United States General Accounting Office

GAO Testimony

Before the Subcommittee on Health, Committee on Ways

and Means, House of Representatives

For Release on Delivery

Expected at 10:00 a.m.

Thursday, January 29, 1998

MEDICARE

HCFA Faces Multiple

Challenges to Prepare for

the 21st Century

Statement of William J. Scanlon, Director

Health Financing and Systems Issues

Health, Education, and Human Services Division

GAO/T-HEHS-98-85

Medicare 

HCFA Faces Multiple Challenges to Prepare

for the 21st Century

Mr. Chairman and Members of the Committee:

We are pleased to be here today as you discuss the Health Care Financing

Administration’s (HCFA) preparedness for administering the Medicare

program in the 21st century. Because the $200 billion Medicare program is

critical to nearly all elderly Americans (those aged 65 and older) and to

many of the nation’s disabled, program management, excessive spending,

and depletion of the Medicare Trust Fund have been the subject of much

congressional concern and scrutiny in recent years. We, the Department of

Health and Human Services’ (HHS) Inspector General, and others have

frequently reported that too much is being spent inappropriately because

of the fraudulent and abusive billing practices of health care providers,

thus prompting congressional concern about program vulnerabilities. (See

the list of related GAO products at the end of this statement.)

You asked us to comment on HCFA’s ability to meet growing program

management challenges. My statement today centers on HCFA’s

administration of the Medicare program, although HCFA also has shared

responsibilities with the states for administering Medicaid, a program

serving low-income Americans. More specifically, my remarks will focus

on (1) HCFA’s new authorities under recent Medicare legislation, (2) HCFA

managers’ views on the agency’s capacity to carry out various

Medicare-related functions, and (3) the actions HCFA needs to take to

accomplish its objectives over the next several years.

To do this work, we obtained agency documents on HCFA’s reorganization

and revised processes and interviewed top agency officials, including the

new Administrator. In addition, we conducted small focus groups attended

by about 60 senior and midlevel managers. We also relied on our previous

and ongoing work on Medicare.

In summary, substantial program growth and greater responsibilities

appear to be outstripping HCFA’s capacity to manage its existing workload.

Legislative reforms have increased HCFA’s authority to manage the

Medicare program. Simultaneously, however, other factors have increased

the challenges HCFA faces, including the need to make year 2000 computer

adjustments and develop a new, comprehensive information management

strategy; manage transitions in its network of claims processing

contractors; and implement a major agency reorganization. In addition,

officials report that the expertise to carry out HCFA’s new functions is not

yet in place and that HCFA has experienced a loss of institutional

knowledge through attrition. In this environment, agency managers are

Page 1 GAO/T-HEHS-98-85
Medicare 

HCFA Faces Multiple Challenges to Prepare

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concerned that some of their responsibilities might be compromised or

neglected altogether because of higher-priority work.

HCFA’s approach for dealing with its considerable workload is incomplete.

Heretofore, the agency lacked an approach—consistent with the

requirement of the Government Performance and Results Act of 1993 to

develop a strategic plan—that specified the full range of program

objectives to be accomplished. HCFA has developed a schedule for

responding to recent legislative reforms but is still in the process of

detailing the staffing and skill levels required to meet reform

implementation deadlines. While addressing new mandates, the agency

also needs to specify how it will continue to carry out its ongoing critical

functions.

Background The size and nature of the Medicare program make HCFA unique in

authority and responsibility among health care payers. Fee-for-service

Medicare serves about 33 million beneficiaries and processes a high

volume of claims—an estimated 900 million in fiscal year 1997—from

hundreds of thousands of providers, such as physicians, hospitals, skilled

nursing facilities, home health agencies, and medical equipment suppliers.

HCFA is also responsible for paying and monitoring more than 400 managed

care health plans that serve more than 5 million beneficiaries. Enrollment

in these plans has been growing by about 85,000 beneficiaries monthly.

