GAO

United States General Accounting Office

Report to the Administrator, Health Care 

Financing Administration

March 2000 MEDICARE 

FINANCIAL 

MANAGEMENT

Further Improvements 

Needed to Establish 

Adequate Financial 

Control and 

Accountability

GAO/AIMD-00-66

Page 1 GAO/AIMD-00-66 Medicare Financial Management

Contents

Letter 3

Appendixes Appendix I: Comments From the Department of Health and Human 

Services 38

Appendix II: Financial Management/Internal Control Weaknesses

Included in Financial Statement Audits, Fiscal Years 1996-1999 51

Appendix III: Financial Management Improvement Projects 52

Appendix IV: GAO Contacts and Staff Acknowledgments 53

Figures Figure 1: Flow of Medicare Program Dollars 9

Abbreviations

CBS Center for Beneficiary Services

CFO Chief Financial Officer

CPE Contractor Performance Evaluation

EDP Electronic Data Processing

FFMIA Federal Financial Management Improvement Act

FSG Financial Services Group

GMRA Government Management Reform Act

GPRA Government Performance and Results Act

HCFA Health Care Financing Administration

HHS Department of Health and Human Services

HI Hospital Insurance

IGLAS Integrated General Ledger Accounting System

MARS Medicare Accounts Receivable System

MSP Medicare Secondary Payer

OFM Office of Financial Management

OIG Office of Inspector General

OMB Office of Management and Budget

ReMAS Recovery Management Accounting System

SGL U.S. Government Standard General Ledger

SAS Statement on Auditing Standards

SMI Supplementary Medical Insurance
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United States General Accounting Office

Washington, D.C. 20548

Accounting and Information

Management Division

B-284462 Letr

March 15, 2000

The Honorable Nancy-Ann Min DeParle

Administrator

Health Care Financing Administration

Dear Ms. DeParle:

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

beneficiaries at a cost of over $200 billion annually. 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, the Health Care Financing 

Administration (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.

The Congress instituted comprehensive management reforms to assist 

federal agencies in establishing accountability for programs like Medicare. 

The Federal Managers’ Financial Integrity Act of 1982 (Financial Integrity 

Act) requires agency managers to annually assess the adequacy of their 

internal control1

 and accounting systems and report on material 

weaknesses found and the plans for correcting the problems. The Financial 

Integrity Act also requires the Comptroller General to issue standards for 

internal control in government, which were issued in 1983 and recently 

updated in light of advancing technology and refinements in internal 

control. The Comptroller General’s Standards for Internal Control in the 

Federal Government is issued to help agencies establish and maintain 

effective internal control systems that are designed to ensure that agencies 

achieve their goals and objectives.2

1

The term internal control is synonymous with the term management control (as used in 

Office of Management and Budget Circular A-123) that covers all aspects of an agency’s 

operations (programmatic, financial, and compliance).

2

The standards define internal control as an integral component of an organization’s 

management that provides reasonable assurance that the following objectives are being 

achieved: (1) effectiveness and efficiency of operations, including the use of the entity’s 

resources, and (2) reliability of financial reporting, including reports on budget execution, 

financial statements and other reports, and compliance with applicable laws and 

regulations.
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Other laws, such as the Chief Financial Officers (CFO) Act of 1990, as 

expanded by the Government Management Reform Act (GMRA) of 1994, 

and the Government Performance and Results Act of 1993 (GPRA), 

prompted agencies to improve financial management, internal control, and 

performance measurement.3

 The CFO Act and GMRA established CFO 

positions, required audited financial statements annually, and set 

expectations for agencies to deploy more modern financial management 

systems. GPRA required agencies to develop multiyear and annual strategic 

goals, methods for measuring performance toward achieving those goals, 

and annual reports on the results.

Like many agencies, HCFA has made strides toward implementing the 

requirements of recent reform legislation by preparing agencywide 

financial statements that have been subjected to independent audit since 

fiscal year 1996. HCFA has made progress in improving its audit opinions 

each year and just recently received an unqualified or “clean” opinion on its 

fiscal year 1999 financial statements. At the same time, audits of HCFA’s 

financial statements have continuously cited the agency for serious 

financial management weaknesses that affect its ability to establish 

adequate control and accountability for Medicare finances. Many of these 

weaknesses continued through fiscal year 1999.

3

Other management reform legislation that has had an impact on financial management 

includes (1) the Federal Financial Management Improvement Act (FFMIA) of 1996 and 

(2) the Clinger-Cohen Act of 1996.
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The Medicare program has also received increased attention as a result of 

investigations by the Department of Health and Human Services’ (HHS) 

Office of Inspector General (OIG) and the Department of Justice that cited 

HCFA’s Medicare claims contractors4

 and providers, such as hospitals and 

physicians, for payment errors and fraudulent billing practices. The OIG 

estimated that for fiscal year 1999, claims contractors improperly paid an 

estimated $13.5 billion in Medicare claims, mostly for medical services that 

were not covered by Medicare or were not reasonable, necessary, or 

appropriate. Also, we recently reported that although HCFA is 

implementing several actions to improve its oversight of Medicare claims 

contractors, organizational and oversight weaknesses impede the agency’s 

ability to ensure that providers are appropriately paid.5

Because of our concerns about the impact of continuing financial 

management weaknesses on the integrity of the Medicare program and the 

potential for losses, we evaluated HCFA’s financial management activities, 

including evaluation and follow-up on audit findings, monitoring of 

contractor financial operations, internal financial reporting practices, and 

financial management improvement initiatives, to determine if they are 

sufficient to resolve financial management weaknesses identified through 

annual financial statement audits and other management-type reviews of 

HCFA’s Medicare activities. 

Results in Brief Although HCFA is responsible for ensuring that the billions of dollars 

expended for Medicare each year are managed in a fiscally responsible 

way, it has not yet established an adequate foundation for control and 

accountability over the financial operations of the Medicare program. 

HCFA’s financial management activities, which include evaluation and 

follow-up on audit findings, contractor monitoring, and financial reporting, 

are insufficient to resolve the internal control and financial reporting 

weaknesses identified through audits and other reviews. Resolving these 

weaknesses is important because of the risk they pose to the Medicare 

program. Unresolved weaknesses could result in losses to the government.

4

Contractors are intermediaries and carriers with whom HCFA contracts to administer the 

Medicare fee-for-service claims.

5

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

Integrity (GAO/HEHS-99-115, July 14, 1999).
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While HCFA set and achieved goals for improving its audit opinion, many 

long-standing financial management weaknesses remain. Notably, HCFA 

received an unqualified or “clean” opinion on its fiscal year 1999 financial 

statements, and its audit report was issued on time. For HCFA, as well as 

other federal agencies, annual financial audits represent an important 

means to assure continued progress in improving financial management 

and pinpoint significant weaknesses in financial management that require 

management’s attention. In fact, the audit report on HCFA’s fiscal year 1999 

financial statements highlighted that many of the underlying control 

weaknesses reported in previous audits still exist. 

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. Despite the impact that these and other financial 

management weaknesses have on HCFA’s ability to safeguard Medicare 

assets, HCFA’s procedures for following up on audit findings and evaluating 

corrective actions to ensure they are appropriate and effectively 

implemented are insufficient. 

HCFA’s monitoring of contractor financial activities is also insufficient. 

Until recently, the scope of HCFA’s oversight was limited, focusing mainly 

on contractor compliance with administrative budgets, which total about 

$1.6 billion annually, instead of focusing on the significant financial 

activities related to the approximately $170 billion expended each year to 

pay Medicare benefit claims. Further, HCFA does not routinely analyze 

contractor financial data to detect irregularities and assess risk as part of 

day-to-day monitoring activities, nor has HCFA issued complete and up-todate instructions to contractors on key financial matters.

