtain contractor assistance to

administer the Medicare program, including limiting CMS to choosing only certain

types of companies to process claims and restricting them to a cost-based reimbursement method.

I will describe how Medicare currently contracts with its carriers and fiscal intermediaries and contrast that with the flexibility in contracting authority already

available to most other government agencies.

Medicare Contracting Entities

Carrier, Fiscal Intermediary, DMERC and RHHI Contracts. The legislative authorities under which CMS contracts with carriers and fiscal intermediaries are

found in Title 42 of the United States Code (U.S.C.).2 Currently, these contracts are

governed by laws that are more restrictive than general federal contract laws. These

contracts are not subject to the general government contracting authorities which

are found in Title 41 of the United States Code, nor are they subject to the Federal

Acquisition Regulation (FAR).

Program Safeguard Contracts. Contracts with program safeguard contractors are

subject to FAR and Title 41 of the U.S.C. 3 The contracts must be awarded using

full and open competition with few prohibitions on who can hold these contracts.

These contracts can be entered into for up to 5 years and can be reimbursed using

either fixed price or cost-reimbursement methodologies. In addition, the program

safeguard contracts can be terminated at the Government’s ‘‘convenience.’’

Awarding the Contract

Although most government contracts require competitive bidding using full and

open competition with very few prohibitions on who can be awarded a government

contract, CMS is limited as to which entities it may contract with. Under Part A,

the statute allows for a process under which hospitals and certain other institutional providers nominate an organization to serve as a representative for its members. Currently, the National Blue Cross/Blue Shield Association, designated by the

providers, serves as the prime contractor with CMS. As such, it subcontracts with

its local member plans to perform as fiscal intermediaries. Presently, all fiscal intermediaries are insurance companies. For home health and hospice providers, CMS

has designated a small number of FIs to serve as Regional Home Health Intermediaries (RHHIs), based on its current authority to designate an intermediary to

serve a class of providers.

Carriers are defined by statute to be non-governmental organizations engaged in

‘‘providing, paying for, or reimbursing the cost of health services under group insurance policies or contracts,’’ or other such group arrangements. This requirement has

effectively limited such contracts to insurance companies. By statute, carrier contracts may be entered into without competition. CMS contracts with DMERCs under

a separate authority and uses a competitive bidding process to award these conVerDate 11-MAY-2000 08:36 Dec 16, 2001 Jkt 010199 PO 00000 Frm 00022 Fmt 6633 Sfmt 6621 E:\HEARINGS\74849 pfrm01 PsN: 74849
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tracts. (See Table 1 for a comparison of how and to whom contracts are normally

awarded.)

Table 1—Contract Award

Type of Contract Competitive or non-competitive Contractor

General Government Contracts .............. Competitive ............................ Any organization

Program Safeguard Contractors ............ Competitive ............................ Any organization

Fiscal Intermediaries ............................. Non-competitive ..................... Insurance co. nominated by a provider group

RHHI ....................................................... Non-competitive ..................... Fiscal intermediary designated by CMS

Carriers .................................................. Non-competitive ..................... Company with health insurance experience

DMERC ................................................... Competitive ............................ Company with health insurance experience

Contract Type

Generally, government contracts can be either fixed-price contracts or cost-reimbursement contracts. In a fixed-price contract, the contractor has the full responsibility for the performance costs and resulting profit or loss. Fixed-price contracts are

preferred since the contractor guarantees performance of the work as a condition of

getting paid. In a cost-based contract, the government assumes the risk for all allowable costs. The contractor is liable for delivering only its best effort, not successful performance. General government contracts can be up to 5 years.

On the other hand, Medicare’s fiscal intermediary, carrier, RHHI and DMERC

contracts are generally limited to cost-reimbursement contracts. For these contracts,

CMS and the contractor negotiate an overall amount for the contract based on

standards established by CMS. These contracts are only made for a year.

Table 2—Contract Types

Type of Contract Fixed-price or cost-reimbursement Length

General Government Contract ........... Fixed-price or cost-reimbursement .................. Up to 5 years

Program Safeguard Contractors ........ Fixed-price or cost-reimbursement .................. Up to 5 years

Fiscal Intermediaries ......................... Cost-reimbursement ........................................ 1 year

RHHI ................................................... Cost-reimbursement ........................................ 1 year

Carriers .............................................. Cost-reimbursement ........................................ 1 year

DMERC ............................................... Cost-reimbursement ........................................ 1 year

Contract Renewal and Termination

In general, government contracts can be renewed as long as the contractor meets

or exceeds the performance requirements established in the current contract. Most

contracts may be terminated by the government at any time for default of the contract or for the convenience of the government. If the government terminates the

contract for its convenience, then the government must compensate the contractor

for any preparations and for any completed and accepted work.

The CMS contracts with carriers and fiscal intermediaries, including RHHI and

DMERC contracts, have automatic renewal clauses. As long as the contractors meet

or exceed the standards that CMS publishes annually, the contracts are renewed.

If CMS terminates the contract upon a determination that the contractor has failed

to properly carry out its contracted duties or is not operating in an efficient and effective manner, the contractor has a right to a hearing. Because contracts with fiscal

intermediaries and carriers are generally only one year in duration, these contracts

are rarely terminated. Instead, CMS simply does not renew the contract at the end

of the one year period. The contractor, on the other hand, can terminate at any time

upon written notice to the government. Under CMS’ prime contract with the National Blue Cross Association, when one of the local Blue plans does not renew its

contract, the Association may choose the replacement contractor, thus further limiting CMS’ choice of future contractors.

Table 3—Contract Renewal and Termination

Type of Contract Renewal Termination

General Government Contract ................ May renew .............................. No hearing

Program Safeguard Contractors ............ May renew .............................. No hearing

Fiscal Intermediaries ............................. Automatic renewal ................. Hearing

RHHI ....................................................... Automatic renewal ................. Hearing

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Table 3—Contract Renewal and Termination—Continued

Type of Contract Renewal Termination

Carriers .................................................. Automatic renewal ................. Hearing

DMERC ................................................... Automatic renewal ................. Hearing

MODELS FOR CONTRACTOR REFORM

As noted earlier, under the Health Insurance Portability and Accountability Act

of 1996, CMS was granted new authority and flexibility in contracting separately

for program integrity functions. It may enter into contracts or work orders for specific program safeguard functions, such as medical review, fraud detection, cost report audits, and reviews to identify primary payers to whom Medicare is the secondary payer.

To date, CMS has awarded 19 contracts to Program Safeguard Contractors (PSCs)

to carry out a wide range of activities. These tasks include supplemental activities,

such as an analysis of Y2K issues, which have not replaced regular contractor functions. Other tasks in part or in whole replace safeguard functions currently being

done by contractors. For example one PSC is performing program integrity activities

to target vulnerabilities in therapy services. Another PSC is tasked with conducting

postpayment medical review fraud detection and data analysis for 12 Western

states.

It is too soon to fully evaluate the success of this model; however, preliminary results are encouraging. We support this new authority and look forward to continued

improvements in program operation and oversight that are taking place under the

Medicare Integrity Program.

Another promising development is the designation of specialty contractors such as

the Durable Medical Equipment Regional Carriers. They review and pay all claims

for medical equipment and supplies. There are only four of them, which appropriately concentrates their expertise in this complex area. They are bolstered by a

data analysis unit, staffed by one of these carriers but supporting all four. This enables them to analyze payment and usage patterns which may suggest possible improper or questionable conduct. They are also able to effectively collaborate on the

formulation of national coverage policies and payment control systems.

A recent OIG evaluation found that these entities are effective. We believe that

specialty contractors, with a supporting analytic unit, would make sense for problematic areas and recommend that they be more widely used.

PROPOSED LEGISLATION

To promote innovations and efficiencies from the private sector, legislation is currently being developed that would increase CMS’ flexibility in how it contracts with

Medicare fiscal intermediaries and carriers by allowing it to award work competitively and use performance based contracts. Through this legislation, CMS hopes to

accomplish the following:

• Provide flexibility to CMS and its contractors to better adapt to changes in the

Medicare program.

• Promote competition, leading to more flexible efficiency and accountability.

• Establish better coordination and communication between CMS, its contractors

and health care providers.

• Promote CMS’ ability to negotiate incentives for Medicare contractors to perform

well.

• Improve CMS’ contractor performance evaluation processes, while maximizing objectivity in contractor evaluation.

• Stabilize and guide CMS’ business relationship with its contractors.

CMS has proposed such broad and more flexible contracting authority in the past,

and we have consistently testified in support. For instance, we have supported past

proposals to allow CMS to enter into contracts with one entity to perform both carrier and intermediary functions, allow the Secretary to follow Federal Acquisition

Regulations, and to reimburse contractors on a fixed price basis when needed. We

believe such common sense approaches are long overdue. In fact, in recent work we

found that Medicare’s claims processing system did not prevent duplicate payments

by multiple carriers for any of the 242 services in our audit sample. An ability to

consolidate the number of contractors would help to prevent such types of duplicate

payments from occurring.

More flexibility and specialization will, we believe, bring greater expertise and efficiency to contractor operations. This will, in turn, improve their relations with proVerDate 11-MAY-2000 08:36 Dec 16, 2001 Jkt 010199 PO 00000 Frm 00024 Fmt 6633 Sfmt 6621 E:\HEARINGS\74849 pfrm01 PsN: 74849
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viders and facilitate provider education and understanding of Medicare rules and

regulations. Further, the ability to pay contractors on a fixed-cost basis would offer

the flexibility to award contracts for the best possible value.

CONCLUSION

Through our investigations, financial audits, and evaluations of management

practices, we continue to identify problems at the Medicare contractors which run

the gamut from operational inefficiencies to deliberate defrauding of the Medicare

program. Taken as a whole, these problems underscore the critical need for immediate contracting reforms.

CMS needs to have sufficient flexibility in its authorities to contract with the companies best able to carry out the needed functions, to hold these companies accountable when they fall short, and to reward them when they perform well. Beneficiaries

and providers will be better served, and CMS will get better value for its contracting

dollars.

We fully support the need for Medicare contracting reform legislation. We also

support a reduction in the number of private health insurance companies that process claims to a more manageable number. We look forward to the changes in Medicare contracting that are already taking place under the new Medicare Integrity

Program and look forward to changes brought about by more global contracting reforms as well.

Mr. GREENWOOD. Thank you for your testimony.

Ms. Aronovitz, you are recognized for 5 minutes.

TESTIMONY OF LESLIE G. ARONOVITZ

Ms. ARONOVITZ. Thank you, Chairman Bilirakis, Chairman

Greenwood, and members of the subcommittees. I am pleased to be

here today as you consider how Medicare might be improved

through contracting reform. What you will hear from us is a lot of

agreement about the need for new contract authorities. How CMS

ultimately plans and implements their use will be key. That is

what we really want to talk about.

The original Medicare statute, along with subsequent regulations

and practices, limits how the program contracts for claims administration services. As Mr. Scully and Mr. Mangano have already indicated, there is no full and open competition for these contracts. The

agency is limited to choosing from a small pool of health insurers.

Contracts generally cover all claims-related activities. Contractors

are paid for costs, but do not earn profits. The agency is limited

in its ability to terminate contracts. Most Federal programs do not

face these restrictions. There has been concern that these policies

may impede effective program management.

Today, I am focusing on how contracting reform might help to

address these concerns, but especially on the challenges CMS faces

in implementing contractor reform. First, Medicare could benefit

from contracting reform legislation that authorized full and open

competition for claims administration contracts, and provided

greater flexibility in how contracts are structured. Full and open

competition would allow CMS to select contractors on a competitive

basis, which could help promote better performance and greater accountability, as you have heard from the other witnesses.

We also agree that it would allow CMS to select from a broader

array of entities, capable of performing needed tasks and not just

from among the dwindling number of health insurers interested in

obtaining these contracts. Providing greater flexibility in how contracts are structured could also have benefits. It would allow CMS

to issue contracts for discrete program functions, and that could

improve performance through specialization. Although CMS has

22

not stated what functions it might separately contract for, we know

that there is wide variation in how different contractors inform providers about program policy changes and respond to provider concerns. So, for example, having special contractors handle those responsibilities could lead to more consistency and better relations

between the program and providers.

Allowing contractors to earn a profit would let CMS craft incentives to reward contractors for high quality performance. Bringing

contractor termination procedures into line with those of other Federal programs could make it easier for CMS to terminate poor performers.

While Medicare could benefit from contracting reforms, freeing

the program from current contracting restrictions would only be a

first step in realizing the potential benefits. For example, CMS

would need to carefully define the scope of work in any new contract—that is not an easy thing to do—and develop sound contractor selection criteria. Transition to full and open competition

for all contractors would need to be phased in to ensure effective

coordination among all contractors, and avoid disruption in service

to beneficiaries and providers, especially in the claims processing

stream.

Adequate performance goals and measures would need to be developed to evaluate how well contract specifications were met, and

whether any financial incentives had been earned. The recent experience in hiring special contractors for program safeguard activities

provides useful lessons about the challenges that would need to be

addressed. It took CMS officials about 3 years to determine how

best to implement the authority to hire program safeguard contractors, develop the contract specifications, issue proposed regulations

governing those contractors, develop selection criteria, review proposals, and select contractors. It then took additional time for these

contractors to hire staff, develop systems, and to begin performing

their duties.

We expect it will also take time to fully utilize these new authorities. We think it would be prudent for CMS to take an incremental approach as it proceeds.

Accordingly, removing Medicare’s contracting limitations to promote full and open competition and increase flexibility, could lead

to more efficient and effective management. However, reform will

not yield immediate results. We believe that there is a need for

careful and deliberate implementation of any reforms that may be

enacted.

This concludes my oral comments. I would be happy to answer

any questions you may have.

[The prepared statement of Leslie G. Aronovitz follows:]

PREPARED STATEMENT OF LESLIE G. ARONOVITZ, DIRECTOR, HEALTH CARE—

PROGRAM, ADMINISTRATION AND INTEGRITY ISSUES, GAO

Messrs. Chairmen and Members of the Subcommittees: I am pleased to be here

today as you continue to consider how the Medicare program might be modified.

Discussions about how to reform and modernize Medicare have, in part, focused on

whether the structure that was adopted in 1965 is optimal today. In that context,

questions have been raised about whether the program could benefit from changes

to the way Medicare’s claims processing contractors are selected and the functions

they perform.

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1Our statement will continue to refer to HCFA where our findings apply to the organizational

structure and operations associated with that name. 2 48 CFR, Chapter 1.

3Section 1816 addresses fiscal intermediaries and section 1842 addresses carriers.

The original Medicare statute, along with subsequent regulations and practices,

limits how the program may contract for these services in ways that differ from

most federal contracts. There is no full and open competition for the contracts; the

agency is limited to choosing among health insurers; contracts generally must cover

the full range of claims processing and related activities; and the agency is limited

in its ability to terminate contracts. The Health Care Financing Administration

(HCFA), recently renamed the Centers for Medicare and Medicaid Services (CMS),

has, since 1993, repeatedly proposed legislation to lift current contracting restrictions in order to increase competition for these contracts and provide more flexibility

in how they are structured.1 This year, the agency again plans to seek such changes

in order to improve program management.

To assist the Subcommittees as they consider ways to strengthen Medicare’s program administration, my remarks today focus on our analysis of contracting reform

issues. Specifically, I will discuss (1) how reform might help to address concerns

that current contracting policy may impede effective program management, and (2)

challenges in implementing reform. My comments are based on our prior and ongoing work related to strengthening Medicare operations.

In summary, Medicare could benefit from full and open competition and its relative flexibility to promote better performance and accountability. If legislation removes the current limits on Medicare contracting authority, CMS could (1) select

contractors on a competitive basis from a broader array of entities capable of performing needed program activities; (2) issue contracts for discrete program functions

to improve contractor performance through specialization; (3) pay contractors based

on how well they perform rather than simply reimbursing them for their costs; and

(4) terminate poor performers more efficiently.

Freeing Medicare from current contracting limitations is only the first step in realizing potential benefits. Recent experiences with special contractors for Medicare

program safeguard activities provide useful lessons that the agency could draw upon

if it were free to use full and open competition. These experiences also presage the

challenges in achieving the potential benefits of more flexible contracting authority.

For example, CMS would need to marshal its expertise to effectively use competitive

bidding authority and increased flexibility. It would need to carefully define the

scope of work in any new contracts and develop sound contractor selection criteria.

Transition to full and open competition for all contractors would need to be phased

in to ensure effective coordination of functions among all contractors and to avoid

disruption in service to beneficiaries and providers. And, if contracts with financial

incentives for high-quality performance were used, CMS would need to develop adequate performance goals and reliable measures to monitor and evaluate the extent

to which contract specifications were being met and awards earned.

BACKGROUND

Medicare is a federal health insurance program designed to assist elderly and disabled beneficiaries. Hospital insurance, or part A, covers inpatient hospital, skilled

nursing facility, hospice care, and certain home health services. Supplemental medical insurance, or part B, covers physician and outpatient hospital services, laboratory and other services. Claims are paid by a network of 49 claims administration

contractors called intermediaries and carriers. Intermediaries process claims from

hospitals and other institutional providers under part A while carriers process part

B claims. The intermediaries’ and carriers’ responsibilities include: reviewing and

paying claims; maintaining program safeguards to prevent inappropriate payment;

and educating and responding to provider and beneficiary concerns.

Medicare contracting for intermediaries and carriers differs from that of most federal programs. Most federal agencies, under the Competition in Contracting Act and

its implementing regulations known as the Federal Acquisition Regulation (FAR), 2

generally may contract with any qualified entity for any authorized purpose so long

as that entity is not debarred from government contracting and the contract is not

for what is essentially a government function. Agencies are to use contractors that

have a track record of successful past performance or that demonstrate a current

superior ability to perform. The FAR generally requires agencies to conduct full and

open competition for contracts and allows contractors to earn profits.

Medicare, however, is authorized to deviate from the FAR under provisions of the

Social Security Act enacted in 1965.3 For example, there is no full and open competiVerDate 11-MAY-2000 08:36 Dec 16, 2001 Jkt 010199 PO 00000 Frm 00027 Fmt 6633 Sfmt 6621 E:\HEARINGS\74849 pfrm01 PsN: 74849
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4 CMS has some limited authority to build financial incentives into intermediary and carrier

contracts. This authority was granted under section 2326(a) of the Deficit Reduction Act of 1984

and made permanent by section 159 of the Social Security Act Amendments of 1994.

tion for intermediary or carrier contracts. Rather, intermediaries are selected in a

process called nomination by provider associations, such as the American Hospital

Association. This provision was intended at the time of Medicare’s creation to encourage hospitals to participate by giving them some choice in their claims processor. Currently, there are three intermediary contracts, including the national Blue

Cross Blue Shield Association, which serves as the prime contractor for 26 local

member plan subcontractors. When one of the local Blue plans declines to renew its

subcontract, the Association nominates the replacement contractor. Carriers are

chosen by the Secretary of Health and Human Services from a small pool of health

insurers, and the number of such companies seeking Medicare claims-processing

work has been dwindling in recent years.

The Social Security Act also generally calls for the use of cost-based reimbursement contracts under which contractors are reimbursed for necessary and proper

costs of carrying out Medicare activities but does not expressly provide for profit.4

Further, Medicare contractors cannot be terminated from the program unless they

are first provided with an opportunity for a public hearing—a process not afforded

under the FAR.

