Medicare Administrative Contractors: CMS Should Consider Whether Alternative Approaches Could Enhance Contractor Performance
Published: 2015-04-30T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) required CMS to select claims administrative contractors through a competitive process and to do so in accordance with the FAR. In fiscal year 2013, MACs processed almost 1.2 billion claims totaling more than $363 billion in Medicare payments.
GAO was asked to assess CMS's implementation of contracting reform and examine whether CMS could do more to increase MACs' effectiveness. This report evaluates (1) differences in responsibilities among MACs and the costs associated with these responsibilities, including any changes since the implementation of contracting reform; (2) lessons learned, if any, since CMS implemented contracting reform that could be used to increase MAC efficiency and effectiveness; and (3) alternative contracting approaches that CMS could use to enhance contractor performance. To do this work, GAO reviewed the FAR and CMS documents—including contracting documentation and MAC cost reports—and interviewed officials from CMS and selected MACs. GAO also reviewed the FAR to identify alternative contracting approaches.
section_title: What GAO Found
paragraphs: As of February 2015, 16 Medicare Administrative Contractors (MAC) administered claims submitted by Medicare providers and suppliers. Twelve were A/B MACs that administered Medicare Part A and Part B claims for inpatient hospital care, outpatient physician and hospital services, and home health and hospice care, among other services, in specific jurisdictions. Four other MACs administered claims for durable medical equipment (DME).
GAO found that the A/B and DME MACs are typically expected to carry out similar key responsibilities, a few of which—including claims processing and customer service—have accounted for most of their reported costs. Since the implementation of contracting reform, beginning in 2006, the key responsibilities included in MACs' statements of work have generally remained consistent, with limited exceptions. Further, while similar key responsibilities accounted for the majority of A/B MACs' and DME MACs' costs, there were some differences between A/B MACs and DME MACs in the shares of total costs that were accounted for by certain responsibilities. For example, the DME MACs spent a higher portion on appeals, on average, than did the A/B MACs.
Officials from the Centers for Medicare & Medicaid Services (CMS) and the MACs that GAO interviewed have identified lessons learned since the implementation of contracting reform, and they have made improvements to increase operational efficiency and effectiveness. For example, MACs have developed Internet-based provider portals to reduce expenditures on telephone-based provider customer service. However, both CMS and MAC officials identified challenges for continued improvements in MAC efficiency and effectiveness, such as MACs' desire to protect their competitive advantage by not sharing certain innovations or operational improvements with other MACs.
CMS selected a cost-plus-award-fee contract structure for the MACs when it initially implemented contracting reform. This is a type of cost-reimbursement contract that allows the agency to provide financial incentives for achieving specific performance goals. While CMS has made modifications to its cost-plus-award-fee structure for MAC contracts—such as revising the performance metrics included in MACs' award fee plans and adjusting the distribution of award fees across the metrics to promote performance in areas where MACs have performed poorly in the past—the agency has not formally revisited its MAC contracting approach since the implementation of contracting reform. Moreover, its assessment of alternative contracting approaches has been limited. The Federal Acquisition Regulation (FAR) states that changing circumstances may make different contracting approaches more appropriate later in the course of a series of contracts or a long-term contract than they were at the outset. Further, CMS indicated in its 2007 MAC acquisition strategy that once a baseline cost and level of effort had been established, the agency would reassess whether the cost-plus-award-fee contract structure was still appropriate for the MACs. There are a number of other contracting approaches that could be introduced within or in addition to the cost-reimbursement structure. Without formally assessing the potential benefits and risks of alternative contracting approaches, CMS may be missing opportunities to enhance MACs' efficiency and effectiveness.
section_title: What GAO Recommends
paragraphs: GAO recommends that CMS conduct an analysis to determine whether alternative contracting approaches could be used to help promote improved contractor performance. In its comments, the Department of Health and Human Services concurred with this recommendation and said it plans to analyze alternative contracting approaches for MACs.

section_title: Letter
paragraphs: Medicare funds health care services for approximately 54 million  beneficiaries. Since 2006, the Centers for Medicare & Medicaid Services  (CMS)—the agency within the Department of Health and Human Services  (HHS) that administers the Medicare program—has used regional  contractors called Medicare Administrative Contractors (MAC) to process  claims for health care items and services submitted by 1.5 million enrolled  Medicare providers and suppliers. Among other things, MACs are  responsible for enrolling health care providers in the Medicare program,  processing and paying Medicare Part A and Part B fee-for-service claims,  and handling the first-level of appeals for denied claims. In fiscal year  2013, these contractors processed almost 1.2 billion fee-for-service  Medicare Part A and Part B claims, which totaled more than $363.3 billion  in payments for Medicare services. CMS paid approximately $1.3 billion  to the MACs for these services in fiscal year 2013.
When the Medicare program was established, claims administration  contractors were not selected through a competitive process, and CMS’s  authority to terminate these contracts was limited. Beginning in the 1980s, HHS asked Congress to amend CMS’s authority to select  Medicare claims administration contractors, seeking reforms that would  promote competition, improve contractors’ services to beneficiaries and  providers, achieve cost savings, and increase CMS’s ability to reward  high-performing contractors. In 2003, Congress included contracting  reform provisions in the Medicare Prescription Drug, Improvement, and  Modernization Act of 2003 (MMA). Among other things, the MMA requires  CMS to use competitive procedures to select MACs; offer them incentives  to provide quality service and promote efficiency; develop standards to  assess their performance; and comply with the Federal Acquisition  Regulation (FAR) except where inconsistent with specific MMA  provisions. If a MAC has met or exceeded performance requirements,  the MMA authorizes CMS to renew the contract from term to term without  the application of competitive procedures, so long as CMS periodically  recompetes MAC contracts. Under the MMA, CMS was required to  recompete MAC contracts at least once every 5 years, but the Medicare  Access and CHIP Reauthorization Act of 2015, enacted on April 16, 2015,  now requires that CMS recompete these contracts at least once every   10 years.