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 mean that HCFA cannot ensure 

the reliability of data that the agency and the Congress on an ongoing basis 

use to track the cost of the Medicare program and to help make informed 

decisions about future funding. 

HCFA officials have begun several initiatives to enhance HCFA’s ability 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 long-
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standing financial management problems. However, HCFA does not have a 

comprehensive strategy to ensure successful implementation of the 

improvement initiatives, direct financial management activities, and 

sustain improvements in the long term. HCFA lacks 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. In addition, HCFA has not completed an assessment of 

financial management human capital needs. In the absence of a 

comprehensive strategy, HCFA cannot effectively direct and monitor its 

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

abuse and increasing the likelihood that financial management problems 

will continue. We are making recommendations designed to help HCFA 

resolve these problems. In comments on a draft of this report, HCFA 

generally agreed with our recommendations and described several 

initiatives it has planned or recently begun for resolving the underlying 

financial management control issues.

Background The Medicare program provides health care coverage to people 65 and over 

and to some disabled persons.6

 For fiscal year 1999, total cost for the 

Medicare program was over $200 billion, of which about $37 billion was 

expended for Medicare beneficiaries that opt to enroll in prepaid health 

care plans commonly referred to as managed care organizations and about 

$170 billion was expended for the 85 percent of beneficiaries that have 

chosen Medicare’s traditional pay-per-visit or fee-for-service arrangement. 

Medicare Part A—hospital insurance—covers inpatient hospital, some 

home health, skilled nursing, and hospice services. Medicare Part B—

supplementary medical insurance—covers services provided by 

physicians, outpatient laboratories, and an array of other providers and 

supplies. 

HCFA has primary responsibility for administering the Medicare program. 

HCFA contracts with 56 Medicare claims contractors to help administer the 

Medicare program by processing fee-for-service claims, managing the 

billions of dollars used to pay those claims, protecting Medicare from fraud 

and abuse, and providing education and services to beneficiaries and 

6

The 1965 legislation establishing Medicare originally covered people 65 and over. 

Legislation in 1972 broadened the program to cover certain disabled people and those with 

permanent kidney failure.
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providers. Medicare claims contractors are called intermediaries or 

carriers, depending on the type of claims they process. Intermediaries 

primarily process part A claims for institutions such as hospitals and home 

health agencies. Carriers process part B claims submitted by others, such 

as physicians and suppliers of durable medical equipment. Each business 

day, contractors process about 3.5 million claims worth an average of more 

than $650 million.

Medicare claims contractors assume a large share of the responsibility for 

managing the finances of the Medicare program. Medicare claims 

contractors have financial management responsibilities that include 

(1) establishing agreements with commercial banks to withdraw money 

from the Medicare trust funds and expend those funds to pay Medicare 

claims, (2) establishing budgets with HCFA to cover the administrative cost 

of carrying out their Medicare responsibilities, (3) submitting various 

financial reports to HCFA on activities such as funds withdrawn and funds 

expended, and (4) certifying that their internal controls are in place and 

operating effectively. Figure 1 depicts the flow of Medicare program 

dollars.
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Figure 1: Flow of Medicare Program Dollars

Source: GAO analysis of HCFA documentation of Medicare financial management.

HCFA, as the Medicare program steward, 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. To 

comply with the Comptroller General’s Standards for Internal Control in 

the Federal Government, HCFA is required to implement procedures for 

(1) monitoring claims contractors’ internal controls and (2) promptly 

evaluating audit findings, determining proper actions in response to audit 
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findings, and completing or directing actions that correct identified 

deficiencies. 

HCFA’s monitoring of contractors for both operational and financial 

performance is a multitiered process. HCFA financial managers rely on two 

annual processes as their mechanisms for overseeing contractor activities 

and identifying deficiencies in contractor operation: the annual financial 

statement audits and the annual Contractor Performance Evaluations 

(CPE). In addition, HCFA does day-to-day monitoring of contractor 

operations. 

HCFA financial managers rely on the annual financial statement audit done 

under the CFO Act, as expanded by GMRA, as a tool for oversight of 

contractors’ financial activities. As part of the annual audit of HCFA’s 

financial statements, auditors (1) determine whether Medicare benefit 

payments were made in accordance with applicable laws and regulations, 

(2) review the financial reporting and internal control at Medicare 

contractors and at HCFA’s central office, and (3) review regional office 

oversight of Medicare. When auditors identify specific weaknesses in 

contractor financial management, HCFA’s CFO and its Office of Financial 

Management (OFM) require contractors to submit corrective action plans 

to address the deficiencies.
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HCFA also relies on oversight of contractor financial activities as 

performed under annual CPE reviews. CPE reviews are annual reviews to 

evaluate contractors’ performance in all aspects of their contractually 

required duties. HCFA’s central office and its 10 regional offices have 

shared responsibility for overseeing contractor performance. The central 

office staff in the Center for Beneficiary Services (CBS) provides guidance 

and overall direction for contractor oversight. Regional staff generally 

provide direct oversight and are responsible for annually evaluating 

contractor activities in the following five areas: (1) fiscal responsibility, 

(2) claims processing, (3) payment safeguards, (4) administrative activities, 

and (5) customer service. The CPE review areas most relevant to financial 

managers are fiscal responsibility and administrative activities. The CPE of 

contractor fiscal responsibilities requires a review of contractors’ 

compliance with their budgets and other financial reporting processes. 

Since 1998, regions have completed contractor fiscal responsibility reviews 

using procedures developed by OFM to evaluate contractors’ accounts 

receivable and accounts payable data.7

 The CPE criteria for contractor 

administrative activities require HCFA to review contractors’ internal 

controls. When HCFA identifies significant deficiencies in performance, 

contractors are required to submit a performance improvement plan 

describing their planned corrective actions to resolve those deficiencies.

OFM is responsible for day-to-day 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. The Financial Services Group (FSG) within OFM 

(1) collects financial reports from contractors, (2) monitors financial 

activity such as withdrawals, expenditures, time account analyses, 

receivables, and payables, (3) issues guidance on contractor internal 

controls, and (4) incorporates contractor data into HCFA’s financial 

statements. OFM staff are expected to coordinate with HCFA’s regional 

offices for assistance in day-to-day monitoring of contractor financial data.

Objective, Scope, and 

Methodology

Our objective was to evaluate whether HCFA’s financial management 

activities, including audit evaluation and follow-up, monitoring of 

contractor financial operations, internal financial reporting practices, and 

financial management improvement initiatives, are sufficient to resolve 

7

Contractors report basic balance sheet and income statement information on HCFA Form 

750 and detailed accounts receivable information on HCFA Form 751.
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financial management weaknesses identified through annual financial 

statement audits and other reviews of HCFA’s Medicare activities.

To review HCFA’s financial management activities we (1) reviewed audit 

reports and related documents describing financial management 

weaknesses identified during audits covering fiscal years 1996 through 

1998, (2) reviewed our prior reports on Medicare activities, (3) interviewed 

various Medicare contractor officials and HCFA officials, including the 

CFO and staff within HCFA’s OFM, CBS, and selected regional offices, 

(4) reviewed financial management guidance and other documents 

prepared by HCFA and Medicare contractors specifying financial 

management and reporting requirements and describing efforts to address 

identified weaknesses, (5) tested the adequacy of selected controls and the 

accuracy of reported financial data at selected contractors, (6) reviewed 

guidance prepared by HCFA for performing key financial management 

oversight and monitoring activities and related documentation produced as 

a result of these activities, such as CPE summary reports, (7) reviewed 

statements of work for contracts between HCFA and outside entities for 

financial improvement initiatives, (8) reviewed plans prepared in 

compliance with the CFO Act and the Results Act, such as HCFA’s quarterly 

input to update the HHS’ CFO Financial Management Status Report and 5-

Year Plan and HCFA’s performance plans, and (9) reviewed various 

documents prepared by HCFA describing financial management-related 

objectives and priorities.