The Medicare statute divides benefits into two parts: (1) “hospital

insurance,” or part A, which covers inpatient hospital, skilled nursing

facility, hospice, and certain home health care services, and

(2) “supplementary medical insurance,” or part B, which covers physician

and outpatient hospital services, diagnostic tests, and ambulance and

other medical services and supplies. In fiscal year 1997, part A covered an

estimated 39 million aged and disabled beneficiaries, while a slightly

smaller number were covered by part B, which requires payment of a

monthly premium.

In Medicare’s fee-for-service program—used by about 87 percent of the

program’s beneficiaries—physicians, hospitals, and other providers submit

claims and are paid for each service rendered to Medicare beneficiaries.

Medicare’s managed care program covers a growing number of

beneficiaries who have chosen to enroll in a prepaid health plan rather

than purchase medical services from individual providers. The managed

care program, which is funded from both the part A and part B trust funds,

Page 2 GAO/T-HEHS-98-85
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HCFA Faces Multiple Challenges to Prepare

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currently consists mostly of risk contract health maintenance

organizations (HMO).1

 Medicare pays these HMOs a monthly amount, fixed

in advance, for all the services provided to each beneficiary enrolled.

HCFA, an agency within HHS, has slightly less than 4,000 full-time

employees, 65 percent of whom work in the agency’s headquarters offices;

the rest work in the agency’s 10 regional offices across the country. In

addition to the agency’s workforce, HCFA oversees more than 60 claims

processing contractors that are insurance companies—like Blue Cross and

Blue Shield plans, Mutual of Omaha, and CIGNA. In fiscal year 1997, the

contractors employed an estimated 22,200 people to perform Medicare

claims processing and review functions.

Legislative Reforms

Substantially Increase

HCFA’s Authority to

Manage the Medicare

Program

Two recent acts grant HCFA substantial authority and responsibility to

reform Medicare. The Health Insurance Portability and Accountability Act

of 1996 (HIPAA), P.L. 104-191, provides the opportunity to enhance

Medicare’s anti-fraud-and-abuse activities. The Balanced Budget Act of

1997 (BBA), P.L. 105-33, introduces new health plan options and major

payment reforms. In correspondence to this Subcommittee last October,

we noted that these two pieces of legislation addressed in large measure

our concerns and those of the HHS Inspector General regarding the tools

needed to combat fraud and abuse.2

 They also address many of the

weaknesses discussed in our High-Risk Series report on Medicare.3

HIPAA created for the first time a stable source of funding for Medicare

fraud control. For fiscal year 1997, the act provides for up to $440 million

for program safeguard activities; the level will rise incrementally each

year, reaching $720 million in fiscal year 2003, after which it will remain

constant. This was a significant step in reversing the trend of declining

program safeguard funds relative to program growth in the 8 years prior to

fiscal year 1997, when HIPAA funding provisions became effective. This

funding comes from a HIPAA-established fraud-and-abuse control account

that also funds other activities involving other HHS agencies and the

Department of Justice. HIPAA also provides HCFA with explicit authority to

contract with firms outside its existing claims processing contractor

1

The Medicare managed care program also includes cost contract HMOs and health care prepayment

plans. Cost contract HMOs allow beneficiaries to choose health services from their HMO network or

outside providers. Health care prepayment plans may cover only part B services. Together, both types

of plans enroll less than 2 percent of the Medicare population.

2

See Medicare Fraud and Abuse: Summary and Analysis of Reforms in the Health Insurance Portability

and Accountability Act of 1996 and the Balanced Budget Act of 1997 (GAO/HEHS-98-18R, Oct. 9, 1997).

3

See High-Risk Series: Medicare (GAO/HR-97-10, Feb. 1997).

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HCFA Faces Multiple Challenges to Prepare

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network to perform payment safeguard functions while avoiding conflicts

of interest. HIPAA also adds new civil and criminal penalties to heretofore

little-used enforcement powers.