In 2006, CMS started transitioning Medicare claims administration tasks  from the 51 legacy contractors to the MACs. To do this, CMS established multistate, defined geographic areas, called jurisdictions, where MACs  would serve Medicare providers, suppliers, and beneficiaries. As of March  2014, there were 12 jurisdictions in which MACs administered Part A and  Part B Medicare claims (these MACs are referred to as A/B MACs) and 4  jurisdictions in which MACs administered Medicare claims for durable  medical equipment (DME), prosthetics, orthotics, and supplies (referred to  as DME MACs).
In March 2010, we reported on CMS’s progress and challenges in  establishing the first MAC contracts, and we found that, while the agency  had taken steps to facilitate the complex implementation of contracting  reform, the sample of MACs we reviewed did not meet all of CMS’s  performance requirements at that time. We also found that CMS did not  track total costs and savings associated with the implementation of  Medicare contracting reform. Inspector General issued a report assessing the extent to which MACs  had met CMS’s performance standards and evaluating CMS’s monitoring  of the MACs’ performance. The Office of Inspector General report  examined MACs’ performance between September 2008 and August  2011 and found that MACs included in the review did not meet one- quarter of CMS’s quality assurance standards, that CMS did not always  require corrective action plans for unmet standards, and that unmet  standards without corrective action plans were more likely to remain  unresolved. The Office of Inspector General also found that, while CMS  performed extensive reviews of MACs’ performance, the agency had not  always completed these reviews in a timely manner.
GAO, Medicare Contracting Reform: Agency Has Made Progress with Implementation,  but Contractors Have Not Met All Performance Standards, GAO-10-71 (Washington, D.C.:  Mar. 25, 2010). associated with these responsibilities, including any changes since the  implementation of contracting reform; (2) lessons learned, if any, since  CMS implemented contracting reform that could be used to increase MAC  efficiency and effectiveness; and (3) alternative contracting approaches  that CMS could consider to enhance contractor performance.
To examine differences in responsibilities among MACs and the costs  associated with these responsibilities, including any changes since the  implementation of contracting reform, we compared contract documents,  including MACs’ statements of work, and interviewed CMS officials about  changes to the scope of MACs’ responsibilities since 2006, the year the  first MAC became operational. Additionally, we obtained information  from CMS on MACs’ coordination with other Medicare contractors—such  as Recovery Auditors—to determine whether responsibilities have shifted  to or from MACs or whether MACs have experienced increased  workloads as a result of coordination with other contractors. We  obtained cost reports from CMS for 9 of the 12 A/B MACs and all four of  the DME MACs for which full contract year data were available during the  period of our review. The data we obtained were for costs reported by  each MAC during the most recent full contract year for which data were  available as of April 2014. The cost reports we obtained detailed the  amounts each MAC spent by key responsibility area, such as claims  processing, provider enrollment, and medical review. We analyzed these  reports to calculate the average amounts spent by the 9 A/B MACs and  by the 4 DME MACs on each responsibility area and the average  percentages of MACs’ total costs that were accounted for by each  responsibility area. To assess the reliability of CMS’s data on MACs’  reported costs, we manually reviewed the cost reports for obvious errors  or missing data and interviewed knowledgeable CMS officials. We found  these data to be sufficiently reliable for examining differences in the costs  associated with MACs’ key responsibilities. We calculated the average  amounts spent by the A/B MACs and by the DME MACs—rather than  comparing the MACs’ actual costs—to account for any differences in  responsibilities among the MACs and differences in the dates on which  the MACs reported the costs we analyzed.
To examine lessons learned that could be used to increase MAC  efficiency and effectiveness, we reviewed CMS documents and  interviewed CMS officials regarding experiences since the implementation  of contracting reform. Additionally, we interviewed officials from four  MACs that hold contracts for 7 of the 12 A/B MAC jurisdictions and one of  the four DME MAC jurisdictions. Collectively, the four MACs we  interviewed are responsible for about 58 percent of the estimated A/B  MAC claims volume and about 20 percent of the estimated DME MAC  claims volume. In these interviews, we discussed lessons the MACs have  learned since the implementation of Medicare contracting reform and  improvements they have implemented that have helped them operate  more efficiently and effectively. We also discussed the extent to which  CMS solicits ideas from the MACs about these operational efficiencies.
To examine alternative contracting approaches that CMS could consider  to enhance contractor performance, we reviewed CMS documents,  including the agency’s 2007 MAC acquisition strategy and contract  justification documents. We also reviewed recent award fee plans for  MACs that were operational at the time we requested these documents,  in February 2014. We then examined alternative contracting approaches  that are available under the FAR and analyzed the potential benefits and  risks of each alternative in regard to whether it could enhance MAC  performance. Finally, we interviewed CMS officials to discuss the extent  to which they had considered alternative contracting approaches since  the initial implementation of the MAC contracts.
We conducted this performance audit from January 2014 to April 2015 in  accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.
subsections: section_title: Background
subsections: section_title: MAC Jurisdictions
paragraphs: When implementing contracting reform, CMS initially planned to establish  15 A/B MAC jurisdictions and 4 DME MAC jurisdictions. At that time, CMS  also planned to award four additional MAC contracts for processing  Medicare claims for home health and hospice care, but the agency later  decided to divide this workload among four of the A/B MAC contracts  instead of establishing separate contracts for home health and hospice  care. Since the initial implementation of contracting reform, CMS has  consolidated some of the A/B MAC jurisdictions so that, as of February  2015, there were 12 A/B MAC jurisdictions. (See apps. I, II, and III for  maps of the A/B, DME, and Home Health and Hospice MAC jurisdictions  that were operational as of February 2015.)
section_title: Existing MAC Contract Structure and Incentives
paragraphs: Under the FAR, CMS could choose from two broad types of contract  structures for the MAC contracts—fixed-price contracts and cost- reimbursement contracts. Because of uncertainty about the amount of  costs MACs would likely incur during the initial implementation of the  MAC contracts, CMS opted to structure the MAC contracts as a cost-plus- award-fee contract, which is a type of cost-reimbursement contract that  allows an agency to provide financial incentives to contractors if they  achieve specific performance goals. In its 2007 MAC acquisition  strategy, CMS stated that fixed-price contracts for MACs would be difficult  to administer because little was known about the expected costs of these  contracts in light of the concurrent implementation of several other new  Medicare initiatives, such as the Part D prescription drug benefit and  Medicare Advantage plans, among other things. Agency officials also  said that they believed a cost-plus-award-fee contract structure would  allow CMS to stress the importance of quality performance over the  course of the contracts and would accommodate frequent changes in  MACs’ workloads or responsibilities that CMS anticipated handling over  the course of the contracts. CMS decided to structure each MAC contract  with a 1-year base performance period and four optional 1-year  performance periods.
