Debt Collection Improvement Act of 1996: HHS's Centers for Medicare &amp; Medicaid Services Faces Challenges to Fully Implement Certain Key Provisions
Published: 2002-02-22T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The Debt Collection Improvement Act (DCIA) of 1996 requires that agencies refer eligible debts delinquent more than 180 days that they have been unable to collect to the Department of the Treasury for payment and offset and to Treasury or a Treasury-designated debt collection center for cross-servicing. The Centers for Medicare and Medicaid Services (CMS) made progress in referring eligible delinquent debts for collection during fiscal year 2001. Much of the referral volume was late in the year, however, and substantial unreferred balances remained at the end of the fiscal year. Inadequate procedures and controls hampered prompt identification and referral of both eligible non-Medicare Secondary Payer (MSP) and MSP debts. The delayed referral of non-MSP debts resulted from problems with the CMS debt-referral system and insufficient CMS monitoring of contractor referrals. The low level of MSP debt referrals resulted primarily from limited contractor efforts and insufficient CMS monitoring of contractor performance.
section_title: What GAO Found
paragraphs: Although GAO did not test whether selected CMS debts had been reasonably excluded from referral and reached no overall conclusion about the appropriateness of CMS exclusions, GAO found that CMS did not report reliable Medicare debt information to the Treasury Department as of September 30, 2000.

section_title: Letter
paragraphs: On October 10, 2001, we testified before your subcommittee on agencies’  implementation of the Debt Collection Improvement Act (DCIA) of 1996.One of the major purposes of DCIA is to maximize collection of billions of  dollars of nontax delinquent debt owed to the government.  Toward this  end, DCIA requires that agencies refer eligible debts delinquent more than  180 days that they have been unable to collect to the Department of the  Treasury for payment offset and to Treasury or a Treasury-designated debt  collection center for cross-servicing.  Treasury performs payment offset  through its Treasury Offset Program (TOP), which includes the offset of  certain benefit payments, vendor payments, and tax refunds. Cross- servicing involves such actions as locating debtors, issuing demand letters,  and referring debts to private collection agencies.
As you know, we testified on (1) problems we identified in selected federal  agencies’ processes and controls for identifying and referring eligible debts  to Treasury’s Financial Management Service (FMS) for collection action,  (2) obstacles that hampered agencies from promptly referring eligible  debts, and (3) problems we identified related to the appropriateness of  exclusions from referral requirements.
This report provides additional detail on the Centers for Medicare &  Medicaid Services’ (CMS) progress in implementing the debt-referral  requirements of DCIA to collect delinquent Medicare debts and includes  several recommendations. Collection of delinquent Medicare debts is  particularly critical because they represented a significant portion—about  9 percent—of the approximately $58 billion of reported delinquent nontax  debts governmentwide as of September 30, 2000, and continue to represent  a large amount.
In September 2000, we reported that the Health Care Financing  Administration (HCFA), now known as CMS, had not fully implemented the  referral provision of DCIA. The agency had implemented pilot referral  projects for its two major types of Medicare debt:  (1) Medicare Secondary  Payer (MSP) debts, for which insurance or other entities are primarily  financially responsible and CMS is seeking reimbursement, and (2) other  debts, referred to as non-MSP debts.  CMS was referring delinquent  Medicare debts to the Department of Health and Human Services’ (HHS)  Program Support Center (PSC), a Treasury-designated debt collection  center for certain HHS debts.  However, we reported that under the pilot  projects, contractors referred only older, large-dollar-value Medicare debts,  thereby excluding from referral a significant amount of debt and, in  particular, more recent, lower-dollar-value claims.  Collection industry  statistics indicate that low-dollar-value and current debts are typically  easier to collect than large-dollar-value and older debts.  In the September  2000 report, we recommended that CMS (1) immediately refer all Medicare  debts to PSC as soon as they become more than 180 days delinquent and  are determined to be eligible for referral and (2) refer the backlog of  eligible debts as quickly as possible.