We did our work from June 1999 through early January 2000, at HCFA’s 

central office in Baltimore, Maryland, and at the three HCFA regional 

offices—Atlanta, Philadelphia, and San Francisco—responsible for 

oversight of the contractors that we visited. We visited 7 of the 56 Medicare 

contractors, including 4 previously subjected to CFO audit-related testing. 

The seven represented a cross-section of large, medium, and small-sized 

contractors: five are both fiscal intermediaries and carriers, one is a fiscal 

intermediary only, and another is a carrier only.8

 Collectively, the seven 

accounted for approximately $44 billion or 26 percent of total expenditures 

reported by Medicare claims contractors during fiscal year 1999. We did 

our work in accordance with generally accepted government auditing 

standards. We requested and obtained written comments on a draft of this 

report from the Administrator of HCFA. These comments are reprinted in 

appendix I.

8

Most intermediaries and carriers are local Blue Cross Blue Shield companies. 
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Medicare Financial 

Operations Lack 

Adequate Control and 

Accountability

Since fiscal year 1996, auditors of HCFA’s financial statements have 

reported serious weaknesses in accounting, internal control, and financial 

reporting processes for the Medicare program, many of which continue 

today. Despite the serious and long-standing nature of these problems, 

HCFA has not yet implemented adequate processes to improve control and 

accountability over the Medicare program. HCFA’s procedures for 

evaluating audit findings and following up are not effective to ensure that 

corrective actions are implemented. In addition, HCFA has serious 

deficiencies in its oversight and monitoring of contractor financial 

activities. For example, HCFA’s annual oversight reviews are limited in 

scope, and day-to-day monitoring of contractor financial activities includes 

little analysis of contractor financial data to detect irregularities. HCFA’s 

guidance to contractors for executing financial activities is incomplete and 

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

reporting practices lack 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.

Significant Financial 

Management Weaknesses 

Persist

In its first audit of HCFA-wide financial statements, which covered fiscal 

year 1996, the OIG cited HCFA for numerous financial management 

problems. The OIG cited problems with fundamental recordkeeping and 

financial reporting, incomplete documentation, weak internal control, and 

financial systems weaknesses that prevented the agency from accurately 

reporting significant assets and liabilities, such as accounts receivable and 

accounts payable. In response, HCFA set and achieved goals of improving 

its audit opinion each year. As a result, after 4 years of audit experience, 

HCFA received its first unqualified or “clean” audit opinion on its fiscal year 

1999 financial statements. 

For HCFA, as well as other federal entities, obtaining an unqualified or 

“clean” audit opinion on its financial statements is an important objective. 

However, it is not an end in and of itself. The key for agencies is to take 

steps to continuously improve internal control and underlying financial 

information for programs like Medicare. As contemplated by FFMIA9

 and 

9

FFMIA requires agencies to substantially comply with (1) federal financial management 

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

Government Standard General Ledger (SGL) at the transaction level.
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the CFO Act, HCFA must be able to generate reliable, timely, accurate, and 

useful information for decision-making on an ongoing basis, not just as of 

the end of the fiscal year. 

While HCFA has made continuous improvement in its audit opinion, many 

of the underlying internal control weaknesses in HCFA’s operations 

continue. Audit reports prior to the report on HCFA’s fiscal year 1999 

financial statements included seven significant deficiencies in the design or 

operation of the Medicare internal control structure.10 The significant 

deficiencies included in the 1996 through 1998 audit reports were the result 

of over 400 specific financial management problems found in contractor 

and HCFA central and regional office operations. The majority of the 

specific financial management problems related to contractor operations. 

Similarly, the report on HCFA’s fiscal year 1999 financial statements 

included many of the same internal control, financial reporting, and 

electronic data processing weaknesses that had been reported in prior 

audits. Appendix II summarizes the significant weaknesses identified by 

the auditors.

In addition, the fiscal year 1999 financial statement audit report cited 

HCFA’s financial systems for continued substantial noncompliance with 

FFMIA. Specifically, the auditors reported that HCFA does not have 

integrated accounting systems to capture expenditures at the Medicare 

contractor level, and certain aspects of the existing financial reporting 

system do not conform to the financial system requirements currently 

specified by the Joint Financial Management Improvement Program. At the 

same time, HCFA was also cited by the auditors for continuing to use 

processes to prepare its fiscal year 1999 statements that do not effectively 

accumulate, analyze, and distribute reliable financial information in a 

timely manner, nor ensure material misstatements are identified in a timely 

manner.

By obtaining a “clean” opinion on its financial statements, HCFA made 

progress in addressing one of its significant financial management 

weaknesses, Medicare accounts receivable.

10The audit reports classified the deficiencies as reportable conditions or material 

weaknesses, which are conditions in which the design or operation of one or more of the 

internal control components do not reduce to a relatively low level the risk that 

misstatements caused by errors, fraud, or noncompliance in amounts that would be material 

to the financial statements may occur and not be detected promptly by employees in the 

normal course of performing their duties. 
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For example, HCFA’s fiscal year 1998 financial statements resulted in a 

qualified opinion because HCFA was unable to reliably track accounts 

receivable worth billions of dollars.11

To address the accounts receivable issue, HCFA entered into an 

interagency agreement with the OIG to review accounts receivable. The 

OIG review was done to assist HCFA in validating the accuracy and 

completeness of accounts receivable balances as of September 30, 1998, 

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

year 1999. The review provided additional detail on accounts receivable 

problems that had been previously reported in financial statement audit 

reports. For example, the October 1999 OIG report identified more than 

$2.7 billion in accounts receivable overstatements and understatements in 

amounts reported by contractors and HCFA’s central and regional offices. 

Of the $2.7 billion, $0.7 billion related to receivable balances and activity 

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

payer (referred to as Medicare Secondary Payer (MSP)). Another

$1.8 billion related to balances and activity for non-MSP receivables, which 

are contractor overpayments to providers, beneficiaries, physicians, and 

suppliers. In addition, approximately $0.2 billion related to misstatements 

in accounts receivable tracked by HCFA central and regional offices due 

mostly to the lack of supporting documentation and improper recording of 

amounts.

The report states that HCFA and its contractors are unable to properly 

classify, summarize, and report Medicare accounts receivable activity and 

balances using current accounting procedures. Contractors use ad hoc 

spreadsheet applications and a wide variety of claims processing systems 

for tracking receivables that often cannot be reconciled to control 

amounts. As a result, some contractors inserted unsupported numbers in 

the accounts receivable reports to force accounts receivable activity to 

agree with reported accounts receivable balances. The report also stated 

that some contractors were unable to support beginning balances for 

receivables and others reported incorrect activity, including collections. 

Recommendations in the OIG report stated that the ultimate solution for 

HCFA to address many of the accounts receivable problems is the 

development of a Medicare integrated financial management system for 

11A qualified opinion states that except for the effects of the matter to which the 

qualification relates the statements are free from material misstatements. 
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mandatory use by all contractors. In addition, the OIG also recommended 

necessary adjustments for some of the $2.7 billion in over-and-under 

statements to properly present the ending accounts receivable balances as 

of March 31, 1999. 

Recognizing that the ultimate solution to its accounts receivable problems 

will take years to implement, HCFA implemented procedures to eliminate 

or write off accounts receivable balances as had been recommended in 

previous financial statement audit reports. HCFA wrote off almost 

$3 billion of Medicare accounts receivable balances for fiscal year 1999. 

The almost $3 billion in accounts receivable being written off consists of 

$0.8 billion in non-MSP receivables (i.e., receivables that represent 

contractor overpayments to providers, beneficiaries, physicians, and 

suppliers) and $2.1 billion in MSP receivables (i.e., amounts owed by other 

insurance companies that should have been primary payers). Support 

provided to us during our review did not clarify how the adjustments 

recommended by the OIG report relate to the amounts being written off. 

