GAO

United States General Accounting Office

Report to Ranking Member, 

Subcommittee on Labor, Health and 

Human Services, Education and Related 

Agencies, Committee on Appropriations, 

U.S. Senate

May 2001 MEDICARE

Opportunities and 

Challenges in 

Contracting for 

Program Safeguards

GAO-01-616
Page i GAO-01-616 Program Safeguard Contractors

Letter 1

Appendix I Comments From the Health Care Financing

Administration 18

Appendix II GAO Contact and Acknowledgments 23

Table

Table 1: General Categories of HCFA’s PSC Task Orders 6

Abbreviations

HCFA Health Care Financing Administration

HHS OIG Department of Health and Human Services Office of

 Inspector General

HIPAA Health Insurance Portability and Accountability Act of 1966

PSC program safeguard contractor

Contents
Page 1 GAO-01-616 Program Safeguard Contractors

May 18, 2001

The Honorable Tom Harkin

Ranking Member

Subcommittee on Labor, Health and

 Human Services, Education and

 Related Agencies

Committee on Appropriations

United States Senate

Dear Senator Harkin:

In fiscal year 1999, the Medicare program, which ranks second only to

Social Security in federal expenditures, paid over $200 billion to provide

medical care to about 39 million elderly and disabled beneficiaries.

Because of its size and complexity, we designated Medicare in 1990 as

being at high risk for fraud, waste, abuse, and mismanagement and that

designation continues today. The Congress passed the Health Insurance

Portability and Accountability Act of 1996 (HIPAA) in part to provide

better stewardship of the program.1

 This act gave the Health Care

Financing Administration (HCFA)—the agency that administers

Medicare—the authority to contract with specialized entities to combat

fraud, waste, and abuse. Previously, such safeguard activities were

exclusively performed by the insurance companies—known as claims

administration contractors—that HCFA contracts with to process and pay

Medicare claims.

In May 1999, HCFA selected 12 of these specialized entities to act as

program safeguard contractors (PSCs). A little over a year later, you asked

us to review HCFA’s implementation of its new contracting authority.

Specifically, you requested that we (1) describe HCFA’s progress in

implementing its PSC contracting authority and (2) assess whether HCFA

could improve its management of the PSCs to ensure their most effective

use.

To learn how HCFA is implementing its PSC contracting authority, we

interviewed officials from two HCFA divisions—Program Integrity; and

Acquisitions and Grants. We discussed their plans for managing the PSCs,

evaluating their performance, and compensating them through different

 1

P.L. 104-191.

United States General Accounting Office

Washington, DC 20548
Page 2 GAO-01-616 Program Safeguard Contractors

arrangements. We also interviewed representatives from six PSCs and four

claims administration contractors. We reviewed relevant documents,

including the general contract requirements—which apply to all the

PSCs—and the individual task order contracts, which define the specific

activities individual PSCs are to perform.

To identify ways that HCFA could improve its management of the PSCs,

we interviewed HCFA officials and reviewed HCFA planning documents.

We also interviewed 12 contract management specialists at federal and

state agencies, as well as at private organizations. These specialists

included experts in performance measurement and performance-based

contracting, and a former director of the Office of Federal Procurement

Policy. We conducted our work from June 2000 through April 2001 in

accordance with generally accepted government auditing standards.

HCFA is experimenting with different options for integrating the PSCs into

Medicare’s program safeguard activities. From September 1999 through

April 2001, HCFA issued 15 task orders that include different ways of

utilizing PSC services. Some task orders involve discrete activities that

focus on specific areas vulnerable to fraud and abuse, such as community

mental health center services; others require PSCs to replace some or all

of the program safeguard activities traditionally performed by claims

administration contractors. Still others may have a national impact on

fraud and abuse prevention and detection, such as the development of a

plan that all contractors could use for reviewing the appropriateness of

physical, speech, and occupational therapy services. HCFA also plans to

explore different methods of paying the PSCs to better control costs and

encourage more effective performance. Finally, because the PSCs have

begun to play a larger role in HCFA’s program integrity efforts, the agency

recently revised its approach to monitoring and evaluating the PSCs’

performance.

HCFA lacks a long-term strategy for determining how best to use the

PSCs. Instead, its approach has been to issue task orders ad hoc. This has

afforded HCFA certain flexibilities, such as targeting its task orders on

known problem areas. While this experimental approach may be prudent

in the short term, it does not represent a process for systematically testing

different options for using PSC services in the long term. Moreover, HCFA

has not set clearly defined criteria for determining how the PSCs should

be integrated into Medicare’s existing program integrity efforts. In

addition, HCFA has not established clear, measurable performance criteria

Results in Brief
Page 3 GAO-01-616 Program Safeguard Contractors

to assess the PSCs’ performance on individual task orders. Although HCFA

identified dimensions for evaluating PSC performance on most task

orders, these dimensions are very broad and not well defined. One

dimension, for example, deals with cooperation and coordination between

the PSCs and stakeholders. However, HCFA has not developed criteria to

rate how well the PSCs are performing in these dimensions.