BBA provides for a dramatic expansion of health plan choices available to

Medicare beneficiaries and makes reforms to payment methods in

traditional fee-for-service Medicare and managed care. Under the act’s

new Medicare+Choice program, beneficiaries will have new health plan

options, including preferred provider organizations (PPO), provider

sponsored organizations (PSO), and private fee-for-service plans.

Medicare+Choice introduces new consumer information and protection

provisions, including a requirement to disseminate comparative

information on Medicare+Choice plans in beneficiaries’ communities and

a requirement that all Medicare+Choice plans obtain external review from

an independent quality assurance organization.4

 These provisions address

problems we have worked to correct with this committee and others in the

Congress.5

BBA also provided for revamping many of Medicare’s decades-old payment

systems to contain the unbridled growth in certain program components.

Specifically, the act mandated prospective payment systems for services

provided by about 1,100 inpatient rehabilitation facilities, 14,000 skilled

nursing facilities, 5,000 hospital outpatient departments, and 8,900 home

health agencies. In addition, it made changes to the payment methods for

hospitals, including payments for direct and indirect medical education

costs. It also adjusted fee schedule payments for physicians and durable

medical equipment and authorized the conversion of the remaining

reasonable charge payment systems to fee schedules. Finally, the act

granted the authority to conduct demonstrations on the cost-effectiveness

of purchasing items and services through competitive bids from suppliers

and providers.

4

BBA authorized the HHS Secretary, subject to appropriations, to collect $200 million in user fees to

conduct information activities associated with Medicare+Choice. Subsequently, in the HHS

appropriation, the Secretary was given authority to collect $95 million of the originally authorized

amount for this purpose. HCFA was also appropriated between $20 million and $30 million for the

administration of BBA-related activities.

5

See Medicare: HCFA Should Release Data to Aid Consumers, Prompt Better HMO Performance

(GAO/HEHS-97-23, Oct. 22, 1996) and Medicare: Opportunities Are Available to Apply Managed Care

Strategies (GAO/T-HEHS-95-81, Feb. 10, 1995).

Page 4 GAO/T-HEHS-98-85
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HCFA Faces Multiple Challenges to Prepare

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HCFA’s Capacity to

Accomplish Its

Mission Is

Diminishing Relative

to Added

Responsibilities

While legislative reforms are dramatically reshaping Medicare, other

changes are occurring, thus compounding difficult management

challenges. For example, HCFA is rethinking its strategy to develop,

modernize, or otherwise improve the agency’s multiple automated claims

processing and other information systems. This will involve preparing

systems for the year 2000, repairing the deteriorating managed care

enrollment systems, and making the necessary modifications to existing

systems. HCFA plans to make these changes as an interim measure until,

consistent with the Information Technology Management Reform Act of

1996 (P.L. 104-106), comprehensive reengineering can take place, such as

making claims processing systems and payment mechanisms more

efficient, programming BBA payment changes, and modernizing the

anti-fraud-and-abuse system software.6 HCFA is also confronting transition

problems resulting from the recent loss of large-volume claims processing

contractors and the need for remaining contractors to absorb the

workload. Finally, HCFA recently restructured its organizational units to

better focus on its mission and is experiencing the kind of disruptions

common to organizational transitions.

Against this backdrop, the themes that emerged from our individual

interviews and focus groups with HCFA managers centered on

(1) distribution of agency resources, (2) need for specialized expertise,

(3) loss of institutional experience, and (4) reorganization issues.

Heightened

Responsibilities Result in

Redirected Priorities

“Robbing Peter to pay Paul” was the expression used to characterize one

of the major themes from our focus groups. Specifically, managers were

concerned that because of the concentrated efforts to implement BBA and

solve computer problems that could arise in the year 2000, the quality of

other work might be compromised or tasks might be neglected altogether.

However, managers also noted that whereas some BBA-related tasks are

completely new—such as conducting an open enrollment period for

Medicare+Choice plans—and therefore add to the workload, others

merely formalize work that was already underway but impose deadlines

for completion, such as developing prospective payment methods for

reimbursing several types of health care providers.