For this report, we were to follow up to determine whether (1) CMS was  promptly referring eligible Medicare debts for collection action, (2) any  obstacles were hampering CMS from referring eligible Medicare debts, and  (3) CMS was appropriately using exclusions from referral requirements.At the time of our review, the HHS Office of Inspector General (OIG) was  conducting detailed testing of CMS’s implementation of DCIA and the  effectiveness of CMS’s debt collection and debt management activities.  According to an OIG official, the OIG’s report on its findings is scheduled  for release in March 2002.  As part of its work, the OIG tested selected  debts to determine whether CMS appropriately categorized their status,  including their exclusion status (e.g., in bankruptcy, under appeal).  Therefore, as agreed with your office, we did not test whether selected  CMS debts had been reasonably excluded from referral, and we reached no  overall conclusion about the appropriateness of CMS exclusions.  During  the course of our review, however, we did make several observations  concerning the accuracy of the exclusion and debt-eligible amounts that  CMS reported to Treasury as of September 30, 2000.
subsections: section_title: Background
paragraphs: CMS, an operating division of HHS, administers Medicare, Medicaid, and  the State Children’s Health Insurance Program.  As administrator of  Medicare, which paid about $215 billion in benefits to approximately 39.5  million Medicare beneficiaries in fiscal year 2000, CMS is the nation’s  largest health insurer.  Although most participating providers comply with  Medicare billing rules, inadvertent errors or intentional misrepresentations  that result in overpayments to providers do occur.  These overpayments  represent money owed back to Medicare.  According to the HCFA  Financial Report for Fiscal Year 2000, about $8.0 billion out of  $8.1 billion of the debts reported owed to CMS originated in the Medicare  program.
subsections: section_title: MSP and Non-MSP Medicare Debts
paragraphs: CMS Medicare debts consist largely of overpayments to hospitals, skilled  nursing facilities, physicians, and other providers of covered services and  supplies under Part A (hospital insurance) and Part B (supplemental  medical insurance) of the Medicare program.  We examined two types of  Medicare debts:
Medicare secondary payer (MSP) debts.  MSP debts arise when  Medicare pays for a service that is subsequently determined to be the  financial responsibility of another payer.  Cases that result in MSP debts  include those in which beneficiaries have (1) other health insurance  furnished by their employer or their spouse’s employer (or, in certain  instances, another family member) that covers the medical services  provided, (2) occupational injuries, illnesses, and conditions covered by  workers’ compensation, and (3) injuries, illnesses, and conditions  related to a liability or no-fault insurance settlement, judgment, or  award.
Non-MSP debts.  Although Medicare is phasing out this payment  method, Medicare has paid certain institutional providers interim  amounts based on their historical service to beneficiaries.  Medicare  contractors retrospectively adjust these payments based on their review  of provider costs. When a provider's cost-reporting year is over, the  provider files a report specifying its costs of serving Medicare  beneficiaries. Cost report debts arise when the cost report settlement  process, which includes audits and reviews by Medicare contractors,  determines that the amount an institution was paid based on its cost  report exceeds the final settlement amount.  Another type of non-MSP  debt related to cost reporting is unfiled cost report debt.  If an  institutional provider fails to submit a timely cost report, CMS  establishes an unfiled cost report debt.  The amount of the debt equals  the full amount disbursed for the year in which the provider failed to  submit a timely report. Most providers have an ongoing business  relationship with the Medicare program; therefore, contractors are able  to collect most non-MSP debts by offsetting subsequent Medicare  payments to providers.  However, if offsetting subsequent payments  does not fully liquidate the debt (e.g., because the provider has left the  Medicare program), unpaid balances more than 180 days delinquent are  subject to DCIA’s debt-referral requirements.