MEDICARE COULD BENEFIT FROM OPEN COMPETITION AND INCREASED FLEXIBILITY

Medicare could benefit from various contracting reforms. Freeing the program to

directly choose contractors on a competitive basis from a broader array of entities

able to perform needed tasks would enable Medicare to benefit from efficiency and

performance improvements related to competition. It also could address concerns

about the dwindling number of insurers with which the program now contracts. Allowing Medicare to have contractors specialize in specific functions rather than assume virtually all claims-related activities, as is the case now, also could lead to

greater efficiency and better performance. Authorizing Medicare to pay contractors

based on how well they perform rather than simply reimbursing them for their

costs, as well as allowing the program to terminate contracts more efficiently when

program needs change or performance is inadequate, could also result in better program management.

Ability to Contract With a Broader Array of Entities Would Expand CMS Options

Since Medicare was implemented in 1966, the program has used health insurers

to process and pay claims. Before Medicare’s enactment, providers feared that the

program would give the government too much control over health care. To win acceptance, the program was designed to be administered by health insurers like Blue

Cross and Blue Shield. Subsequent regulations and decades of the agency’s own

practices have further limited how the program contracts for claims administration

services. The result is that agency officials believe they must contract with health

insurers to handle all aspects of administering Medicare claims, even though the

number of such companies willing to serve as Medicare contractors has declined and

the number of other entities capable of doing the work has increased.

While using only health insurers for claims administration may have made sense

when Medicare was created, that may be much less so today. The explosion in information technology has increased the potential for Medicare to use new types of business entities to administer its claims processing and related functions. Additionally,

the need to broaden the pool of entities allowed to be contractors also has increased

in light of contractor attrition. Since 1980, the number of contractors has dropped

by more than half, as many have decided to concentrate on other lines of business.

This has left the program with fewer choices when one contractor withdraws, or is

terminated, and another must be chosen to replace it.

Since 1993, the agency has repeatedly submitted legislative proposals to repeal

the provider nomination authority and make explicit its authority to contract for

claims administration with entities other than health insurers. Just this month, the

Secretary of Health and Human Services told the Senate Finance Committee that

CMS should be able to competitively award contracts to the entities best qualified

to perform these functions and stated that such changes would require legislative

action. With such changes, when a contractor leaves the program, CMS could award

its workload on a competitive basis to any qualified company or combination of companies—including those outside the existing contractor pool, such as data processing

firms.

25

5This authority was granted under section 1893 of the Social Security Act as amended. Program safeguard activities are intended to prevent and detect fraudulent and abusive activities

of providers and beneficiaries. These activities include (1) medical review of claims to determine

if they are for covered, medically necessary and reasonable services, (2) reviews to identify other

primary sources of payment, (3) audits of cost reports submitted by institutional providers to

determine if costs are allowable and reasonable, (4) identification and investigation of possible

fraud cases, and (5) provider education and training related to Medicare coverage policies and

appropriate billing practices.

Contracting for Specific Functions Could Strengthen Service to Beneficiaries and

Providers

Allowing Medicare to have separate contractors for specific claims administration

activities—also called functional contracting—could further improve program management. Functional contracting would enable CMS to select contractors that are

more skilled at certain tasks and allow these contractors to concentrate on those

tasks, potentially resulting in better program service. For example, the agency could

establish specific contractors to improve and bring uniformity to efforts to educate

and respond to providers and beneficiaries, efforts that now vary widely among existing contractors.

Currently, CMS interprets the Social Security Act and the regulations implementing it as constraining the agency from awarding separate contracts for individual claims administration activities, such as handling beneficiary inquiries or

educating providers about program policies. Current regulations stipulate that, to

qualify as an intermediary or carrier, the contracting organization must perform all

of the Medicare claims administration functions. Thus, agency officials feel precluded from consolidating one or more functions into a single contract or a few regional contracts to achieve economies of scale and allow specialization to enhance

performance.

CMS has had some experience with functional contracting under authority granted in 1996 to hire entities other than health insurers to focus on program safeguards.5 CMS has contracted with 12 program safeguard contractors (PSC) who

compete among themselves to perform task-specific contracts called task orders.

These entities represent a mix of health insurers, including some with prior experience as Medicare contractors, along with consulting organizations, and other types

of firms. The experience with PSCs, however, makes clear that functional contracting has challenges of its own, which are discussed later in this testimony.

Offering Contractors Payment Incentives Could Result in Greater Efficiencies

Allowing Medicare to offer financial incentives to contractors for high-quality performance also may have benefits. According to CMS, the Social Security Act now

precludes the program from offering such incentives because it generally stipulates

that payments be based on costs. Contractors are paid for necessary and proper

costs of carrying out Medicare activities but do not make a profit. Repeal of costbased restrictions would free CMS to award different types of contracts—including

those that provide contractors with financial incentives and permit them to earn

profits. CMS could test different payment options to determine which work best. If

effective in encouraging contractor performance, such contracts could lead to improved program operations and, potentially, to lower administrative costs. Again,

implementing performance-based contracting will not be without significant challenges.

CMS Needs to be Able to Terminate Poor Performers More Efficiently

Allowing Medicare to terminate contractors more efficiently may also promote better program management. The Social Security Act now limits Medicare’s ability to

terminate intermediaries and carriers, and the provisions are one-sided. Intermediaries and carriers may terminate their contracts without cause simply by providing CMS with 180 days notice. CMS, on the other hand, must demonstrate, that

(1) the contractor has failed substantially to carry out its contract or that (2) continuation of the contract is disadvantageous or inconsistent with the effective administration of Medicare. CMS must provide the contractor with an opportunity for

a public hearing prior to termination. Furthermore, CMS may not terminate a contractor without cause as can most federal agencies under the FAR.

In past years, the agency has requested statutory authority to eliminate the public hearing requirement and the ability of contractors to unilaterally initiate contract termination. Such changes would bring Medicare claims administration contractors under the same legal framework as other government contractors and provide greater flexibility to more quickly terminate poor performers. Eliminating contractors’ ability to unilaterally terminate contracts also may help address challenges

the agency faces in finding replacement contractors on short notice.

26

6 CMS developed an indefinite-delivery/indefinite-quantity contract that allowed it to select

contractors and outline in broad terms the activities to be performed. Each task order identifies

a specific function to be performed. For example, one task order involves conducting unannounced site visits to selected community mental health centers to determine whether they are

complying with Medicare regulations. 7 According to a CMS contracting official, a claims administration contractor has the flexibility

to subcontract under section 1842 of the Social Security Act.

CONTRACTING REFORM POSES MANY IMPLEMENTATION ISSUES

While Medicare could benefit from greater contracting flexibility, time and care

would be needed to implement changes to effectively promote better performance

and accountability and avoid disrupting program services. Competitive contracting

with new entities for specific claims administration services in particular will pose

new challenges to CMS—challenges that will likely take significant time to fully address. These include preparing clear statements of work and contractor selection criteria, efficiently integrating the new contractors into Medicare’s claims processing

operations, and developing sound evaluation criteria for assessing performance. Because these challenges are so significant, CMS would be wise to adopt an experimental, incremental approach. The experience with authority granted in 1996 to

hire special contractors for specific tasks related to program integrity can provide

valuable lessons for CMS officials if new contracting authorities are granted.

Contracting With New Entities Will Take Time and Require Careful Planning

If given authority to contract competitively with new entities, CMS would need

time to accomplish several tasks. First among these would be development of clear

statements of work and associated requests for proposals detailing work to be performed and how performance will be assessed. CMS has relatively little experience

in this area for Medicare claims administration because current contracts instead

incorporate by reference all regulations and general instructions issued by the Secretary of Health and Human Services to define contractor responsibilities. CMS has

experience with competitive contracting from hiring PSCs. It did take 3 years to determine how best to implement the new authority through its broad umbrella contract, develop the statement of work, issue the proposed regulations governing the

PSCs, develop selection criteria, review proposals, and select contractors.6 Program

officials have told us they are optimistic about their ability to act more quickly if

contracting reform legislation were enacted, given the lessons they have learned.

However, we expect that it would take CMS a significant amount of time to develop

its implementation strategy and undertake all the necessary steps to take full advantage of any changes in its contracting authority. CMS took an incremental approach to awarding its PSC task orders, and the same would be prudent for implementing any changes in Medicare’s claims administration contracting authorities.

Even after new contractors are hired, CMS should not expect immediate results.

The PSC experience demonstrates that it will take time for them to begin performing their duties. PSCs had to hire staff, obtain operating space and equipment,

and develop the systems needed to ultimately fulfill contract requirements—activities that often took many months to complete. Without sufficient start-up time, new

contractors might not operate effectively and services to beneficiaries or providers

could be disrupted.

Coordination Is Critical for Functional Contractors

Developing a strategy for how to incorporate functional contractors into the program and coordinate their activities is key. While there may be benefits from specialization, having multiple companies performing different claims administration

tasks could easily create coordination difficulties for the contractors, providers, and

CMS staff. For example, between 1997 and 2000, HCFA contracted with a claims

administration contractor that subcontracted with another company for the review

of the medical necessity of claims before they were paid.7 The agency found that

having two different contractors perform these functions posed logistical challenges

that could make it difficult to complete prepayment reviews without creating a backlog of unprocessed claims.

The need for effective coordination was also seen in the PSC experience. PSCs and

the claims administration contractors need to coordinate their activities in cases

where the PSCs assumed responsibility for some or all of the program safeguard

functions previously performed by the contractors. In these situations, HCFA officials had to ensure that active claims did not get lost or ignored while in the processing stream.

Coordination is also necessary to ensure that new efficiencies in one program area

do not adversely affect another area. For example, better review of the medical neVerDate 11-MAY-2000 08:36 Dec 16, 2001 Jkt 010199 PO 00000 Frm 00030 Fmt 6633 Sfmt 6621 E:\HEARINGS\74849 pfrm01 PsN: 74849
27

8Medicare: Opportunities and Challenges in Contracting for Program Safeguards (GAO-01-

616, May 18, 2001). 9GAO-01-616, May 18, 2001.

10Medicare: Existing Contracting Authority Can Provide for Effective Program Administration

(GAO/HRD-86-48, Apr. 22, 1986).

cessity of claims before they are paid could lead to more accurate payment. This

would clearly be beneficial, but could also lead to an increase in the number of appeals for claims denials. Careful planning would be required to ensure adequate resources were in place to adjudicate those appeals and prevent a backlog.

CMS has not stated how claims administration activities might be divided if the

agency could do functional contracting. It would be wise for CMS to develop a strategy for testing different options on a limited scale. In our report on CMS’ contracting for PSC services, we recommended, and the agency generally agreed, that

it should adopt such a plan because CMS was not in a position to identify how best

to use the PSCs to promote program integrity in the long term.8

Experience Is Needed to Develop Effective Evaluation Criteria

Taking advantage of benefits from competition and performance-based contracting

hinges on being able to identify goals and objectives and to measure progress in

achieving them. Specific and appropriate evaluation criteria would be needed to effectively manage any new arrangements under contracting reform. Effective evaluations are dependent, in part, upon clear statements of expected outcomes tied to

quantifiable measures and standards. Because it has not developed such criteria for

most of its PSC task orders, we reported 9 that CMS is not in a position to effectively

evaluate its PSCs’ performance even though 8 of the 15 task orders had been ongoing for at least a year as of April 2001. If CMS begins using full and open competition to hire new entities for other specific functions, it should attempt to move

quickly to develop effective outcomes, measures, and standards for evaluating such

entities.

Effective criteria are also critical if financial incentives are to be offered to contractors. Prior experiments with financial incentives for Medicare claims administration contractors generally have not been successful. This experience raises concerns about the possibility for success of any immediate implementation of such authority without further testing. For example, between 1977 and 1986, HCFA established eight competitive fixed-price-plus-incentive-fee contracts designed to consolidate the workload of two or more small contractors on an experimental basis. Contractors could benefit financially by achieving performance goals in certain areas at

the potential detriment of performance in other activities. In 1986, we reported that

two of the contracts generated administrative savings estimated at $48 million to

$50 million.10 However, the two contractors’ activities also resulted in $130 million

in benefit payment errors (both overpayments and underpayments) that may have

offset the estimated savings. One of these contractors subsequently agreed to pay

over $140 million in civil and criminal fines for its failure to safeguard Medicare

funds.

CONCLUDING OBSERVATIONS

Removing the contracting limitations imposed at Medicare’s inception to promote

full and open competition and increase flexibility could help to modernize the program and lead to more efficient and effective management. However, change will

not yield immediate results, and lessons learned from the experience with PSC contractors underscore the need for careful and deliberate implementation of any reforms that may be enacted.

This concludes my statement. I would be happy to answer any questions that either Subcommittee chairman or Members may have.

GAO Contact and Staff Acknowledgments

For further information regarding this testimony, please contact me at (312) 220-

7600. Sheila Avruch, Bonnie Brown, Paul Cotton, and Robert Dee also made key

contributions to this statement.

Related GAO Products

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).

Major Management Challenges and Program Risks: Department of Health and Human Services (GAO-01-247, Jan. 2001).

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

28

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

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

Medicare Contractors: Further Improvement Needed in Headquarters and Regional Office

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

Medicare: 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).

HCFA Management: Agency Faces Multiple Challenges in Managing Its Transition to the 21st

Century (GAO/T-HEHS-99-58, Feb. 11, 1999).

Medicare: HCFA Faces Multiple Challenges to Prepare for the 21st Century (GAO/T-HEHS-98-

85, Jan. 29, 1998).

Mr. GREENWOOD. Thank you for your testimony.

Mr. Scully, if you will return.

The Chair recognizes himself for 5 minutes for questions.

I would like to ask each of you how you see these proposed contract reforms affecting the average Medicare beneficiary, my mother, my father, other beneficiaries? How would they, if they would,

notice or benefit from these changes?

Let me start with you, Mr. Scully.

Mr. SCULLY. I think hopefully, I mean we have some great contractors who do a terrific job. I used to represent a couple of them

when I was a lawyer. We also have some that have not done such

a great job, and our ability to identify the ones that have done the

best job and been the most responsive to providers and beneficiaries is limited. To our ability to switch work flows from one

place to another is very limited. So when we have a contractor who

is the lowest rated and is the least responsive to providers and

beneficiaries, it’s tough to make a change. Our ability to switch

work flows to another FI is very limited. It has to go through the

Blue Cross Blue Shield Association.

I represented Blue Cross of California when they were being

pushed out of the program in the early 1990’s. They fixed their

problems and stayed in for a few more years. But I have been on

the other side of it. I think there is a pretty substantial difference

in the quality of contractors. But our ability to adjust our work

flows, depending on who the best contractors are, is pretty limited.

I don’t think that is really good policy.

I think if we could identify instead of 49 FIs and carriers, a more

limited number of people who we could move the work flows

around to, depending on their performance, we would have a much

better situation.

I also think some of the things that were referred to as far as

local medical decisions and things like that with a more consolidated group of contractors, that we had probably a better, more rationally motivated relationship with, you would probably find more

consistent decisionmaking as well.

Mr. GREENWOOD. Mr. Mangano?

Mr. MANGANO. I think in this country we expect high quality. We

expect high quality out of our health care system, out of our automobiles, and every other part of the economy that we deal with.

If we have a system that allows CMS to find the best contractors

that can operate most efficiently, and that efficiency enhances the

effectiveness of their services to the beneficiaries, that is, when

beneficiaries have problems and they want to call their Medicare

contractor, if we have the contractors that perform best at doing

those functions, then I think people are going to feel that they have

29

responsive government on their hands, and they are going to be

able to get their questions answered, and they are going to be able

to get the services they are entitled to under the Medicare program.

Ms. ARONOVITZ. We talk about full and open competition. One of

the underpinnings for full and open competition is the principle of

getting the best value for your product or service. That involves

cost, but it also involves performance or quality and timeliness. I

think what Mr. Scully and Mr. Mangano said is that CMS should

be in a position to be able to have the flexibility to assure that its

contractors are performing well and according to whatever measures have been set out.

But an even more direct result of new authority could be in the

area of functional contracting. I’m not sure that this would be the

most feasible, but it is something CMS needs to consider. We know

that there are some direct interactions that occur between contractors and the providers and the beneficiaries right now in terms of

answering questions on the telephone, sending newsletters to the

providers, and developing carrier and intermediary websites.

In the process of looking at those mechanisms that create an environment for good provider and beneficiary relations, it is possible

that a functional contract, where experts understanding how to

communicate with beneficiaries and providers, might turn out to be

a very good thing. So there are ways to immediately get some of

the benefits from authorities if you could find a functional contract

that could address some of the immediate problems that you have.

Mr. GREENWOOD. The contractors sort of seems to need to serve

three masters, at least. You have the obligation to the taxpayers

to provide the service at a cost-efficient way. You have the obligation to interact with the beneficiaries in a way that is appropriate.

Then you have the obligation to interrelate with the providers, who

are often frustrated in their interactions with the providers.

How, with the latitude of these reforms, how does CMS manage

to weigh these three competing demands and make sure that in the

interests of serving one of those masters, we don’t begin to do a

lesser job with the others? Any one of you want to try that? Tom?

Mr. SCULLY. It is always a tough balance. Again, I don’t want to

complain about contractors. There are some very good ones. It is

just our limited ability to find the ones who get that balance right

the most. I think there’s some like United Wisconsin, I guess is the

United Government Services, which is Blue Cross Wisconsin, there

are some Blues that have made a fundamental decision this is

something they are in for the long haul and are very focused on.

Pal Meadow in South Carolina is one. Wisconsin is another. There

are others that do a pretty good job. I don’t want to evaluate all

of them right here. There are others that aren’t as interested in it.

Blue Cross of North Carolina, Mr. Burno dropped out about 2

weeks ago. They just made a decision this was not a core business

strategy of theirs. I respect that, but some people are more focused

on it than others, and some are more interested in this business.

We want to identify with those people and become tighter, better

partners, and make sure we get that balance right.

Another point which I didn’t make earlier is that right now, you

have to be an insurance carrier. So for instance, EDS, which I

30

would argue is one of the better information transfer agents, wanted to get into this business. They had to go out and buy a shell

insurance company to do it. Other people we have looked at that

are trying to get in this business, to maybe potentially be additional good contractors, credit card companies and others, can’t do

it under the existing statute.

So our flexibility to find people that want to be in this business

and want to establish long-term partnerships is limited by the statute that says you have to be an insurance carrier.

Mr. GREENWOOD. Do either of the other of you wish to testify?

My time is up, so please be brief.

Mr. MANGANO. Not really. It is just a question of, I think, making expectations clear, having contracts that are written clearly

enough in terms of explaining what the requirements are in the

provision of services to beneficiaries as well as to provide services

to suppliers who are going to be billing the Medicare program.

To the degree to which those specifications can be clear and that

the contractors can be held responsible for delivering services on a

performance basis, I think you are going to increase the opportunity to having more success with contractor operations.

Mr. GREENWOOD. Okay. My time is expired.

The Chair recognizes the gentleman from Ohio, Mr. Brown, for

5 minutes.

Mr. BROWN. Thank you, Mr. Greenwood, Mr. Chairman.