However, HCFA officials stated that they worked closely with the auditors 

to ensure that there was little to no overlap between the adjustments and 

write-offs. 

HCFA officials stated that the $3 billion in receivables is being written off in 

accordance with policy endorsed by the CFO Council or because 

regulations preclude further collection action. HCFA officials also 

explained that using tools provided by the Debt Collection Improvement 

Act, they will refer some of the debt to the Department of the Treasury for 

further collection. However, given the nature of some of the amounts being 

written off, there is little likelihood of any future collections. For example, 

the amounts being written off include debts owed by entities no longer in 

business. Also, some of the write-offs are the amounts that HCFA has 

determined may never be repaid due to either the age of the accounts 

receivable or the lack of detailed records to substantiate the validity of the 

debt. HCFA is writing off all balances that are (1) over 10 years old,

(2) from 6 to 10 years old, with no collection activity in the past 12 months, 

or (3) not supported by detailed records. It may be a normal industry 

practice and consistent with federal laws and regulations to write off 

accounts receivable balances that are deemed “uncollectible”, but such 

actions are troubling for taxpayers and a concern for a program like 

Medicare where total costs borne by the elderly are rising at the same time 

that billions of dollars are being written off. HCFA officials said that they 

expect to solicit outside assistance again next year to assess the accounts 
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receivable amounts because the underlying accounts receivable systems 

problems still exist.

Audit Evaluation and 

Follow-up Procedures Were 

Ineffective 

Evaluating the financial management problems identified during audits and 

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

financial management problems and establish financial accountability. The 

Comptroller General’s Standards for Internal Control in the Federal 

Government requires that agencies implement actions to ensure that the 

findings of audits and other reviews are promptly resolved. Among the 

steps to ensure that findings are promptly resolved is determining that 

proper actions have occurred in response to findings and 

recommendations. Moreover, the Office of Management and Budget’s 

(OMB) implementing guidance for the Financial Integrity Act12 emphasizes 

the importance of agency management taking timely and effective action to 

correct identified deficiencies. Responsibility for correcting deficiencies is 

an integral part of management accountability and should be considered a 

priority by the agency.

As of January 2000, HCFA’s procedures for ensuring that corrective actions 

are effectively implemented to resolve financial management related audit 

findings were ad hoc at best. The one documented audit follow-up practice 

that HCFA has consistently taken is preparing a quarterly corrective action 

plan that lists the actions HCFA plans to implement to address the 

significant findings of the financial statement audit report, including 

material weaknesses and reportable conditions. This corrective action plan 

is included in the HHS’ annual CFO Financial Management Status Report 

and 5-Year Plan, required by the CFO Act. HCFA’s corrective action plans 

for fiscal years 1997 and 1998 included specific steps to address some of 

the financial management related weaknesses. However, our review 

showed that the plans lacked sufficient detail on corrective actions to 

address other key financial management weaknesses that impact the 

reliability of data used to track financial activities of the Medicare program 

and to help make informed decisions. For example, the fiscal year 1998 

corrective action plan did not include detailed steps or target completion 

dates for correcting (1) the inadequacy of HCFA’s procedures to detect 

errors in data used in Medicare accounts payable estimates, (2) the lack of 

regional office oversight to monitor the reliability of contractor reports on 

Medicare funds expended, and (3) the lack of contractor control 

12OMB Circular No. A-123 Revised, June 21, 1995, Management Accountability and Control.
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procedures to provide independent checks of the validity, accuracy, and 

completeness of amounts reported to HCFA. 

In discussions with HCFA officials about the lack of specificity in its 

financial statement audit corrective action plans, HCFA officials explained 

that more detailed steps to address each audit finding are provided by 

contractors in the corrective action plans that HCFA requires them to 

submit. According to HCFA OFM staff, since the fiscal year 1996 audit, 

HCFA has asked its claims contractors to develop and implement 

corrective actions that address the deficiencies identified by the financial 

statement auditors. The contractors’ corrective action plans are to be sent 

to OFM for review and approval. However, HCFA has not established 

written procedures for tracking receipt of corrective action plans prepared 

by contractors. 

While OFM staff could describe their procedures for tracking contractor 

corrective action plans, they said they were just beginning to document 

them. OFM provided us with draft written procedures that describe the 

process. However, when we requested copies of the contractors’ corrective 

action plans addressing the fiscal year 1998 audit, OFM officials said they 

were not available because the CFO audit coordinator had failed to request 

them from the contractors. OFM eventually provided us copies of the 

corrective action plans after they requested them from the contractors 

more than 6 months after the completion of the fiscal year 1998 audit. 

While the contractor corrective action plans included steps to address the 

audit findings and target completion dates, we found that HCFA does not 

follow up at contractor sites to ensure that corrective actions are being 

implemented. 

HCFA has not developed written procedures that require HCFA central or 

regional office staff to follow up at contractor sites, although HCFA 

officials had plans to do so. The Financial Integrity Act requires agency 

management to track progress to ensure timely and effective results. 

However, OFM staff said that until they implement procedures to ensure 

that HCFA staff follow up at contractor sites, they would continue to rely 

on the auditors to follow up as part of subsequent year financial statement 

audits. Since the first audit, auditors have followed up with 24 of the 41 

contractors included in audits of fiscal years 1996, 1997, 1998, and 1999 

financial statements. However, the auditors did not follow up with 12 of the 

41 contractors because they were not included in subsequent audits. The 

other five contractors no longer participate in the Medicare program. 
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Weaknesses in HCFA’s follow-up have hindered prompt resolution of 

financial management problems. In fact, during our contractor visits for 

this review, we found that several contractors included in previous audits 

had weaknesses in their internal controls over Medicare activities similar 

to weaknesses found in previous audits. For example, two contractors did 

not have adequate control procedures in place for independent review of 

key financial data reported to HCFA on funds expended and bank account 

activity. Also, these two contractors did not have adequate controls to 

ensure the accuracy of the outstanding check amounts reported to HCFA. 

For the two contractors, outstanding check amounts totaled over 

$100 million as of September 30, 1999.

We also found that OFM did not implement procedures to evaluate whether 

the financial management problems identified at the contractors under 

audit are systemic in the operations of contractors not included in the 

audit. Our review found that two contractors not included in previous 

audits had problems in controls over cash and review of financial data, 

similar to findings reported at contractors in prior audits. For example, 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. 

Oversight of Contractor 

Financial Activities Is 

Limited in Scope

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. The Comptroller General’s 

Standards for Internal Control in the Federal Government states that with 

increased delegation of authority and responsibility, agency management 

should have effective procedures to monitor results and hold individuals 

accountable for their decisions and actions. In delegating authority to 

accomplish an agency’s mission, a critical internal control challenge is to 

delegate enough to achieve the objectives of the agency, but not so much 

that internal control is significantly weakened. In addition, the standards 

state that because conditions change over time, agency management must 

determine if internal control continues to address new or changed risks by 

implementing a combination of ongoing monitoring activities and separate 

evaluations. Ongoing monitoring activities are performed continually to 

provide important feedback on the internal control and are usually more 

effective than separate evaluations. Separate evaluations of control can be 
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useful because they focus directly on the controls’ effectiveness at a 

specific time. 

HCFA’s oversight of contractor financial activities for the Medicare 

program has not focused on ensuring that contractors have 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, included limited review 

of contractor financial activities and the controls over those activities. 

HCFA regional office CPE reviews of contractor financial responsibilities 

largely focused on contractor 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 about $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.

In the past, HCFA officials have raised concerns about having the 

necessary resources, including the staff expertise, to provide oversight in 

critical areas such as financial management and review of contractor data. 