We are making two recommendations to the Acting Deputy Administrator

of HCFA to help improve the management of the PSCs. HCFA agreed that

our recommendations are critical to ensuring the effectiveness of the PSCs

and indicated that it is already beginning to implement them. However,

HFCA expressed concern that we did not sufficiently recognize its efforts

in managing the PSCs.

Traditionally, HCFA’s claims administration contractors performed most

of Medicare’s program safeguard functions. These five functions are

intended to ensure that Medicare pays only appropriate claims for covered

services performed by legitimate providers to eligible beneficiaries. They

include:

• medical reviews of claims to identify claims for noncovered, medically

unnecessary, or unreasonable services, conducted both before the

claims are paid (prepayment review) and after payments are made

(postpayment review);

• reviews to identify other primary sources of payment, such as private

health insurers, that are responsible for paying claims mistakenly billed

to Medicare;

• audits of cost reports submitted by institutional providers to determine

if their costs are allowable and reasonable;

• identification and investigation of possible fraud cases that are referred

to the Department of Health and Human Services Office of Inspector

General (HHS OIG) for investigation and possible prosecution by the

Department of Justice; and

• provider education and training related to Medicare coverage policies

and appropriate billing practices.

In May 1999, HCFA selected 12 entities to act as PSCs, using a competitive

bidding process.2

 These entities represent a mix of health insurance

 2

HCFA initially selected 13 PSCs, but one dropped out.

Background
Page 4 GAO-01-616 Program Safeguard Contractors

companies, information technology businesses, and several other types of

firms. To be selected as a PSC, potential contractors had to indicate that

they were capable of performing four of HCFA’s five program safeguard

activities—either directly or through subcontracts with other

organizations.3

 Almost all of the PSCs have had experience as HCFA

contractors: Six are currently Medicare claims administration contractors4

and an additional five have other types of contracts with HCFA.

HCFA awarded each of the PSCs an indefinite delivery/indefinite quantity

contract. This type of contract allows HCFA to select a contractor and

outline in broad terms the activities to be performed. When HCFA

identifies a specific function to be performed, it issues a task order

proposal for that work, and the PSCs compete to receive the task order

contract. HCFA can issue numerous task orders covering one, several, or

the entire range of program safeguard activities, and it can award multiple

task orders to an individual PSC.

HCFA is exploring different ways to use and pay the PSCs to combat

fraud, waste, and abuse in the Medicare program. Because the PSCs

represent a new means of promoting program integrity, HCFA took an

incremental approach to implementing its specialized contracting

authority and awarding the task orders. This incremental approach gave

HCFA the opportunity to test multiple options for how the PSCs will

function. These options include, for example, a PSC performing all

safeguard functions in a particular region of the country and PSCs

conducting work targeted at specific types of providers or benefits

considered particularly vulnerable to fraud and abuse. In addition, HCFA

plans to experiment with different methods of paying PSCs to enhance

their performance. Finally, HCFA recently revised its approach to

monitoring and evaluating the PSCs’ performance because of their

growing role in program integrity.

 3

One of HCFA’s program safeguard activities is to identify other insurers responsible for

paying claims mistakenly billed to Medicare. Because HCFA has a separate contractor to

perform this activity, however, the PSCs are not required to do so.

4

Two of the six PSCs with claims administration contracts have established new entities to

perform PSC work.

HCFA Is

Experimenting With

Different PSC

Approaches
Page 5 GAO-01-616 Program Safeguard Contractors

In September 1999, about 3 years after HIPAA was enacted, HCFA

awarded its first PSC task order. Officials emphasized that they needed

time to consider how best to implement HCFA’s contracting authority.

This included the time necessary to develop the indefinite

delivery/indefinite quantity contract and the proposed regulations

governing their new program integrity efforts. By April 2001, HCFA had

awarded 15 task orders focusing on different aspects of program integrity,

such as fraud detection and medical review of claims.