section_title: Collection Services for CMS Medicare Debts
paragraphs: CMS refers its eligible MSP and non-MSP debts to PSC, which provides  debt management services for certain HHS operating divisions.  Under  DCIA, federal agencies are required to refer all eligible debts that are more  than 180 days delinquent to Treasury or a Treasury-designated debt  collection center.  In 1999, Treasury designated PSC a debt collection  center for HHS, allowing PSC to service certain debts, including MSP and  unfiled cost report debts.  PSC is responsible for attempting to collect MSP  debts, obtaining cost reports for unfiled cost report debts, reporting MSP  and unfiled cost report debts to TOP, and referring other types of Medicare  debts to Treasury’s FMS for cross-servicing.
section_title: Prior Findings on CMS’s Implementation of DCIA
paragraphs: In September 2000, we reported that CMS was slow to implement DCIA but  could increase Medicare overpayment collections if it fully implemented  the referral requirements of the act. We recommended, and CMS agreed,  that CMS fully implement DCIA by transferring Medicare debts to PSC or  Treasury for collection as soon as they became delinquent and were  determined to be eligible.  We also recommended that CMS refer the  backlog of eligible Medicare debts to PSC as quickly as possible.
We noted in the report that CMS had two pilot projects under way that  were designed to expedite the transfer of delinquent Medicare debts for  collection action. One pilot covered certain MSP debts valued at $5,000 or  more, and the other covered certain non-MSP debts, primarily related to  cost report audits, of $100,000 or more.Contractors participating in the  pilots were to (1) verify the amount of a delinquent debt and ensure that it  was still uncollected, (2) issue a DCIA intent letter indicating that  nonpayment would result in the debt’s referral to PSC, and (3) record the  debt in a central CMS database used to transmit the debt to PSC for  collection.CMS’s goal is to have referred all eligible Medicare debts for  collection action by the end of fiscal year 2002.
section_title: CMS Medicare Debts Eligible for Referral as of September 30, 2000
paragraphs: As shown in table 1, CMS reported that about $6.6 billion of Medicare debts  were more than 180 days delinquent or classified as currently not  collectible (CNC) as of September 30, 2000.  This information was reported  in the Medicare Trust Fund Treasury Report on Receivables Due from the  Public (TROR), which contained the most recent agency-certified  information available during our review.  Debts classified as CNC are  written off the books for accounting purposes—that is, they are no longer  carried as receivables.  A write-off does not extinguish the underlying  liability for a debt, and collection actions may continue to be taken on  debts classified as CNC.
Of the $6.6 billion of Medicare debts reported as more than 180 days  delinquent or classified as CNC, CMS reported that it had referred  approximately $2 billion of debts and had excluded from referral  approximately $1.8 billion of debts. CMS also reported in the TROR that  about $1.6 billion in unfiled cost reports were delinquent more than 180  days.  Because CMS does not recognize amounts associated with unfiled  costs reports as receivables for financial reporting purposes, the agency  reports unfiled cost report debts more than 180 days delinquent as a  separate, additional item in the TROR. With these exclusions and  additions, CMS reported about $6.4 billion of Medicare debts eligible for  referral to PSC for collection action as of September 30, 2000.
Of the approximately $6.4 billion of Medicare debts that CMS had reported  as eligible for referral by the end of fiscal year 2000, the agency reported  that about $4.3 billion of the debts had not been referred to Treasury or a  Treasury-designated debt collection center.  About $2.6 billion of the  unreferred amount was non-MSP debt, and the remainder was MSP debt.
CMS’s goal for fiscal year 2001, which the agency met, was to refer an  additional $2 billion of unreferred eligible debts.  CMS’s goal for fiscal year  2002 is to refer the remainder of eligible Medicare debts.
section_title: Objectives, Scope, and Methodology
paragraphs: Our objectives were to determine whether (1) CMS was promptly referring  eligible Medicare debts for collection action, (2) any obstacles were  hampering CMS from referring eligible Medicare debts, and (3) CMS was  appropriately using exclusions from referral requirements.
