For Release on Delivery

Expected at

10 a.m.

Wednesday,

March 15, 2000

GAO/T-AIMD-00-118

MEDICARE FINANCIAL

MANAGEMENT

Further Improvements

Needed to Establish

Adequate Financial

Control and Accountability

Statement of Gloria Jarmon

Director, Health, Education, and Human Services

Accounting and Financial Management Issues

Accounting and Information Management Division

Testimony

Before the Subcommittee on Government Management,

Information and Technology, Committee on Government

Reform, House of Representatives

United States General Accounting Office

GAO
Page 1 GAO/T-AIMD-00-118

Mr. Chairman and Members of the Subcommittee:

I am pleased to be here today to discuss our review of the Health Care

Financing Administration’s (HCFA) financial management activities for

Medicare. Our report1 on these issues is being issued today and copies

have been given to the Subcommittee. Medicare is the nation’s largest

health insurer, covering almost 40 million beneficiaries at a cost of over

$200 billion annually. Each business day, HCFA’s contractors process

about 3.5 million claims worth an average of more than $650 million.

Addressing the financial management challenges associated with

administering the Medicare program is a daunting task given the size and

complexity of the program. As the Medicare program steward, HCFA is

accountable for ensuring that funds are spent wisely and in accordance

with applicable Medicare laws and that the Medicare program is well

managed.

Over the past 4 years, HCFA has set and achieved goals of improving its

audit opinion each year. For fiscal year 1999, HCFA received an

unqualified, or “clean,” opinion on its financial statements, and its audit

reports were issued on time. Annual financial audits represent an

important means to assure continued progress in improving financial

management and to identify significant weaknesses in financial

management that require management’s attention. Audit results are also

key indicators of the quality of the underlying agency financial data and

related systems used to compile that information.

For HCFA, as well as other federal agencies, while obtaining an

unqualified or “clean” audit opinion on its financial statements is an

important objective, it is not an end in and of itself. The key for agencies is

to take steps to continuously improve internal controls and underlying

financial systems for programs such as Medicare. The ultimate goal is for

agencies to be able to generate reliable, timely, accurate, and useful

information for decision-making on an ongoing basis.

Since fiscal year 1996, audits of HCFA’s financial statements have cited the

agency for many financial management weaknesses that affect the

agency’s ability to establish adequate control and accountability. Many of

the underlying internal control weaknesses in HCFA’s operations

continue. The Medicare program has also received increased attention as a

result of investigations by the Department of Health and Human Services’

1Medicare Financial Management: Further Improvements Needed to Establish Adequate Financial

Control and Accountability (GAO/AIMD-00-66, March 15, 2000).
Page 2 GAO/T-AIMD-00-118

(HHS) Office of the Inspector General (OIG) and the Department of

Justice that cited Medicare claims contractors and providers, such as

hospitals and physicians, for payment errors and fraudulent billing

practices. For fiscal year 1999, the OIG estimated that claims contractors

improperly paid $13.5 billion in Medicare claims, mostly for medical

services that were not covered by Medicare or were not reasonable,

necessary, and appropriate.

At the same time, HCFA has been the subject of increased congressional

interest since we designated the Medicare program a high-risk area in the

early 1990s. Just recently, we testified before the Subcommittee on Labor,

Health and Human Services, Education and Related Agencies, Senate

Committee on Appropriations, on Medicare program integrity issues,

including the ongoing and emerging challenges HCFA faces in

safeguarding Medicare payments.2

Today, I will discuss the results of our report that is being issued today on

HCFA’s financial management activities for Medicare. As our report

highlights, HCFA has not yet established an adequate foundation for

control and accountability over the Medicare program’s financial

operations. Let me begin by summarizing these weaknesses:

• Financial statement audits have repeatedly cited claims contractors for

internal control and financial reporting weaknesses, including failure to

safeguard checks received from providers for overpayments and

incorrectly recording billions of dollars owed to the Medicare program for

such overpayments. However, HCFA’s procedures for following up on

audit findings and evaluating corrective actions were insufficient.

• HCFA’s monitoring of contractor financial activities was also insufficient.