Regional and headquarters officials responsible for the oversight of claims

processing contractors told us that their capacity to monitor contractors

had seriously diminished. For example, one region that formerly had six

6

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

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

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HCFA Faces Multiple Challenges to Prepare

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staff members dedicated to contractor oversight currently has two; the

others, they said, had been reassigned to work on managed care issues.

This concerns us in light of our work on Medicare program management.

Over the past several years, we have reported that HCFA has not adequately

ensured that contractors are paying only medically necessary or otherwise

appropriate claims.

Similarly, the HHS Inspector General’s fiscal year 1996 financial audit found

contractor oversight weaknesses. For example, some contractors selected

for audit could not readily verify total Medicare expenditures, including

paid claim amounts, to ensure that amounts were accurate, supported, and

properly classified; did not adequately document accounts receivable; and

did not have adequate internal controls over the receipt and disbursement

of cash. Further, HCFA does not have a method for estimating the amount

of improper Medicare payments; for fiscal year 1996, the Inspector General

estimated that HCFA made about $23 billion in inappropriate payments.

New Initiatives Create

Need for New Skills

Managers also expressed a common concern about the staff’s mix and

level of skills. They noted that HCFA’s traditional approach of hiring

generalist staff and training them largely on the job is no longer well suited

to the agency’s need to implement recent reforms expeditiously. Instead,

managers are beginning to identify the need for staff with specialized

technical expertise, such as computer system analysts, survey

statisticians, data analysts, market researchers, information management

specialists, managed care experts, and health educators. In our

discussions, several managers placed “appropriate skill sets” at the top of

their wish lists.

As an illustration, the Medicare+Choice program introduces new health

plan types and requires the dissemination of information about the plans

to beneficiaries in 1998. Called the Medicare+Choice Information Fair, this

nationwide educational and publicity campaign will be the first effort of its

kind for HCFA. Managers were concerned that staff without prior

experience will need to pull together information that describes and

evaluates the merits of various plans.

Similar concerns emerged from our discussions about the lack of

specialists in other program and agency support areas. Some managers

noted the need for highly trained staff to develop, maintain, and modernize

Medicare’s government-owned claims processing and other automated

Page 6 GAO/T-HEHS-98-85
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HCFA Faces Multiple Challenges to Prepare

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data systems. They also cited the need for specialists in contracting,

facilities management, and telecommunications.

Retirements and Other

Departures Drain HCFA of

Experienced Staff

Many senior and midlevel managers and experienced technical staff have

retired in recent years or are eligible to retire soon. Almost 40 percent of

the organization has turned over in the past 5 years. Many were said to

have spent their entire careers focused on a particular aspect of the

Medicare program. A common concern in our discussions was the erosion

of experienced staff to perform a variety of tasks, such as writing

regulations and developing payment systems.

Managers cited the loss of experienced staff as a problem for developing

and implementing the various prospective payment systems mandated by

BBA. They also noted that developing one new payment system would have

been manageable, but losses of expert staff make it difficult to implement

multiple new payment systems concurrently. For example, experienced

staff are needed to perform such technical tasks as those we mentioned in

our October statement before this Subcommittee, including collecting

reliable cost and utilization data to compute the new prospective payment

rates, developing case mix adjusters, auditing cost reports to avoid

incorporating inflated costs into the base rates, and monitoring to guard

against providers’ skimping on services to increase profits.7

Our focus group participants emphasized that it will be difficult to replace

its experienced staff in the short term. Although HCFA is planning to hire

new people, the time typically needed for recruiting, hiring, and orienting

new employees is considerable. Managers commented that new

employees, although highly educated and motivated, sometimes need

extensive on-the-job training to replace lost expertise.

HCFA’s Reorganization Is

in Transition

In July 1997, HCFA restructured its entire organization. The new design

reflected the agency’s intent to, among other things, (1) combine activities

to redirect additional resources to the growing managed care side of the

program, (2) acknowledge a shift from HCFA’s traditional role as claims

payer to a more active role as purchaser of health care services, and

(3) establish three components focused on beneficiaries, health plans and

providers, and Medicaid and other activities conducted at the state level. It

also established technical and support offices to assist these components.