For example, we reported in July 1999 that HCFA officials believe that staff 

resources were not adequate to perform detailed testing and validation 

procedures necessary to ensure the accuracy of contractor-reported data.13

The Comptroller General’s Standards for Internal Control in the Federal 

Government states that an agency’s control environment is significantly 

affected by the competence of its personnel and the agency’s ability to 

(1) identify appropriate knowledge and skills needed for various jobs and 

(2) provide needed training to maintain skill levels for particular jobs.

HCFA’s difficulties in applying resources to oversight activities in the past 

resulted in limited examination of essential contractor financial data thus 

limiting the information HCFA has to assess the integrity and reliability of 

contractor operations and develop solutions. 

13GAO/HEHS-99-115, July 14, 1999.
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Recognizing the shortcomings of the HCFA annual oversight process, in 

fiscal year 1998, the CFO took steps to address weaknesses in oversight of 

financial activities. 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 staff conducting the reviews. 

Although several reviews were done under the new approach, the reviews 

were not sufficient to address the serious deficiencies in contractor data 

for accounts receivable and accounts payable identified from previous 

audits because the scope of the procedures was limited. The procedures 

required testing of only a few receivable amounts at each contractor site 

selected from various types of reported receivables balances and related 

activity. The procedures did not require the selection of tested items to be 

based on a statistically valid selection methodology. OFM staff explained 

that the procedures were not developed as a detailed audit tool; therefore, 

they do not include the level of testing that audit procedures would include. 

OFM staff said that the procedures were developed to give HCFA 

indications of possible receivable problems that require additional review. 

HCFA could better identify the root causes of receivable problems and 

enhance the agency’s ability to address the problems if tests were 

performed on a larger number of items that are selected based on the 

nature and size of the various receivable-related populations and if a 

statistically valid methodology is used for selecting the items. 

Similarly, we found deficiencies in the accounts payable audit procedures. 

The procedures did not provide reviewers with guidance for determining 

the number of items to select for testing and for performing procedures to 

ensure that all payable amounts are accounted for. As a result, HCFA 

reviewers may have been limited in thoroughly evaluating the accuracy of 

contractor-reported accounts payable data.

The procedures 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 

approximately $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 have 

discussed with the CFO the need for expanded evaluation procedures to 
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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, instead of relying solely on CPE reviews for financial 

management oversight, the CFO solicited outside help to assess 

(1) accounts receivable balances reported by contractors and

(2) contractor internal controls. As discussed earlier, HCFA entered into a 

reimbursable interagency agreement with the OIG to assess the accuracy 

and controls over reported accounts receivable. HCFA also contracted with 

outside consultants to validate internal control at contractors in response 

to a GAO finding that HCFA does not regularly check contractors’ internal 

controls.14

HCFA officials said that they plan to continue both the accounts receivable 

and internal control reviews in the future. While these two efforts 

demonstrate that HCFA is acting to address its longstanding problems, we 

are concerned that HCFA’s financial managers have not taken steps to 

comprehensively assess 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, financial managers have not 

completed assessments of HCFA’s human capital needs for oversight of 

contractor financial operations in a coordinated effort with the central 

office unit and regional offices responsible for oversight. It is also unclear 

whether HCFA’s financial managers plan to continue developing and 

improving procedures for oversight of contractor financial operations 

through CPEs or if such procedures will be replaced and supplemented by 

outside consultant reviews. 

Day-to-Day Monitoring of 

Contractor Financial 

Activities Is Insufficient

In addition to annual CPEs not providing adequate oversight of contractor 

financial activities, HCFA’s day-to-day monitoring of contractor data has 

also been insufficient. HCFA does 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. In addition, accountability for several of HCFA’s 

day-to-day monitoring practices has not been clearly defined. 

14GAO/HEHS-99-115, July 14, 1999.
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The Comptroller General’s Standards for Internal Control in the Federal 

Government states that ongoing monitoring activities should include 

comparisons and reconciliations to identify inaccuracies or exceptions that 

alert management to any internal control problems. The standards also 

state that agency internal control should provide for assessing the risks 

that an agency faces by estimating the significance of identified risks, 

assessing the likelihood of occurrence, and deciding how to manage the 

risks. Another important control activity included in the standards is 

assigning authority and responsibility in a manner that ensures each 

individual knows how his or her actions interrelate and contribute to 

meeting the agency objectives. 

Despite the billions of Medicare dollars flowing through contractor bank 

accounts and the risk posed by these activities, HCFA does not have 

adequate mechanisms that indicate whether bank activity conducted on 

behalf of contractors is reasonable. In early 1999, examiners from the 

Federal Deposit Insurance Corporation discovered and reported to HCFA 

that one bank, which provides banking services for eight 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 does not routinely monitor 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 is currently investigating the bank in part 

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 requested 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.

HCFA does not routinely analyze other data critical to ensuring the 

integrity of contractor operations. For example, the contractors’ 
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reconciliation of “total funds expended” is an important control which 

ensures that all amounts reported to HCFA by Medicare contractors are 

accurate, supported, complete, and properly classified. The reconciliation 

requires contractors to reconcile total monthly expenditures to the number 

of Medicare claims processed and to payment amounts including 

(1) periodic interim payments to providers that cover their estimated cost 

of providing Medicare services, (2) cost settlement payments that cover the 

difference between provider periodic interim payments and actual costs 

incurred, and (3) cash recovered from provider overpayments. Contractors 

must reconcile the expenditure amounts listed with detailed supporting 

data from their financial records and systems. HCFA requires that the 

contractors prepare and submit the reconciliations monthly, but it does not 

track receipt of them or review the reconciliations to detect irregularities 

or assess risk. By not reviewing these reports and requesting the 

supporting schedules necessary to ensure the accuracy of amounts 

reported by Medicare contractors, HCFA’s ability to hold Medicare 

contractors accountable for submitting accurate financial data is hindered.

HCFA financial managers explained that they do not analyze the 

reconciliations received from all contractors because they do not receive 

any supporting documents from the contractors to determine if the 

amounts are accurate. Although such analysis is an agency management 

responsibility, HCFA relies on the OIG review of the reconciliations that are 

done for the sample of contractors selected as part of the annual financial 

statement audit. HCFA officials said that they do not currently perform any 

procedures for the other contractors not selected for the audit. 

HCFA could analyze certain reconciliation amounts reported over time to 

obtain useful information for monitoring all contractors, although 

contractors do not submit supporting schedules for each amount. 

Analyzing significant increases or decreases in the amounts of various 

types of expenditures and receipts for overpayment recoveries reported on 

the reconciliation could indicate whether a contractor is experiencing 

difficulties. For example, an analysis identifying a significant decrease in 

monthly receipts for overpayments could assist in highlighting potential 

collection problems. Similarly, an analysis identifying a significant decrease 

in cost settlement payments could assist in highlighting potential problems 

related to the contractors’ processing of provider cost settlements.

In evaluating HCFA’s monitoring activities, we also found that some HCFA 

staff are not aware of the extent to which they are accountable for certain 

agency activities. For example, HCFA’s monitoring activities are supposed 
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to be carried out by staff in OFM at HCFA’s central office and with 

assistance from staff in the regional offices. HCFA receives monthly and 

quarterly contractor financial data related to (1) contractor bank charges 

and collateral, (2) contractor withdrawals and expenditures for benefits, 

(3) contractor administrative withdrawals, and (4) contractor accounts 

receivable and payable. However, we found that clear lines of responsibility 

have not been established for analysis done by OFM and the regions, and 

analysis is limited. 

OFM has one staff person that monitors the Medicare bank account 

balances—about 20 commercial banks maintain the accounts for the

56 Medicare contractors. The staff person said that because of other 

responsibilities, he only reviews 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. The OFM staff person told us that regional staff might 

routinely analyze bank activity, but he does not coordinate with the regions 

to ensure that they do. Staff at the three regions we visited told us that they 

do not routinely analyze contractor bank balances and referred us to the 

OFM staff person. 