HCFA first awarded task orders for projects that would not disrupt the

processing of Medicare claims; for example, several projects involved

reviewing claims after they have been processed. In developing the initial

task orders in 1999, HCFA was concerned about the potential effects of

the year 2000 conversion on its claims processing systems and the

possibility that one or more of the claims administration contractors

would leave the program. HCFA decided that its initial task orders would

either be focused on tasks that were independent of claims processing or

that supplemented, but did not replace, the claims administration

contractors’ program safeguard activities. Subsequent task orders have, in

many cases, given the PSCs greater safeguard responsibility for

performing work, including replacing the functions traditionally

performed by the claims administration contractors.

Based on our assessment, the 15 task orders can be divided into four

categories representing different ways of structuring the PSCs’

responsibilities. As shown in table 1, these categories cover a wide range

of options, from discrete, narrowly focused task orders related to a

particular service or provider type to task orders with a broad focus that

can have a national impact on Medicare’s program safeguard activities.

HCFA is testing these options to identify how the PSCs can make the most

significant contributions to program integrity.

HCFA Is Taking an

Incremental Approach to

Implementing the PSCs
Page 6 GAO-01-616 Program Safeguard Contractors

Table 1: General Categories of HCFA’s PSC Task Orders

Name Purpose

Start of

Contract

Category 1: Task orders that are discrete and narrowly focused.

Community Mental Health Center Reviews Conduct unannounced site visits to selected community mental

health centers to determine whether they are complying with

Medicare requirements.

11/22/99

Home Office Cost Report Audits Conduct field audits at the home offices of large provider chains,

such as skilled nursing facilities.

11/24/99

Compliance with Corporate Integrity

Agreements

Perform on-site reviews of providers subject to corporate integrity

agreements to determine whether they are complying with the

terms of their agreements.

11/24/99

Nebulizer Project Conduct medical reviews and participate in field investigations on

the use of nebulizer drugsa

 in three states.

6/14/00

Category 2: Task orders that support or replace some safeguard activities at one or more claims administration

contractors.

Benefit Integrity Support Center Perform postpayment data analysis and support fraud unit activities

at New England claims administration contractors.

11/24/99

Statistical Analysis Center Conduct statistical analyses and trending activities on Medicare

claims data in three midwestern states.

3/14/00

Western Integrity Center Perform postpayment medical review, fraud detection, and data

analysis for 12 western states.

7/14/00

Category 3: Task order that replaces all safeguard activities at a claims administration contractor.

Durable Medical Equipment Perform all program integrity functions, including prepayment and

postpayment review, for the northeast region’s claims processing

contractor for durable medical equipment.

11/7/00

Category 4: Task orders that have a broad focus and a potential national impact on improving the efficiency and

effectiveness of Medicare’s safeguard activities.

Year 2000 Analysis Conduct national analyses to minimize the risk of increased fraud

and abuse as technological changes were made for the year 2000.

9/30/99

Provider Education Plan Conduct a national education needs assessment and develop a

comprehensive educational plan for Medicare providers.

11/15/99

Systems Requirements Assess Medicare claims processing systems and recommend

modifications required to fully integrate the PSCs into the claims

payment process.

3/8/00

Comprehensive Error Rate Testing Program Develop national paid claim error rates by contractor, benefit

category, and provider type through independent review of a

random sample of claims.

5/17/00

Therapy Services Perform data collection and statistical analyses related to therapy

services and create a plan for reviewing therapy services and

developing educational materials.

8/14/00

Correct Coding Initiative Maintain automated system edits used by all claims administration

contractors to identify certain types of inappropriate claims.

9/29/00

Managed Care Payment Validation Analyze Medicare+Choice payment data to validate accuracy of

payments and to identify program integrity vulnerabilities and

solutions.

11/22/00

a

These drugs are intended to provide relief to individuals suffering from respiratory problems and may

be used with a nebulizer, a medical device to aid inhalation.

Source: GAO analysis of task orders awarded to HCFA’s program safeguard contractors as of April

2001.
Page 7 GAO-01-616 Program Safeguard Contractors

The task orders in the first category represent special projects that focus

attention on particular areas that are considered vulnerable to fraud and

abuse. For example, in recent years, community mental health center

services have been the target of investigations by law enforcement

agencies, including the HHS OIG and the Federal Bureau of Investigation.

These investigations were due, in part, to concerns about steep increases

in the cost per patient treated and increases in the number of these

providers in certain regions of the country. Further, the nebulizer task

order was awarded because nebulizer drugs have historically been a

source of fraud and abuse—including kickbacks from suppliers to

beneficiaries and physicians.