Mr. Scully, I have regular Medicare meetings in my district,

which many Members have, just to familiarize beneficiaries with

various Medicare services and answer questions, all that. We may

have 50 people there. We may have 200 people there. We also have

all these meetings. One of the presenters is from the Ohio State

Health Insurance Counseling Assistance Program, OSHIP and

Ohio SHIP, whatever, and in other States.

They are important because they translate education outreach efforts to the State and local level. They also, as you know, are heavily reliant on volunteers. The SHIP programs, I believe, get about

$15 million spread across the country, the 50 State agencies. How

will CMS ensure, as it is getting more and more difficult for them

with this pretty small amount of money to do what they need to

do? The services they give are obviously very important. How do

you plan to ensure that these agencies have the sufficient resources

and staff to respond to an increase in referrals generated by the

1-800 number and all that that entails?

Mr. SCULLY. Well, I think the SHIPs do a great job. I think it’s

$13 million. It might be $15, but it is in that range, which is obviously a limited amount of money. Probably my No. 1 priority tied

with contractor reform is beneficiary education. As you may have

seen, we have already announced that we are planning to spend

$35 million this fall on I think an unprecedented level of beneficiary education.

One of the biggest efforts in that, I think it’s about $17, $18 million is substantially enhancing the 1-800 number. What happens

now, if you call 1-800-MEDICARE from Ohio or from Philadelphia,

is you generally get a very basic level of information and then you

get transferred off to a SHIP, which are generally volunteers. They

get an increasingly intense level of call-ins to our 1-800 number.

31

One of the things that is going to happen starting October 1, is

when you call in, you are going to have an entire new tier of the

Medicare 1-800 number that you will get a person on the phone

who is familiar with your Ohio district or Philadelphia or Florida,

whatever, that will give you a whole level of information about

your Medicare, Medigap benefits, your Medicare benefits, your outof-pocket costs. They won’t pick a whole package for you, but they

will give you a whole level of assistance parallel with what the

SHIPs are doing.

So I think one of the things that you are going to get, and it’s

also going to be 24 hours a day, 7 days a week, instead of the current 8 hours a day, 5 days a week. So one of the things that this

will do is I think substantially reduce the referrals to the SHIPs.

SHIPs do a great job. They do such a good job that we are basically

trying to turn our 1-800 MEDICARE numbers into basically a massive SHIP service. The SHIPs are basically through the State insurance commissioners.

Mr. BROWN. Do you see placing, as some have suggested, a Medicare representative in every Social Security Office so people can

have that one-on-one contact?

Mr. SCULLY. You know, that used to be—that is a very complicated issue, because obviously CMS/the old name evolved out of

Social Security. So for years, there was a Medicare person in each

Social Security Office, which was helpful. As the budgets were

squeezed at various departments over the years, the Social Security

obviously—their No. 1 priority was not Medicare. Medicare people

disappeared from that.

We are intensely focused on beneficiary education. Whether the

best way to do that is to put people back in Social Security offices

or to do it through senior centers, or to do it through others ways

are things that I am very open to and I have been looking at it.

But we are very focused on beneficiary education. I think it is

going to be pretty hard this fall for anybody in the United States

to miss our beneficiary education campaign, hopefully.

Mr. BROWN. The last question, Mr. Chairman, along these lines,

Medicare plus choice or its predecessor used to—managed care generally used to provide more money for various kinds of agency information. That has been cut over the years, what managed care

has provided. Sort of two parts to the question. As you strive to increase the involvement of managed care in Medicare, whether you

are successful in that or just the fact that we have provided managed care a good bit more money in this $11 billion last year and

lots of dollars before that, do you plan to call on managed care, on

Medicare plus choice participants to provide more education resources so that OSHIP and others complementarily, if you will, can

provide better kind of service?

Mr. SCULLY. Through the user fee package?

Mr. BROWN. Well, however you would use the power of this office

to encourage managed care companies, to encourage Medicare plus

choice to provide more agency information.

Mr. SCULLY. Yes. We are clearly going to do that. How it’s funded, I think the user fee was reduced last year in legislation, so

there is some limited discretion over that.

32

We are clearly going to put out a lot more information on our

website and various other places about plans. Just to clarify, by the

way, I am trying to knock the word managed care out of my vocabulary. Private health plans—I have been misquoted frequently as

wanting to double managed care. My point, which was widely reported about the Medicare+Choice plan was that in 1997 when the

bill passed, CBO had anticipated by 2002 that you would have

about 30 percent of people in Medicare+Choice. That number has

now dropped to 15 percent. I have every indication more people are

going to drop out this summer.

What I have been saying is that I think a lot of seniors who have

private health plan choices like the drug coverage, we tend to keep

those people in, and then try to get back to what most people anticipated was the growth curve. But it is not that I am out there

trying to pump managed care. We are very interested in making

seniors know about other options, whether it’s Medicare+Choice,

Medicare Select, Medigap.

One of the things when I came into this job I found was that our

data and our polling show seniors really do not understand the

benefits at all, even the base benefit. They don’t understand the copayments and the deductibles. So I am interested in educating

them as thoroughly as we can, and whatever option they decide to

pick is great, as long as they know what they are doing.

Mr. GREENWOOD. The time of the gentleman has expired. The

Chair recognizes the chairman of the Health Subcommittee, Mr.

Bilirakis, for 5 minutes.

Mr. BILIRAKIS. Thank you, Mr. Chairman. Last week we had a

hearing, a young lady from HHS—I don’t remember whether she

was from CMS or not, C-M squared S, but she stayed in the audience. That was very impressive, that you had someone doing that.

I would hope that you would have someone sitting in here taking

notes when the next panel comes up. I think it is so very important. It makes people feel good too, that someone cares.

Mr. SCULLY. It would probably be me, Mr. Chairman. I am still

a staff person.

Mr. BILIRAKIS. There is a June 28 letter from Secretary Thompson to Speaker Hastert regarding your recommendations on needed

legislative changes to the law. Are you, Mr. Mangano or Ms.

Aronovitz, familiar with that? Have you had a chance to look at it?

Ms. ARONOVITZ. I think we received it this morning. But I think

in some ways it is very similar to prior year proposals.

Mr. SCULLY. Yes.

Mr. BILIRAKIS. We have two mikes there. We ought to be able to

use them.

So you are familiar with it?

Mr. MANGANO. Yes. I had seen the bill a couple of days ago.

Mr. BILIRAKIS. Okay. You have seen it before we have this morning.

I am not asking about it now, but I would hope that you would

submit to us any thoughts you have on these recommendations and

your recommendations regarding them. That could be very, very

helpful.

Mr. MANGANO. I would be happy to.

Mr. BILIRAKIS. We would appreciate that very much.

33

Mr. Scully, in your written testimony you state that ‘‘Many contractors serve multiple and sometimes non-contiguous States, resulting in a patchwork’’—underlined—‘‘Patchwork of coverage in

service across the country.’’ We found out that that is one of the

problems, that there is a patchwork, lack of consistency, if you will,

a lack of contract authority, and what CMS aimed with expanded

contract authority, would CMS aim to minimize this current patchwork? What benefits do you believe could be achieved from more

regional contracts or single contracts?

Look at the charts. There you see fiscal intermediaries, carriers.

Is there a need to have separate fiscal intermediaries from carriers? If there is no need, would that be more efficient, result in

better efficiency and less costs?

Mr. SCULLY. I think eventually it would. I am not sure right now,

as many people stated, I don’t think you can do this over night. I

think this is a multi-year phase in. I mean you definitely have completely different Part B and Part A deductibles and systems. In

some of the States that overlap, like Blue Cross of Florida I think

or Trail Blazer, as both contracts, which I think is actually I didn’t

realize until last night when I was reading, that that is actually

part of Blue Cross of South Carolina as well.

Mr. BILIRAKIS. But they are separate contracts.

Mr. SCULLY. They have two contracts, but they have two different systems, two different groups of people.

Mr. BILIRAKIS. Right.

Mr. SCULLY. Arguably, if Trail Blazer is doing Texas in Part A

and Part B, those functions could be merged. There has also been

a lot of discussion, whether it happens or not, in Congress about

eventually merging Part A and Part B in some form anyway. So

I don’t think whether that ever happens or not, the merging of the

contractor systems to me intuitively makes a lot of sense. That

there’s not a great ability——

Mr. BILIRAKIS. Even if Parts A and B are merged, so you would

only have one carrier that would handle the fiscal as well as the

rest of it, makes sense. Does it not?

Mr. SCULLY. Yes.

Mr. BILIRAKIS. It certainly sounds more efficient. It sounds like

probably less costly.

Mr. SCULLY. Well, I would hope so. At some point it should be.

I also think fundamentally I am not a believer in cost-based systems any place in Medicare. Whether you look at it for hospitals

or any of our old cost-based systems, there is not immediate overnight savings. With the DRGs, there probably won’t be immediate

overnight savings when we go from rehab hospitals to PPS this

year. But I think all the prospective payments systems show that

if you incentivize people correctly, eventually there are cost savings

and there are efficiencies. I think most of these companies will tell

you that they would rather do rather than a cost-based contract is

just the tradition. That they would much rather be incentivized.

Mr. BILIRAKIS. You don’t feel that you have the legal authority

to make these changes now though? You would need changes made

in the law?

Mr. SCULLY. We believe we clearly don’t.

34

Mr. BILIRAKIS. Okay. If we go ahead and incorporate these as we

contemplate doing in our ‘‘Medicare Reform Modernizing’’ or whatever we want to call it, prescription drug legislation, you would go

right into trying to make some of these changes as rapidly as you

reasonably can?

Mr. SCULLY. Yes. I would not expect that we are going to get to

18 and 20 overnight, but I do think that we could identify in those

charts the people who are our best partners, and generally start to

move work toward them and start to find the best people who are

doing the best services, and give them more work, and gradually

phaseout the people that——

Mr. BILIRAKIS. You know for years we have heard about problems like this. I can’t recall any emphasis made on the part of the

old HCFA people over the years. I am not referring to any particular administration coming up here and placing emphasis on

these things. In fact, Mr. Brown keeps talking about additional resources. He means money, I guess. The point is, yes, if that is needed, there should be requests for it. But that certainly in and by

itself never gives us the answer in and by itself. Nor do I recall

much emphasis being placed on people coming up here basically demanding, at least explaining the need for that money.

Mr. SCULLY. I think some form of this bill, I know all 4 years

of the first Bush Administration I was in, we set something up. But

there always seemed to be other controversies, whether it was

RBRBS back then or whatever. But in Nancy Eon’s case, who is a

good friend of mine or the most recent administrator, she had Y2K,

BBA, lots of other things going on. I think this just fell down the

priority list. But for whatever reason right now, it is a big priority

for us and a huge one for the Secretary. So we are happy to explain

what I think is a long overdue need.

Mr. BILIRAKIS. Mr. Chairman, may I continue on? I realize I have

gone past my time.

Mr. GREENWOOD. Just this once.

Mr. BILIRAKIS. Just this once. He’s paying me back, is what he

is doing.

Mr. Mangano, we have talked before. The fraud provisions and

what not, we have all placed emphasis on that. How much of the

fraud claims that are taking place out there would you say is the

result of lack of communication, lack of education? I would say on

the part of providers as well on the part of the contractors in the

old HCFA. It is a big problem, certainly in my congressional district, as you know. I am trying to get to the meat of that. I mean,

you know, I just can’t believe that all of these providers are bad

guys. I just wonder how much of it might be due to lack of communication and what not. If that is much of the case, I would hope

that Mr. Scully will be aware of it so that again, we can have uniformity of communications and adequate communications and that

sort of thing. Not much of a question, but if you have any quick

comment.

Mr. MANGANO. Well, each year that we have done our review of

the payment claims, the improper payment report we call it in our

office, we have seen dramatic improvements in terms of the reduction in improper payments. From the first year we did it, 1996, it

35

was running at 14 percent or $23 billion, to the last year that we

did it, where it was down to just under 7 percent, at $11.9 billion.

Each year we have done this review, we have made recommendations. HCFA has basically agreed that we have to increase the education component of the Medicare program. Providers have every

right to know how to bill properly. When they bill properly, everybody succeeds.

There have been efforts across the country and conferences have

been held in local areas. Our staff goes out many, many times during the year to meet with local groups as well as professional

groups to help explain the compliance rules from our perspective

and the CMS perspective, et cetera.

But we still need to do more of it. It is clear to us there is not

the level of clarity that needs to be existing out there for everybody

to be able to understand the rules and to bill properly.

Mr. BILIRAKIS. Yes. From an image standpoint, they are guilty.

They are guilty even if found innocent later on. It gets around the

community and there goes their reputation and all of their hard

work and education down the drain. So it is something we have got

to emphasize.

Thank you very much, Mr. Chairman. I appreciate your indulgence.

Mr. GREENWOOD. The Chair recognizes the gentlelady from Colorado, Ms. DeGette, for 5 minutes.

Ms. DEGETTE. Thank you, Mr. Chairman.

In the next panel, Mr. Chiplin is going to testify, and we talked

about this a few minutes ago, that the beneficiaries require a lot

of information so that they can make an informed decision about

their health care decisions. I guess I would ask you, Mr. Scully,

how well CMS ensure that beneficiaries can get this information if

the contractor functions are parceled out to two, three, or four different entities?

I can see the rationale for that in a lot of contexts, but in the

context of beneficiary information, won’t they get confused trying

to call one contractor to get benefit information, another to get eligibility information, and someone else to get the status of their

claim?

You testified earlier that it used to be that before the budget

cuts, there would be more people in the Social Security offices and

so on to give this information. How are we going to get that education to the beneficiaries?

Mr. SCULLY. As far as I think the GAO testimony was that there

is some merit in contracting our more and splintering our contracts

further, which we are looking at. I have not quite reached that decision yet, for some of the reasons you suggested, which is I am

worried about becoming too splintered. But we are in the process

of evaluating that.

I can tell you since the day I walked in the door, my No. 1 focus,

and I think the staff will tell you this, has been beneficiary education and putting together this major campaign to educate seniors

and beneficiaries.

I think a lot of that is done more through us than through the

contractors. I think, for instance, if you look at our website, which

doesn’t get many hits. If you are a dialysis patient, there is no

36

question in my mind if you go into Denver and pull up dialysis centers, there is very detailed information on quality on dialysis centers. People don’t use it. They go when the nephrologist tells them

to go.

Similarly, the information on nursing homes is not I don’t think

quite objective enough, and we are working on that. But my goal

is to basically provide a lot more quality, objective, fair information

for people to make better decisions. That is going to be probably

my No. 1 push, as long as I survive 31⁄2 years.

Ms. DEGETTE. I think that is an admirable goal. But don’t you

think that that particular component of beneficiary education

would be made more difficult if contractor functions are parcelled

out?

Mr. SCULLY. Well, I think that is the balance to weigh. But I

think what we are talking about here fundamentally to begin with

is probably contraction of contractors, where you have more consistent contracting. Whether it is also a good idea, as we have done

in some of the fraud abuse efforts, to subcontract out specific issues

to subcontractors who are more focused on particular beneficiary

education areas, we have not made that decision yet. I think it is

being discussed. That is one of the recommendations GAO had, but

I think the balance there is splintering it too much.

Ms. DEGETTE. Ms. Aronovitz, would you comment on that?

Ms. ARONOVITZ. I think there is a difference between having

fewer contractors, but still having an interface and having oversight in management so that you would still have local connections.

If somebody calls an 800 number, they don’t necessarily know that

they are getting a Blue Cross Blue Shield company in Alabama

versus in North Dakota. There are a lot of ways to still maintain

the local relationship between beneficiaries. We would not want

CMS to ever consider any kind of functional contract that would

break the relationship in that way. So it is a matter of figuring out

how to be very specific about what you are asking for and then

finding experts who could bid on these contracts that could provide

that kind of quality.

Ms. DEGETTE. I think that that is an important concept to keep

in mind as you go through this.

Let me follow up, Ms. Aronovitz, just about functional contracting. It seems to me that if it is going to work well, CMS is

going to need to clearly lay out the scope of responsibilities and expectations for each contractor, and make sure that the contractors

are not duplicating work or letting responsibilities fall through the

cracks, some of the same problems that you are suggesting this to

remedy.

What steps will CMS need to take to administer Medicare properly if they use functional contracting?

Ms. ARONOVITZ. I think functional contracting is a very, very

good concept theoretically. But I think implementation-wise, there

are a lot of challenges. I think CMS is learning a lot from its contracting for program safeguard contracts. A lot of those are functional contracts. They are very specific.

We issued a report about 2 or 3 months ago on the status of

CMS’ efforts to implement its PSC or MIP authority on these functional contracts. Basically there are two issues that CMS really has

37

to be careful about. The first one is being very specific about defining or putting your arms around what that function would be. It

is not that easy to do, but if you don’t do a good job, then you are

going to get somebody to bid on something less than what you are

actually expecting.

The second thing is that you have to have performance measures

and standards in place because if you don’t have performance

measures articulated well upfront, you are not going to know

whether you are getting what you are paying for. Those are the

types of activities that become critical in any type of contracting,

whether it is an invitation for bid or a request for proposal. In either case, you really need to understand what type of performance

you are expecting. It’s not easy.

Ms. DEGETTE. Thank you.

Mr. GREENWOOD. The time of the gentlelady has expired. The

Chair recognizes for 5 minutes Dr. Norwood.

Mr. NORWOOD. Thank you, Mr. Chairman.

Mr. Mangano, you have been with HHS a long time. You have

been working in the area of Medicare a long time. You have been

involved in subcontracting area a long time. I think we all would

agree that systems developed over 35 years ago probably at least

need to be changed. If we were starting from scratch, they might

not even recognize each other.

Now do you ever sit around fantasizing what this really ought to

be? How this system really should deal with subcontractors? Because you have a lot of experience and I value your thought.

Mr. MANGANO. Well, I would like to answer it this way. The Congress and the American people have every right to expect that the

Medicare system be run efficiently and effectively.

I would like to maybe use a little bit of imagination now and

think that we have all just started up a new company. This company is going to do about $200 billion worth of business each year.

We are going to have 40 million customers. We are going to have

over a million different providers of service here. You are the board

of directors, and you are interviewing potential candidates that are

applying to be your chief executive officer. A young chap comes

walking in the door and he says, ‘‘I have got a great new business

plan for you. Here is how we are going to run our company. First,

we are not going to do any open or full competition for any of the

contracts for the people who are actually going to manage our program on an every day basis...’’

Mr. NORWOOD. Mr. Mangano?

Mr. MANGANO. Yes, sir.

Mr. NORWOOD. Forgive me. I did ask our witness the question.

I want it in writing. You are in charge. You are king for the day.

You start from scratch. Tell me how you would do the subcontractors. Give me your opinion at the same time on the changes that

Mr. Scully brings to us today from the Administration that they

would like to see in a bill.

I would absolutely love to sit here and hear the answer, but we

don’t have time. So I take my question to you very seriously. I

think you could bring a lot to the table for us to look at as this

subcommittee tries to accommodate Mr. Scully, the Administration,

and make some finally changes in Medicare.