Until recently, HCFA’s oversight focused mainly on contractor compliance

with administrative budgets, which total about $1.6 billion annually,

instead of on the significant financial activities related to the

approximately $170 billion3 expended annually to pay Medicare health

benefit claims. Further, HCFA did not routinely analyze contractor

financial data to detect irregularities and assess risk as part of day-to-day

monitoring activities, nor had it issued complete and up-to-date

instructions to contractors on key financial matters.

2Medicare: HCFA Faces Challenges to Control Improper Payments (GAO/T-HEHS-00-74, March 9,

2000).

3Of the more than $200 billion in annual costs for Medicare, about $37 billion was expended for

managed care and about $170 billion was expended to pay fee-for-service health benefit claims.
Page 3 GAO/T-AIMD-00-118

• Audit reports have also cited HCFA for inefficiencies in its internal

financial reporting practices, including a lack of documented policies and

procedures.

Overall, these shortcomings in HCFA’s financial operations mean that it

could not adequately ensure the reliability of data that the agency and the

Congress used to track the cost of the Medicare program and to help make

informed decisions about future funding.

HCFA’s management has recognized the seriousness of these problems

and has shown a commitment to improving financial management. To

address these issues, HCFA has started several initiatives designed to

establish better control and accountability, such as hiring outside

consultants to evaluate contractor internal controls. These initiatives, if

successfully implemented, will assist HCFA in correcting some of its

longstanding financial management problems. At the same time, HCFA has

not yet taken critical steps to address the challenges of implementing its

planned improvement efforts.

• HCFA has not yet developed a comprehensive strategy to ensure

successful implementation of the initiatives, direct financial management

activities, and sustain improvements in the long term. In the absence of a

comprehensive strategy, HCFA cannot effectively direct and monitor its

many initiatives, potentially putting billions of dollars at risk for fraud and

abuse and increasing the likelihood that financial management problems

will continue.

• HCFA has not yet completed ongoing assessments of financial

management human capital needs. Without sufficient staff who possess

the necessary skills to perform the oversight, analytical, and other tasks

that are needed to manage the complex Medicare program, the prospects

for improving HCFA’s financial management remain dim.

Our report makes recommendations designed to help HCFA resolve these

problems.

In 1999, Medicare’s traditional pay-per-visit or fee-for-service program

covered almost 85 percent of Medicare beneficiaries. Physicians, hospitals,

and other providers submit claims to Medicare to receive reimbursement.

HCFA administers Medicare’s fee-for-service program largely through an

administrative structure of claims contractors. Since 1965, when the

Medicare program was enacted, the law has called for insurance

companies—such as Blue Cross and Blue Shield, Travelers, and Aetna—to

process and pay claims because of their expertise in performing these

HCFA’s Process for

Managing Medicare

Fee-For-Service
Page 4 GAO/T-AIMD-00-118

functions. As Medicare claims contractors, these companies assume a

large share of the responsibility for managing the federal funds of the

Medicare program, although HCFA has ultimate responsibility.

Medicare claims contractors use federal funds to pay health care providers

and are reimbursed for their administrative expenses incurred in

performing the work. More specifically, contractors have financial

management responsibilities that include (1) establishing agreements with

commercial banks to withdraw federal funds from the Medicare trust

funds to pay Medicare claims, (2) submitting various financial reports to

HCFA on the amount of funds withdrawn and expended, and (3) certifying

that their internal controls are in place and operating effectively.

Over the years, HCFA has reduced the number of Medicare contractors

from a peak of about 130 in 1966 to 56 in 1999. Generally, intermediaries

are the contractors that handle Part A claims submitted by hospitals,

skilled nursing facilities, and hospices. Carriers are those contractors

handling Part B claims submitted by physicians, laboratories, equipment

suppliers, and other practitioners.

HCFA is responsible for ensuring that contractors do their jobs accurately

and efficiently, including managing Medicare funds in a fiscally

responsible manner. HCFA is also responsible for establishing an internal

control system to safeguard Medicare assets. At HCFA’s central office, the

Office of Financial Management (OFM) is responsible for monitoring of

contractor financial data and activities in addition to facilitating the annual

financial statement audit process, preparing financial statements, and

executing daily internal accounting functions. HCFA’s central office unit,

the Center for Beneficiary Services (CBS) and the 10 regional offices share

the responsibility for conducting annual oversight reviews of all aspects of

contractor operations for the Medicare program as part of HCFA’s

Contractor Performance Evaluation (CPE) program. HCFA’s OFM is

expected to coordinate with CBS and assist the regional offices in

assessing contractor financial activities.