Under the cost-plus-award-fee contract, MACs receive a base fee, which  is fixed at the inception of the contract, plus reimbursement for allowable  costs. The MACs also may earn an incentive, known as an award fee,  based on their performance on standards that are defined by CMS in  advance of each 1-year performance period. During the procurement  process, MAC offerors propose to CMS the amounts of the base fees and  award fees they would like to be eligible to earn over the course of their  contracts, which are subject to negotiation to arrive at the final base and  award fee amounts with successful offerors. For the MACs that were in  operation as of January 2014, base fees represented about 1 to 3 percent  of the MACs’ total contract values, while the award fees that the MACs  were eligible to earn represented about 1 to 5 percent of the total contract  values. Over the course of MAC contracts, prior to the start date for  each 1-year performance period, CMS can revise the metrics included in  MACs’ award fee plans and adjust the distribution of award fees across  the metrics to promote performance in high-priority areas and to  emphasize areas where MACs may be able to influence a positive  programmatic outcome.
For the 12 A/B MACs that were in operation as of January 2014, the total  estimated value for the 5-year contract period—if all option years are  exercised—is over $5.2 billion, with the total estimated contract values  ranging from about $326 million to $609 million per A/B MAC. For the four  DME MACs that were in operation as of January 2014, the estimated   5-year contract value—if all option years are exercised—is about   $624 million. Estimated 5-year contract values for the DME MACs   ranged from about $92 million to $257 million per MAC. See table 1 for  details about the ranges of base fees and available award fee pools that  CMS estimated the MACs in operation as of January 2014 were eligible  to earn over the course of their 5-year contracts.
section_title: CMS Oversight of the MACs
paragraphs: For each MAC, CMS develops a statement of work that outlines the  functional requirements—or responsibilities—that the MACs are to fulfill  over the course of their contracts. CMS oversees MACs’ performance in  carrying out the responsibilities outlined in their statements of work in a  variety of ways, including but not limited to the following:
Reviewing MACs’ quality control plans. Under their statements of  work, each MAC is responsible for developing a quality control plan,  which must be submitted to CMS within 45 days after the contract is  awarded and updated annually thereafter, when the contract is  renewed for additional option years. CMS reviews the MACs’ quality  control plans and approves them after ensuring that they include all  required elements. Among other things, the quality control plan  specifies procedures—such as an audit and inspection system and a  formal system for implementing corrective actions—to which the MAC  will adhere, in order to ensure that the MAC meets its contract  performance requirements.
Assessing MACs’ performance on the quality assurance  surveillance plan. Consistent with the FAR, CMS develops a quality  assurance surveillance plan to outline performance standards that all  MACs are expected to meet, in accordance with their statements of  work. At the end of each contract year, CMS assesses each MAC’s  performance on the set of surveillance plan standards that CMS has  established for each of 11 different business function areas. For  example, one business function area is provider customer service,  and two of the quality assurance surveillance plan standards for that  area relate to the timeliness of the MAC’s responses to telephone and  written inquiries from providers. After CMS completes its annual  surveillance plan review for each MAC, the MACs have an opportunity  to dispute CMS’s assessment or provide more information that may  result in a change to the MAC’s performance score. In some cases,  CMS may require that the MAC complete an action plan to address  deficiencies cited in the quality assurance surveillance plan review.
Assessing MACs’ performance through Contractor Performance  Assessment Reporting System reviews. At the end of each  contract year, CMS is required to prepare a Contractor Performance  Assessment Reporting System report for each MAC, which provides  an overall rating of each MAC’s performance during the contract  year. MACs’ performance that they gather through various sources, such as  the MACs’ cost reports, the results of quality control plan and quality  assurance surveillance plan reviews, and award fee evaluations.  Using information aggregated from all of these sources, CMS rates  the MACs in areas such as quality, schedule, cost control, business  relations, and personnel management. The Contractor Performance  Assessment Reporting System stores these reports electronically and  makes them available for other federal agencies to review in the event  that an entity holding a MAC contract later competes for other federal  contracts.
The base year of each MAC contract is comprised of an implementation period and an  operational period of performance, each of which requires a separate Contractor  Performance Assessment Reporting System report, but these two reports are completed  only after the end of the base year of the contract.
Assessing MACs’ performance on metrics included in their  award fee plans. Award fees are the key performance incentive  included in the type of cost-reimbursement contract CMS selected for  the MACs under the FAR. Award fee plans include fewer performance  standards than the quality assurance surveillance plan and are  intended to (among other things) reward MACs for being innovative,  cost-effective, and collaborative for the overall benefit of the Medicare  program. CMS develops the award fee plan and, at the end of each  contract year, reviews MACs’ performance on the standards included  in the plan, to determine whether each MAC is eligible to earn some,  all, or none of its available award fee pool. CMS assigns a certain  percentage of the award fee to each of the performance standards  included in the plan. To be eligible to earn any percentage of the  award fee, the MAC must achieve at least a “satisfactory” rating in  each performance element under its most recent Contractor  Performance Assessment Reporting System evaluation, signifying  that it has substantially met all cost, schedule, and technical  performance requirements of its contract. Further, the MAC must  meet all or almost all of the significant criteria included in its award   fee plan. MACs that perform at this level are eligible to earn up to   50 percent of their award fees. Only MACs that exceed all or almost  all of the significant award fee criteria while also substantially meeting  all cost, schedule, and technical performance requirements of their  contracts are eligible to earn up to 100 percent of their award fees and  an “excellent” rating for the award fee. MACs generally have not  earned all of the award fees for which they have been eligible. For  example, in its January 2014 report, the HHS Office of Inspector  General analyzed data from two performance periods and found that  MACs had earned between 35 and 86 percent of their overall award  fee pools.