38

Mr. Serato states in his written testimony that at last count,

Medicare contractors receive on average a new instruction from

CMS every 5 hours of every day of the year. What happens, Tom,

talk to me in terms of being a hospital man, not head of this agency. What happens when CMS sends these instructions down to the

subcontractors? What do they do with those instructions? Do they

send them to your hospital?

Mr. SCULLY. I think they send them everywhere. That is part of

the problem with the whole system. There are a lot of great people

in CMS. I think the Secretary found that, and I have found that

too. But there has been a mode over the years of just sending out

random strafing runs from everybody. I am trying to change that.

Mr. NORWOOD. Did you receive those in your hospitals? In other

words, it isn’t just the subcontractor who receives the new document or change order every 5 hours, it is also those on the other

end that are providing the care?

Mr. SCULLY. I think the change orders he is talking about are

the ones that actually go to the FIs and the carriers. But separate

and apart from that, HCFA puts out a lot of regulations and program memorandums that go directly to the providers outside of

that everyday. One of the first steps—I am not sure you have seen

our response yet to the committee, but the Secretary announced

the regulatory reform effort last week which is a first step, and this

is the regulatory side. Starting October 1, CMS is going to put out

a compendium of all its regulations each quarter. There will be a

menu of everything coming out that quarter. If it is not on there,

it won’t come out.

Second, we are going to put out regulations and program memorandums 1 day a month. So that if you are a hospital or a physician or a provider, you will only have to look at the Federal Register 1 day a month. Now it is a self-imposed regulation. We are

trying to simplify the process.

Mr. NORWOOD. What you are saying is you are going to have less

than one every 5 hours under your regime?

Mr. SCULLY. I think that is to the carriers, what he is talking

about. But the first step—— Mr. NORWOOD. But the carrier passes it on down the line.

Mr. SCULLY. Yes. No question. Well indirectly.

Mr. NORWOOD. Not maybe every time, but frequently.

Mr. Mangano, I wondered if you knew there was a change order

every 5 hours? Did you know that before coming in here?

Mr. MANGANO. I did not know it was once every 5 hours, but I

do know there are a lot of them.

Mr. NORWOOD. Now could you somehow logically put together a

relationship that that might have a lot to do with some of your investigations into what is called waste, fraud, and abuse, and there

is where we save all our money?

Mr. SCULLY. One thing I would argue, one argument for reform

is that in a cost-based system, you send out a change order. They

may be upset about it, but they just build it into their cost. If we

went to a more rational contracting system, there would be a lot

more push back all——

Mr. NORWOOD. That hospital can’t build it into its costs very

readily.

39

Mr. SCULLY. This is to the carriers.

Mr. NORWOOD. I know. But they come from the carrier. I promise

you, the carrier doesn’t sit there with it. They tell us what to do

because of what CMS told them what to do. I am asking for somebody to say they understand that perhaps some of this so-called

waste, fraud, and abuse is being stimulated out of Baltimore, out

of people who are honestly trying to do right in the system, who

can’t keep up with the change order every 5 hours or even if there

is one a week.

Mr. SCULLY. I totally agree with you. One thing I have tried to

bring, sometimes to the great pain of my staff in the 3 weeks I

have been there, is to have them view it from the local provider

side, because in a lot of cases, they have the best of intentions, and

they don’t understand what happens to the docs and the hospitals

at the other end of what they are doing. I think I have made a

pretty big push already to make them understand that.

Mr. NORWOOD. Thank you. I see the red light, Mr. Chairman. I’m

sorry about it, but I see it.

Mr. GREENWOOD. We noticed you care about this issue, Mr. Norwood.

The gentlelady from California is recognized for 5 minutes.

Ms. CAPPS. Thank you, Mr. Chairman. Thank you very much for

the testimony of each of the three of you. I was sitting here thinking of a kind of theoretical, sort of sophisticated question, set of

questions I could pose to you. Then I thought of a rural county that

I represent in central California, San Luis Obispo.

I am thinking of a provider, one in particular, who wrote me

such a painful letter. I had a conversation with him it was so troubling to read his letter. The reimbursement rate is third lowest in

the State, in that particular county, although I have worked hard,

we got it raised 12 percent. It is because the cost of living doesn’t

match it in any way. It is an area where Medicare+Choice is pretty

much vacated.

But I am talking now about the provider, who when we had a

change of carriers about a year ago, all of a sudden there was a

delay in payment. Many of the providers took liens on their practices and mortgages on their houses and went into debt. Rural

areas have their own peculiar challenges.

This one, this doctor is—I hope he is still in practice, just a couple years from retirement, really not equipped to do anything

else—so far in debt, not able to have enough other kinds of insurance patients and Medicare reimbursing so little anyway for the

cost of service to provide, feeling a responsibility toward providing

for his patients as providers leave. Then patients have to drive

even further distances, and Medicare patients have challenges.

Many of them are elderly.

I was hard pressed to know how to respond to him. He said can’t

the system—the margin is so small anyway. When the carrier

changes and all of a sudden there is a delay, we get really involved

in our congressional office because they call us right away. ‘‘What’s

wrong? I am not able to meet my expenses.’’

I just, I don’t know how to pose the questions to you, but I don’t

know how to deal with this troubling, troubling situation in my

community.

40

Mr. SCULLY. Well, I am sorry to hear that. I hope you will call

me if you have—— Ms. CAPPS. I have called. Well, it was your predecessor.

Mr. SCULLY. You have called me already?

Ms. CAPPS. No, I haven’t called you yet, but thank you for the

offer.

Mr. SCULLY. Because I already have to go to about seven, there

are eight different States, and I would love to visit Santa Barbara

as opposed to North Dakota.

Ms. CAPPS. No, this is San Luis Obispo.

Mr. SCULLY. I’m know. I’m kidding. And San Luis Obispo.

Ms. CAPPS. Santa Barbara though is No. 4 lowest in reimbursement. That is considerably lower than next door neighbor county

to the south.

Mr. SCULLY. Yes. I am pretty familiar with your district. I obviously will try to help. I was not familiar with that change, and that

there was a slowdown.

As a general matter, I think it is United Government Services,

my general experience with them is that they are one of the better

contractors. So I am sorry to hear that. I think they have the whole

State.

Ms. CAPPS. I thought this one was Heritage, but I looked at your

list and I didn’t see that particular one.

Mr. SCULLY. Heritage is EDS, I believe. Yes, Heritage is EDS.

Must be HI, I guess.

Ms. CAPPS. I am not trying to lay the finger on a particular carrier. But if this is what happens as changes are made, you just

have to know that there are real-life consequences that are very,

very painful.

Now in terms of our beneficiaries, we have a wonderful program,

pretty much volunteer, a voluntary program called HICAP. I think

it is throughout the State of California, which they do a marvelous

job of interpreting regulations and answering questions and referring patients, and explaining the services. But I have had tremendous challenges in meeting the requests for ‘‘help us’’ from both

providers and also hospitals. So many are so close to going under,

been in the red so long, and it is really troubling. Medicaid and

Medicare, we call it Medi-Cal, are really their main sources of income.

Mr. SCULLY. Well, in fairness to defend Medicare to some degree

since I used to be in the hospital business until 3 weeks ago, Medicare believe it or not, is generally the best and fastest, the fastest

payer, far faster than most of the private because under statute we

have to be.

But if you have problems with your carriers—it is EDS, Heritage

is their insurance company—if you have problems with them, I

would be happy to get the men to sit down with you in our regional

office in San Francisco, and try to make sure that we incentivize

them to better performance.

Ms. CAPPS. Is this part of what I guess, my question then to you

and your testimony or I will take a response from anyone else. I

don’t want this to be a complaining session. But is the goal then

of this time of organization to prevent these kinds of things from

happening? I guess I am not quite——

41

Mr. SCULLY. I guess I am surprised, because generally EDS, I

thought was pretty good. I hope this is a unique problem. But my

goal is basically to find the best contractors, exactly in your situation, find the 18 to 20 best Part A, Part B contractors together and

gradually evolve to a system where we have got the best people

who perform the best to pick up more and more volume so that the

people who end up providing services in your county are our best

contractors.

Right now, our ability to shift workload to the best people is not

very good. It is very limited. So my hope is in 5 or 6 years, we can

sit down as CMS and say everybody has got one of our top 20 performing contractors, and that they are incentivized. I personally

just think cost-based contracting is crazy. Get into appropriate

incentivized contracts, incentivized to perform better.

Ms. CAPPS. I wondered when I first began hearing your testimony what is the incentive for anyone to want to volunteer to work

with you. Then I am also of course very aware of your 2 percent

administrative costs. I mean who else does business like that?

Ms. ARONOVITZ. I just want to add one thing. That is, that what

I hear you saying does not have to do with ongoing performance

of the contractor.

Ms. CAPPS. No.

Ms. ARONOVITZ. But when a contractor leaves.

Ms. CAPPS. Changing.

Ms. ARONOVITZ. Right. Transitions in HCFA have been notoriously challenging. It is a difficult thing to try to get a whole new

contractor in place.

Ms. CAPPS. I appreciate that.

Ms. ARONOVITZ. I think that is a really important lesson. I think

CMS has gotten much, much better in transition, in doing transitions than it did several years ago, where we were very concerned.

But it is a lesson to keep in mind when you are going to be consolidating or using new authorities to consolidate your contractors because if you are not careful and you don’t do it slow enough and

do a lot of planing, then you might have these disruptions in service. One of the really critical challenges that the agency faces is to

avoid those kinds of disruptions.

Ms. CAPPS. I appreciate that. Thank you.

Mr. GREENWOOD. The time of the gentlelady has expired. The

Chair recognizes the gentleman, Mr. Ganske, for 5 minutes.

Mr. GANSKE. Thank you, Mr. Chairman.

On June 6, I gave special orders on Medicare reform. I have a

copy here which I will provide to you, Mr. Scully. I have 26 recommendations for Medicare CMS reform. It is not meant to be exclusive. I am sure there are many other suggestions. Number 26

says the efficient organization, performance, and oversight of Medicare fiscal intermediaries and carriers is hampered by legislative

prohibitions against competition and financial incentives for good

performance which should improve contractor performance by modernizing the legislative authorities, including the authority to compete for contracts and to financially reward good performance.

I think those are principles that we need to look at, consistent

with what this hearing is about. But the details are very important

on this. So I guess I have a question in terms of how do you define

42

or what are you thinking about when you are talking about functional contracting?

Mr. SCULLY. Functional contracting, and it is something that has

been debated in CMS since I got there, which is how good an idea

it is. I mean the basic issue is do you want to take some of the

functions that our carriers and FIs have done, such as reviewing

claims patterns for upcoding, fraud and abuse, things like that, and

break them out of existing contracts and give them to a separate

subcontractor who is focused just on that as a functional contract.

I think their argument is to have both ways. As Ms. DeGette suggested, I think finding people who are most effective at their subset

of the world is a great idea. But to the point where we balkanize

the system so that we have got too many overlapping contractors,

I think that is a tension that we need to resolve in CMS, to what

works best.

We have broken some of it out already in the MIP program, the

Medicare Integrity Program for subcontracting. Some of the contracts have come back and said look, we can do the same thing.

You are reinventing the wheel, and you are wasting your time. I

think that is just something we need to look further into and find

the right balance as to what the carriers and FIs, hopefully consolidated together, can do best and can we really go out and find people who are focused on specific claims review can do for us a little

better. But I am concerned about just balkanizing the whole program and having contractors crawling over each other, which is the

worst of all worlds.

Mr. GANSKE. I share your concern on that. I think there are some

elements in this proposal that tend to be both centripetal and centrifugal. In other words, there are some parts of the proposal I

think tend to go toward fragmentation, parts tend to pull back in.

For instance, the issue of executing combined Part A and Part B

contracts. Tell me how you think that would work.

Mr. SCULLY. I think it is a complex transition, but I think right

now, my understanding, and I have only been there 3 weeks so I

am still learning, is that we have totally separate Part B and Part

A systems. So even if you are Trail Blazer or Blue Cross of Georgia, I think, or some of the others that have both halves of the contract, both parts of the contract, they really operate in separate

worlds. There is a common working file that ties them together to

some degree, but there is a limited amount of discussion between

those two sides.

I think to some degree a phasing in where you had overlap would

be helpful in a whole variety of ways, including the fact even when

you get to things like lifetime deductibles and outlays for Medicare,

it is hard to track. So running a coordinated program, it seems for

a variety of policy reasons as well as just functionally running the

carriers better, in the long run, I don’t think it can happen overnight, trying to develop our new systems toward an integrated Part

A and B system. Whether Part A and B are together or separate,

it just seems to me it would be a more rational way to deliver the

services.

Mr. GANSKE. I think before heading in that direction, you need

to answer the question. There are many reasons why Part A and

Part B have been separate traditionally over the years. You need

43

to decide whether in fact that is a way to go in the first place, and

then if you decide that it would be, how well you could make it

functionally work. I think Mr. Serota has some testimony that he

will give us today on how complicated that actually could be.

I don’t think that we as a committee have come to any consensus

on that issue over the combination of Part A and B. I certainly

have not.

Mr. SCULLY. I would hope that I could work with you. One of my

ideas this fall is to find some of the places where Part A and B

overlap, and there are a number of States, and to try to do some

pilots and demos that are incentive-based, where you have an overlapping contract to see how well it works, and see what the problems are. Because clearly, we do not want to dive into this head

first without knowing where we are going.

Mr. GANSKE. I would tend to agree with that because I think

that rather than instituting a broad, overall change without first

realizing what some of the consequences could be would be foolhardy.

So anyway, I will get a copy of this to you. I would very much

appreciate it if in some way, you could respond to each of these

points that I make in my speech so I get some idea of what you

are thinking about these issues.

Mr. SCULLY. We have a new hopefully implemented policy responding to all congressional inquiries in 14 days. Twenty six questions might take a little longer, but hopefully we will be pretty

quick.

Mr. GANSKE. Thank you. I yield.

Mr. GREENWOOD. The time of the gentleman has expired. All of

the members of the panel have had the opportunity to inquire of

these witnesses. So there is a floor vote being called now. In fact,

there are a series of them. So this panel is excused. We thank you

for your testimony. I look forward to working with you in the future.

We will recess until 12:30.

[Brief recess.]

Mr. GREENWOOD. The committee will come to order. The Chair

would ask the third panel, consisting of Mr. Scott Serota, President

and CEO of Blue Cross and Blue Shield Association, and Mr. Timothy Cullen, Chairman of United Government Services, Mr. Alfred

Chiplin, Managing Attorney, Health Care Rights Project, Center

for Medicare Advocacy, Inc. to come forward.

Welcome, gentlemen. Thank you for indulging us while we had

the series of votes. Appreciate your presence.

You gentlemen are aware that this is a hearing, a joint hearing

between the Health and the Oversight and Investigations Subcommittees. It is the practice of the Oversight and Investigations

Subcommittee to take testimony under oath. Do any of you have

any objections to giving your testimony under oath?

Mr. SEROTA. No, sir.

Mr. GREENWOOD. Pursuant to the rules of the committee and the

House, you then have the right to be represented by counsel. Do

any of you wish to be represented by counsel during your testimony?

Mr. SEROTA. No, sir.

44

Mr. GREENWOOD. Okay. In that case, if you will rise and raise

your right hand I will give you the oath.

[Witnesses sworn.]

Mr. GREENWOOD. You are under oath.

Mr. Serota, if you would begin by giving your testimony, you will

be recognized for 5 minutes.

TESTIMONY OF SCOTT P. SEROTA, ACTING PRESIDENT AND

CEO, BLUE CROSS AND BLUE SHIELD ASSOCIATION; TIMOTHY F. CULLEN, CHAIRMAN, UNITED GOVERNMENT SERVICES, LLC; AND ALFRED J. CHIPLIN, JR., MANAGING ATTORNEY, HEALTH CARE RIGHTS PROJECT, CENTER FOR MEDICARE ADVOCACY, INC.

Mr. SEROTA. Thank you, Mr. Chairman, and members of the subcommittees. I am Scott Serota, President and Chief Executive Officer of Blue Cross Blue Shield Association. I appreciate the opportunity to testify today. I also appreciate your interest and leadership in identifying ways to improve the Medicare contractor program to enhance services for beneficiaries and providers.

Many of our plans contract with the government to handle much

of the day-to-day Medicare administrative activities. We pay

claims, provide customer service, educate providers, and fight

waste, fraud, and abuse. Our contractors are committed to achieving outstanding performance. Blue Cross Blue Shield plans are

proud of their role as Medicare administrators. Even with soaring

workloads we have remained cost-effective, keeping administrative

costs to less than 1 percent of the total Medicare benefits. We also protect the trust fund by saving the government $17 for

every dollar invested in program safeguard activities. We support

efforts to improve the ability of both contractors and the CMS to

provide the highest level of service to Medicare beneficiaries.

Before discussing our specific recommendations on contractor reform, I would like to provide you with a perspective on the challenges we face as contractors. First, inadequate funding, coupled

with rising workloads impede contractors’ ability to provide service

levels beneficiaries and providers expect and frankly, deserve. Our

contractors have been severely under-funded since the early 1990’s,

while claims volume have risen almost 70 percent.

While the additional funding provided through a permanent appropriation in 1996 for dedicated fraud and abuse activities has

helped, it has not solved the budget problems for the rest of the

contractor budget, which are needed to pay claims, provide customer service, and educate providers. This is still subject to the annual appropriations process. We are pleased the Administration

and many members of this committee have recognized the need for

additional administrative resources. We would like to work with

you to make this happen.

Second, the Medicare program has grown more and more complex in recent years. Over the past few years, several new payment

mechanisms were implemented and benefits added. In addition,

HIPAA administrative simplification provisions and privacy rules

must be implemented. Just as each of you have heard from providers about Medicare complexities, so do we as contractors hear

these same complaints from the providers.

45

Third, frequent changes in program direction challenges our contractors. At last count, Medicare contractors received an average of

a new instruction from CMS every 5 hours of every day of the year.

Finally, many legislative changes to Medicare are rarely accompanied by administrative funding or appropriate transition time for

proper implementation.

I will turn to our specific recommendations for contractor reform.

These recommendations are based on the broad outline of CMS’ proposal since we just this morning received specifics. In general,

we agree with most of CMS’ proposal. We agree that competition

can be strengthened in the program. CMS should be able to contract with any qualified entity, not just health insurers. In doing

this, CMS should focus on competitively bidding those contracts

with those contractors which are voluntarily exiting the program or

those contractors which perform poorly. This would allow the government to maintain those contractors that are providing quality

service and meeting CMS’ performance expectations.

We also would support the elimination of provider nominations,

so long as the provider community is in agreement. We strongly

support modernizing current cost-based contracts. Currently, most

contractors are paid cost up to a cap set by CMS. There is no opportunity for profit. We believe CMS should be allowed to use other

payment options, such as cost-plus contracting.

Our bottom line objective with any reform effort is to ensure that

the services to beneficiaries and providers are not disrupted or

made more complicated. We must improve the program, not make

it more difficult. It is for this reason we would encourage the committee to establish a more businesslike contracting environment,

with a clear and definitive statement of work, disciplined and controlled change orders, sufficient funding to accomplish the work in

a timely and professional manner, with prompt responses to contractors’ budget requests, and contracting officers that are fully empowered within CMS to manage the contractual relationship.