7

Medicare: Recent Legislation to Minimize Fraud and Abuse Requires Effective Implementation

(GAO/T-98-9, Oct. 9, 1997).

Page 7 GAO/T-HEHS-98-85
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HCFA Faces Multiple Challenges to Prepare

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(See HCFA’s organization chart in app. I.) In announcing the planned

reorganization, the Administrator explained that as Medicare has evolved

over the years, new programs and projects were layered onto existing

structures. Over time, he noted, this became cumbersome and confusing.

Many managers we spoke with considered the reorganization to be

theoretically sound. Some also told us that it was long overdue, because

HCFA’s structure encouraged work on narrow issues within self-contained

groups—an approach that did not benefit from the expertise existing

across the agency. However, a consensus of focus group participants and

high-level officials believed that the timing of the reorganization’s

implementation is unfortunate. They explained that they are currently

facing full agendas with tight deadlines, which add to the stresses

associated with any organizational change.

Managers described their difficulties in establishing new communication

and coordination links within units as well as across the agency. For some,

new efforts to coordinate have proved time-consuming to the point of

being counterproductive. Managers commented that sign-off sheets

formalizing coordination have enough names to take on the appearance of

a staff roster.

They noted that the situation was particularly acute in light of the fact that

people have not yet moved to the actual location of their new units.

Managers in one division said staff were scattered in as many as seven

places around HCFA’s building. HCFA now hopes to have staff relocated by

late spring, although this plan appears to be optimistic.

HCFA Lacks a

Comprehensive Plan

to Accomplish Its

Short-Term Agenda

We observed that managers appeared to be clear on top management’s

expectations for completing BBA-related activities and for making sure that

contractors’ claims processing systems would comply with the millennium

changes. They were less certain, however, about the agency’s strategy for

meeting other mission-related work.

To articulate the importance of BBA, HCFA established a tracking system

that enumerates all the activities related to BBA mandates, identifies

responsible agency units, and specifies completion deadlines. HCFA

recently required lead units to prepare detailed BBA project plans that

outline tasks, time periods, and resource needs. However, we did not find

similar plans to detail the activities for other agency priorities or ongoing

Medicare functions. As a result, HCFA does not have a comprehensive view

Page 8 GAO/T-HEHS-98-85
Medicare 

HCFA Faces Multiple Challenges to Prepare

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of its workload that would enable the agency’s senior decisionmakers to

consider whether resources are, in fact, adequate or properly distributed

and which activities could be at risk of being neglected.

One example that came to our attention concerned the legislative

mandates for reporting to the Congress on specific activities and

programs. Currently, neither top management nor the Office of Legislation

compiles a list of reports due and their deadlines. Unit managers are

concerned because, although they are aware that certain reports for which

they are responsible will be late, there is no systematic way to keep top

management informed. Top management, in turn, cannot decide to

heighten the priority for a particular report or develop a strategy to

mitigate the consequences of others being late.

The illustration above and our discussions with agency officials suggest

that while HCFA may be ready to assert its BBA-related resource needs, it is

not likely to be in a position to adequately justify the resources it seeks to

carry out its other Medicare program objectives. This observation calls to

mind our July 1997 report on the adequacy of HHS’s draft strategic plan

under the Government Performance and Results Act.8

 We noted that the

plan failed to address certain major management challenges, including

Medicare-related problems. Specifically, the plan did not address

long-standing concerns about Medicare’s existing claims processing

systems or HCFA’s efforts to acquire a billion-dollar integrated database

system. In addition, it did not address the issue of information security

that was identified in the fiscal year 1996 financial statement audit of HCFA,

specifying that systems weaknesses created the risk of unauthorized

access to sensitive medical history and claims data.