The second category represents task orders in which the PSC supplements

or replaces some of the routine program integrity activities of one or more

claims administration contractors. For example, the Benefit Integrity

Support Center task order calls for the PSC to work with all the claims

administration contractors that have jurisdiction over the New England

states to identify potential cases of fraud and abuse. In addition, the PSC

staff are also supplementing the work conducted by fraud control units at

four of these contractors—partly because these units have few staff. The

PSC that was awarded the Western Integrity Center task order is replacing

some of the safeguard activities—including postpayment reviews and

fraud case development—of two claims administration contractors that

serve 12 western states.

The third category, in which a PSC performs all program safeguard

functions, consists solely of the Durable Medical Equipment task order.

This task order is important in that it represents a test for determining

whether a PSC can effectively replace the safeguard activities performed

by the claims administration contractors. These activities include the

performance of prepayment medical reviews by the PSCs. These reviews

must be completed before the claims can be processed and paid by the

responsible claims administration contractor. This process poses a

challenge because the PSC must complete an assessment of whether

claims should be paid without delaying the processing and payment of

appropriate claims to legitimate providers by the claims administration

contractors.5

 Although this is the only task order being used to test this

 5

Several years ago HCFA conducted a pilot project testing this separation of duties

between different contractors. HCFA found that separating prepayment review and claims

processing posed logistical challenges that could make it difficult to complete prepayment

reviews without creating a backlog of unprocessed claims.
Page 8 GAO-01-616 Program Safeguard Contractors

option, the results may provide HCFA with important insights regarding

how to identify improper claims prior to payment without creating undue

processing delays.

The task orders in the fourth category are national in scope and aim to

build HCFA’s knowledge base and systems to enhance the prevention and

detection of fraud, waste, and abuse. For example, the PSCs that were

awarded the Systems Requirement task order are identifying potential

changes to existing claims processing systems to enable PSCs’ automated

systems to be fully integrated with those of the claims processors. The

Therapy Services task order requires the development of a plan that all

contractors could use for reviewing the appropriateness of physical,

speech, and occupational services—services that the HHS OIG has

identified as prone to improper Medicare payments. HCFA expects the

PSC’s efforts on this task order will reduce payment error rates for therapy

services without disrupting the delivery of these services to Medicare

beneficiaries.

HCFA plans to explore a variety of methods for paying PSCs to determine

which are most appropriate for the specific functions required in the task

orders. These methods fall under the general categories of costreimbursement, fixed-price, and cost-plus-incentive contracts. Most of the

task orders are currently paid on some variation of a cost-reimbursement

basis. Under a cost-reimbursement contract, HCFA reimburses the PSCs

for their allowable costs—including such items as salaries, travel, and

subcontractors needed to perform the activities specified in the task order.

This type of contract provides the least incentive for a PSC to manage its

costs because HCFA assumes most of the risk for inefficient performance.

Thirteen of the 15 task orders are paid on this basis.6

A fixed-price contract requires a PSC to assume most of the risk for

managing its costs and provides it with the greatest incentive for efficient

performance. Despite these potential benefits for HCFA, a fixed-price

contract has been used for only one task order.7

 Establishing fixed-price

contracts is difficult because HCFA has no prior experience with using

 6

This includes four time and materials contracts, in which direct and indirect labor are paid

at specified rates, while materials are paid at cost.

7

One other task order was initially awarded as fixed-price contract, but was changed to a

cost reimbursement contract before any substantial work had been conducted.

HCFA Plans to Experiment

With Different Types of

Contract Payments
Page 9 GAO-01-616 Program Safeguard Contractors

task orders for program safeguards. HCFA officials told us that this type of

contract currently may not be feasible for most task orders because the

agency generally lacks the data necessary to reasonably estimate costs. As

a result, neither HCFA nor the PSCs can have a complete understanding of

the costs associated with meeting the contract requirements. Without

reliable cost data, HCFA officials fear that PSCs could submit high bids

that include excessive profits or low bids that lead to disagreements over

the scope of work and subsequent requests for additional funds.

To address these concerns, HCFA officials stated that they are developing

a new reporting system to obtain cost data associated with different

program safeguard activities. They believe this system, which may be

implemented by the end of 2001, will establish an independent data source

to assess the reasonableness of the PSCs’ estimated costs and will

ultimately provide a stronger basis for competing future task order

contracts on a fixed-price basis. For example, in regard to a task order for

prepayment medical review, HCFA could use this data system to estimate

the cost for a registered nurse to review 1,000 claims. Certain types of

program safeguard work, however—such as the development of fraud

cases—might not be amenable to a fixed-price contract due to the

uncertainties inherent in detecting, investigating, and developing such

cases.