There are two areas in which we differ with CMS. We do not

agree that CMS should further fragment the program through

functional contracting. Our understanding is that CMS wants to

separately contract each function. For example, have one contractor

pay claims, one provide beneficiary services, another for education.

We just don’t think this makes any sense.

When a provider or beneficiary calls, they don’t want answers,

they want action. They want a problem solved. Functional contracting would diminish the current single point of accountability

that our contractors represent. In addition, it disrupts effective

management of the program, and has the potential to increase, not

decrease costs, because each entity will have its own budget and

coordination costs.

We do not believe that A and B contractor operations should be

merged. We believe the objective of approved care for beneficiaries

and more uniform medical policies can easily be accomplished without having to change contractor operations. Data can be shared and

combined, and local medical policies can be brought into agreement.

I do have one final recommendation not included in the CMS proposal. That is, to provide stable and adequate funding. It is simply

46

unrealistic to expect contractors to meet expectations without appropriate resources. To achieve this goal, we recommend a new

funding methodology be developed for Medicare contractors. Congress should explore employing mechanisms similar to those used

to fund Social Security administrative costs and Medicare peer review organizations.

I urge the committee to increase the permanent MIP appropriation that is capped at $720 million in fiscal year 2003 and beyond,

despite the continued increase in claims volume. If fraud and abuse

efforts are to be effective, MIP funding must keep pace with the increasing workloads.

In summary, we are committed to achieving outstanding performance by providing high quality service to beneficiaries and providers. We believe more can and should be done to improve contractor operations and oversight. We look forward to working with

the committee on these recommendations to improve the program.

Thank you.

[The prepared statement of Scott Serota follows:]

PREPARED STATEMENT OF SCOTT SEROTA, PRESIDENT AND CHIEF EXECUTIVE

OFFICER, BLUE CROSS AND BLUE SHIELD ASSOCIATION

Mr. Chairmen and members of the Oversight and Investigations and Health Subcommittees, I am Scott Serota, President and Chief Executive Officer of the Blue

Cross and Blue Shield Association. We represent 45 independent, locally operated

Blue Cross and Blue Shield Plans throughout the nation. I appreciate the opportunity to testify before the Subcommittees on Medicare contractor reform.

Since 1965, Blue Cross and Blue Shield Plans have played a leading role in administering the Medicare program. They have contracted with the federal government to handle much of the day-to-day work of paying Medicare claims accurately

and in a timely manner. Nationally, Blue Cross and Blue Shield Plans serve as Part

A Fiscal Intermediaries (FIs) and/or Part B carriers and collectively process most

Medicare claims.

Medicare contractors have four major areas of responsibility:

1. Paying Claims: Medicare contractors process all the bills for the traditional

Medicare fee-for-service program. In FY 2001, it is estimated that contractors

will process over 900 million claims, more than 3.5 million every working day.

2. Providing Beneficiary and Provider Customer Services: Contractors are

the main points of routine contact with the Medicare program for both beneficiaries and providers. Contractors educate beneficiaries and providers about

Medicare and respond to about 40 million inquiries annually.

3. Handling Hearings and Appeals: Beneficiaries and providers are entitled by

law to appeal the initial payment determination made by carriers and FIs.

These contractors handle over 7.4 million annual hearings and appeals.

4. Special Initiatives to Fight Medicare Fraud, Waste, and Abuse: All contractors have separate fraud and abuse departments dedicated to assuring that

Medicare payments are made properly. According to the Department of Health

and Human Services (HHS), these activities saved the government $9 billion in

1998.

Medicare contractors operate under detailed instructions from the Center for

Medicare and Medicaid Services (CMS), formerly known as the Health Care Financing Administration. As government contractors, Medicare contractors must comply

with numerous federal statutes, regulations, and Executive Orders. In addition, contractors must follow extensive CMS-issued program guidelines and manual instructions. To monitor compliance with these guidelines, contractors are visited several

times each year by their local CMS regional office staff for an assessment of their

performance against CMS’ requirements. These reviews, termed Contractor Performance Evaluations, are conducted across all aspects of contractor operations—

claims processing timeliness and accuracy, customer service, fraud and abuse detection efforts—and culminate in a formal annual report called the Report of Contractor Performance. Also, CMS routinely contracts with private companies to review various critical aspects of contractors operations.

47

Blue Cross and Blue Shield Medicare contractors are proud of their role as Medicare administrators. While workloads have soared, operating costs—on a unit cost

basis—have declined about two-thirds from 1975 to 2001. In fact, contractors’ administrative costs represent less than 1 percent of total Medicare benefits. Few government expenditures produce the documented, tangible savings of taxpayers’ dollars generated by Medicare anti-fraud and abuse activities. For every $1 spent fighting fraud and abuse, Medicare contractors save the government $17.

Blue Cross and Blue Shield Medicare contractors are committed to achieving outstanding performance. We support efforts to improve the ability of both contractors

and the CMS to cost-effectively provide the highest service levels to Medicare beneficiaries.

With this as background, I would like to focus my testimony on the following two areas:

I. Current challenges facing Medicare contractors; and

II. BCBSA recommendations for contractor reform.

I. CHALLENGES FACING CONTRACTORS

There are four key challenges currently facing Medicare contractors:

1. Inadequate funding levels with rising workloads;

2. Increased complexity of Medicare rules;

3. Frequent changes in program direction; and

4. Legislative mandates not accompanied by additional funding.

Inadequate funding levels: Of utmost importance to attaining outstanding performance is an adequate budget.

However, Medicare contractors have been severely underfunded since the early

1990’s and are facing poor prospects of receiving adequate funding next year. During the early to mid-1990’s, reductions in funding concurrent with increases in

workload seriously eroded contractors’ ability to fight fraud and abuse. Between

1989 and 2000, the number of Medicare claims climbed almost 70 percent to over

800 million, while payment review resources grew less than 11 percent. As a result,

the amount allocated to contractors to review claims shrank from 74 cents to 48

cents per claim. Because of the significant cost of reviewing claims, this decline

in funding resulted in CMS’ directions to contractors to reduce the percentage of claims that were scrutinized and investigated. Similarly, the percentage of cost reports audited declined—between 1991 and 1996, the chances that any

institutional provider’s cost report would be reviewed in detail fell from about 1 in

6 to about 1 in 13.

Throughout this period, contractors identified to CMS additional anti-fraud efforts

they could undertake if awarded additional resources. BCBSA and Blue Plans urged

both Congress and the Administration to allocate significantly more funds for critical anti-fraud and abuse efforts. Finally, in 1996, Congress created the Medicare

Integrity Program (MIP) in the Health Insurance Portability and Accountability Act.

MIP provided a permanent, stable funding authority for the portion of the Medicare

contractor budget that is explicitly designated as fraud and abuse detection activities. MIP funding was set at $500 million in 1998 and is authorized to rise to $720

million in 2002. After 2002, the permanent authorization is capped at $720 million

despite continuing estimated increases in claims volumes.

Thanks to this new funding mechanism, Medicare contractors have been able to

improve their efforts to reduce the amount of fraud, waste, and abuse in the Medicare program. Contractors’ enhanced anti-fraud and abuse efforts due to MIP funding contributed to the significant decline in improper claims and documentation submission by providers. The OIG audit of FY 2000 claims estimated that improper

Medicare payments had dropped to $11.9 billion, or about 6.8% of the $173.6 billion

in Medicare payments. The improper payment rate declined by over 50% or $11 billion in five years.

But, the creation of MIP did not solve the budget problems for the remainder of

the contractor budget. The largest portion of the contractor budget—program management—is subject to the annual appropriations process and continues to face severe funding pressures. Program management activities include claims processing

, beneficiary and provider communications, and hearings and appeals of claims initially denied. Under the appropriations process, contractors must compete for funding with high priority programs such as the National Institutes of Health and education.

For example, between 1989 and 1998, funding for program management activities

(adjusted for inflation) declined by 18 percent. During this period, the volume of

Medicare claims increased by 84 percent; Medicare outlays (in real dollars), by 65

percent. Whenever possible, contractors responded to reduced funding by achieving

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significant efficiencies in claims processing, lowering program management costs per

claim by 56 percent in real dollars over this period. But even these efficiencies have

not been enough to keep pace with rising Medicare claims volume and diminishing

funding levels. For example, this year, contractors have been instructed to cut back

on customer service plans, responding to inquiries, provider training and other provider services in order to live within the 2001 budget.

Inadequate budgets for program management also impact Medicare’s fight against

fraud and abuse. While many think of program management activities as simply

paying claims, these activities are Medicare’s first line of defense and are critically

linked to MIP anti-fraud and abuse activities. As an example, many of the frontend computer edits (e.g., preventing duplicate payments and detecting suspicious

claims) are funded through program management. Inadequate funding impacts different functions at different times, but always disrupts the integration of all the

functional components needed to ‘‘get things right the first time.’’ It thus results in

inefficiency and higher costs.

We are pleased that Secretary Thompson and many Members of this Committee

have recognized the need for additional administrative resources at CMS. However,

we are concerned that the Administration’s FY 2002 budget relies on $115 million

in new user fees from doctors, hospitals, and other providers. Congress has consistently rejected user fees and BCBSA would recommend they be rejected again. We

also strongly recommend Medicare contractor funding be increased to $1.567 billion

in FY 2002 to ensure adequate resources are available to provide the high quality

services beneficiaries and providers deserve.

Increased Complexity of Medicare Rules: The Medicare program continues to

grow more and more complex. It takes a great deal of time and resources to educate

providers and beneficiaries about new laws and rules as well as answer questions.

Contractors have been challenged over the years with enormous program changes

such as:

• New payment mechanisms for outpatient departments, home health agencies, and

skilled nursing facilities.

• Changes to Medicare coverage rules: Balanced Budget Act (BBA), Balanced Budget Refinement Act (BBRA), and the Beneficiary Improvement and Protection Act

(BIPA).

• Implementation of the administrative simplification provisions of HIPAA.

Just as Members of Congress are hearing from providers on the program’s complexities, so too are contractors who must answer their questions and concerns.

Frequent Changes in Direction: Medicare contractors are challenged by the

very nature of the business. At last count, Medicare contractors, received on average

a new instruction from CMS every five hours of every day of the year. This constant

state of change requires contractors to be extremely flexible—both in terms of operations and budget. It has not been uncommon in the past for contractors to be forced

to abandon projects or reallocate staff mid-year in order to adapt to CMS’ suddenly

revised priorities or modified funding levels.

Medicare contractors operate under cost contracts, and CMS places budget caps,

or limits, on the unit costs paid to contractors to process claims. By law, Medicare

contractors are not allowed any profit. Under these contracts, Medicare contractors

essentially do whatever work CMS requests, without ‘‘change orders.’’ There is not

a clear statement of work at the beginning of the year, and contractors generally

must comply with constant change orders from CMS without additional reimbursement. These demands make the Medicare contractor business extremely challenging.

Legislative Mandates Without Funding: Legislative changes to Medicare are

rarely accompanied by administrative funding or appropriate transition time for

proper implementation. This is extremely cumbersome for contractors that are already strapped for resources.

BCBSA RECOMMENDATIONS TO IMPROVE THE MEDICARE CONTRACTOR PROGRAM

BCBSA agrees that revisions to the Medicare contractor program could strengthen

contractors’ ability to effectively and efficiently handle day-to-day administration of

the Medicare program. Blue Cross and Blue Shield Medicare contractors are committed to achieving outstanding performance levels and providing superior service

to Medicare beneficiaries and providers. We want to work with the Congress and

CMS to attain this objective. While CMS has outlined a number of changes, we understand the specific proposal is still under development. Therefore, our comments

reflect our best understanding of their proposal at this time.

Competitive Contracting: We believe that Congress should explore revising

Medicare contracts to allow qualified companies to compete based on a modified

49

Federal Acquisition Rule (FAR)—the federal government’s rules on competitive contracting. The FAR would instill at least two disciplines now missing in the program:

a clear scope of work, and a professional contracting officer for each contract,

through whom contract changes are made. Conducting such competitions under the

FAR would ensure that contracts are awarded on the basis of fair competition, and

it would give all contractors appropriate appeal rights and due process.

HHS has indicated its intent to reduce the number of contractors to fewer than

20 by 2006. We would point out that such consolidation is already occurring without

legislation. In fact, the number of FFS contractors has declined from nearly 50 in

1985 to 32 at the present time. We would caution the Congress and the Administration against moving precipitously with additional consolidation. It could have the potential of seriously disrupting program operations, which in turn could hinder provider services and beneficiary care. To ensure stability of the Medicare program,

BCBSA recommends that CMS only put to competitive bid poor performing contractors or those that occur when a contractor is voluntarily exiting the program, rather

than using an artificial and mandated timetable for consolidation. This would allow

the government to maintain those contractors that are providing quality services

and meeting CMS’ performance expectations.

Allowing Non-Health Insurers: BCBSA does not oppose the CMS proposal to

allow non-health insurance entities as FFS contractors. In fact, we believe CMS already has this authority under current statute and would question whether CMS

actually needs additional legislative authority to accomplish this. However, we

strongly support the development of criteria to ensure that entities allowed to compete are well qualified to provide the full range of Medicare administrative services.

Functional Contracting: We understand that CMS would like additional authority to further fragment current contractor functions. CMS already has considerable authority to contract separately for Medicare processing functions. For example, the MIP authority under HIPAA permits HHS to separately contract for payment safeguard functions and last year’s Medicare legislation requires separate contracting for second level appeals.

We believe it is unwise for CMS to further fragment Medicare functions because

it would diminish the current single point of accountability that fiscal intermediaries and carriers represent to providers and beneficiaries. By breaking up contracting functions and spreading them among a large pool of new entities—many

of whom would be inexperienced in Medicare—the claims payment process could be

impaired, which is likely to disrupt effective management of the program. Costs

would invariably increase because claims processing, customer service, and fraud

and abuse activities are interconnected; for example, claims processing and fraud

control efforts would still require coordination and extensive data sharing after

these responsibilities are divided. At the very least, a comprehensive plan to ensure

efficient coordination among the functional contractors and an infrastructure to support the coordination must be developed and implemented prior to adopting any provisions to further fragment program operations.

Moreover, separating key functions to different contractors could hinder efforts to

fight fraud and abuse and disrupt services to beneficiaries and providers for several

reasons:

1. Fragmentation is likely to create competing, counterproductive incentives.

2. Staffing resources required to implement and manage this type of new contracting authority are so immense that they would undermine CMS’ efforts to

administer its other initiatives effectively.

3. Contracts could be awarded to entities that have no experience working with the

Medicare program (a current program requirement), or even entities that have

no familiarity with health claims processing.

4. Functional contracts are likely to increase, not decrease costs.

Above all else, fragmenting the claims payment process would destroy the current

single point of accountability now available to CMS, providers, and beneficiaries. I

cannot emphasize enough the potential confusion and difficulty that may arise from

managing a multitude of independent specialty contractors who share work but do

not share accountability for the outcome (e.g., for a correctly and efficiently processed claim), and may even consider themselves competitors to each other. It is conceivable that under CMS’s proposal an individual claim could be handled by three

or more individual contractors before it is finally processed. This fragmentation

could remove any accountability for processing a single claim properly—from beginning to end.

Combine Part A and B Contractor Operations: The Medicare program is

unique in that two distinct operations exist for Parts A and B, each having been

designed separately. We do not believe that merging contractor operations would improve the program for beneficiaries. In fact, it could have the opposite effect, hinVerDate 11-MAY-2000 08:36 Dec 16, 2001 Jkt 010199 PO 00000 Frm 00053 Fmt 6633 Sfmt 6621 E:\HEARINGS\74849 pfrm01 PsN: 74849
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dering operations and causing disruptions in services. Part A is geared toward interactions with hospitals and the provider community while Part B contractor operations are targeted toward interactions with beneficiaries.

Because of the differing benefit structures, which led to separate Part A and Part

B contractors, Medicare’s information systems have not advanced the techniques for

consolidated processing. In fact, since CMS’s aborted attempt to construct a single

processing platform in the early 1990s (the Medicare Transaction System or MTS),

CMS has pursued a strategy of separate automated systems for Part A and Part

B, and an additional automated claims processing system for its Durable Medical

Equipment Regional Contractors. As the General Accounting Office testified recently

before your Committee: ‘‘HCFA lacks [the capacity to collect comprehensive information on services and payments in the aggregate and for individual beneficiaries]

today, not because it has separate contractors for parts A and B, but because of deficiencies in its information systems.’’ We can appreciate the advantages of having a common database of beneficiary

and claims information to promote customer service and medical review. Similarly,

local medical policies should not differ between Part A and Part B in the same

states or major metropolitan areas. These two concerns, however, are easily dealt

with without having to change contractor operations: data can be shared and combined, and local medical policies can be brought into agreement.

Eliminate Provider Nominations: Provider nomination was originally implemented to offer greater ease and simplicity of claims payment for institutional providers. This process has been important for provider chains that are able to choose

one contractor to handle claims from their providers on a nationwide basis. As you

consider this recommendation, we suggest consulting with the provider community

on the impact of such a change. BCBSA would not oppose this, which would include

elimination of our Prime Contract, so long as the provider community is in agreement.

Drop special contractor termination provisions: CMS clearly has the authority to terminate current contractors if they are not meeting performance expectations. We understand that CMS is considering a proposal that would eliminate contractor’s current termination rights, primarily the payment of phase-out costs. Continuing contractors should retain their existing termination rights.

The original construction of Title XVIII intended contractors to be reimbursed at

neither profit nor loss and permitted contractors termination rights and payment for

phase-out costs. Had the statute envisioned today’s typical FAR contracting rules,

termination rights and reimbursements would be handled differently. If, in the future, Medicare FFS contracts are procured under the FAR, then interested parties

will be able to consider those termination provisions in their bid proposals. Contractors that are not given the opportunity to rebid under different termination rules,

should retain the current contractual rights.

CMS authority to award other than cost reimbursement contracts: We

agree with CMS that the current cost based contracting system should be modernized. Currently, most contractors are paid costs up to a cap set by CMS; there is

virtually no opportunity for profit. We believe CMS should be allowed to use other

payment options, such as cost plus contracts.

We would like to again highlight that contractors have been extremely efficient.

Unit costs have dropped two-thirds over the last 25 years; administrative costs represent less than 1 percent of benefit payments. This has been achieved by the many

technological advances employed by contractors.

As previously stated, a major challenge over the past 10 years has been inadequate funding, coupled with rising workloads and legislative changes necessitating

major payment systems revisions. The prospects for adequate funding for next year

do not appear promising. Any change to how contractors are paid must be accompanied by sufficient overall funding.

Stable and Adequate Funding is Necessary. While Blue Cross and Blue

Shield Medicare contractors are committed to continually achieving greater efficiencies, it is simply not realistic to expect contractors to attain outstanding performance levels with greater workloads and tighter budgets.