Although CMS also administers Medicaid and the State Children’s Health  Insurance Program, we limited our review to Medicare debts because the  Medicare program is the source of the vast majority of CMS’s reported  delinquent debt.
To address our objectives, we obtained and analyzed the Medicare Trust  Fund TROR for the fourth quarter of fiscal year 2000, which was the most  recent agency-certified report available at the completion of our fieldwork,  and other financial reports prepared by CMS.  The most recent year-end  TROR should contain the most reliable information available because  Treasury requires that agency chief financial officers (or their designees)  certify year-end data as accurate.  We interviewed CMS and PSC officials to  obtain an understanding of the debt-referral process and any obstacles that  may be hampering referral of eligible debts.  In addition, we reviewed CMS  policies and procedures on debt referrals and examined current and  planned CMS efforts to refer eligible delinquent debts.
We also met with representatives from 4 selected CMS contractors that  process and pay Medicare claims, and we discussed how they identified  and referred eligible Medicare debts to PSC.  At the time of our review,  CMS had 55 Medicare contractors that processed claims and collected on  overpayments.  We used two criteria to select the 4 contractors:  (1) the  size of their debt portfolio and (2) whether the contractor participated in  the CMS pilot projects.  Specifically, 1 of the selected contractors had the  largest amount of debt overall and the largest amount of Part A debt, 1  other selected contractor had the largest amount of Part B debt, and  another of the selected contractors had the largest amount of MSP debt.  We selected the fourth contractor to ensure that our review covered at least  one-third of all the debt maintained at the CMS contractors. Three of the 4  contractors that we selected participated in the MSP pilot project, and 2  participated in the non-MSP pilot project.
As agreed with your office, we did not test selected debts that were  excluded from referral because the HHS OIG was performing detailed  testing of CMS’s implementation of DCIA and the effectiveness of its debt  collection and debt management activities.  As part of its work, the OIG  tested selected debts at CMS and its Medicare contractors to determine  whether the status of debts had been appropriately categorized.  We also  did not independently verify the reliability of certain information that CMS  and PSC provided (e.g., debts reported as more than 180 days delinquent).
We performed our work from November 2000 to September 2001 in  accordance with U.S. generally accepted government auditing standards.
We requested written comments on a draft of this report from the  administrator of CMS or his designated representative.  CMS’s letter is  reprinted in appendix I.  We also considered, but did not reprint, the  technical comments provided with CMS’s letter and have incorporated  them throughout this report, where appropriate.
section_title: CMS Did Not Promptly Refer All Eligible Medicare Debts in Fiscal Year 2001
paragraphs: Overall, CMS did not promptly refer all of its reported eligible Medicare  debts in fiscal year 2001.  Although CMS referred approximately $2.1 billion  of Medicare debts during the year, almost all were non-MSP debts primarily  related to cost report audits.  Further, the vast majority of these debt  referrals—about  $1.9 billion—occurred late in the fiscal year, from June  through September.  While approximately $1.8 billion of eligible MSP debts  were reported as eligible for referral as of September 30, 2000, CMS  referred only about $47 million of MSP debts in fiscal year 2001.
subsections: section_title: CMS Referred a Significant Amount of Non-MSP Debts in Fiscal Year 2001, but Not Promptly
paragraphs: CMS made progress in referring non-MSP debts to PSC during fiscal year  2001, but most of the progress occurred late in the fiscal year.  Problems  with the debt-referral system contributed to the late referral of non-MSP  debts.  Although CMS reached its $2 billion referral goal for fiscal year  2001, both the prospects for collection during the year and the collectibility  of the debts were likely diminished by the referral delays.