The third type of contractor payment incorporates the use of financial

incentives, such as performance awards or fees, that a contractor can earn

for meeting certain performance goals. For example, HCFA has begun to

experiment with financial incentives on the Comprehensive Error Rate

Testing program task order. This task order requires the PSC to evaluate

the accuracy of a random sample of claims processed by the claims

administration contractors. The PSC has the opportunity to earn two

separate award fees: One is based on the PSC’s success in obtaining

medical records from providers after the claims have been submitted, and

the second is based on having few successful appeals of its medical review

decisions. HCFA chose the first measure because obtaining relevant

medical records is critical to the PSC’s ability to accurately determine if a

claim was paid correctly, while the second measure is an indicator of the

quality of the PSC’s medical review decisions.

HCFA’s initial efforts to manage the task orders generally have focused on

the PSCs’ start-up activities. HCFA has worked closely with the PSCs to

ensure that they acquire and develop the resources and systems needed to

ultimately fulfill contract requirements. This focus on the PSCs’ early

HCFA Has Revised Its

Approach to PSC

Monitoring and Evaluation
Page 10 GAO-01-616 Program Safeguard Contractors

efforts has resulted in HCFA’s central office assuming a major role in

overseeing the PSCs and managing the individual task orders. HCFA

recognized that as the PSCs play a larger role in its program integrity

efforts, it would be appropriate to reconsider its approach to PSC

monitoring and evaluation.

Consistent standards for monitoring and evaluating PSC performance are

important for developing a common understanding of how to use PSCs

most effectively. We have previously reported that HCFA’s regional office

staff charged with monitoring the work performed by the claims

administration contractors were given wide discretion in how they

conducted their oversight, resulting in inconsistent evaluations.8

 We

subsequently reported that HCFA was taking a number of steps to

strengthen its oversight of the claims administration contractors, such as

providing detailed direction to the regions to improve the quality and

consistency of contractor reviews.9

HCFA has revised its approach to PSC monitoring and evaluation to more

effectively assess the PSCs’ progress in accomplishing the task orders’

specific objectives. Until recently, the same staff who generally monitored

the PSCs’ day-to-day progress were also responsible for periodically

evaluating these contractors’ performance in completing certain tasks.

HCFA has since assigned primary responsibility for day-to-day monitoring

of the PSCs to the regional offices. To ensure independence, the central

office will be responsible for separately evaluating the PSCs. This

approach should help HCFA maintain an appropriate level of objectivity

and independence in these assessments.

HCFA has not followed a systematic, strategic approach for testing and

evaluating how best to use the PSCs to promote program integrity. Also,

HCFA has not yet developed clear, measurable criteria to evaluate PSCs’

performance on the individual task orders. By addressing both of these

issues, HCFA would be in a better position to ensure that the PSCs are

used most effectively.

 8

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

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

9

Medicare Contractors: Further Improvement Needed in Headquarters and Regional Office

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

Improvements in PSC

Strategy and

Evaluation Process

Are Needed
Page 11 GAO-01-616 Program Safeguard Contractors

HCFA lacks a strategy for determining how best to use the PSCs in the

long term. During our review, HCFA officials could not provide us with

specific goals and objectives for using the PSCs to combat fraud, waste,

and abuse or their evaluation criteria for assessing which PSC options

work best under different circumstances. While an incremental,

experimental approach for implementing its new contracting authority

may be prudent in the short term, a long term strategy would help HCFA

to better target its PSC resources and provide a basis for deciding where

and how to use the PSCs to promote program integrity.

Without a clearly defined strategic direction, HCFA has issued the task

orders ad hoc. This ad hoc approach has provided HCFA significant

flexibility in targeting its task orders on known problem areas and in using

the PSCs in different ways. However, it does not represent a strategy for

systematically testing different PSC options and for building upon the

results of one task order to issue future task orders—a strategy we believe

would provide HCFA with a sound basis for deciding how best to use its

PSC resources. Currently, HCFA relies on its staff to identify and develop

proposals for work that the PSCs should perform. Task orders are also

developed as opportunities arise—such as when a claims administration

contractor leaves the program, creating the opportunity to shift some or all

of the contractor’s program safeguard activities to a PSC.

HCFA officials said that they believe that it is important to gain some

experience with their PSC contracting authority before establishing

HCFA’s strategic direction for these contractors. They also told us that

they have a vision for consolidating program safeguard activities among

the PSCs and fewer claims administration contractors and are currently

drafting a plan to this effect. Until May 2001, however, they could not tell

us when this plan would be issued or whether it would contain goals and

objectives for its PSCs or criteria for evaluating the success or failure of

these contractors. In commenting on a draft of this report, HCFA officials

identified four general questions they are using to evaluate the PSC

options. They also told us that they plan to complete their evaluation of

the PSC options by October 2001 in order to have a more clearly defined

long-term strategy in place for fiscal year 2002.