While HCFA officials had acknowledged its most serious and longstanding financial management problems, HCFA had not implemented

processes to establish adequate control and accountability over the

Medicare program. For example, HCFA procedures for evaluating audit

findings and following up were not effective to ensure that corrective

actions were implemented. In addition, HCFA had serious deficiencies in

its oversight and monitoring of contractor financial activities. HCFA’s

guidance to contractors for executing financial activities was incomplete

Establishing a Solid

Foundation for

Control and

Accountability
Page 5 GAO/T-AIMD-00-118

and in some cases outdated. Further, HCFA’s internal accounting and

financial reporting practices lacked documented procedures. These

weaknesses in internal control and financial reporting processes pose a

risk to the Medicare program because such weaknesses could result in

losses to the government.

Over the past 4 years, HCFA has made progress in improving some of its

financial management weaknesses. At the same time, many significant

accounting and financial systems-related weaknesses cited by auditors in

past reports on HCFA’s financial statements still exist. For example:

• HCFA’s systems do not fully comply with the federal financial system

requirements of the Federal Financial Management Improvement Act

(FFMIA).4 The federal financial system requirements prescribe the basic

elements for integrated federal financial management systems and having

financial systems that fully comply with these requirements is key to the

goal of having reliable, timely, and useful information for day-to-day

decision making.

• Contractor EDP controls over data processing systems do not provide

adequate safeguards to reduce improper access to and manipulation of

data.

• Medicare contractors are unable to accurately report some financial data

due to insufficient accounting systems, inadequate independent

verification of reported amounts, and lack of other financial controls.

• Medicare contractors’ controls to properly account for cash balances and

activity do not provide adequate safeguards to reduce the opportunities

for theft and other irregularities in their cash procedures.

• HCFA’s preparation of annual financial statements is manually intensive,

requiring extensive adjustments due to lack of an accounting software

package to automatically manipulate data for the development of financial

statements. In short, HCFA obtained a “clean” audit opinion through a lot

of hard work because its financial systems were not adequate.

Most notably, HCFA has had long-standing problems in supporting the

amount of accounts receivable due back to the Medicare program either

for claims in which Medicare should be the secondary rather than primary

4FFMIA requires that agencies’ financial management systems comply with three requirements: (1) federal

financial management systems requirements, (2) applicable federal accounting standards, and (3) the U.S.

Government Standard General Ledger at the transaction level.

Significant Financial

Management Weaknesses

Persist
Page 6 GAO/T-AIMD-00-118

payer (referred to as Medicare secondary payer) or for contractor

overpayments to providers, beneficiaries, physicians, and suppliers.

For fiscal year 1999, HCFA devoted significant resources to address its

accounts receivable problems by (1) entering into an interagency

agreement with the HHS OIG to assist in validating the accuracy and

completeness of accounts receivable balances at September 30, 1998, and

March 31, 1999, as well as the activity for the first 6 months of fiscal year

1999 and (2) implementing procedures to write off almost $3 billion of

Medicare accounts receivable balances for fiscal year 1999. While these

efforts were significant to improving HCFA’s accounts receivable balance

at September 30, 1999, and the auditors’ opinion on the financial

statements, the underlying financial systems problems still remain. The

auditors still reported the Medicare accounts receivable issue as a material

internal control weakness. They stated that many Medicare contractors

are still using processes, such as ad-hoc spreadsheet applications and a

wide variety of claims processing systems, for tracking receivables that

often cannot be reconciled to control amounts. This means that misuse of

government resources could occur and HCFA would not be able to detect

it in a timely manner.