section_title: MACs’ Responsibilities Are Generally Similar and Have Remained Consistent Since Contracting Reform Responsibilities of the MACs Are Functionally Similar across All Contracts and Have Generally Remained Consistent Since Contracting Reform, with Limited Exceptions
paragraphs: MACs have a number of key responsibilities related to the Medicare  program, as outlined in their statements of work, and these  responsibilities have generally remained the same since contracting  reform began in 2006. Among the responsibilities, MACs are charged with  processing Medicare claims submitted by providers—which involves  processing the claim to the point of payment, denial, or other action—in a  timely and accurate manner. In addition, MACs are responsible for  conducting medical reviews of claims to determine whether the claims are  for services covered by the Medicare program and whether the services  were medically necessary. MACs also handle first-level appeals, or  requests for redeterminations for any claims that were initially denied.  Further, the MACs are responsible for maintaining a Medicare provider  customer service program, which has three main components: a provider  outreach and education program, a contact center to handle provider  inquiries, and self-service technology for providers to access Medicare  information at any time. For descriptions of MACs’ key responsibilities,  see appendix IV.
According to CMS officials, with limited exceptions, MACs’ responsibilities  are functionally similar across all of the MAC contracts. One exception is  that there are slight differences between the responsibilities of the A/B  MACs and those of the DME MACs. For example, DME MACs are not  responsible for enrolling medical equipment suppliers in the Medicare  program, whereas the A/B MACs have the responsibility of enrolling  providers and suppliers. Enrollment of medical equipment suppliers is  handled centrally by the National Supplier Clearinghouse contractor.
Another exception is that the MACs can have different jurisdiction-specific  responsibilities. For instance, some MACs serve jurisdictions in which  Medicare Strike Force teams are located. The Medicare Strike Force  teams investigate and prosecute potential fraud in specific locations with  a high historic level of program fraud. The MACs provide additional  support, perform special analyses, and carry out follow-up actions for  certain providers as requested by the Strike Force teams. Additionally,  certain MACs have had jurisdiction-specific responsibilities related to  Medicare demonstration projects regarding specific types of providers,  such as rural community hospitals, or for specific activities or services,  including enrollment of providers that offer home health services.
Although MACs’ responsibilities are generally similar across each of the  contracts, CMS officials told us that the MACs often have different  workloads for certain responsibilities, based on factors such as the  provider mixes in their jurisdictions. For example, some MAC jurisdictions  have a large number of long-term care hospitals. Since these types of  hospitals may receive higher payments for the services they provide than  other types of hospital providers, the MACs must review information  about the long-term care hospitals they serve to ensure that hospitals  qualify for the higher payments. As a result, these MACs may spend more  time and resources than MACs with fewer long-term care hospitals would  spend fulfilling contract requirements associated with processing claims  from long-term care hospitals.
CMS officials also told us that the responsibilities of the MACs have  generally remained the same since the implementation of contracting  reform, although legislative changes have affected some of the MACs’  workloads for certain responsibilities. One such change was the creation  of the nationwide Recovery Auditor Program by the Tax Relief and Health  Care Act of 2006, which changed how Medicare claims are reviewed after  they have been paid to identify any improper payments. Prior to the  implementation of the nationwide recovery auditor program in 2010, the  MACs were responsible for conducting post-payment reviews to recover  improper payments, but the Recovery Auditors now conduct the bulk of  these reviews. If the Recovery Auditor finds overpayments of certain  claims, the MACs recover those overpayments from the providers.  Although the MACs are conducting fewer postpayment reviews than they  originally did, CMS officials told us that the MACs’ workload for recovering  overpayments identified by the Recovery Auditors’ reviews has  increased.(PPACA) required the revalidation of providers’ and suppliers’ eligibility to  participate in the Medicare program. Although the A/B MACs and the  National Supplier Clearinghouse have always had responsibility for  provider enrollment, the PPACA requirement to revalidate providers was  added to the A/B MACs’ and the National Supplier Clearinghouse’s  responsibilities. As of November 2014, the MACs and the National  Supplier Clearinghouse had sent revalidation notices to more than   1.04 million Medicare providers and suppliers.
section_title: Most of MACs’ Reported Costs Were Accounted for by Certain Key Responsibilities, Such as Claims Processing and Provider Customer Service
paragraphs: Although there were some differences between A/B MACs’ and DME  MACs’ reported costs, most of the reported costs for both the A/B MACs  and the DME MACs were for a few key responsibilities. On average, both  the A/B MACs and the DME MACs reported a large portion of their costs  were incurred for similar activities, including claims processing and the  Provider Customer Service Program. However, the A/B MACs reported a  higher average percentage of their costs for financial management than  did the DME MACs. Additionally, on average, the DME MACs reported a  higher portion for appeals than did the A/B MACs.
For the nine A/B MACs included in our review, the total costs reported   by all nine MACs were $732.1 million. These MACs’ reported total   costs for their respective full contract years ranged from $41.4 million to  $132.9 million, with an average of $81.3 million per MAC. Four  responsibility areas—claims processing, financial management, Provider  Customer Service Program, and provider enrollment—accounted for  about 60 percent of the nine A/B MACs’ reported costs during the most  recent full contract year for which cost data were available. Four other  key responsibilities accounted for about 26 percent of the A/B MACs’  reported costs: appeals (about 7 percent), medical review (about   7 percent), administrative requirements (about 7 percent), and  infrastructure requirements (about 6 percent). The nine A/B MACs in our  review incurred the remainder of their reported costs—about 14 percent— for other responsibilities, such as reopening of initial claims  determinations, the Medicare secondary payer program, and jurisdiction- specific requirements.percentages of A/B MACs’ total reported costs, by key responsibility area,  for the most recent full contract year for which data were available for  MACs that were in operation at the time of our review.
section_title: CMS and MACs Have Identified Lessons Learned to Improve MAC Operations, but Also Challenges for Continued Improvements Since the Implementation of Contracting Reform, CMS and the MACs Have Identified Lessons Learned and Made Improvements to Increase Operational Efficiency and Effectiveness
paragraphs: Officials from CMS and the MACs we interviewed agreed that they have  learned many lessons since the initial implementation of the MAC  contracts, and together, they have implemented improvements to  increase the MACs’ operational efficiency and effectiveness. The MACs’  statements of work outline CMS’s expectation that the MACs will  continuously refine their business processes to foster efficiencies to  promote the best value for the government and use innovative solutions  to improve program operations.