HCFA has not clearly defined the specific outcomes it would like to

achieve under each task order. Instead, we found that many of the specific

outcomes outlined in the PSC task orders describe work processes—

critical steps to be performed that serve as a substitute for outcomes. For

example, under the Benefit Integrity Support Center task order, two of

HCFA’s Implementation of

the PSC Task Orders Lacks

a Strategic Direction

HCFA Lacks Clearly

Defined Criteria for

Evaluating PSC

Performance
Page 12 GAO-01-616 Program Safeguard Contractors

HCFA’s desired outcomes are that the PSC will (1) use a variety of

methods to detect potential fraud cases, and, (2) establish good working

relations with its law enforcement partners. Both of these are processes

that HCFA believes will contribute to accomplishing its desired outcome,

developing “quality” fraud cases.

Contract specialists told us that it is not always possible to develop

specific outcomes during the initial stages of a project and that using

processes as proxies for outcomes is therefore acceptable. However, they

also said that outcomes could begin to be developed once work has

proceeded for a period. As of April 2001, work on 8 of the 15 task orders

had been ongoing for at least a year, thereby providing HCFA with

information from which to review and better define its expected outcomes

on each.

HCFA has begun to evaluate the PSCs’ performance. However, HCFA has

not developed clear, quantifiable performance measures and standards for

most of these task orders. HCFA officials told us that several task order

evaluations are under way but none have been completed. They said that

the ongoing evaluations generally consist of reviewing the PSCs’ selfassessments, progress reports, and general performance. For most of its

task orders, HCFA established seven broad dimensions for assessing PSC

performance: (1) cooperation and coordination, (2) innovation, (3)

integrity, (4) quality, (5) timeliness, (6) value added, and (7) satisfaction.10

However, it has not developed measures to determine how well the PSCs

performed in these dimensions nor established standards against which to

judge whether the PSCs’ performance was satisfactory.

To illustrate, as part of the Provider Education task order, HCFA plans to

assess the PSC’s cooperation and coordination with stakeholders based, in

part, on stakeholder feedback and the number of outstanding issues that

reflect a lack of communication. However, HCFA has no written guidance

explaining how it will obtain and measure stakeholder feedback. This task

order does not explain how HCFA will define an outstanding issue or

judge what constitutes a lack of communication between the PSC and a

stakeholder. It also does not define the standards against which HCFA will

differentiate between PSC performance that is excellent, good, acceptable,

 10Some task orders include performance requirements that are specific to the work

performed for that task order. For example, HCFA plans to assess the effectiveness of the

audit determinations made by the PSC conducting the Home Office Cost Report Audits task

order.
Page 13 GAO-01-616 Program Safeguard Contractors

poor, or unacceptable. Therefore, HCFA will not have a strong basis for

assessing the PSC in this dimension.

One of HCFA’s attempts to develop performance measures and standards

that are clear and quantifiable has been for the Statistical Analysis Center

task order. This task order requires the PSC to develop a wide variety of

data analyses for claims data in three states. These measures and

standards were drafted by the PSC at HCFA’s request and were recently

incorporated into the task order requirements. The PSC’s performance

measures for the quality dimension, for example, require that the findings

resulting from these data analyses be accurate and able to withstand

external validation. The PSC’s standards are that HCFA will rate the

quality of the PSC’s data analyses as excellent if 95 percent or more of the

PSC’s analyses meet these criteria, while HCFA will rate them

unacceptable if the performance measures are met fewer than 86 percent

of the time.

Contract specialists told us that, ideally, measures and standards should

be incorporated into the task orders before work begins, so that all parties

agree on how performance will be evaluated. They also emphasized that

developing clear, quantifiable performance measures and standards is an

evolving process. While HCFA has not yet developed such measures and

standards for nearly all of its task orders, we believe that it is best for the

agency to now start with fairly simple measures and refine them over time

as it gains experience with each task order. It is also important to collect

data on various aspects of PSC performance and test different measures to

identify the right combination for motivating the PSCs to perform well.

Developing the right mix of measures that will not distort contractor

behavior but will lead to the desired outcomes is a challenging task facing

HCFA. For example, HCFA officials consider more traditional

performance measures for program safeguards—such as the number of

fraud referrals to the HHS OIG—to be inappropriate because they might

motivate a PSC to be overzealous in its pursuit of marginal cases. While it

is important to consider how performance measures can potentially

distort contractor behavior, such concerns should not prevent HCFA from

developing appropriate measures. For example, testing different

combinations can help HCFA identify the right mix of performance

measures to minimize such distortions.