Evaluating the financial management problems identified from audits and

implementing follow-up procedures is critical if HCFA is to resolve its

financial management problems and establish financial accountability. We

found that HCFA had limited procedures to promptly evaluate and resolve

auditor findings. In the past, HCFA relied on auditors to ensure that

Medicare contractors were implementing corrective actions to address

weaknesses. Auditors had followed-up with contractors that were

included in subsequent financial statement audits but had not followed-up

with those that were not included. HCFA did not have back-up procedures

that require its staff to follow-up at contractor sites to ensure that

recommended corrective actions were implemented, nor did HCFA have

adequate procedures to determine if problems found at contractors under

audit were also occurring program-wide at other contractors. Weaknesses

in HCFA’s follow-up have hindered prompt resolution of financial

management problems. In fact, during our visits to contractors included in

previous audits, we found several instances where contractors had

weaknesses in their internal controls over Medicare activities similar to

weaknesses found in previous audits. For example, two contractors we

visited did not have adequate controls to ensure the accuracy of their

outstanding check amounts reported to HCFA. For the two contractors,

outstanding check amounts totaled over $100 million as of September 30,

1999.

Audit Evaluation and

Follow-up Procedures

Were Ineffective
Page 7 GAO/T-AIMD-00-118

Our review also found two contractors not included in previous audits that

had problems with controls over cash and review of financial data, similar

to findings reported on contractors in prior audits. One contractor that

receives cash from providers and other sources averaging about

$20 million a month did not physically secure checks while awaiting

deposits, thus increasing the risk of lost checks and untimely deposits of

Medicare funds. Another contractor with cash receipts of about $1.5

million monthly did not record the amounts in a log when first received,

thus creating opportunities for theft.

HCFA is just starting to document procedures for ensuring that its staff

adequately evaluates audit findings and conducts follow-up with

contractors to ensure prompt resolution. We believe that these new

procedures are a good first step, but HCFA financial managers must

coordinate with other HCFA units to ensure that adequate resources are

available to support a comprehensive audit evaluation and resolution

process.

When daily financial operations of a program as complex as Medicare are

delegated to outside entities, oversight mechanisms are important tools for

maintaining financial control and accountability. HCFA’s oversight of

contractor financial activities for the Medicare program did not focus on

ensuring that contractors had the necessary internal controls in place to

account for and report on all financial activities related to the Medicare

program. Until fiscal year 1998, HCFA’s CPEs, the primary tool for

evaluating contractor operations, focused largely on contractors’

compliance with the annual budget HCFA establishes to pay contractors

for administering the Medicare program—approximately $1.6 billion a

year. The financial responsibility reviews did not focus on some of the

significant financial activities and data related to the almost $170 billion

expended each year to pay providers’ claims, such as Medicare accounts

receivable, accounts payable, and funds withdrawal activities. In addition,

regional oversight reviewers did not adequately examine contractor

internal controls to gain assurance that contractors’ reports on financial

data were reliable.

Recognizing the shortcomings of the HCFA annual oversight process, in

fiscal year 1998, the Chief Financial Officer (CFO) took steps to address

weaknesses in oversight of financial activities. For example, HCFA’s OFM

developed procedures for the regions to use in checking and testing

financial data related to accounts receivable and accounts payable for

several of the large contractors. OFM also provided staff to assist regional

reviewers in an attempt to develop and leverage the skills and expertise of

Oversight of Contractor

Financial Activities Was

Limited in Scope
Page 8 GAO/T-AIMD-00-118

staff conducting the reviews. The procedures, however, did not cover

other key financial activities, such as contractor bank balances and funds

withdrawal procedures.

Contractors and the commercial banks that act on behalf of contractors

withdraw the almost $170 billion required annually to pay Medicare

benefit claims. Despite the magnitude of dollars that flow in and out of

contractor bank accounts, HCFA has not developed detailed procedures to

review contractor bank balances and the amount of funds withdrawn. We

discussed with the CFO the need for expanded evaluation procedures to

cover these areas. The CFO agreed and has begun discussions with

officials in the HCFA headquarters unit responsible for contractor

oversight about expanding financial management oversight.