CMS officials we interviewed explained that they routinely encourage,  solicit, and review ideas from MACs about how to improve their  operational efficiency and effectiveness. These officials explained that  they have gathered ideas about increasing efficiency and effectiveness  from the MACs in the following ways:  In contract solicitations, CMS instructs MAC offerors to propose  programmatic or operational innovations they would implement if  awarded a MAC contract and to describe the expected benefits of the  proposed innovations.
When MACs are transitioning into each new contract, CMS requires  them to formally submit lessons learned documents, which detail  challenges or other insights identified by MACs while transferring  operations from previous contractors. These lessons learned may be  beneficial to other MACs during future contract implementation  periods.
In the fall of 2013, CMS created an innovations submissions mailbox  for the MACs to send in improvement or innovation requests. The  MACs are to use this system when they want to implement a new  process, service, technology, or other improvement, but there are  funding needs or other contract requirements that CMS must approve  in order for the MAC to implement the planned improvement.
CMS convenes meetings annually with MAC executives, and they  often discuss process improvement ideas at these meetings.
CMS also acknowledges MACs’ ideas for significant process  improvement through the Contractor Performance Assessment  Reporting System, a web-based application it uses to record MAC  performance evaluations.
CMS and the MACs have convened workgroups related to various  key responsibilities, in which the MACs collaborate and share ideas.
According to CMS officials, when a particular MAC’s innovations have  merit across the MAC community, CMS will incorporate the practices into  subsequent MAC statements of work, to spread the operational  improvement to other MACs.
Officials from CMS and the four A/B MACs and one DME MAC we  interviewed listed the following examples of lessons learned and  innovations that some of the MACs have implemented since the  implementation of contracting reform:
Provider self-service portals. Three of the four A/B MACs and the  one DME MAC we interviewed said that they had developed Internet- based provider self-service portals, which allow providers to validate  their eligibility, submit claims electronically, request claim  reconsiderations, and check the status of claims and  reconsiderations, among other things. MAC officials said that this has  reduced their expenditures on resources devoted to telephone-based  provider customer service.
Data analytics. Officials from one A/B MAC described how they have  begun using data analytics to more effectively identify provider- specific patterns of billing errors so that they can conduct targeted  outreach and education to providers and try to prevent future billing  errors.
Clinical editing software. CMS officials described the software that  one MAC has deployed to improve the effectiveness of its prepayment  edits. The software enables the MAC to electronically flag errors in  Medicare claims that are not likely to meet the criteria for Medicare  payment when the provider submits the claim for payment, rather than  after the MAC begins processing the claim. The MAC explained that  the provider is then offered an opportunity to correct errors before  transmitting the claim to the MAC for payment. This reduces the  resources this MAC must devote to the appeals process, the CMS  officials said.
Representation at administrative law judge hearings. Another  MAC described an innovation it had piloted in its DME MAC  jurisdiction, which CMS has since required of all A/B and DME MACs.  The innovation addresses the rate at which the MACs’ decisions to  deny coverage for Medicare services or DME were being overturned  at administrative law judge hearings, which are convened when the  MAC and a Medicare qualified independent contractor have both  determined that a claim should be denied and the beneficiary or  provider disagrees with that determination. In the past, the MACs  did not send representatives to these hearings, and many of the  disputed claims were ultimately paid. The MACs now send physicians  to administrative law judge hearings to represent the MAC and explain  why it denied payment for claims that are the subject of the hearings.  More of the MACs’ initial determinations are being upheld, which  results in savings of Medicare dollars, the MAC said.
CMS officials said that the agency includes in its MAC performance  reviews an assessment of whether the MAC has generated ideas or  process improvements that add value to the government. These ideas  and innovations are documented in the Contractor Performance  Assessment Reporting System, which may contribute to a favorable past  performance evaluation for the MAC when its contract is recompeted.
section_title: CMS and the MACs Have Identified Some Challenges for Continued Improvements in MAC Efficiency and Effectiveness
paragraphs: While they have made various changes since the implementation of  contracting reform, officials we interviewed from both CMS and the MACs  described some challenges created by the structure of the MAC contracts  that may constrain continued improvements in MAC efficiency and  effectiveness. One challenge CMS officials identified was the 5-year limit  on MAC contract terms, which they said constrained their ability to  respond to issues with MACs’ performance. These officials stated that  they were reluctant to decide not to exercise an option year for a MAC  based on performance issues. According to the officials, it was impractical  to award a new contract within the 5-year contract terms permitted by the  MMA because it takes approximately 18 to 24 months to solicit, award,  and implement a new MAC contract. The officials said they would be  more likely to consider replacing MACs midcontract if the contracts lasted  longer than 5 years. To illustrate this, CMS officials told us that they had  issued only one written notification to a MAC, advising that the agency  might not exercise a contract option year—unless the contractor improved  its performance—since the implementation of contracting reform.  According to the CMS officials, the MAC ultimately improved its  performance after receiving the notice, but CMS’s decision to continue  the contract was also partially influenced by the agency’s conclusion that  the potential benefit of replacing the MAC before the end of its contract  term was outweighed by the risks and costs that would be associated with  recompeting the contract sooner than planned.
In addition, the CMS officials we interviewed stated that a potential benefit  of increasing the time between MAC contract competitions could be that  CMS and the MACs would have more time to develop innovations and  that the MACs would have more time to implement them to yield  performance improvements. The MAC officials we interviewed echoed  these sentiments. The officials we interviewed from CMS and the MACs  said they would support a legislative change to increase the maximum  time between MAC contract competitions from 5 years to 10 years. In its  January 2014 report, the HHS Office of Inspector General recommended  that CMS seek legislation increasing the limit on MAC contract duration.  The Medicare Access and CHIP Reauthorization Act of 2015, enacted in  April 2015, increased the maximum time between MAC contract  competitions to 10 years.