HCFA officials told us they are trying to develop appropriate performance

measures and acknowledge that they need better information to evaluate

the PSCs. For example, HCFA plans to contract with a consulting firm to
Page 14 GAO-01-616 Program Safeguard Contractors

collect data on the performance measures and standards used by private

insurers to assess their program safeguard functions. In addition, HCFA is

developing error rate data by contractor, benefit category, and provider

type as part of the Comprehensive Error Rate Testing program task order.

HCFA officials told us that they would eventually like to use these data as

the basis for performance measures for future task orders—perhaps

judging a PSC by how much it reduces the paid claims error rate for

hospitals or for durable medical equipment.

HCFA was prudent in using an incremental approach to test the

integration of PSCs into Medicare’s program safeguard activities in the

short term. However, HCFA now has well over a year’s experience with

the PSC task orders and should develop a long-term strategy to ensure that

the PSCs are used most effectively. We believe it is important for HCFA to

now define its goals for the PSCs and determine how it will evaluate

different options for PSC integration into Medicare’s program safeguard

efforts. Creating a long-term strategy would enable HCFA to test different

options more systematically and to use the results of this testing in the

development of future task orders.

Although HCFA has already started to evaluate PSC performance on

several task orders, it cannot do so effectively because it lacks clear,

quantifiable performance measures and standards that are linked to

defined outcomes. We recognize that it will take some time for the agency

to develop appropriate performance criteria, but we believe it is important

to start experimenting with different performance measures, standards,

and outcomes to lay the groundwork for effective task order performance

evaluations in the future. This need for better performance measures,

standards, and outcomes will become especially critical if HCFA adopts

more fixed-price contracts containing financial incentives and penalties

that are based on PSC performance.

To assist HCFA in determining if the PSCs are an effective approach to

safeguarding Medicare payments, we recommend that the Acting Deputy

Administrator of HCFA define the strategic direction for future use of the

PSCs. This should include setting goals and objectives for the PSC

program and devising evaluation criteria for assessing the overall

effectiveness of the PSCs in promoting program integrity.

Conclusions

Recommendations for

Executive Action
Page 15 GAO-01-616 Program Safeguard Contractors

In addition, as HCFA gains experience with PSC performance, the Acting

Deputy Administrator should begin to develop clear, quantifiable

performance measures and standards tied to well defined outcomes for

each of the task orders.

In written comments on a draft of this report, HCFA agreed that our

recommendations are critical to ensuring the effectiveness of the PSCs.

However, HCFA also expressed concern that we did not sufficiently

recognize its efforts in managing the PSCs. In addition, HCFA supplied

new information to update us on its management of the PSCs and

indicated that it is already taking steps to implement our

recommendations. We have included HCFA’s letter as appendix I. HCFA

also provided us with technical comments, which we incorporated as

appropriate.

Regarding our first recommendation, HCFA agreed that it needs to

establish a strategic direction for future use of the PSCs, but stated we

should give greater recognition to its ongoing planning efforts. HCFA also

provided new information regarding its PSC strategy. For example, HCFA

noted that it has finalized its PSC Management and Performance

Evaluation Strategy and stated that it intends to evaluate five different

models as part of its effort to develop a long-term strategy. HCFA also

noted that its plan identifies the following critical questions to be used in

its evaluation of the PSC models.

• Did the model achieve the desired outcomes?

• What was the level of internal and external customer satisfaction?

• What are the costs and benefits of the model?

• How well does the model meet HCFA’s implementation criteria?

HCFA stated that its goal is to complete the assessment of the PSC models

by October 2001 and to develop a more clearly defined long-term strategy

for fiscal year 2002.

HCFA’s written comments describing its plan contain new information

that is substantively different from the draft version it provided us during

the course of our review. Although the new information lacks sufficient

detail for us to fully assess its plan, we agree that it is an important step.

However, it is difficult for us to assess the evaluation questions without

more precise definitions of the terms used, such as the “desired outcomes”

for each of the models and the “implementation criteria.” In our view,

Agency Comments
Page 16 GAO-01-616 Program Safeguard Contractors

these questions are too vague to provide a meaningful basis for

determining which PSC models are most effective. Moreover, we question

whether HCFA will be able to complete its analysis of the models by

October 2001 because it will not have had the opportunity to fully test all

the PSC models. For example, although the task order that requires the

PSC to perform all prepayment and postpayment reviews was awarded

last year, the test of its ability to effectively perform prepayment reviews is

not scheduled to begin until October 2001—the same month HCFA stated

that its analysis would be complete.