We urge Congress to provide adequate funding levels to assure that contractors

can perform the range of functions necessary to safeguard program funds and support high quality service levels to beneficiaries and providers. As highlighted earlier,

funding has not kept pace with programmatic needs—important functions are not

being funded. We have two specific recommendations that are not included in the

CMS package:

• First, we urge Congress and the Administration to assure Medicare administrative funds keep pace with workload increases and new legislative/regulatory requirements. Congress also may wish to explore using a new methodology to deVerDate 11-MAY-2000 08:36 Dec 16, 2001 Jkt 010199 PO 00000 Frm 00054 Fmt 6633 Sfmt 6621 E:\HEARINGS\74849 pfrm01 PsN: 74849
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velop Medicare contractor budgets, such as those mechanisms used to fund Social Security Administration administrative costs and Medicare Peer Review Organizations. • Second, we urge the Committee to increase the permanent MIP appropriation,

which is currently capped at $720 million in 2002 and beyond. If fraud and

abuse efforts are to be effective, MIP funding must keep pace with workload increases. MIP has also had a positive effect on Medicare’s financial situation,

lowering FFS inflation and extending Part A Trust Fund solvency, according to

the OIG and Medicare Trustees. Therefore, it is critical this program be continued.

BCBSA would like to work with Congress to assure adequate funding is available

each year for high quality provider and beneficiary services.

CONCLUSION

Blue Cross and Blue Shield Medicare contractors are committed to achieving outstanding performance. We believe more can and should be done to improve Medicare

contractor operations and CMS oversight. Success in Medicare claims administration requires that CMS and the contractors work together toward their mutual goal

of providing high quality services to beneficiaries and providers, including accurate

and timely claims payment.

BCBSA look forward to working with this Committee and CMS to make these

needed improvements.

Mr. GREENWOOD. Thank you for your testimony.

Mr. Cullen, you are recognized for 5 minutes.

TESTIMONY OF TIMOTHY F. CULLEN

Mr. CULLEN. Thank you, Mr. Chairman, and members of the

subcommittees. My name is Tim Cullen. I am Chairman of the

Board of United Government Services. We are the largest Medicare

Part A intermediary. We process about 20 percent of all Part A

claims. We employ 1,300 people in eight different States.

We support the Medicare Contractor Reform proposals of the Secretary and CMS. We welcome and support more competition in

Medicare contracting. We have competed for and won contracts in

the Medicare program. In our private business side at Wisconsin

Blue Cross, we compete for business every day.

The Medicare contractor program needs to change and be administered within the context of free market competition. This is the

clear and obvious direction of nearly every segment of our society.

The program needs competition. It needs incentives. It needs reasonable limits on contractor liability.

The current program of cost contracts, with no incentives to excel

and unlimited liability, is essentially a program of all stick and no

carrot. The current system of throwing out non-compliant contractors, but not rewarding good ones simply encourages mediocrity.

That does not serve the senior citizens of America well.

We support moving away from cost contracts. Cost contracts do

not reward excellence. Cost contracts require CMS to micromanage

contractors. We need to move to incentive-based contracts through

the competitive bid process. I have no doubt that CMS can successfully manage the changes proposed by the Secretary and the administrator.

Transitions of business to new contractors would occur with reform. There would be this movement of business to different contractors. This does not need to be disruptive to senior citizens or

providers. Working closely with CMS, we at United Government

Services have successfully completed large transitions in Michigan,

Virginia, West Virginia, and California, all in the past 4 years. In

52

addition to these States for the Part A side, we also assumed workloads for the federally qualified health centers in all 50 States, as

well as regional home health intermediary for eight more western

States.

If you address the issues involving the employees currently doing

the work, it is a key factor in that success. We also go out and meet

with provider groups, meet with beneficiary groups in advance of

the transition date so they know who the contractor and intermediary is going to be, and know how to get a hold of us. You can

mitigate a lot of those transitional issues if you meet with people

in advance.

The Medicare contractor budget of over $1 billion does not go out

for bid today really unless the contractor leaves voluntarily or involuntarily. As a matter of public policy, we do not think this is defensible, particularly for large contractors and intermediaries.

We support the elimination of the provider nomination process,

and therefore, the Blue Cross Association master contract with

CMS. As a practical matter, on a day-to-day basis, we intermediaries interact with CMS daily, hourly, and not that often involving the association. So as a practical matter, the relationship

is between us as intermediaries and with CMS.

Regarding changes to termination agreements and costs, we

must recognize and protect existing contracts with employees, such

as our unionized employees in downtown Milwaukee. We are proud

of our employment record on the new contracts we have been

awarded, and are well aware that both the committee and CMS

value continuity of services when intermediaries change.

Contract incentives can be structured to be very beneficial to a

senior citizen. Incentives can reward contractors for speed and accuracy, for example, in handling customer service phone calls. Have

the incentives reward the kind of behavior that benefits the senior

citizen.

Competition and properly structured incentives will encourage

excellence in Medicare contracting. This serves the senior citizens

of America.

I thank you for this opportunity to testify. I will be pleased to

try to answer any questions of the subcommittees. Thank you.

[The prepared statement of Timothy F. Cullen follows:]

PREPARED STATEMENT OF TIMOTHY F. CULLEN, CHAIRMAN, UNITED GOVERNMENT

SERVICES, LLC

Mr. Chairman and members of the Committee I am pleased to testify before you

today. I am Chairman of the Board of United Government Services (UGS). As the

largest Medicare Part A intermediary we process 20% of all Part A claims. We employ 1,300 people in eight states.

We support the Medicare Contractor Reform proposals of the Secretary and CMS.

We welcome and support more competition in Medicare contracting. We have competed for and won contracts in the Medicare program and on our private business

side, at Wisconsin Blue Cross, we compete for business everyday.

The Medicare contractor program needs to change and be administered within the

context of free market competition. This is the clear and obvious direction of nearly

every segment of our society.

The program needs competition, incentives and reasonable limits on contractor liability.

The current program of cost contracts, with no incentives to excel and unlimited

liability, is essentially a program of no carrot and all stick.

53

The current system of throwing out non-compliant contractors but not rewarding

the good ones encourages mediocrity and that does not serve the senior citizens of

America well.

We support moving away from cost contracts. Cost contracts do not reward excellence. Cost contracts require CMS to micromanage contractors. We need to move to

incentive-based contracts through the competitive bid process.

I have no doubt that CMS can successfully manage the changes proposed by the

Secretary.

Transitions of business to new contractors would occur with reform. This does not

need to be disruptive to senior citizens or providers. Working closely with CMS, we

at UGS have successfully completed large transitions in Michigan, Virginia, West

Virginia and California all in the past four years. Addressing issues involving the

employees currently doing the work is a key factor in this success.

The Medicare contractor budget of over one billion dollars does not go out for bid

unless a contractor leaves voluntarily or involuntarily. As a matter of public policy

we do not think this is defensible for large contractors and intermediaries.

We support the elimination of the provider nomination process and therefore the

Blue Cross Association Master Contract with CMS. As a practical matter, on a day

to day basis we intermediaries interact directly with CMS and only on a rare basis

involve the Association.

Regarding changes to termination agreements, we must recognize and protect existing contracts with employees such as our unionized employees in downtown Milwaukee. We are proud of our employment record on the new contracts we have been

awarded and are well aware that both the Committee and CMS value continuity

of services when intermediaries change.

Contract incentives can be structured to be very beneficial to senior citizens. For

example, incentives can reward contractors for speed and accuracy in handling customer service phone calls. Incentives can reward contractors for answering a high

percentage of phone calls in a short period of time.

Competition and properly structured incentives will encourage excellence in Medicare contracting and this serves well the senior citizens of America.

Thank you for this opportunity to testimony and I will try to answer any questions from the Committee.

Mr. BILIRAKIS. Thank you very much, Mr. Cullen. I apologize for

this shifting around up here, but you have been up here enough to

know what it is like.

Mr. Chiplin, who is the Managing Attorney for the Health Care

Rights Project, Center for Medicare Advocacy. Welcome, sir. Please

proceed.

TESTIMONY OF ALFRED J. CHIPLIN, JR.

Mr. CHIPLIN. Thank you, Mr. Chairman, and subcommittee members. My name is Alfred Chiplin. I am the Managing Attorney in

the Washington, DC based Health Care Rights Project at the Center for Medicare Advocacy.

Thank you for this opportunity to testify on Medicare contractor

issues affecting older and disabled Americans, particularly as the

Center for Medicare and Medicaid Services, CMS, takes on new

leadership and is in the midst of another of its all too frequent reorganizations.

Beneficiaries need good information from carriers and intermediaries. One of the more critical functions of carriers and intermediaries is to educate people about Medicare options and about

how to get medically necessary services. From our experience, we

have learned that people with Medicare need to hear about their

Medicare options from multiple sources multiple times. Unfortunately, CMS has cut carrier and intermediary funding to provide

these important educational services. Other than the State health

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funded to meet community needs, the elderly and people with disabilities have few places to turn for good information.

Beneficiaries need timely information about the Medicare+Choice

program and its plans. Recent actions by the Secretary of HHS are

likely to undercut significantly any legitimate CMS efforts to provide reliable and timely beneficiary information necessary to make

decisions about choosing a Medicare+Choice plan.

On May 25 of this year, the Secretary sent a letter to the American Association of Health Plans, summarily giving HMOs additional time in which to inform CMS of their proposed benefits and

premiums for their 2002 Medicare plans, and whether they plan to

participate in the Medicare program. A number of beneficiary organizations and individual beneficiaries have recently filed suit

against the Secretary, complaining that this action is illegal. They

allege that the delay in this important information deadline from

July 1, 2001, to September 17, 2001, will prevent older and disabled Americans from receiving Medicare and You, the annual government mailing with comparative health plan information, in time

to make an informed choice about services.

The Secretary’s decision also allows HMOs to mail out marketing

materials with unapproved information as long as it includes a disclaimer explaining that the information is subject to final approval.

We also note that the Secretary is doing a few things that we

think are useful in this regard. He is taking the Medicare hotline,

the 1-800 number, and moving that to a 24 hour a day, 7 day a

week service, which we think will be helpful. We also are pleased

that in this whole movement, they are moving to extending the

special enrollment period through the month of December. These

actions we think will be helpful. But overall, it puts beneficiaries

in a bad position with respect to being able to have good information both for the plans, for carriers, for intermediaries about making health plan choices. We think this will redown to much confusion, and will have a number of negative repercussions at all levels

with respect to decisionmaking.

In addition, beneficiaries need all types of information from their

carriers and intermediaries. We also note that Medicare continues

to be a program full of what I call bifurcations. What I mean by

that is that intermediaries and carriers, carriers and their staff,

generally rely on various Medicare manuals, program instructions,

and other kinds of interpretations in making decisions about Medicare claims. In many instances, these instructions and interpretations are in fact inconsistent with the Medicare statute and implementing regulations. Much attention needs to be given to that.

We are also concerned about issues of contractor oversight. We

note that CMS responded to a letter of proposals by Congressman

Stark and Congresswoman Johnson on June 14, saying that it is

exploring incorporating the use of best practice standards from the

private industry. We have no basic problem with this, although we

caution that the adaptation and use of such practices is not a substitute for good statutory and regulatory enforcement and contract

enforcement.

Similarly, we have just learned of a durable medical equipment

carrier making coverage decisions on the basis of a publication

called Home Medical Equipment Answer Book. This of course is not

55

an official Medicare manual, nor regulation, but rather an industry

synthesis of Medicare law and practice. CMS should assure that

carriers and intermediaries use such non-Medicare tools in a fashion that does not compromise Medicare law. It is illegal to use

screens in norms of treatment and treatment rules of thumbs to

deny Medicare coverage without first providing a Medicare beneficiary with an opportunity for an individualized evaluation of his

or her medical factual situation.

We are also concerned that beneficiaries and carriers and intermediaries need to look at and address the whole question of managing the local coverage determination process known as LMRPs.

In this system, carriers and intermediary functions to make, review

and approve local coverage determinations about Medicare. In fact,

95 percent of all coverage policies are made on the local level, with

5 percent being made and developed on the national level. Currently there are some 8,000 LMRPs. The local carrier advisory committee develops these with input from State medical societies, medical directors, and advocacy groups.

Mr. BILIRAKIS. Please summarize, Mr. Chiplin, if you would,

please.

Mr. CHIPLIN. The concern here is that you have all these carriers, all this information being developed by different people.

There is no commonality of information. One intermediary in one

area gives coverage for certain things, and one the next day doesn’t

give it. People are all over the place. There is no way to get these

processes harmonized. It means beneficiaries go without coverage.

That is the basic summary of that.

The main thing that we would say in summary about this whole

set of issues of carrier and intermediary contracting concerns is

that they need to be adequately funded. They need to be funded

specifically to address the question of beneficiary information in all

of its forms.

We also need to have them to address ways of getting at information. There is a lot of concern about whether the Internet is in fact

a vehicle useful for older people. The geriatological research on that

is rather mixed.

So we strongly encourage more funding, careful analysis, and if

you move to a different system of contractors, that there is ample

experimentation and transition planning so that we don’t have the

kinds of problems that Congresswoman Capps identified in her

comments earlier this morning.

Thank you.

[The prepared statement of Alfred J. Chiplin, Jr. follows:]

PREPARED STATEMENT OF ALFRED J. CHIPLIN, JR., CENTER FOR MEDICARE

ADVOCACY, INC., HEALTHCARE RIGHTS PROJECT

Good morning, ladies and gentlemen. My name is Alfred J. Chiplin, Jr. I am the

managing attorney in the Washington, DC-based Healthcare Rights Project of the

Center for Medicare Advocacy, Inc., (the Center). The Center represents elders and

people with disabilities who are unfairly denied Medicare and/or access to necessary

healthcare.

Thank you for this opportunity to testify on Medicare contractor issues affecting

older and disabled Americans. This is an important and highly relevant topic, particularly as the Centers for Medicare and Medicaid Services (CMS), formerly known

as the Health Care Financing Administration (HCFA), takes on new leadership and

is in the midst of another of its all too frequent reorganizations.

56

About the Center for Medicare Advocacy, Inc.

In addition to the Healthcare Rights Project, located here in Washington, DC., the

Center for Medicare Advocacy has its headquarters in Connecticut, a data unit in

Maine, and a consulting attorney in Tucson, AZ. The Center celebrated its 15th anniversary on March 1, 2001.

The Center for Medicare Advocacy, Inc., (the Center) is staffed by attorneys, paralegals, nurses, and technical assistants who provide legal advice, self-help materials,

and representation to elders and people with disabilities. The Center operates a

Medicare toll-free telephone hotline for Connecticut residents. This line responds to

over a 1,500 calls per calendar quarter from persons seeking information about

Medicare coverage and related issues.

In addition to this state specific work, the Center is involved in national advocacy

on behalf of improvements in Medicare coverage and appeals processes. Attorneys

for the Center have participated in most of the major beneficiary-focused Medicare

litigation that has been brought over the years—including issues of access to Medicare covered services for persons with chronic conditions, the lack of notice that

comports with due process when skilled nursing facilities decide to terminate services for beneficiaries, and the problem of lack of notice or inadequate notice when

managed care organizations decide to deny, reduce or terminate Medicare covered

services. Similar litigation has been brought in the context of the home health benefit.

The Center is called upon frequently to provide training for attorneys and other

advocates who seek to represent Medicare beneficiaries. Center staff regularly provide Medicare training at national conferences and at state and local events. The

Center has assisted organizations in establishing local Medicare education efforts,

including brochures, pamphlets, and other writings of interest to those who represent beneficiaries. Our most recent effort in this regard is our Medicare Handbook, published in July 2000. An updated version of this text is at the printers for

a re-issue date of August 2001. In addition, we maintain an informational website

at www.medicareadvocacy.org. The site was visited 28,000 times last quarter.

Beneficiaries need good information from carriers and intermediaries.

Older and disabled Americans need access to meaningful and accurate information to make informed health care choices, to gain access to health care that is

medically necessary, and to assure access to a health care system that responds to

their needs and the needs of their community. Any changes to the Medicare carrier

and intermediary contracting system should strive to realize these needs.

One of the carriers’ most critical functions is to educate people about Medicare

options and how to get medically necessary services. I am sure you know from personal experience and experiences your constituents have shared with you how very

difficult it is to make good health care choices. For the elderly and people with disabilities, these decisions are particularly hard because they tend to have low fixed

incomes and a high likelihood of needing substantial health care services.

From our experiences, we have learned that people with Medicare need to hear

about their Medicare options from multiple sources, multiple times. Carriers, which

have local offices throughout communities, provide education through face-to-face

meetings, and are viewed as a trusted source by people with Medicare. Carriers

have also instituted toll-free hotlines for consumers, have begun to provide more

free information to providers, and have expanded their educational reach through

their web sites.

Unfortunately, CMS has cut carrier funding to provide these important educational services and, other than the State Health Insurance Assistance Programs

which are substantially underfunded to meet community needs, the elderly and people with disabilities have few places to turn for good information.

Timely information about Medicare+Choice Plans.

In addition to the lack of funding questions raised above, there is the problem of

providing timely and accurate information necessary to make Medicare+Choice plan

choices. Recent actions by the Secretary of the Department of Health and Human

Services are likely to undercut significantly any legitimate CMS effort to provide reliable and timely beneficiary information necessary to make decisions about choosing a Medicare+Choice plan. In a May 25, 2001 letter to the American Association

of Health Plans, Secretary Thompson summarily gives HMOs additional time in

which to inform CMS of their proposed benefits and premiums for their 2002 Medicare plans and whether they plan to participate in the Medicare program.

A number of beneficiary organizations and an individual Medicare beneficiary

have recently filed suit in federal district court for the District of Columbia alleging

57

1See, The Gray Panthers Project Fund, et al., v. Thompson, Secretary of Health and Human

Services, Civil Action No. 1:01CV01374 (HHK)(D. DC, filed June 22, 2001).

that the Secretary’s action is illegal.1 They allege that the delay in the deadline

from July 1, 2001 to September 17, 2001 will prevent older and disabled Americans

from receiving Medicare and You, the annual government mailing with comparative

health plan information, in time to make an informed choice about their health care

options.

Since Medicare+Choice was enacted in 1997, HMOs have been required by law

to submit their Medicare plan information to HCFA, now CMS, which is responsible

for reviewing and analyzing the data, putting it in a comparative format and sending it to the nearly 40 million peoplw with mMedicare 15 days before November 1,

in time for Medicare’s open enrollment period. This year, however, the Secretary authorized CMS to mail out Medicare and You 2002 without the comparative information on premiums, benefits, and cost-sharing for every Medicare HMO in the community.

The Secretary’s decision also allows HMOs to mail out marketing materials with

unapproved information as long as it includes a disclaimer explaining that the information is subject to final approval. And, he is extending the time frame for the

HMOs to mail out their own marketing materials, including information on benefit

and premium changes.

Consumer advocates are also concerned because beginning January 2002, those

enrolled in Medicare HMOs will be ‘‘locked-in’’ to their healthcare choices. They will

only be permitted to make one change during the first six months of the year and

later during the open enrollment period in the fall of the year.

People who lose their HMO coverage can enroll in Original Medicare (fee-for-service) and may purchase a supplemental (Medigap) policy if they do so during a special time period that begins October 2, 2001 and ends March 4, 2002. About 27 percent of people with Medicare have one of the 10 different Medigap plans, the price

for which varies depending on the amount of coverage one buys. Those interested

in choosing another HMO option, if one exists in their community, are advised to

research the cost of premiums, benefits and co-payments, what doctors and hospitals

participate in a given plan, and prescription drug coverage available. Over the last

three years, about 1.7 million older and disabled Americans had to find new

healthcare coverage when their HMOs dropped out of the Medicare program.