In fiscal year 1999, HCFA solicited outside help to address some of its

significant financial weaknesses. As discussed earlier, HCFA entered into

a reimbursable interagency agreement with the OIG to assess and validate

the accounts receivable activity and balances reported at September 30,

1998, and March 31, 1999. HCFA also contracted with outside consultants

to validate internal controls at contractors in response to our July 1999

report that HCFA does not regularly check contractors’ internal controls.5

While these two efforts demonstrate that HCFA is acting to address its

long-standing problems, we are concerned that HCFA’s financial managers

have not yet comprehensively assessed how the agency will sustain strong

oversight in these two areas in the future or address the recommendations

that will likely result from these reviews. For example, HCFA has

developed a work force planning project, but thus far this initiative has

provided limited information about specific areas, such as financial

management.

HCFA’s day-to-day monitoring of contractor data is insufficient. HCFA did

not routinely analyze key contractor financial data to detect irregularities

in contractor financial activities and assess risk, despite the importance of

such mechanisms in establishing sound internal control. For example,

HCFA did not have adequate procedures to ensure that bank activity

conducted on behalf of contractors was reasonable. In early 1999, HCFA

was alerted to a problem in the banking activities done on behalf of the

Medicare program. Examiners from the Federal Deposit Insurance

Corporation discovered and reported to HCFA that a bank, which provides

5Medicare Contractors: Despite Its Efforts, HCFA Cannot Ensure Their Effectiveness or Integrity

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

Day-to-Day Monitoring of

Contractor Financial

Activities Is Insufficient
Page 9 GAO/T-AIMD-00-118

banking services for several contractors, had a practice of drawing funds

from the U.S. Treasury on the day before the bank needed the money to

pay Medicare claims. The bank was selling the amount to another bank

overnight to earn interest and transferring it back to its accounts the next

morning without HCFA’s knowledge.

When HCFA was made aware of the situation, the CFO issued a letter to

the bank president to (1) inform the bank that the practice was not in

accordance with provisions of the Medicare program bank agreement and

Treasury’s regulations concerning collateral requirements for federal

funds and (2) request that the bank immediately stop the practice.

However, because HCFA has so little information on contractor bank

activities and does so little analysis, it could not fully determine the extent

of irregular activities by this bank. At the request of HCFA, the OIG

investigated this bank to determine the amount of profit the bank made

from this practice. HCFA officials said that they are awaiting the results of

this report to determine what actions against the bank are needed,

including disciplinary actions. In addition, HCFA officials said that they

asked the OIG to conduct a separate review of bank procedures for a

sample of banks participating in the Medicare program to determine if

other banks are unfairly profiting from similar practices and to identify

areas of potential vulnerability.

We also found that HCFA did limited analysis of quarterly reports

submitted by contractors on bank charges, account balances, and

collateral. OFM had one staff person who monitored the Medicare bank

account balances for the approximately 20 commercial banks that

maintain Medicare accounts for the 56 contractors. The staff person said

that because of other responsibilities, he only reviewed bank account

reports for about 2 or 3 of the 56 Medicare contractors each quarter. When

we asked to review his analysis, the staff person could not provide any

support or written analysis procedures.

HCFA’s ability to address long-standing financial management weaknesses

was also hampered because financial managers had not issued complete,

up-to-date guidance to contractors for financial activities. According to

contractors we visited, one specific area where instructions were needed

was the allocation of cash receipts between the two Medicare trust funds.6

Because HCFA had not issued specific instructions in this area,

6Congress established two trust funds for Medicare. The Hospital Insurance (HI) trust fund is used to pay

Medicare Part A claims and is funded primarily by employment taxes. The Supplementary Medical Insurance

(SMI) trust fund is used to pay Part B claims and is primarily funded by Medicare premiums and a federal

matching contribution.

Contractors Lacked

Sufficient Guidance to

Resolve Financial

Management Deficiencies
Page 10 GAO/T-AIMD-00-118

contractors adopted different methodologies that in some cases led to

inaccurate trust fund balances. One contractor adopted a procedure where

all overpayments received were allocated to the Hospital Insurance (HI)

trust fund. The contractor did not take any steps to determine if the

overpayments were related to previous Supplementary Medical Insurance

(SMI) or HI benefit payments. After adopting procedures to determine if

receipts were related to HI or SMI, the contractor reviewed its allocation

for a 9-month period in fiscal year 1999 and found that $33 million which

should have been allocated to the SMI trust fund had been incorrectly

allocated to the HI trust fund. This error was significant because accurate

data on Medicare trust fund balances is essential in managing and

monitoring trust fund activities and funding needs.