Contractors Lack Sufficient 

Guidance to Resolve 

Financial Management 

Deficiencies

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

is also hampered because financial managers have not issued complete, upto-date guidance to contractors for financial activities. Contractors we 

visited said they need additional guidance from HCFA to assist in 

correcting control weaknesses. According to contractors, one specific area 

where instructions are needed is the allocation of cash receipts between 

the two Medicare trust funds.15 Because HCFA has not issued specific 

instructions in this area, contractors have adopted different methodologies 

that in some cases lead 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 

15Congress 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.
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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 is 

significant because accurate data on Medicare trust fund balances are 

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. Also, we found 

several financial-related sections of the contractor manuals that had not 

been updated since the 1970s. 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 Lacks Structure for 

Internal Financial Reporting 

Practices 

Past financial statement audits have identified weaknesses in HCFA’s 

internal financial reporting processes. Specifically, auditors reported that 

significant staffing constraints within HCFA’s Division of Accounting limit 

its ability to conduct the annual financial statement preparation process 

and contribute to lax procedures and controls for preparing and 

safeguarding financial data. However, HCFA has not acted to ensure that it 

has knowledgeable financial management staff and clearly documented 

procedures for executing accounting and financial reporting activities. 

HCFA’s financial statement reporting process is not clearly documented. 

Uniform policies and procedures for the financial statement preparation 

process are critical to ensuring that accounting personnel can produce 

complete, accurate, and consistent financial statements in a timely manner. 

However, HCFA’s current financial statement preparation process relies 

primarily on the experience of a few key personnel who have prepared the 

financial statements in previous years. The key personnel have not 

documented their procedures. This approach renders HCFA vulnerable to 

loss of financial reporting institutional knowledge through normal staff 

attrition, and thereby creates significant risks that information supporting 

the financial statements will not be complete, accurate, properly 

authorized, and consistent from year to year. 
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We also found that HCFA does not have an updated accounting manual to 

direct accounting staff in performing routine accounting procedures for the 

Medicare program. OFM officials said that staff are instructed to use 

accounting guidance provided by HHS and tailor the guidance as necessary. 

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 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 to the 

Medicare program.16 HCFA is currently taking steps to enhance its 

procedures for reporting trust fund balances.

HCFA Lacks a 

Comprehensive 

Financial Management 

Strategy

HCFA has not developed a comprehensive strategy to direct its financial 

management activities. A comprehensive financial management strategy, 

along with plans for implementing the strategy, is important because of the 

size and complexity of the Medicare program and the recurring financial 

management weaknesses and problems identified by HCFA’s auditors. A 

key part of HCFA’s strategic planning should be assessing human capital 

because managing an organization’s employees is essential to achieving 

results. Without a comprehensive plan for improving financial 

management, resolution of problems may be delayed and the billions of 

dollars related to the Medicare program will continue to be at risk.

16Although 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.
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HCFA Lacks Plans for 

Implementing Financial 

Management Improvement 

Initiatives 

While HCFA has several initiatives underway to improve financial 

management and operations, it has not developed a comprehensive 

implementation plan. A comprehensive plan would include long- and shortrange plans with clearly defined objectives and goals. The plan should 

include specific corrective actions and target dates and resources 

necessary to implement those actions. A comprehensive plan would also 

assign accountability by identifying offices and staff responsible for 

carrying out the corrective actions. Establishing accountability is 

important for increasing the chances of successful implementation and 

outcomes.

HCFA prepares agencywide strategic plans and annual performance plans 

as required by GPRA and provides input into the HHS’ annual CFO 5-year 

plan required by the CFO Act; however, these plans are broader in scope 

and focus on different goals and objectives. They do not provide an 

adequate substitute for a specific HCFA financial management 

improvement plan. Also, each division and branch of OFM sets annual unit 

work priorities. These priorities likewise do not adequately substitute for a 

financial management plan because their focus is narrower.

HCFA has initiated several projects intended to correct problems identified 

during financial statement audits. These projects include (1) developing an 

integrated accounting system to include both overpayment tracking and 

financial reporting, (2) developing two new systems to improve oversight 

and financial reporting over Medicare receivables, (3) reviewing 

contractors internal control, and (4) developing a comprehensive 

contractor financial management manual. (See appendix III, which 

contains more information on these projects.) 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 implementation plan for 

completing the projects and using the results. HCFA officials provided us 

broad conceptual ideas of how the initiatives would need to be 

implemented. However, as of January 2000, HCFA was in the early stages of 

drafting more specific details for these projects.
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For example, three of the initiatives involve developing new financial 

management systems to improve oversight and financial reporting over 

Medicare receivables and developing an integrated accounting system. 

While these systems are in their early design phases, HCFA has not fully 

developed detailed plans for coordinating implementation and integration 

of these systems. One step HCFA officials stated that they have taken is to 

hire an experienced systems design specialist to lead the integrated 

account system project. Still, delays in developing detailed plans could 

cause problems as the projects progress. In January 1999, we issued a 

special series of reports17 that discusses major management challenges and 

program risks that must be addressed to improve the performance, 

management, and accountability of federal agencies. In this series of 

reports, we reported that a challenge for agencies is to ensure that modern 

information technology management practices are consistently defined and 

properly implemented. As underscored by the Clinger-Cohen Act,18

complete and enforceable systems architectures—blueprints to guide 

systems development—are essential foundations on which the 

interoperability and coordination of related business processes and 

systems are built. Lack of well-defined systems architectures often leads to 

problems in systems interface and data exchange, confusion for users, and 

delays in program operations.

Another financial management improvement initiative that HCFA has 

underway is to review contractors’ internal control structures to identify 

poor internal control and needed improvements. HCFA has contracted with 

independent public accounting firms to perform these reviews. A 

documented, comprehensive plan is important to avoid duplication of 

effort when conducting these reviews. Auditors of HCFA’s financial 

statements have already reviewed the internal controls of some of the 

Medicare contractors included in these reviews. 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 the resultant recommendations. In addition, HCFA officials do not have 

alternative plans in the event these reviews cannot be continued. Without 

alternative plans, this critical activity could be interrupted.

17Major Management Challenges and Program Risks: A Governmentwide Perspective

(GAO/OGC-99-1, January 1999).

18The Clinger-Cohen Act of 1996 builds on the best practices of leading public and private 

organizations by requiring agencies to better link information technology planning and 

investment decisions to program missions and goals.
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The project to develop a comprehensive contractor financial management 

manual, which is well underway, also lacks a clear plan for how the manual 

will be used. Documentation for the project consists of a statement of work 

describing the procedures an independent consultant is to perform to 

develop the manual. HCFA has not documented plans for how it intends to 

implement the new manual, including (1) how training will be provided and 

(2) how the manual will be kept current.

Assessments of Human 

Capital Needs Are 

Incomplete

Effectively managing an organization’s employees—or human capital—is 

essential to achieving the goals of the organization. The CFO Act 

recognizes the importance of human capital to achieving financial 

management objectives by stating that an agency CFO shall direct, manage, 

and provide policy guidance and oversight of agency financial management 

personnel, activities, and operations, including the recruitment, selection, 

and training of personnel to carry out agency financial management 

functions. Similarly, a comprehensive financial management strategy at 

HCFA should include human capital planning. 

We issued an exposure draft of an executive guide designed to help federal 

agencies achieve federal financial management objectives.19 The guide 

discusses best practices of leading private and public sector finance 

organizations. One of the best practices for creating world-class financial 

management is to build a team that delivers results. Our guide identified 

leading finance organizations that have developed finance teams with the 

right mix of skills and competencies. The guide offers three critical 

elements for developing a first-rate team: (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.