The results of this approach to information dissemination is likely to include

many negative repercussions for carriers and intermediaries as they try to help people with questions and options in this uncertain environment. The law of unintended consequences, particularly of the ‘‘negative kind,’’ is likely to be monstrously

evident throughout this up-coming M+C plan election process.

Carrier and Intermediary Education about Medicare coverage.

Medicare continues to be a program filled with unfortunate bifurcations. Intermediaries and carriers and their staffs generally rely on the various Medicare

manuals and program instructions comprising the agency’s interpretation of the

statute they administer. In many instances these instructions and interpretations

are in fact inconsistent with the Medicare statute and implementing regulations.

Beneficiaries often have to continue through the administrative review process until

they reach the Administrative Law Judge (ALJ) level of review before the applicable

Medicare law and regulation is applied. This is wasteful and time-consuming for all

parties concerned. More attention should be given to assuring that carrier and intermediary policies and practices conform to the law. In this regard, we caution that

Congress not take the easy way out and simply ratchet down the ability of ALJs

to go beyond carrier and intermediary interpretations of the law, but rather strive

to assure that carrier and intermediary policy is in conformance with the Medicare

statute and regulations.

Reforms in this area should include a focus on assuring that carriers and intermediaries have been advised that their practices and pronouncements on a given

issue are outside the statute and regulations. Moreover, carriers and intermediaries

must be monitored to assure that once advised, corrective actions are taken. We

have, for example, encountered many situations where carriers and intermediaries

consistently misapply Medicare law and regulation with respect to granting Medicare coverage of services and procedures for persons with chronic conditions where

skilled maintenance therapies are reasonable and necessary and have been prescribed by the patient’s physician. This is particularly a problem in the area of

Medicare covered home health services. It is long-settled that such coverage is appropriate under the Medicare program

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Assuring contractor oversight.

We note in CMS’ June 14, 2001, response to Congressman Stark’s and Congresswoman Johnson’s proposals for administrative reform, that it is exploring incorporating the use of best-practice standards from the private industry. While we have

no problem with this in the main, we caution that the adaptation and use of such

practices is no substitute for statutory and regulatory enforcement or contract enforcement.

We have just learned of a Durable Medical Equipment Review Contractor

(DMERC) making coverage decisions on the basis of a publication called a Home

Medical Equipment Answer Book. This, of course, is not an official Medicare manual

or regulation, but rather an industry synthesis of Medicare law and practice. CMS

should assure that carriers and intermediaries use such non-Medicare tools in a

fashion that does not compromise Medicare law. It is illegal to use screens and

norms of treatment, and treatment ‘‘rules of thumb’’ to deny Medicare coverage,

without first providing a Medicare beneficiary with an opportunity for an individualized evaluation of his or her medical-factual situation.

Similarly, our experience is that CMS, formerly HCFA, rarely takes serious and

significant enforcement steps against recalcitrant carriers and intermediaries. Best

practice and continuous quality improvement approaches to quality must not be allowed to become an impediment to the use of more forceful sanctions where appropriate. We are not suggesting that only the severest of penalties be considered in

all circumstances, but rather that there is established a culture and practice of the

use of the full range of the agency’s tools and resources to assure statutory, regulatory, and contractual compliance.

Managing the local coverage determinations process.

Another important carrier and intermediary function is to make and/or review

and approve local coverage determinations, also called Local Medical Review Policies

or LMRPs. Ninety-five percent of all coverage policies are made on the local level,

with 5% being developed on a national level. Currently, there are approximately

8,000 LMRPs The local carrier advisory committee (CAC) develops these LMRPs,

with input from state medical societies, medical director groups, and advocacy

groups responding to consumers, and uses carrier data that indicates high utilization of a particular treatment or procedure.

LMRPs in Medicare, until recently, have been a relatively hidden element of the

Medicare coverage process. They reflect differences in local community medical practices and norms of treatment which in many ways belie the over all notion of Medicare as a uniform system of coverage and procedural rules for the operation of the

federal Medicare program.

Given the lengthy time it often takes for a national coverage decision to be approved, from six months to several years, local coverage determinations are in many

cases viewed as practical or expedient. In many instances, LMRPs can be and are

the first step in developing new national coverage determinations by proving the

success of the treatment or procedure on a local level, which can then be subject

to more stringent national review when national coverage determinations are made.

Nonetheless, their proliferation, without uniform oversight and without notice and

opportunity for beneficiary involvement, leads to program fragmentation and inconsistencies in coverage and to litigation in some instances.

We note in CMS’ June 14th letter of response to Representatives Pete Stark and

Nancy Johnson’s proposal of CMS administrative reforms, hat on the issues of

LMRPs, that the agency acknowledges the problems of inconsistent policies and that

standardization is necessary. We strongly encourage the agency to follow through

on standardizing these policies. This is essential if the Medicare program is to be

a national and uniform and reliable program of services and benefits.

Balancing local and national coverage determinations.

Medicare needs to strike a good balance between national and local coverage determinations, as both have advantages. National determinations ensure that everyone with Medicare is given access to a particular service, no matter where they live.

Local determinations ensure that people with Medicare can get access to serious,

life-saving treatments in their community, even when no national coverage decision

has been made. LMRPs have also proved helpful in extending coverage to people

with Medicare for life-changing services outside of the area in which the LMRPs

were implemented.

For example, a Medicare HMO beneficiary in Pennsylvania was denied a treatment for severe back pain. She was wheelchair-bound because of her back problems.

Over the years she had numerous back surgeries and underwent treatment at several pain management clinics. Her doctor requested that the HMO authorize a conVerDate 11-MAY-2000 08:36 Dec 16, 2001 Jkt 010199 PO 00000 Frm 00062 Fmt 6633 Sfmt 6621 E:\HEARINGS\74849 pfrm01 PsN: 74849
59

sultation with an out-of-network doctor in New York to see if she would be a candidate for Percutaneous Laser Disc Decompression (PLDD), a procedure that was

covered by the Medicare carrier in New York, but not by the carrier in Pennsylvania.

The HMO denied pre-authorization claiming that PLDD was without proven clinical efficacy, and that the HMO did not have to cover the procedure because it was

not available in Pennsylvania. With the recommendation of her doctor who claimed

that the HMO would cover the service, the beneficiary borrowed money from the

bank, had the consultation and eventually the procedure. The surgery allowed her

to dispense with her wheelchair, and resume many of her daily activities. After receiving multiple denials for coverage by the HMO, an administrative law judge overruled arguments that since PLDD was not covered in Pennsylvania, the carrier in

Pennsylvania did not have to cover it and required the HMO to reimburse the beneficiary for the procedure.

While there may be good reason to change the Medicare contracting system, any

reforms should bear in mind the risk of losing the expertise of local carriers, making

Medicare education less available, and possibly jeopardizing local coverage determinations. Carriers today are generally the only source for information about local

coverage rules, although CMS has now contracted-out the cataloging and compiling

of LMRPs on a website .

We have found that even Medicare managed care plans, although required to

cover the same services as original Medicare in their geographical area, often do not

know what Medicare covers . A carrier responsible for a broader area such as an

entire region would face the challenge of keeping updated information regarding the

various local coverage determinations throughout the states under its jurisdiction.

Carriers also serve as the critical link between CMS policymakers and local providers by sharing information about providers’ experiences with the government,

and educating providers about new government regulations or administrative directives. The local nature of the carriers also allows them to better represent to CMS

the concerns of people with Medicare in their state.

The Centers for Medicare and Medicaid Services (CMS) have announced a $35

million national Medicare education campaign to inform people about their Medicare

options. A portion of this money should be allocated to carriers to reinforce their

role as Medicare educators and to allow them to expand their hotline and counseling

services. In short any contractor reform initiatives must appreciate that access to

good information and good health care are the foundation of a strong Medicare program.

Conclusion.

We appreciate the opportunity to testify on these important issues. We recognize

the large and important task that confronting CMS as an agency and as a community of concerned and dedicated staff. Further, we recognize that CMS can not meet

its many responsibilities to provide meaningful beneficiary education and services

to Medicare beneficiaries through its carriers and intermediaries without adequate

staffing and funding. We feel the agency has all too often been cobbled by the combined curse of under-funding, under-staffing, and seemingly rudderless change and

reorganization. In this regard, CMS staff need the assurance of sound and reliable

direction and authority so that they can work with carrier and intermediary staff

with confidence in the laws, regulations, and instructions that govern the Medicare

program and with confidence in the tools of oversight and enforcement extended

them by the agency itself.

Thank you very much.

Mr. BILIRAKIS. Thank you. Thank you, Mr. Chiplin. I might add

that particularly the areas that you mentioned are the same areas

that we are concerned with.

Mr. Greenwood, to inquire.

Mr. GREENWOOD. Thank you, Mr. Chairman. Address a question

to Mr. Serota, if I might.

A for-profit private contractor is going to obviously have an obligation toward its bottomline, toward its profit, toward its stockholders if there are stockholders. It also has an obligation to the

taxpayers, obviously. CMS will want to make sure that it gets the

most efficient use of taxpayers dollars. It also has an obligation to

the beneficiary to provide prompt, clear, usable information and so

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forth. Then finally, a very important obligation to the providers to

make their life as manageable as possible.

What are the ways that we can construct, that CMS can construct contracts so that the private for-profit contractor doesn’t

skimp on any of its other obligations in the name of maximizing

its profit?

Mr. SEROTA. Well, I think there are a number of ways. I think

the first probably is to reform the methodology for reimbursement

for contractors so that there is an opportunity for them to earn a

margin on the business. I think if the statement of work is clearly

statement, the accountability is clearly stated, and there are clear

indications of the expectations, our contractors, our Blue contractors as well as others will be able to evaluate whether they can in

fact meet all those obligations in a cost-effective fashion.

That kind of statement of work put out to competitive bid would

allow plans to make an assessment and participate in the program

when they can meet all those obligations. They should be held to

very high performance standards to ensure that they meet those

obligations, principally to the beneficiaries and the providers. I

think with a reasonable opportunity to earn a return, they will be

able to satisfy their shareholders as well.

Mr. GREENWOOD. Let me be more specific. If I am an

optomologist and I have a patient, and I want to do a surgical procedure that has to do with lifting an eyelid for instance, and because that provides better eyesight. So it is covered—I am making

this up, but it is covered if it is to improve the eyesight. It is not

covered if it is cosmetic. So the physician makes whatever the term

is, an application to have that procedure reimbursed. Do you have

an obligation as a private contractor to try to make extra certain

that you don’t pay for something you shouldn’t? You owe that to

the taxpayers, you owe that to your bottomline. But the patient

and the provider out there are frustrated because they are going

through whatever paperwork, hoops you make them go through.

So the question is how do we end up rewarding the contractor

who manages to fulfill the obligations in terms of cost, but do it in

a way that makes the providers stand up and cheer, and say that

is what we have been waiting for, that kind of responsiveness, that

kind of effectiveness.

Mr. SEROTA. Well, I think by putting performance standards into

the contract, which requires decisions to be made in a timely fashion upon receipt of information, I think is certainly one way to hold

contractors accountable. I also think with a clear statement of expectation, that this is what is expected so that the providers, the

beneficiaries, and the contractors all understand their expectations

and their responsibilities on the front end, will also allow those

kinds of things.

Mr. GREENWOOD. How would you feel about a mechanism that

allowed the providers to provide, to offer some input into how well

those expectations are being met?

Mr. SEROTA. I think that that is the best way to get feedback on

whether you are satisfying your customers. Just ask them. Clearly

providers and beneficiaries are our customers in this regard. We

survey in our private business, providers and consumers all the

time to be certain we are meeting their expectations. I think that

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that would be a reasonable way to ensure that we were meeting

our expectations in the provider contracting area as well.

Mr. GREENWOOD. Mr. Cullen, could you comment on those questions, please? You will need to pull one of the microphones toward

you.

Mr. CULLEN. Well, I think that you would set standards for the

contract that we would have to perform, if there was incentives in

it. Then the marketplace will decide it. Businesses that don’t want

to get into this business, will look at the return, the risk and so

on, and decide whether to get in or not. I think that can work.

I also think that we as contractors or intermediaries have a function like most insurance companies, which is if you will, we are

sort of the heavy. We are the one responsible for delivering the bad

news, talking about costs on the commercial side, and here denying

care based on regulations that we are meant to enforce. I think

that is our job. I think to the extent this morning that Congresswoman Capps thought it was the Part B carrier’s problem in California and her constituent thought it was the Part B carrier’s problem, not Congresswoman Capps’. To this extent, I think the way

the system is supposed to work. It is our job to please these customers. We would be incentivized to do it if we got past the cost

contract environment.

Mr. GREENWOOD. My time has expired. I thank the chairman.

Mr. BILIRAKIS. Mr. Brown, to inquire.

Mr. BROWN. Thank you, Mr. Chairman.

Mr. Chiplin, there is a study by Judith Hipper or Hibbard for

AARP on the information that older consumers use to make health

plan choices. I have looked at those materials sent out. I am pretty

confused. I do health care a lot here. I have got to think that seniors are at least as confused by this sort of cascading of information

that they receive.

It is pretty clear from this study that seniors prefer one-on-one

support assistance, as I guess probably we all do. Sometimes it is

not especially available. I am concerned that CMS’ new education

initiative doesn’t place enough emphasis on getting seniors that

one-on-one assistance. Do you tend to think that way also?

Mr. CHIPLIN. Well, I do. The big concern right now and the primary vehicle for getting the one-on-one assistance is through the

State health insurance counseling system, they call them SHIPs. In

California, they call them HICAPs. They have different names. But

they are very under-funded. Carriers and intermediaries also play

a role in the beneficiary education side of it. But getting good information out through lots of venues is very important. Medicare information is inherently complicated. So I think the more vehicles

you can use, the better, and that you keep the information in small

bite-sized pieces, and have lots of different writings that target particular coverage issues.

Mr. BROWN. So funding SHIP is one we talked about that is

funding I thought $15 million. The administrator earlier, Mr.

Scully, said $13 million. Whatever it is, it is clearly—I know it is

with Nationwide in Ohio, the carrier there, it is pretty clearly

under-funded even with the reliance on volunteers the way that

they do.

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What about the proposal to put a Medicare person in the Social

Security offices? Does that make sense?

Mr. CHIPLIN. I think it does. That would really be helpful because we often get questions about Medicare coverage and people

say I have gone to my Social Security office and there wasn’t anybody there that really could answer the question. So that would

help.

I think also with that you would probably need to have a number

of people at the Social Security office who could act as what you

might call an ombudsman or some other kind of person who could

sit down and spend a little bit more time with an individual to look

at coverage, both coverage issues, eligibility issues, access to service issues.

Mr. BROWN. Any other thoughts on what we should direct HCFA

or direct CMS to do, what ways through which education program

other than better funding for SHIPs, other than potentially putting

a Medicare person in the Social Security offices?

Mr. CHIPLIN. One other thing that comes to mind is to look intergenerationally. Older people rely often on their children and other

young people or younger people in their lives and community. We

find that when we do some pairing of older and younger around,

understanding information, that that is also another and positive

avenue of getting information out to people.

Mr. BROWN. Let me in my remaining time, Mr. Chairman, let me

ask a different question, Mr. Chiplin. There was testimony earlier

that we should consider consolidating the number of contractors.

Our experience has been that contractors will make local coverage

determinations, obviously based on local interests, local needs, local

circumstances. Is there a contradiction there if we do more of this

contractor kinds of consolidation that the uniqueness or the sort of

home rule, if you will, or decisionmaking, local decisionmaking will

suffer and that patients will not and Medicare beneficiaries will not

have the kind of service that they might have otherwise?

Mr. CHIPLIN. That is one of the most tangled area of Medicare

practice I know of, of this whole business of local medical coverage,

local medical practices, and you have national ones, and how all

those things integrate. I think Medicare needs to re-look at that

from beginning to end.

I do think that under the current system, having some ability for

coverage issues to bubble up, if you will, from the local area and

local practice has some merit. But you do end up with a very bifurcated national program. That, as you see in my testimony, is a

major problem where you have carrier A covering something and

carrier B not covering it. This is supposedly a national program.

So I think that you could put money into it and you could do

some specialization with various carriers around coverage and coverage policy questions, but you still don’t deal with the larger question of a uniform program.

Mr. BROWN. Mr. Serota, do you want to respond to that?

Mr. SEROTA. Well, I think that it is important to recognize that

healthcare is a local phenomenon. It is delivered locally. It is delivered in every community, and that we are trying in this environment to deliver a national program Medicare on a local basis.

There needs to be some ability, and we have that through the—I

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will give you the wrong name, but the medical advisory groups and

the Part B local medical groups to modify the practice to fit more

appropriately with what is available in a local community. I think

that that’s important. That is the flavor of American health care.

Frankly, that is one of the reasons the Blues have been as successful as they have been, because we are on the ground in every market.

So I think you need to ensure that we don’t get too uniform in

an administration so that we can’t take advantage of innovation

and creativity, which happens in a local market, so we need to

allow that flavor to continue to exist.

Mr. BILIRAKIS. Do you agree with that, Mr. Cullen?

Do you agree with that too, Mr. Chiplin?

Mr. CULLEN. This issue is already here, if nothing else that’s

been talked about today ever occurs. We are the Part A all the way

in seven States from Virginia to Hawaii. So we are trying to be

consistent across in several territories. We process claims through

12 time zones, way out into the Pacific. I think in the end, because

it is a national program, Mr. Chiplin in any case, that a lot of these

decisions have to be decided nationally because health care is delivered locally as Mr. Serota says, but local, is that all just all of Virginia, is that local? Or an area of Virginia or all of Wisconsin? It

gets pretty broad right away, just with all the contractors, intermediaries we have today. I think it has to be decided nationally.

I also would say that—I wasn’t asked, but on the customer service, that putting somebody in every Social Security office would certainly be helpful, but of course there is not a Social Security office

in every community. In my home county, there is one. But there

are lots of people who wouldn’t have access easily.

The 1-800 number which you have funded, which is now toll-free,

has tremendously increased the number of phone calls we get because now senior citizens can call not on their own nickel. They can

call an 800 number toll free and get questions answered. That, as

you look to what needs to be funded, to fund the customer service

area of our work so we can handle all those phone calls is one of

the better ways in 2001 probably to serve senior citizens in terms

of answering their questions.

Mr. BILIRAKIS. Mr. Chiplin, do you have anything more you

wanted to offer or have you explored that pretty deeply?

Mr. CHIPLIN. I agree in part with Mr. Serota. I do think it is a

lot of value of having coverage issues worked through locally, but

I think we end up in the situation where we don’t have any uniformity of standards, no dependability in the program with respect

to coverage policy. That really hurts beneficiaries, especially since

it takes so long to get things through the approval process.

Mr. BILIRAKIS. We get a lot of complaints toward that end.

When we first started on this path of patients first, taking a look

at what was in HCFA, and taking a look at the need to make some

changes, and to do it with them and not to basically shove it down

their throats, we made the comments a number of times that we

weren’t attacking HCFA. This wasn’t a witch hunt. But they don’t

have a very good image out there. I dare say that if the beneficiaries had a better knowledge of HCFA’s performance over the

last number of years, that image would probably be even worse.