According to the MAC officials we interviewed, the competitive nature of  the MAC contracting environment has made MACs reluctant to share  certain innovations or operational improvements with other MACs. The  MAC officials said that they must balance CMS’s desire for them to share  innovations with other MACs with trying to protect any competitive  advantages they have in the contracting environment. From the  perspective of officials from two of these MACs, collaboration and sharing  of ideas was more widespread among the legacy contractors, which were  not selected through competitive processes. After the initial transition  from the legacy contractors to MACs, officials from one MAC said that  there was a period of time when MACs may have overvalued a particular  improvement or innovation as being proprietary or a competitive  advantage and been reluctant to share ideas with other MACs. In the  view of this contractor, MACs have since become more willing to share  ideas that are retrospective and aimed at fixing past problems. However,  they still want to protect true innovations, which are ideas that address  problems more prospectively and aim to find better ways of fulfilling their  contract requirements.
CMS officials also described their recent decision to delay for 5 years the  planned consolidation of two pairs of A/B MAC jurisdictions, based on  their experiences with the recent consolidation of three other pairs of A/B  MAC jurisdictions. In 2010, CMS announced that it planned to consolidate  the 15 original A/B MAC jurisdictions to 10 jurisdictions before 2017.  Consolidations had been implemented in three pairs of A/B MAC  jurisdictions by February 2014, but CMS decided in March 2014 that it  would delay for 5 years the consolidation of the two remaining pairs of  MAC jurisdictions. The agency gave several reasons for this decision.  First, CMS officials found that operational cost reductions associated with  the first three consolidations were smaller than expected, and they were  concerned that merging the remaining two pairs of A/B MAC jurisdictions  could affect contractor performance negatively in key areas, including  provider customer service. CMS was also concerned about the  heightened complexity of the final two MAC jurisdiction consolidations  because some of the affected jurisdictions were responsible for home  health and hospice workloads. Finally, CMS was concerned about the  business landscape that has evolved since the implementation of  contracting reform. According to the CMS officials we interviewed, MACs  conduct highly specialized work and, in the view of the officials, few other  potential contractors would be capable of performing such specialized  work successfully. The agency has already limited the share of the A/B  MAC workload that can be serviced by a single contractor or affiliated  contractors.almost the maximum workload CMS has specified that a single contractor  can hold, CMS was concerned that further A/B MAC workload  consolidations and reductions in the number of MAC marketplace  participants could constrain CMS’s ability to respond to other challenges  that might arise.
section_title: CMS Has Informally Considered Some Alternative Contracting Approaches but Could Do More to Assess Whether They Could Enhance MAC Performance
paragraphs: While CMS has made modifications to its cost-plus-award-fee structure  for MAC contracts—such as revising the metrics included in MACs’ award  fee plans and adjusting the distribution of award fees across the metrics  to promote performance in high-priority areas and areas where MACs  have performed poorly in the past—the agency has not formally revisited  its MAC contracting approach since the implementation of contracting  reform. According to the FAR, changing circumstances may make certain  contracting approaches more appropriate later in the course of a series of  contracts or a long-term contract than they were at the outset. Moreover,  CMS indicated in its 2007 acquisition strategy that once a baseline cost  and level of effort had been established, the agency would reassess  whether the cost-plus-award-fee contract structure was still appropriate  for the MACs. However, CMS’s assessment of alternative contracting  approaches since the implementation of contracting reform has been  limited.
In recent contract justification documents, CMS has indicated why a firm  fixed-price contract structure remains an unsuitable approach for MAC  contracts and included a limited discussion of why the use of incentive  fees—a type of fee available under the cost-reimbursement contract  structure—would not be appropriate for MACs.justification documents fulfill CMS’s responsibility under the FAR to  document the circumstances, facts, and reasoning behind taking  individual contract actions (such as entering into a contract in a given   These contract  MAC jurisdiction). In addition, the FAR also requires agencies to perform  acquisition planning and, where a written evaluation plan is required, to  review their acquisition plans and revise them as appropriate at key dates  specified in the plan or whenever significant changes occur, but at least  annually. While CMS’s decision to continue using the cost-reimbursement  contract structure for the MAC contracts may be appropriate, there are a  number of other contracting approaches that could be introduced within or  in addition to the cost-reimbursement structure. CMS officials have  discussed some of them internally but not documented any formal  assessments of the alternatives by revising CMS’s 2007 MAC acquisition  strategy. A comparative evaluation of the possible costs and benefits of  alternative contracting approaches would provide a more evidence-based  rationale for CMS’s chosen approach for the MAC contracts. Without  formally assessing the potential benefits and risks of alternative  contracting approaches, CMS lacks assurance that the current contract  structure is the optimal method for incentivizing MACs’ performance, and  CMS may be missing opportunities to enhance MACs’ efficiency and  effectiveness.
Following are four examples of potential alternative contracting  approaches which may be permissible under the FAR, if properly  documented and approved, along with some of the potential risks and  benefits that CMS could consider. While some of these approaches are  not explicitly mentioned in the FAR, they are also not prohibited. The FAR  allows agencies to develop and test new acquisition methods, provided  they are not explicitly precluded by federal law, executive order, or  regulation.
Using award terms. One type of incentive available to CMS is the  award term. Unlike the contract option years that exist under CMS’s  current MAC contracting approach, which CMS can exercise at its  discretion once it has complied with the FAR requirements for  exercising an option, award terms would incentivize MACs’  performance by automatically extending their contracts, as long as  they met preestablished performance requirements.
CMS officials told us that, while they had not documented an  assessment of this alternative, they had discussed it internally and  concluded that the statutory 5-year limit on MAC contract terms  limited the potential of the award-term approach to serve as a greater  motivator to MACs’ performance than the option years that are  available under the existing cost-plus-award-term contract structure.  We agreed that award terms may be a greater performance motivator  if MAC contracts lasted longer than 5 years; however, there was  nothing that would have precluded CMS from adopting the award- term approach within the 5-year terms for MAC contracts. For  example, CMS could have restructured MAC contracts so that years  two and three would be option years, and years four and five would be  award-term years. CMS had not formally analyzed the potential risks  and benefits of the award-term approach in the context of the 5-year  contract term or compared these to the current option year approach.  Given the recent legislative change that will permit MAC contracts to  last up to 10 years, the award term approach may have more potential  than CMS previously thought. Among the factors that CMS could  consider would be whether this incentive could increase or decrease  CMS’s administrative costs associated with monitoring MACs’  performance over the course of their contracts and the extent to which  the agency may need to revise its performance metrics or thresholds,  if at all, in order to accommodate the implementation of award terms.