In responding to our second recommendation, HCFA said it agreed that it

should develop improved performance evaluation criteria for individual

task orders. However, HCFA pointed out that it has already identified

some performance measures in several task orders, such as the Statistical

Analysis Center and the Comprehensive Error Rate task orders. We

described the performance measures used on these two task orders in our

draft report and believe that they represent positive steps. However, as we

noted, the majority of the task orders still lack clearly defined

performance evaluation criteria.

HCFA also said that we should recognize that there are two different

methods for evaluating contractor performance—a basic approach that

assesses general performance in areas such as quality or timeliness and

performance-based contracting which focuses more on outcome than on

process. HCFA said we should discuss the two methods it is using for the

PSC task orders. We do not believe that such a discussion is necessary.

Regardless of which method is used, an effective evaluation of contractor

performance depends on the development of well-defined performance

measures and standards. Our report recognizes both the difficulty of

developing these criteria and HCFA’s initial efforts to do so. As we noted

in our report, most of the performance dimensions HCFA has developed

thus far are not well defined and lack measurable standards. We believe

that HCFA will not be able to effectively evaluate the PSCs until it

develops clearly defined performance criteria.

Finally, HCFA took issue with our statement that it lacks clear goals and

objectives for the PSCs. HCFA stated that these goals and objectives are

inherent in the Medicare Integrity Program legislation, which is part of

HIPAA. We recognize the importance of these goals and objectives and

believe that they provide a foundation on which HCFA can strengthen its

program safeguard activities. However, as we noted in our report, we

believe that sufficient time has elapsed since the Medicare Integrity

Program legislation was enacted to enable HCFA to translate the
Page 17 GAO-01-616 Program Safeguard Contractors

legislation’s goals and objectives into a more specific and clearly defined

role for the PSCs, especially in terms of PSC operations and their future

contributions to program integrity.

As agreed with your office, unless you announce its contents earlier, we

plan no further distribution of this report until 30 days after its issuance

date. At that time, we will send copies to the Honorable Tommy

Thompson, Secretary of Health and Human Services, Michael McMullan,

Acting Deputy Administrator of HCFA, and other interested parties. We

will make copies available to others upon request.

If you or your staff have any questions about this report, please call me at

(312) 220-7600. An additional GAO contact and other staff who made

major contributions to this report are listed in appendix II.

Sincerely yours,

Leslie G. Aronovitz

Director, Health Care—Program

 Administration and Integrity Issues
Page 18 GAO-01-616 Program Safeguard Contractors

Appendix I: Comments From the Health Care

Financing Administration
Appendix I: Comments From the Health Care

Financing Administration

Page 19 GAO-01-616 Program Safeguard Contractors
Appendix I: Comments From the Health Care

Financing Administration

Page 20 GAO-01-616 Program Safeguard Contractors
Appendix I: Comments From the Health Care

Financing Administration

Page 21 GAO-01-616 Program Safeguard Contractors
Appendix I: Comments From the Health Care

Financing Administration

Page 22 GAO-01-616 Program Safeguard Contractors
Page 23 GAO-01-616 Program Safeguard Contractors

Geraldine Redican-Bigott, (312) 220-7678

Robert Dee, Laura Greene, Anna Kelley, Teruni Rosengren, and

Michelle St. Pierre

Appendix II: GAO Contact and

Acknowledgments

GAO Contact

Staff

Acknowledgments

201073
The first copy of each GAO report is free. Additional copies of reports are

$2 each. A check or money order should be made out to the

Superintendent of Documents. VISA and MasterCard credit cards are also

accepted.

Orders for 100 or more copies to be mailed to a single address are

discounted 25 percent.

Orders by mail:

U.S. General Accounting Office

P.O. Box 37050

Washington, DC 20013

Orders by visiting:

Room 1100

700 4th St., NW (corner of 4th and G Sts. NW)

Washington, DC 20013

Orders by phone:

(202) 512-6000

fax: (202) 512-6061

TDD (202) 512-2537

Each day, GAO issues a list of newly available reports and testimony. To

receive facsimile copies of the daily list or any list from the past 30 days,

please call (202) 512-6000 using a touchtone phone. A recorded menu will

provide information on how to obtain these lists.

Orders by Internet

For information on how to access GAO reports on the Internet, send an email message with “info” in the body to:

Info@www.gao.gov

or visit GAO’s World Wide Web home page at:

http://www.gao.gov

Contact one:

• Web site: http://www.gao.gov/fraudnet/fraudnet.htm

• E-mail: fraudnet@gao.gov

• 1-800-424-5454 (automated answering system)

Ordering Information

To Report Fraud,

Waste, and Abuse in

Federal Programs