64

But certainly with the providers, I think you all have to agree the

image is not a very good one.

I guess the biggest complaint we ever get from any of these people over the years has been about HCFA. It hasn’t been so much

reimbursements or low reimbursements or anything of that nature.

I have had doctors say all I have to do is tell me what I can charge

and stick with it for a while and I’ll charge it, whatever it is. I

won’t question it. But to not know, to not know and to basically be

in fear of getting into trouble is just a terrible thing.

We are looking at ways to try to make things a little more efficient, but we are an ivory tower. We don’t really know it as well

as we sometimes think we do.

I guess I do not quite understand, now Trail Blazer in Texas is

the carrier. Trail Blazer in Texas is also a fiscal intermediary, for

the most part. Mutual of Omaha is in there. Are there any other

smaller ones or any others?

Mr. SEROTA. There may be. I am not sure.

Mr. BILIRAKIS. There may be, but it would be a small percentage

if there were, right?

Trail Blazer is able to conduct both functions. But we are talking

about two separate contracts, two separate groups of people? Take

me through that. Why can’t Trail Blazer under one contract do—

they do both jobs in Texas. Whether it’s the same people, who do

it or not, I don’t know. Can someone take me through that to try

to explain that to me?

Mr. SEROTA. I don’t think I can take you in depth through the

Trail Blazer. I can give it conceptually.

Mr. BILIRAKIS. I am sure we can pick at Blue Cross.

Mr. SEROTA. Well, Trail Blazer is Blue Cross. It is owned by Blue

Cross of South Carolina.

Mr. BILIRAKIS. Oh it is? See, that’s what we know up here.

Mr. SEROTA. There are functions in A and B that are designed

differently. The Part A is primarily focused on dealing with the

hospitals, and the providers to Part B, is primarily focused on dealing with beneficiaries.

However, there are functions that overlap. In those instances

where the functions overlap, they are combined when a single FI

and carrier hold the contract. They are combined, and they do work

together. But it is a small piece of the administrative function. Predominantly the functions are different. The two contracts are serving different purposes and different masters. But where those functions do overlap, they do combine and consolidate and take advantage of the efficiencies.

Mr. BILIRAKIS. But even if the functions don’t overlap, and I appreciate the distinction between Part A and Part B, although there

is an awful lot of combining the two, as you know. But even if they

weren’t combined, why couldn’t Trail Blazers under one contract

basically handle both?

Mr. SEROTA. Well, if they were in a competitively bid situation,

the best to do both, then I think there isn’t a reason why they

couldn’t. The issue that concerns us is to force contractors, which

may not be the best in both to do both, rather than competitively

bid them both.

65

I think over time, you might get to a point where that makes

sense, but given the current systems and structures that exist between A and B, you might end up with an inferior contractor in one

A or B.

Mr. BILIRAKIS. If we gave CMS the additional authority, the

flexibility, they would be able to go in from a bidding standpoint

to determine, right? Whereas now, we basically tell them what they

have to do.

Mr. SEROTA. But we don’t think it should be forced. If the competitive marketplace causes it to happen, then certainly we are

supportive of it. But what we don’t think should happen is a forced

scenario where A and B are forced together and bid together. We

think that they are different enough that they should be bid separately and the best provider should be selected.

Mr. BILIRAKIS. But if they are blended together, if A and B, it’s

based on what we are thinking up here—I still haven’t decided in

my own mind whether it is a good idea or not—then you are going

to have to be forced, I guess.

Mr. SEROTA. I guess my point is at this moment in time, I don’t

think that is the right course to take. I think that the programs

are different enough today and the infrastructure doesn’t exist yet

at CMS to bring those two functions together. That would be my

advice.

Mr. BILIRAKIS. Yes. You have testified to that.

Well, all right. Anything further?

Mr. BROWN. No.

Mr. BILIRAKIS. Well, this is a tough subject. I don’t really know

what our timeline is up here. To be honest with you, we should

know but we aren’t sure. We may go back into contracting in a subsequent hearing and we may not. I don’t know. But we definitely

are intent, both sides, and the staffs have been working together

on this issue of repairs, improvements to help the agency to do a

better job for the people.

We would always welcome, and we do welcome, suggestions from

you toward that end. Please don’t hesitate. I mean you only testified for a few minutes here. You waited a long time to do that. We

apologize for the delays. But again, feel free. We will have questions to you, and we are requesting that you respond to those questions in a timely fashion. But again, we ask you to submit additional ideas and suggestions to us. You have an opportunity now.

We are intent on making the changes.

Mr. BROWN. Mr. Chairman?

Mr. BILIRAKIS. Yes, sir.

Mr. BROWN. I have a question from Mr. Strickland, if he could

submit it in writing, actually to Mr. Scully, but any other questions

that any members have for any of the panelists.

Mr. BILIRAKIS. Well we are going to do that. I am not sure

whether we have had unanimous consent. All members of the subcommittee, their opening statements will be made a part of the

record. I don’t know whether we have done that or not.

We appreciate your being here. And HHS is represented? Is

somebody here taking notes? A couple, two or three hands up

there. So they are represented, and they are taking notes, and they

have heard your concerns.

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Thank you very much.

Mr. SEROTA. You’re welcome. Thank you. We wish you good luck.

Mr. BILIRAKIS. Thank you.

[Whereupon, at 1:20 p.m. the subcommittees were adjourned,

subject to the call of the Chair.]

[Additional material submitted for the record follows:]

PREPARED STATEMENT OF THE AMERICAN DENTAL ASSOCIATION

The American Dental Association (ADA) believes Medicare modernization and improvements are critical to the future stability and success of the program. The ADA

is a professional organization that represents more that 144,000 licensed dentists

in the United States. The ADA seeks to advance the art and science of dentistry,

and to promote high-quality dental care and the oral health of the American public.

Medicare does not cover most dental services. But the program affects thousands

of small employer dentists and their Medicare-covered patients. For example, due

to inconsistencies in Medicare regulations, some dentists can be required to file

claims for clearly non-covered services. In addition, many dentists who provide covered services to Medicare beneficiaries on a regular basis must grapple with redundant notices and other unnecessary paperwork problems that can and should be

ameliorated.

The dental delivery system is very different from the medical model. Most private

sector dentists are solo practitioners with fewer than four employees. Very few dental offices employ more than one administrative staff person, who often also serves

as the receptionist. This structure is sufficient to handle private insurer rules and

regulations and process reasonable administrative demands of public programs.

However, the staff resources necessary to address the enhanced administrative burdens caused by contradictory regulations and outdated rules can easily outstrip the

dental office administrative staff’s capabilities. Unnecessary requirements increase

the cost of providing dental services to Medicare beneficiaries in a price sensitive

dental market, which could adversely affect access.

MEDICARE REQUIREMENTS THAT NEED MODERNIZATION AND REFORM

Claims Submission for ‘‘Non-covered’’ Medicare Services

As stated above, Medicare generally does not cover dental care, except in limited

situations. While non-covered services are exempt from Medicare policies, any Medicare beneficiary that receives a dental service may require a dentist to submit a

Medicare claim. This requirement can occur because a Health Care Financing Administration (HCFA) rule, which has been interpreted by the agency and its fiscal

intermediaries as giving the beneficiary a right to file a Medicare claim for virtually

any dental service, has taken precedent over the Medicare statute excluding the

vast majority of dental services.

If a Medicare beneficiary receives non-covered, categorically excluded dental services and requests that the dentist file a Medicare claim, despite the fact that Medicare does not cover the services provided, the dentist must comply. The dentist must

honor this request and all parties affected (the patient and HCFA, as well as the

dentist) must absorb the financial burden of filing an unnecessary claim.

There are additional costs for HCFA and dentists related to the filing of a Medicare claim for non-covered services. Because the program does not reimburse for

most dental services the majority of dentists are not Medicare providers and, therefore have not filled out the lengthy application form in order to receive a provider

number. Provider enrollment is an administratively complex process that can take

numerous hours for the provider to complete and the agency to process. This process

adds unnecessary costs to the health care system and could be easily remedied by

HCFA. The ADA believes HCFA should bring its regulation into conformance with

the Medicare statute and make it clear to carriers, dentists, and Medicare beneficiaries that there is no obligation to submit a claim for categorically excluded dental services. The Association would be willing to work with the Committee to provide language to accomplish this change.

The Association also believes it is necessary to include dentists in the private contracting law. This is important not only because it is fundamentally fair to allow

any practitioner the ability to decide whether the practitioner wants to participate

in a federal program, but also because opting out eliminates unnecessary paperwork

affecting all of those associated with the Medicare system. However, dentists, unlike

many other providers, are unable to decline or withdraw participation in Medicare.

Section 1802 of the Social Security Act, as amended by Section 4507 of the Balanced

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Budget Act of 1997, permits a physician or practitioner to enter into private contracts and effectively withdraw their Medicare participation with Medicare beneficiaries, if specific requirements are met. The ADA supports an amendment to section 1802 to include dentists.

Advance Beneficiary Notices

An Advanced Beneficiary Notice (ABN) must be completed on behalf of a Medicare

beneficiary when there is uncertainty as to whether a given health care service is

covered by the program. The form notifies the patient that Medicare may not pay

for the services rendered by the provider, thus the patient may be responsible for

any and all charges. This form must be completed and filed for each visit, even if

the purpose of the visit is for the continuation of care in a series of treatments for

a specified illness. As a result, at times redundant ABNs are filed, which provide

no new notice to the patient. HCFA, participating dentists and their patients would

all benefit from a change in policy on this matter to permit the filing of a single

ABN that would be valid for all procedures intended to address a single illness.

Provider Enrollment Forms

Medicare’s provider enrollment form is the source of quandary for many dentists

who participate in the Medicare program. When they apply for a Medicare provider

number, all dentists, regardless of whether they are generalists or specialists, must

use the same provider category, which is category 19 (Dentist-Oral Surgeon). This

is, at best, misleading because oral surgeons are a specialty within dentistry, representing a relatively small segment of all practicing dentists. HCFA should offer

provider categories for all dental specialties as well as general dentists. This would

avoid confusion and help alleviate problems encountered by oral surgeons, who too

frequently are denied reimbursement for medical procedures for which they are

qualified to perform because the carrier incorrectly assumes all procures performed

by an oral surgeon are dental services, which are generally not covered by Medicare.

The current system unnecessarily expends HCFA and dental office resources and

delays proper payment on behalf of Medicare beneficiaries.

Mr. Chairman and members of the committee, thank you for providing the ADA

with this opportunity to discuss our concerns about the need to modernize Medicare

and modify the program’s regulations in a manner that will save scarce HCFA resources and reduce burdens placed on dentists and many of their patients. The Association looks forward to working with you on this issue.

PREPARED STATEMENT OF THE MEDICAL DEVICE MANUFACTURERS ASSOCIATION

The Medical Device Manufacturers Association (MDMA), the national voice for the

entrepreneurial sector of the medical device industry, appreciates the interest displayed by the Subcommittee on Health and the Subcommittee on Oversight and Investigations on reforming the systems that the Medicare program uses to contract

for the processing of claims.

Our statement focuses on the role that Medicare’s contractors play in developing

local Medicare coverage decisions, also known as local medical review policies

(LMRP). While MDMA believes there are certainly areas of Medicare contracting for

which close scrutiny is long overdue, we do support the concept of local Medicare

coverage policymaking, and we believe that technological innovation would suffer if

Medicare carriers did not have the discretion to develop a local coverage policy in

the absence of a national policy. Nevertheless, we need to instill in the local policymaking process much of the same openness, transparency, and accountability that

the Centers for Medicare and Medicaid Services (CMS) are attempting to bring to

the national process.

MDMA welcomed CMS’s November 24, 2000 program memorandum (Transmittal

AB-00-116) to its contractors on the development of local medical review policies in

the Medicare program. The memorandum mandated new open LMRP development

requirements and new draft LMRP publication requirements. We saw the program

memorandum as a long-awaited first step toward modernization of the local processes for determining Medicare coverage of medical procedures and technologies

where no national policy exists.

However, MDMA and its members remain concerned with the contractor medical

director (CMD) workgroups and the role they play in developing local coverage policy; both are subjects that the program memorandum did not address. These CMD

workgroups are not specifically authorized by law or regulation, do not meet publicly, and are not required to disclose the nature of their deliberations or to justify

their decisions. Nevertheless, the work of these CMD workgroups is the basis for

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hundreds of local medical review policies that determine what medical procedures

and technologies are available to Medicare beneficiaries.

These CMD workgroups wield significant power in determining how federal entitlement benefits will be administered, yet they effectively are accountable to no one.

MDMA believes that as CMS modernizes its national and local processes, CMS

should do away with the CMD workgroups, one of the last vestiges of ‘‘behindclosed-doors’’ Medicare policymaking.

BACKGROUND

CMS contracts with private insurance companies to carry out various duties

under the Medicare program, such as processing claims, investigating fraud and

abuse, and determining coverage policies for medical procedures. Local ‘‘carriers’’ administer the Medicare Part B benefit (physician services, laboratory and diagnostic

tests, certain medical equipment and supplies, and other related services).

For most Part B services, CMS has not issued national Medicare coverage policies.

The carriers develop the vast majority of Medicare coverage determinations. Local

coverage policies, also known as local medical review policies (LMRP), are supposed

to be developed according to procedures set forth in CMS’s Medicare Program Integrity Manual and are supposed to be published in periodic newsletters or similar documents issued by each carrier. According to CMS, 300 national coverage policies

have been developed over the last 35 years, while more than 6,000 LMRP have been

developed over just the past ten years.

According to Chapter 1, Section 2.7 of the Medicare Program Integrity Manual,

each carrier must establish one Carrier Advisory Committee (CAC) per state in

which the carrier operates. The purpose of a CAC is to provide:

• a formal mechanism for physicians to be informed of and to participate as advisors in the development of LMRP, • a mechanism to discuss and improve administrative policies, and • a forum for the exchange of information between carriers and physicians.

CMS also instructs its carriers to release proposed LMRP to the public for comment prior to implementation.

In addition, Medicare Part B carriers have also formed a number of contractor

medical director (CMD) workgroups to develop templates for future LMRP development. These CMD workgroups do not meet publicly, yet the templates they develop

are circulated among all carriers and often are used as the basis for the development of LMRP by other carriers.

CMS’s November 24, 2000 program memorandum mandates new open LMRP development requirements and new draft LMRP publication requirements. According

to the program memorandum, Medicare contractors now must allow for the submission and presentation of information from members of the general public in the

LMRP development process. Medicare contractors also must provide open meetings

for the purpose of discussing draft LMRP, and these meetings must be held prior

to the presentation of these policies at CAC meetings.

The program memorandum, however, is silent on the role of the contractor medical director workgroups.

PROBLEM

Contractor medical director (CMD) workgroups play a significant role in the development of local Medicare medical review policies, yet these workgroups, unlike the

CACs, are not specifically authorized under Medicare law, regulation, or administrative procedures. The Medicare Program Integrity Manual only mentions these

workgroups in passing in Chapter 1, Section 6, when it lists ‘‘(p)articipating in CMD

clinical workgroups’’ as one of the ‘‘other duties’’ of contractor medical directors.

These CMD workgroups apparently meet periodically, yet neither the agenda nor

the minutes of these meetings are published publicly, nor do we know whether CMS

even requires that the CMD workgroups file such documents with the agency. Moreover, their membership is not published in any official CMS document immediately

available to the public, nor do we know how their membership is determined.

MDMA understands that during these CMD workgroup meetings, the Medicare

contractor medical directors discuss whether new technologies or procedures are

worthy of being covered under the broad discretion granted by CMS to Medicare

carriers. Although there is no instruction or discussion in the Medicare Program Integrity Manual of a process for the development of ‘‘model’’ or ‘‘template’’ LMRP by

these CMD workgroups, a cursory review of LMRP shows that such models or templates are cited frequently by contractors as the basis for their own local policies.

We understand that most of these model or template LMRP are developed by CMD

workgroups.

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Even more curiously, we hear that Medicare carriers often adopt as ‘‘informal’’

LMRP the results of the discussions at these workgroup meetings, which completely

circumvents and negates the LMRP development process. Finally, we understand

that CMS staff attends many of these CMD workgroup meetings, which certainly

lends the CMS imprimatur to these workgroups’ decisions and actions.

MDMA and its members are not the only CMS ‘‘stakeholders’’ concerned with the

actions of these CMD workgroups. For example, the American College of Surgeons

raised detailed concerns similar to ours in response to CMS’s 1998 ‘‘town hall’’ meeting on modernizing the Medicare coverage process:

At the present time, some carriers are developing and announcing policy

without CAC input while other carriers obtain input from the CAC but ignore

it and issue final policies without any apparent response to the comments it received. Of particular concern to the College is the dissemination of ‘‘model’’ policy, which some carriers seem to view as a form of national policy that must

be followed without question...

. . . the College has significant concerns about the current model (recently renamed ‘‘template’’) policy development process. Under this process, a small

number of contractor medical directors develop policy without providing physician organizations or other stakeholders an opportunity to provide input or to

review early drafts. Once the contractor medical directors have completed their

work on so-called templates, these materials are sent to all the carriers for their

consideration. Generally speaking, carriers then proceed to adopt the templates

as model policy. However, even when a carrier provides its carrier advisory committee with a chance to comment on the model policy, our impression is that

the offer comes too late in the policy development process. The label ‘‘model’’

appears to signal that the issue has already been subject to a rigorous review,

that further analysis and comment is unnecessary or unwanted, and that the

policy should be accepted ‘‘as is.’’ In fact, we consider the template process to

be a CMS-sanctioned attempt to bypass the usual, albeit limited, due process

safeguards associated with national coverage policy making. [October 19, 1998

letter from ACS to Jeffrey L. Kang, M.D., M.P.H., Director, Office of Clinical

Standards and Quality, CMS re September 25, 1998, Open Town Hall Meeting

To Discuss the Medicare Coverage Process]

SOLUTION

Again, MDMA appreciates CMS’s ongoing efforts to modernize the local Medicare

coverage policymaking process. The ability to participate in a transparent and predictable process, as well as to understand the criteria by which their technologies

will be evaluated during that process, will help medical technology entrepreneurs

develop innovative new products that meet the needs of the Medicare program and

its beneficiaries.

However, CMS needs to take the next step toward true reform of the LMRP development process by disbanding the contractor medical director workgroups. Under

the new open local process, CMS should not permit the development of model or

template policies, including de facto national coverage (and non-coverage) policies

and ‘‘informal’’ policies, by contractor medical directors absent public scrutiny and

accountability. The early stages of LMRP development should be equally as open,

if not more so, as the later stages.

Furthermore, we believe there simply is no need for CMD workgroups to develop

model or template policies. Local medical review policy was intended by CMS to be

an administrative and educational tool that describes how contractors will review

claims to ensure that they meet Medicare coverage requirements. Local Medicare

contractors are supposed to develop LMRP based on a perceived need for clarification, and they are supposed to develop these policies locally.

The model or template policies developed by CMD workgroups become de facto national policies as local contractors adopt them. If there is a need for clarity across

the nation, then CMS should initiate the process of making a national coverage decision. Simply put, there should only be one national Medicare coverage process, and

that process should be conducted by CMS.

We thank the subcommittees for your consideration of our perspective.

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