Implementing negative performance incentives. Under the FAR,  agencies can also establish cost-reimbursement contracts with  negative performance incentives. For example, under this type of  contract, CMS theoretically could deduct from MACs’ base fees if they  failed to meet certain performance thresholds. Alternatively, CMS  could include nonmonetary negative incentives in MAC contracts,  such as reducing the length of the contract if the MAC failed to meet  established performance thresholds. For example, the contract could  provide that, if a MAC’s performance fell below a certain level, CMS  could reduce the length of the last option year of the contract by   3 months. For even lower levels of performance, CMS could impose  reductions of 6 months, 9 months, or 1 year.
The CMS officials we interviewed had not documented an  assessment of whether monetary or nonmonetary negative incentives  for poor performance would be appropriate for MAC contracts.  However, they said that they had discussed it internally and  concluded that the targets for existing MAC performance metrics are  too high to accommodate negative performance incentives. For  example, the CMS officials said that, while other federal contracts  may require contractors to meet a certain requirement 80 percent of  the time, MACs are required to meet many of their requirements 95 to   100 percent of the time.
Transitioning certain elements within the MAC contracts to a  fixed-price structure. In 2007, CMS documented its rationale for  using a cost-reimbursement contract structure for the MAC contracts.  However, while maintaining the overall cost-reimbursement contract  structure, CMS could use a fixed-price contract structure for separate  contract components; that is, CMS could set a firm price separately  for certain contract responsibilities. In that case, the MACs would only  be paid according to the fixed price for each contract component that  was set at the beginning of the contract.
In its 2007 acquisition strategy and more recent contract justification  documents, CMS concluded that it would be too difficult to predict at  the outset of each contract the workloads and specific costs that could  be incurred for each of the MACs’ responsibilities. That is, CMS has  stated that the fixed-price contract structure is not appropriate  because legislative changes in Medicare coverage and payment  policy, as well as other factors outside CMS’s and the MACs’ control,  could cause the agency to make near-constant technical changes to  MACs’ contracts over the course of each contract term.
CMS officials we interviewed said they had engaged in some internal  discussions about whether there were any elements within MACs’  contracts that could be transitioned from a cost-reimbursement to a  fixed-price contract structure, but they had not formally analyzed the  feasibility of doing so or which contract responsibilities have the  potential to be appropriate for a fixed-price contract structure. Given  that CMS has been collecting MAC cost reports for more than 8 years,  the agency has the data it would need to analyze the potential  benefits or risks of transitioning certain MAC responsibilities to a fixed- price structure. For example, while it may not be appropriate to  transition the responsibilities of provider enrollment or medical review  to a fixed-price structure—because of the unpredictability of future  workloads MACs could incur for these particular responsibilities— CMS could evaluate whether it would be appropriate to transition  certain other MAC requirements—such as certain claims processing  production activities—to a fixed-price approach.
Transitioning certain elements of the MAC contracts to an  incentive fee structure. Another contracting approach available to  CMS is the incentive fee. Under this arrangement, CMS would  establish target costs that it would expect each MAC to incur for each  contract responsibility. Using an agreed-upon formula that CMS would  negotiate with each MAC, if the total costs reported by the contractor  were less than the target costs, the contractor would earn a total fee  that is greater than the target fee. If the total costs were greater than  the target costs, the MAC would earn a total fee that is less than the  target fee. For example, each MAC is required to have a Provider  Customer Service Program to educate providers on Medicare  requirements and respond to their inquiries. Using historical cost data,  CMS could establish a target cost for these programs and incentivize  the MACs to reduce costs in this area through techniques such as  encouraging providers to use self-service information portals rather  than seeking information through written inquiries.
CMS officials told us that they initially decided against using the cost- plus-incentive-fee contract structure for MACs because they believed  that changing Medicare requirements precluded the establishment of  specific cost, schedule, or performance targets from the outset of  contracting reform, and CMS’s recent contract justification documents  continue to reflect that belief. There is no indication, however, that  CMS has engaged in an analysis that might help identify whether  there are certain MAC responsibilities for which the cost-plus- incentive-fee approach might be feasible, without transitioning to this  approach for all MAC contract responsibilities. Now that CMS has  more experience with MAC contracts and has more data on past  costs and performance for MACs’ key responsibilities, CMS may be  able to identify selected responsibilities that could be transitioned to  an incentive fee structure.
section_title: Conclusion
paragraphs: CMS has accumulated a considerable amount of data on MACs’ reported  costs and performance under the cost-plus-award-fee contract structure  the agency established when the first MACs became operational 8 years  ago. The FAR states that certain contracting approaches may be more  appropriate later in the course of a series of contracts or a long-term  contract than they were at the outset, and CMS indicated in its 2007  acquisition strategy that it would revisit its contracting approach once it  had collected baseline information. However, CMS has not engaged in a  formal analysis of whether several other contracting approaches have the  potential to increase MACs’ efficiency and effectiveness. Instead, recent  contract justification documents have included a limited assessment of  potential alternatives. Without using the wealth of data it has collected  since the implementation of contracting reform to analyze other available  contracting approaches, CMS may be missing opportunities to increase  MACs’ efficiency and effectiveness.
section_title: Recommendation for Executive Action
paragraphs: We recommend that CMS conduct a formal analysis, using its experience  and data it has collected since the implementation of the first MAC  contracts, to determine whether alternative contracting approaches could  be used—even if only for selected MAC contract responsibilities—to help  promote improved contractor performance.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to HHS and received written comments,  which are reprinted in appendix V. In its comments, HHS concurred with  this recommendation and said it plans to analyze alternative contracting  approaches for MACs. Finally, HHS provided technical comments, which  we addressed as appropriate.
As agreed with your offices, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from its  issuance date. At that time, we will send copies to the Secretary of Health  and Human Services, appropriate congressional committees, and other  interested parties. In addition, the report will be available at no charge on  the GAO Web site at http://www.gao.gov.