Observations HCFA is an agency facing many challenges. Even before BBA made major

changes, Medicare was a vast and complex program. Volumes of reports

by us and others demonstrate, in numerous areas, HCFA’s need to address

program vulnerabilities. Because of the risks associated with a program of

Medicare’s magnitude, the need for HCFA to be vigilant cannot be

overstated.

HIPAA and BBA have given HCFA many of the tools it needs to tame and

police excessive spending. Although some resources accompanied HCFA’s

new authorities, senior and midlevel managers contend that HCFA is

8

The Results Act: Observations on the Department of Health and Human Services’ April 1997 Draft

Strategic Plan (GAO/HEHS-97-173R, July 11, 1997).

Page 9 GAO/T-HEHS-98-85
Medicare 

HCFA Faces Multiple Challenges to Prepare

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struggling to carry out Medicare’s numerous and challenging activities. In

addition, they assert that the loss of experienced staff has further

diminished HCFA’s capacity. Nevertheless, senior managers do not appear

to be adequately informed about the status of the full range of Medicare

activities or associated resource needs. Under these circumstances, HCFA

seems to be focusing most of its energy on important deadlines and

pressures, but other critical functions may be receiving back-burner

attention.

We have work underway to assess the status of HCFA’s efforts to implement

aspects of HIPAA and BBA and modernize the agency’s information systems.

We will also continue to monitor the progress of HCFA’s reorganization

efforts.

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

questions.

Page 10 GAO/T-HEHS-98-85
Page 11 GAO/T-HEHS-98-85
Appendix I 

HCFA’s Organization

Page 12 GAO/T-HEHS-98-85
Page 13 GAO/T-HEHS-98-85
Page 14 GAO/T-HEHS-98-85
Page 15 GAO/T-HEHS-98-85
Related GAO Products

Medicare: Effective Implementation of New Legislation Is Key to Reducing

Fraud and Abuse (GAO/HEHS-98-59R, Dec. 3, 1997).

Medicare Fraud and Abuse: Summary and Analysis of Reforms in the

Health Insurance Portability and Accountability Act of 1996 and the

Balanced Budget Act of 1997 (GAO/HEHS-98-18R, Oct. 9, 1997) and related

testimony entitled Recent Legislation to Minimize Fraud and Abuse

Requires Effective Implementation (GAO/T-HEHS-98-9, Oct. 9, 1997).

Medicare Automated Systems: Weaknesses in Managing Information

Technology Hinder Fight Against Fraud and Abuse (GAO/T-AIMD-97-176, Sept.

29, 1997).

Medicare Home Health Agencies: Certification Process Is Ineffective in

Excluding Problem Agencies (GAO/T-HEHS-97-180, July 28, 1997).

Medicare: Need to Hold Home Health Agencies More Accountable for

Inappropriate Billings (GAO/HEHS-97-108, June 13, 1997).

Medicare Managed Care: HMO Rates, Other Factors Create Uneven

Availability of Benefits (GAO/HEHS-97-133, May 19, 1997).

Medicare (GAO/HR-97-10) and related testimony entitled Medicare: Inherent

Program Risks and Management Challenges Require Continued Federal

Attention (GAO/T-HEHS-97-89, Mar. 4, 1997).

Medicare: HCFA Should Release Data to Aid Consumers, Prompt Better HMO

Performance (GAO/HEHS-97-23, Oct. 22, 1996).

Medicare: Millions Can Be Saved by Screening Claims for Overused

Services (GAO/HEHS-96-49, Jan. 30, 1996).

Medicare: Excessive Payments for Medical Supplies Continue Despite

Improvements (GAO/HEHS-95-171, Aug. 8, 1995).

Medicare: Increased HMO Oversight Could Improve Quality and Access to

Care (GAO/HEHS-95-155, Aug. 3, 1995).

Medicare: Inadequate Review of Claims Payments Limits Ability to Control

Spending (GAO/HEHS-94-42, Apr. 28, 1994).

(101708) Page 16 GAO/T-HEHS-98-85
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