HCFA’s CFO acknowledged that more detailed instructions to contractors

are needed because HCFA’s contracting documents do not include enough

specificity to contractors on their fiscal responsibilities. However, because

HCFA lacks baseline data on its financial management instructions, it has

hired a contractor to determine what financial guidance has been issued

and to develop a manual of financial and internal control guidance. This

effort has just begun and it is too soon to tell whether it will succeed in

addressing these fundamental problems.

HCFA had not taken steps to ensure that it had knowledgeable financial

management staff and clearly documented procedures for executing

accounting and financial reporting activities. We also found that HCFA did

not have an updated accounting manual to direct accounting staff in

performing routine accounting procedures for the Medicare program. A

recent error in HCFA’s financial reporting demonstrates the importance of

written accounting procedures that are specific to HCFA operations. In

October 1999, HCFA discovered misstatements in its reports to Treasury

on amounts expended from the HI and SMI trust funds. Treasury relies on

the amounts reported for expenditures because Medicare trust fund

amounts not necessary to meet current expenditures are invested in

interest-bearing securities of the U.S. government each month.

Senior OFM officials said that the staff person who prepared the report

had assumed the responsibilities of a former employee but had not

received adequate training. Because of HCFA’s errors, the Medicare trust

fund balances that Treasury invested for several months were incorrect,

thus resulting in a loss of investment interest income of about $80 million

HCFA Lacked Structure for

Internal Financial

Reporting Practices
Page 11 GAO/T-AIMD-00-118

to the Medicare program.7 HCFA officials told us they have taken steps to

enhance their procedures for reporting trust fund balances.

Acknowledging the need to correct the significant financial management

weaknesses in its operations, HCFA has several initiatives underway.

These initiatives—ranging from new systems to help track amounts owed

to HCFA, to contractor financial management guidance, to assessments of

contractors’ internal control—hold promise for improving financial

management, establishing control, and making staff more accountable in

achieving HCFA’s mission. To be successful, HCFA will need to sustain

these initiatives and institutionalize improvements. HCFA faces significant

challenges in successfully implementing these initiatives. For example,

HCFA lacked two key components of any successful financial

management reform: developing a comprehensive strategy and assessing

financial management human capital needs.

HCFA had not yet developed a comprehensive strategy to direct its

financial management activities. HCFA lacked long- and short-range plans

that provide a basis for prioritizing financial management initiatives,

clearly defining goals and objectives, establishing time frames for

completing initiatives, assigning responsibilities, and measuring

performance. A comprehensive financial management strategy, along with

plans for implementing the strategy, is important because of the recurring

financial management weaknesses and the scope of current improvement

initiatives.

HCFA’s current financial management improvement initiatives include

(1) developing an integrated accounting system that incorporates

Medicare contractors’ financial systems and HCFA’s internal financial

accounting systems, (2) developing new systems to improve oversight and

financial reporting over Medicare receivables, (3) reviewing contractors’

internal controls, and (4) developing a comprehensive contractor financial

management manual. While these projects have the potential to provide

major improvements in HCFA’s financial management, the chances of

success could be significantly improved if HCFA established and

documented a specific strategy and implementation plan for sustaining the

projects and institutionalizing improvements. HCFA officials provided us

with broad conceptual ideas of how the initiatives would need to be

implemented. As of January 2000, when we completed our fieldwork,

7Although incorrect balances in the Medicare trust funds resulted in a net loss of interest income to

the Medicare program, other Treasury investments earned the interest lost by the Medicare program.

As a result, these events did not result in a net loss to the U.S. government.

Recent Initiatives Hold

Promise But Sustained

Commitment Is Critical

No Comprehensive

Strategy or Plans for

Implementing Financial

Management Improvement

Initiatives
Page 12 GAO/T-AIMD-00-118

HCFA was in the early stages of drafting more specific details for several

of its financial management improvement initiatives.

Any delays in developing detailed plans could cause problems as the

projects progress. Specifically, the integrated accounting system project,

which HCFA describes as its most comprehensive financial systems

development project, is critical and should be well planned. In the past, we

have reported on the significant challenges that agencies face in ensuring

that modern information technology management practices are

consistently defined and properly implemented.