If you or your staffs have any questions about this report, please contact  me at (202) 512-7114 or kingk@gao.gov. Contact points for our Offices of  Congressional Relations and Public Affairs are on the last page of this  report. GAO staff who made major contributions to this report are listed in  appendix VI.
section_title: Appendix I: Jurisdictional Map for Part A/B Medicare Administrative Contractors, as of February 2015
section_title: Appendix II: Jurisdictional Map for Durable Medical Equipment Medicare Administrative Contractors, as of February 2015
section_title: Appendix III: Jurisdictional Map for Home Health and Hospice Medicare Administrative Contractors, as of February 2015
section_title: Appendix IV: Key Responsibilities of Medicare Administrative Contractors (MAC)
paragraphs: Appendix IV: Key Responsibilities of Medicare  Administrative Contractors (MAC)
subsections: section_title: Key responsibility Claims processing
paragraphs: Description  MACs are to process Medicare claims to the point of payment, denial, or other  adjudicative action in a timely and accurate manner. Additionally, MACs are responsible  for adhering to all claims processing rules outlined in CMS’s Internet-only manuals.
MACs are to process provider applications for enrollment in the Medicare program,  including prescreening of applications, verifying and validating the information in the  enrollment application, and ensuring that the applying providers are not excluded from  participation in the Medicare program.
MACs are responsible for establishing a Provider Customer Service Program to assist  providers in understanding and complying with Medicare’s operational policies, billing  procedures, and processes. The Program is to enable providers to understand, manage,  and bill Medicare correctly, with the goal being to reduce the Medicare paid claims error  rate and improper payments. Each MAC’s program should consist of three major  components:  Provider outreach and education for educating providers and their staff,  Provider contact center for handling provider inquiries, and  Provider self-service technology, including technology that allows access to Medicare  information at any time of the day.
MACs are to decrease the paid claims errors in coverage, coding, and billing through the  Medical Review program. The Medical Review program is designed to promote a  structured approach to how Medicare policy is interpreted and implemented, which often  requires the review of medical records to determine whether the services were medically  necessary.
MACs are responsible for implementing a comprehensive Medicare Secondary Payer  program, which is intended to ensure that plans with primary insurer liability pay before  Medicare pays for a particular service.
A local coverage determination is a decision made by a MAC to cover a particular item or  service on a MAC-wide basis, in accordance with the Social Security Act (i.e., a  determination as to whether the item or service is reasonable and necessary).  MACs are to publish local coverage determinations to provide guidance to the public and  medical community within their jurisdictions. MACs are to develop local coverage  determinations by considering medical literature, advice of local medical societies and  consultants, public comments, and comments from providers. Additionally, MACs are to  ensure that all local coverage determinations are consistent with statutes, rulings,  regulations, and national policies related to coverage, payment, and coding.
A reopening of a Medicare claim is a remedial action taken to change the final  determination that resulted in an overpayment or an underpayment, even though the  determination was correct based on the evidence of record. Reopenings are separate  from the appeals process and are a discretionary action on the part of the MAC. The  MAC’s decision to reopen a claim determination is not an initial determination and is not  appealable.
Description  A party dissatisfied with the MAC’s initial determination about Medicare coverage for items  or services has the right to request within 120 days that the MAC review its initial  determination. Within 60 days of receiving the request for redetermination, a MAC  employee who did not take part in the initial determination must review the claim and  supporting documentation and issue a redetermination either affirming, partially reversing,  or fully reversing the MAC’s initial determination. Parties permitted to appeal initial  determinations include beneficiaries and their representatives, states, providers,  physicians, and other suppliers.
MACs are responsible for deterring and detecting fraud and abuse. The MACs may  receive information about fraud or abuse from several sources, including provider inquiries  or medical review, and are required to refer all suspected cases to the Program Safeguard  Contractors (PSC) or Zone Program Integrity Contractors (ZPIC) for investigation.  Additionally, MACs should communicate with the PSCs and ZPICs to coordinate efforts  and prevent duplication of review activities.
MACs are responsible for maintaining accounting records in accordance with specific  government accounting principles and applicable government laws and regulations. MACs  are expected to report financial activity to CMS in accordance with the financial reporting  requirements set forth in CMS’s Internet-only manuals and the MACs’ statements of work.  Additionally, the MACs are responsible for receiving, reviewing, and auditing (as  necessary) institutional provider cost reports.
MACs are responsible for establishing and maintaining a Program Management Office,  which has defined management processes and organization in order to successfully carry  out the responsibilities of the contract. One part of the Program Management office  requires the MACs to communicate with CMS officials about a variety of issues.
MACs are required to establish or use infrastructure to carry out the requirements of the  contract. This includes telecommunication activities and management of electronic data.
MACs are to comply with various administrative requirements that outline specific needs  for carrying out the contract, such as key personnel, security, quality assurance, public  relations, responding to congressional inquiries, participation in meetings and workgroups,  continuity planning and disaster preparedness, internal controls, and compliance program.
section_title: Appendix V: Comments from the Department of Health and Human Services
section_title: Appendix VI: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, William T. Woods, Director;  Martin T. Gahart, Assistant Director; Christie Enders; John Krump;  Victoria Klepacz; Alexis C. MacDonald; Elizabeth T. Morrison;   Mary Quinlan; and Jennifer Whitworth were major contributors to   this report.
section_title: Related GAO Products
paragraphs: Medicare Program Integrity: Increased Oversight and Guidance Could  Improve Effectiveness and Efficiency of Postpayment Claims Reviews.  GAO-14-474. Washington, D.C.: July 18, 2014.
Medicare Program Integrity: Increasing Consistency of Contractor  Requirements May Improve Administrative Efficiency. GAO-13-522.  Washington, D.C.: July 23, 2013.
Medicare Program Integrity: Few Payments in 2011 Exceeded Limits  under One Kind of Prepayment Control, but Reassessing Limits Could Be  Helpful. GAO-13-430. Washington, D.C.: May 9, 2013.
Medicare Program Integrity: Greater Prepayment Control Efforts Could  Increase Savings and Better Ensure Proper Payment. GAO-13-102.  Washington, D.C.: November 13, 2012.
Medicare Contracting Reform: Agency Has Made Progress with  Implementation, but Contractors Have Not Met All Performance  Standards. GAO-10-71. Washington, D.C.: March 25, 2010.