At the end of fiscal year 2000, about $2.6 billion of non-MSP debts remained  to be referred.  Throughout most of fiscal year 2001, CMS made little  progress in referring these debts.  It was not until June 2001, approximately  two-thirds of the way through the fiscal year, that CMS began making  substantial referrals of non-MSP debts to PSC.  Of the approximately  $2.1 billion of non-MSP debts reported as being referred during fiscal year  2001, CMS referred about $1.9 billion of the debts from June through  September.
CMS officials stated that they were not significantly concerned by the low  level of non-MSP debt referrals during the first two-thirds of fiscal year  2001 because they met their goal of referring $2 billion of eligible Medicare  debts in fiscal year 2001 and they intend to meet their goal of referring the  remaining eligible debts by the end of fiscal year 2002.  However, the  prompt referral of delinquent debts is critical because, as industry statistics  indicate, the likelihood of recovering amounts owed on delinquent debts  decreases dramatically as the age of the debt increases.
section_title: CMS Made Little Progress in Referring MSP Debts in Fiscal Year 2001
paragraphs: CMS made little progress in referring the approximately $1.8 billion of MSP  debts that were reported as eligible for referral as of September 30, 2000.  Limited contractor efforts, coupled with inadequate monitoring of  contractor performance by CMS, contributed to the slow progress.  In  addition, many existing MSP debts will never be referred because in  February 2001 CMS instructed its Medicare contractors to close out MSP  debts delinquent more than 6 years and 3 months, thereby terminating all  collection efforts on such debts.
Unreferred MSP debts represented about 40 percent of the approximately  $4.3 billion of reported eligible Medicare debts that had not been referred  for collection as of September 30, 2000. PSC collection reports show that  the center has had comparatively more success in collecting MSP debts  than it has had in collecting non-MSP debts. By the end of fiscal year 2001,  PSC reported collecting almost as much on delinquent MSP debts as on  delinquent non-MSP debts, even though the total dollar amount of MSP  referrals was a small fraction, about 2 percent, of the total dollar amount of  non-MSP referrals.
CMS began referring MSP debts to PSC in March 2000. PSC records  indicate that through September 30, 2001, CMS had referred only about  $83 million, or 5 percent, of the approximately $1.8 billion of MSP debts  eligible for referral to PSC as of September 30, 2000.  Of this amount, about  $47 million was referred in fiscal year 2001.  These limited referrals were  likely the only collection action taken on most of the eligible MSP debts  from March 2000 through September 2001.  In most cases, CMS instructed  its contractors only to send initial demand letters to MSP debtors and  follow up on any resulting inquiries.
section_title: CMS Lacked Effective Processes and Controls to Promptly Refer Eligible Medicare Debts
paragraphs: CMS did not establish and implement effective controls to promptly refer  eligible Medicare debts to PSC for collection action.  CMS failed to  promptly refer non-MSP debts because the agency had problems with its  debt-referral system.  Limited contractor efforts, coupled with inadequate  CMS monitoring of contractor performance, were primarily responsible for  the slow progress in referring MSP debts.  Because of a CMS policy to close  out debts delinquent more than 6 years and 3 months, some debts will  never be referred for collection action.  In addition, CMS has not developed  a process to report closed-out debts to IRS, even though discharged debt is  considered income and may be taxable.
subsections: section_title: Problems with the Debt- Referral System Delayed the Referral of Non-MSP Debts
paragraphs: Non-MSP debt referrals were delayed until late in fiscal year 2001 primarily  because CMS suspended its debt-referral system in November 2000.  According to a CMS official responsible for non-MSP debt referrals, the  agency suspended the system in order to identify and correct numerous  discrepancies found in the system’s data (e.g., duplicate debt entries,  inconsistencies between debt amounts in the referral system and debt  amounts in the tracking system) and to place additional edits in the system  to prevent such errors in the future.  CMS did not resume referring non- MSP debts to PSC through the debt-referral system until June 2001.