HCFA officials stated that they recently initiated an agencywide workforce 

planning project. This project consists of a four-phased model that plans 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, 

19Executive Guide: Creating Value Through World-Class Financial Management

(GAO/AIMD-99-45, August 1999, exposure draft).
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and learning plans for fiscal year 2001. Having staff with appropriate skills 

is key to achieving financial management improvements. Currently, HCFA 

officials acknowledged that they are constrained by the resources and staff 

skills available to perform financial functions such as analysis of financial 

data to detect irregularities and internal financial reporting processes. 

Given the limited resource and staff skills available to perform key 

financial functions, emphasis on completing more detailed human capital 

planning within HCFA’s proposed time frames is important. 

We recently issued a discussion draft that provides a human capital selfassessment guide to help agencies assess their human capital systems and 

identify both the opportunities available and barriers standing in the way.20

Agencies that focus on valuing employees and aligning their policies to 

support organizational performance goals start with a human capital 

assessment. Part of the impetus for valuing human capital comes from 

GPRA, which requires agencies to pursue performance-based management, 

including strategic planning, results-oriented goalsetting, and performance 

measurement. The results of such an assessment could help determine the 

resources needed to implement the comprehensive financial management 

plan. Further, without a formal assessment of its requirements and needs, 

and a strategy for addressing them, HCFA’s efforts can become piecemeal 

and incomplete. A comprehensive needs assessment and plan, including 

time frames for improving its human capital position, could also strengthen 

the agency’s ability to support its human capital budget requests.

20Human Capital: A Self-Assessment Checklist for Agency Leaders (GAO/GGD-99-179, Sept. 

1999).
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A comprehensive financial management strategy is a crucial tool for 

financial managers. A sufficiently detailed strategy that includes a plan for 

integrating the implementation and results of each of HCFA’s financial 

management improvement initiatives, including the human capital 

resources needed, would provide a “road map” for HCFA’s management and 

staff to help in resolving financial management problems and ensure 

Medicare funds are spent responsibly. We have testified that congressional 

committees, as part of annual appropriation or oversight hearings, could 

use agencies’ corrective action plans, along with financial statement audits 

and other financial related reports, to measure the progress agencies are 

making toward improving financial management. 21 We have also discussed 

the need for the plans to be sufficiently detailed so that agency 

management and staff can resolve financial management problems.

Conclusions 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 difficulties. Financial statement audits and 

other assessments and reviews have identified significant financial 

problems at HCFA and its Medicare contractors year after year. Despite 

these 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 is 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.

21Financial Management: Fostering the Effective Implementation of Legislative Goals

(GAO/T-AIMD-98-215, June 1998).
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Recommendations To improve financial management and accountability in the Medicare 

program, we recommend that the HCFA Administrator direct the Chief 

Financial Officer to take the following actions:

• Improve procedures for evaluating and resolving findings from annual 

financial statements audits by developing, documenting, and 

implementing procedures so that managers promptly evaluate audit 

findings, determine proper actions in response to audit findings, and 

complete within established time frames all actions that resolve the 

findings brought to management’s attention. 

• In developing the procedures, coordinate with the central and regional 

office staff responsible for contractor oversight to ensure that resources 

are applied appropriately for timely follow-up with contractors on 

implementation of corrective actions to address financial statement 

audit findings. 

• Improve oversight of contractor financial activities by working with the 

central and regional office staff responsible for annual contractor 

performance evaluations to (1) refine and expand procedures for review 

of contractor financial activities, (2) provide staff with the necessary 

skills to evaluate contractor financial activities, and (3) identify specific 

contractors and financial activities to be reviewed.

• Improve the agency’s ability to detect irregular financial activities and 

identify high risk contractors by (1) developing analysis and risk 

assessment procedures that detect unusual variances and patterns in 

the amounts of funds withdrawn, funds expended, bank balances, 

accounts receivable, accounts payable, and other key financial data 

reported by contractors and (2) coordinating and sharing analysis and 

risk assessment methodologies with central and regional office staff 

responsible for contractor monitoring and oversight.

• Improve guidance to contractors for executing Medicare financial 

activities by ensuring that the current initiative to develop a 

comprehensive contractor financial management manual (1) solicits 

input from contractors on the areas where better guidance is needed to 

address long-standing internal control weaknesses, such as specific 

instructions on allocation of cash receipts between the two Medicare 

trust funds, (2) includes steps for ongoing updating of guidance, 

(3) articulates how the manual will be used and implemented, (4) uses 

the results of audit findings and oversight reviews to determine areas 

where more complete and detailed guidance to contractors is needed, 

and (5) reviews the contractor fiscal intermediary and carrier manuals 

to determine which sections need updating. 
B-284462

Page 34 GAO/AIMD-00-66 Medicare Financial Management

• Improve internal financial reporting processes by developing 

comprehensive policies and procedures that clearly define (1) the 

process to be followed in preparing the financial statements, (2) the 

routine accounting procedures performed by OFM, and (3) the number 

of staff and skills needed to carry out OFM accounting and financial 

reporting responsibilities.

• Develop a comprehensive financial management strategy that clearly 

(1) defines financial management objectives and goals, (2) specifies 

corrective actions to address financial management weaknesses, 

(3) includes target dates and resources necessary to implement 

corrective actions, (4) identifies offices/staff responsible for carrying 

out the corrective actions, (5) provides clear implementation plans that 

link the various financial management improvement initiatives currently 

underway and alternative plans in the event these reviews cannot be 

continued, (6) provides details on the systems architecture and 

requirements needed for its integrated financial management systems, 

and (7) includes a human capital needs assessment.

Agency Comments and 

Our Evaluation 

In written comments (reprinted in appendix I) on a draft of this report, 

HHS and HCFA officials agreed with our recommendations and discussed 

steps that they have begun or are planning to take to address HCFA’s 

financial management challenges. In their comments, HHS and HCFA 

officials reaffirmed their commitment to addressing the most serious 

deficiencies in HCFA’s financial management system. They also provided 

technical comments, which we incorporated in this report as appropriate. 
B-284462

Page 35 GAO/AIMD-00-66 Medicare Financial Management

We agree with HHS and HCFA, as stated in their comments, that HCFA has 

taken a number of steps to improve the opinion on HCFA’s financial 

statements and to address internal control weaknesses. However, many of 

the actions that HCFA cites in its comments as major strides toward 

addressing serious, longstanding financial management weaknesses are 

either still being developed or are not yet fully implemented. As a result, it 

is too soon to conclude whether these actions will be effective. For 

example, HCFA has hired independent certified public accounting firms to 

analyze the internal control systems of its largest Medicare contractors. 

When these reviews are completed, HCFA plans to use the results to ensure 

that contractors take corrective actions to resolve identified weaknesses. 

HCFA also plans to solicit external assistance next fiscal year to validate 

Medicare accounts receivable. Similarly, HCFA plans to require more 

specificity in contractor corrective action plans and is starting an 

agencywide workforce planning project. Until these initiatives have been 

fully implemented and evaluated, HCFA cannot ensure that it has resolved 

the underlying causes of its most serious audit findings as evidenced by 

persistent material internal control weaknesses cited in the audit report on 

HCFA’s fiscal year 1999 financial statements.22

This report contains recommendations to you. The head of a federal agency 

is required by 31 U.S.C. 720 to submit a written statement on actions taken 

on these recommendations. You should send your statement to the Senate 

Committee on Governmental Affairs and the House Committee on 

Government Reform within 60 days of the date of this report. A written 

statement must also be sent to the House and Senate Committees on 

Appropriations with the agency’s first request for appropriations made over 

60 days after the date of this report. 