Another financial management improvement initiative that holds great

promise for helping HCFA improve financial control is the current project

to review contractors’ internal control structures, identify poor internal

controls, and suggest needed improvements. HCFA has contracted with

several independent public accounting firms to perform these reviews.

However, HCFA has not yet developed a comprehensive plan to ensure

sustained oversight of contractor internal controls. HCFA officials

envision that these contracted reviews will continue in future years, but

HCFA has not determined what resources will be needed to do the reviews

or respond to recommendations resulting from the reviews. Further,

HCFA officials do not have alternative plans in the event that these

reviews cannot be continued. Without alternative plans, this critical

activity could be interrupted.

HCFA officials have stated that they lack sufficient staff with the

specialized skills to perform key financial functions, including overseeing

and monitoring contractor financial activities, analyzing financial data to

detect irregularities, and developing and maintaining internal financial

reporting processes. Despite these resource challenges, HCFA has not

completed assessments of its human capital needs.

In our recently issued exposure draft of an executive guide designed to

help federal agencies achieve federal financial management objectives,8

we highlighted successful human capital efforts in leading organizations

including three critical elements for developing first-rate staff teams.

These elements include (1) determining required skills and competencies,

(2) measuring the gap between what the organization needs and what it

has, and (3) developing strategies and detailed plans to address current or

expected future deficiencies.

8Executive Guide: Creating Value Through World-Class Financial Management (GAO/AIMD-99-45, August

1999, exposure draft).

Assessing Human Capital

Needs Is Essential
Page 13 GAO/T-AIMD-00-118

In comments to our report, HCFA officials stated that they recently

initiated an agencywide workforce planning project. This project consists

of a four-phased model designed to incorporate critical elements similar to

those mentioned in our guide. To date, the results of this project have

provided HCFA with limited information, and more detailed assessments

to analyze current and future work functions and competencies have not

been completed. HCFA’s current plans are to use results from its project

to formalize hiring, staffing, and learning plans for fiscal year 2001. Having

staff with appropriate skills is key to achieving financial management

improvements. Therefore, emphasis on completing more detailed human

capital planning within HCFA’s proposed time frames is important.

With billions of dollars at risk in the Medicare program, the importance of

ensuring that Medicare assets are properly accounted for and that

adequate controls are in place to safeguard them cannot be overstated. In

this respect, HCFA continues to face difficult challenges. Financial

statement audits and other assessments and reviews have identified

significant financial management problems at HCFA and its Medicare

contractors year after year. Despite the seriousness of these repetitive

problems, HCFA’s follow-up on audit findings and recommendations,

evaluation of contractors’ corrective action plans, analysis of available

financial data to detect inappropriate financial management activities, and

financial guidance for HCFA and contractor staff has been limited.

Further, it is difficult for HCFA to improve and expand oversight of

contractor financial operations without first determining the required staff

skills and competencies needed. In addition, HCFA’s internal financial

reporting processes render HCFA vulnerable to errors in critical data

needed to administer the Medicare program.

The significance of the financial management issues facing HCFA

emphasizes the need for a comprehensive strategy to direct its financial

activities and assess its human capital needs. This strategy would help

HCFA establish seamless systems and processes to improve financial

management and accountability. HCFA has agreed with the

recommendations in our report that we are releasing today. Management

outlined its ongoing and planned initiatives to address the problems

highlighted in our report. Top management’s continued support of these

initiatives and sustained actions, as outlined in HCFA’s response to our

report, will be key to its success in resolving these problems. We plan to

continue to monitor HCFA’s progress in implementing its financial

management improvement efforts.

Conclusions
Page 14 GAO/T-AIMD-00-118

Mr. Chairman, this concludes my statement. I would be happy to answer

any questions you or other Members of the Subcommittee may have.

For information about this statement, please contact Gloria Jarmon at

(202) 512-4476 or at jarmong.aimd@gao.gov. Individuals making key

contributions to this statement included Kay Daly, Kim Brooks, and Meg

Mills.

(916347)

Contact and

Acknowledgement
Page 15 GAO/T-AIMD-00-118
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