We are sending copies of this report to Senator Tom Harkin, Senator James 

Jeffords, Senator Edward Kennedy, Senator Joseph Lierberman, Senator 

Daniel Patrick Moynihan, Senator William Roth, Senator Arlen Specter, and 

Senator Fred Thompson and to Representative Bill Archer, Representative 

Dan Burton, Representative David Obey, Representative John Edward 

Porter, Representative Charles Rangel, and Representative Henry Waxman, 

in their capacities as Chairmen or Ranking Minority Members of Senate and 

House Committees and Subcommittees. We are also sending copies of this 

22Health Care Financing Administration, Fiscal Year 1999 Consolidated Financial 

Statements, Ernst & Young LLP, February 2000.
B-284462

Page 36 GAO/AIMD-00-66 Medicare Financial Management

report to the Honorable Donna Shalala, Secretary of Health and Human 

Services, and the Honorable Jacob J. Lew, Director of the Office of 

Management and Budget. Copies will be made available to others upon 

request.

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

if you have any questions about this report. Other GAO contacts and staff 

acknowledgments are listed in appendix IV.

Sincerely yours,

Gloria L. Jarmon

Director, Health, Education, and Human Services

Accounting and Financial Management
Page 37 GAO/AIMD-00-66 Medicare Financial Management
Page 38 GAO/AIMD-00-66 Medicare Financial Management

Appendix I

Comments From the Department of Health 

and Human Services ApendxiI

Note: GAO comments 

supplementing those in the 

report text appear at the end 

of this appendix. Technical 

comments are omitted.
Appendix I

Comments From the Department of Health 

and Human Services

Page 39 GAO/AIMD-00-66 Medicare Financial Management

See comment 1.
Appendix I

Comments From the Department of Health 

and Human Services

Page 40 GAO/AIMD-00-66 Medicare Financial Management
Appendix I

Comments From the Department of Health 

and Human Services

Page 41 GAO/AIMD-00-66 Medicare Financial Management

See comment 1.
Appendix I

Comments From the Department of Health 

and Human Services

Page 42 GAO/AIMD-00-66 Medicare Financial Management
Appendix I

Comments From the Department of Health 

and Human Services

Page 43 GAO/AIMD-00-66 Medicare Financial Management

See comment 2.
Appendix I

Comments From the Department of Health 

and Human Services

Page 44 GAO/AIMD-00-66 Medicare Financial Management
Appendix I

Comments From the Department of Health 

and Human Services

Page 45 GAO/AIMD-00-66 Medicare Financial Management
Appendix I

Comments From the Department of Health 

and Human Services

Page 46 GAO/AIMD-00-66 Medicare Financial Management
Appendix I

Comments From the Department of Health 

and Human Services

Page 47 GAO/AIMD-00-66 Medicare Financial Management
Appendix I

Comments From the Department of Health 

and Human Services

Page 48 GAO/AIMD-00-66 Medicare Financial Management
Appendix I

Comments From the Department of Health 

and Human Services

Page 49 GAO/AIMD-00-66 Medicare Financial Management

See comment 3.
Appendix I

Comments From the Department of Health 

and Human Services

Page 50 GAO/AIMD-00-66 Medicare Financial Management

The following are GAO’s comments on the Department of Health and 

Human Service’s letter dated March 2, 2000.

GAO Comments 1. See “Agency Comments and Our Evaluation” section.

2. We have modified the report to reflect development of written 

procedures related to contractor corrective action plans. 

3. We have modified the report to reflect this project.
Page 51 GAO/AIMD-00-66 Medicare Financial Management

Appendix II

Financial Management/Internal Control 

Weaknesses Included in Financial Statement 

Audits, Fiscal Years 1996-1999 ApendxiI

Source: GAO analysis of HHS OIG reports on the financial statement audits of the Health Care 

Financing Administration for fiscal years 1996-1999.

FY 1996 FY 1997 FY 1998 FY 1999

Finding: Weaknesses in contractors’ ability to accurately report financial data due to 

insufficient accounting systems, inadequate independent verification of reported 

amounts, and lack of other financial controls. 

Effect: HCFA has limited assurance that amounts reported by contractors are properly 

classified, summarized, and supported by appropriate detailed records to ensure their 

validity.

••••

Finding: HCFA preparation of annual financial statements is manually intensive, 

requiring extensive adjustments due to lack of an accounting software package to 

automatically manipulate data for development of financial statements.

Effect: HCFA cannot timely prepare financial statements and material errors may not be 

detected timely.

••••

Finding: HCFA lacked adequate procedures to detect errors in data used to estimate 

the entitlement benefits due and payable liability.

Effect: The liability could be inaccurately reported in financial statements.

••••

Finding: Contractor EDP controls over data processing systems do not provide 

adequate safeguards to reduce improper access to and manipulation of data.

Effect: Confidential medical data may be disclosed and Medicare claims improperly 

processed or paid.

••••

Finding: Contractor controls to properly account for cash balances and activity do not 

provide adequate safeguards to reduce the opportunities for theft and irregularities in 

cash procedures.

Effect: Medicare funds could be misused.

••••

Finding: HCFA lacked detailed records to support overpayments owed back to the 

Medicare program by providers and other entities when Medicare is the secondary payer 

of claims.

Effect: Potential losses in collecting millions from accounts receivables that are deemed 

uncollectible due to lack of support.

••••

Finding: HCFA lacked oversight and monitoring practices to ensure that material errors 

in contractor financial data are detected promptly.

Effect: HCFA could not accurately and timely account for Medicare finances.

••••
Page 52 GAO/AIMD-00-66 Medicare Financial Management

Appendix III

Financial Management Improvement Projects ApendxiI

Source: GAO analysis of documents and oral statements provided by HCFA staff.

Project name Project phase Project objective(s)

Current projected

completion date

Integrated General Ledger 

Accounting System (IGLAS)

Development of system 

requirements 

Develop an integrated general ledger 

accounting system at the contractor and 

HCFA levels.

After 2004

Recovery Management 

Accounting System (ReMAS)

Development of system 

requirements

Develop an integrated system to manage 

and account for the recovery of Medicare 

payments made in error because the 

beneficiary has other insurance (Medicare 

as the secondary payer, MSP). 

July 2001 or later

Medicare Accounts Receivable 

System (MARS)

Development of system 

requirements

Design, develop, and implement a 

computer system which will receive 

accounts receivable data from the 

Medicare-contractor selected systems 

and, from this data, will produce 

information needed by HCFA staff in debt 

collection and financial reporting activities 

(non-MSP receivables).

July 2001 

Internal Control Review 

(consolidation of HCFA’s 

financial management 

guidance into one manual)

Identification of the current 

sources of financial 

management guidance 

(program memorandums, 

carrier/financial intermediary 

manuals)

Develop a manual that will be the one 

source for contractors regarding financial 

management requirements and 

instructions. A users’ manual would also 

be written to be used by 

auditors/reviewers to assess contractor 

compliance with the guidance.

August 31, 2000

Medicare accounts receivable 

consulting efforts 

Complete for FY 1999; similar 

effort planned for FY 2000

Validate the accuracy and completeness 

of Medicare contractors’ accounts 

receivable balances at fiscal year-end and 

through the subsequent 6 months of 

activity.

Not yet finalized

SAS-70/Self-Certification 

Reviews

Funding has been approved for 

the performance of SAS70/self-certification reviews at 

26 Medicare contractors 

To perform internal control reviews at 

selected Medicare contractors as part of 

HCFA’s performance evaluation to ensure 

that these contractors meet their 

contractual obligations.

April 2000
Page 53 GAO/AIMD-00-66 Medicare Financial Management

Appendix IV

GAO Contacts and Staff Acknowledgments ApendxiIV

GAO Contacts Kay Daly, (202) 512-9312

Kimberly Brooks, (202) 512-9038

Jim Kernen, (404) 679-1938

Acknowledgments In addition to those named above, Shawn Ahmed, Ed Brown, Ray Bush, 

Don Hunts, Wayne Marsh, Meg Mills, Timothy Murray, Dave Shoemaker, 

Sabrina Springfield, and Cynthia Teddleton made key contributions to this 

report.

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