Not only did CMS’s suspension of the debt-referral system limit the debt- referral activities of the 5 contractors participating in the non-MSP pilot, it  also delayed CMS’s planned October 2000 expansion of the debt-referral  program to all contractors.  CMS did not issue updated instructions for  referring non-MSP debts to each of its 55 contractors until April 2001.  The  guidance, revised in response to our September 2000 recommendation that  all CMS debt be transferred to PSC as soon as it becomes delinquent and is  eligible for transfer, expanded the criteria for referring non-MSP debts by  including Part B debts, as well as Part A debts, and lowering the referral  threshold from $600 to $25.
After the debt-referral system began operating again and the referral  requirements were expanded and extended to all contractors, CMS  increased its referrals of non-MSP debts to PSC by about $1.9 billion from  June through September 2001.
section_title: Limited Contractor Efforts and Inadequate Monitoring of Contractor Performance Impeded Referral of MSP Debts
paragraphs: The low referral of MSP debts in fiscal year 2001 occurred partly because  for most of the year, until May 2001, only the 15 contractors participating in  the pilot project were authorized to identify eligible Part A debts and refer  them to PSC.  According to information from CMS, as of September 30,  2000, these 15 contractors held a total of about $542 million of Part A debts  that were more than 180 days delinquent, representing about 31 percent of  MSP debts eligible for referral as of that date.
In response to our September 2000 recommendation, CMS issued a  program memorandum in May 2001 extending to all MSP contractors the  requirement to identify delinquent MSP debts and refer them to PSC.  CMS  also expanded the referral criteria to include Part B debts, as well as Part A  debts.  The dollar threshold for referral is to be reduced in phases, from  $5,000 to $25. The phased reduction is intended both to eliminate the  backlog of higher-dollar debts and to ensure referral of current debts,  thereby avoiding a continuing backlog.  A CMS official stated that the  memorandum was not issued sooner partly because CMS had to respond to  contractors’ concerns that they needed additional funding to automate  their debt-referral processes to comply with the new referral requirements.  The CMS official stated that after much consideration, CMS concluded that  referrals could be performed manually and that seeking additional funding  for automation would likely cause further delays in referring MSP debts to  PSC.
Another factor that contributed to the low amount of MSP debt referred to  PSC was the failure of certain pilot project contractors to promptly refer  eligible debts.  Under the MSP pilot project, contractors were required to  identify eligible Part A debts, send DCIA intent letters (which state CMS’s  intention to refer a debt for collection action if it is not paid within 60 days)  to those debtors, and enter the debt information into the debt-referral  system. We selected and reviewed the work of 3 large Medicare contractors  that participated in the MSP pilot project and found that none of the 3  promptly identified and referred all eligible MSP debts.
One of the contractors held $255 million of Part A MSP debt more than 180  days delinquent as of September 30, 2000.  As of May 2001, the contractor  reported that it had identified and sent out DCIA intent letters for only  about $33 million, or about 13 percent, of the debt.  The contractor official  responsible for MSP debts stated that the contractor was under the  impression that the pilot project required it to make only two file queries, in  February 2000, to identify eligible debts and that the queries were to cover  only debts incurred from March 1997 through August 1998.  However, our  review of the implementing instructions for the pilot project found that it  was to cover all MSP debts that were not more than 6 years old, and CMS  officials responsible for MSP debts advised us that they had never  instructed the contractor to limit its file queries.
Another of the 3 contractors whose work we reviewed held about  $61 million of Part A MSP debt delinquent more than 180 days as of  September 30, 2000.  The contractor official responsible for MSP debts  stated that the contractor believed that the MSP pilot project had ended in  August 2000.  As such, from September 2000 through December 2000, the  contractor did not review its debt portfolio to identify additional MSP debts  eligible for referral. The contractor subsequently began identifying and  referring debts again in January 2001.  In addition, the contractor’s records  indicated that as of April 2001, about $6.2 million, or 48 percent, of the  $12.8 million of debt for which it had sent DCIA intent letters prior to  September 2000 had not been referred to PSC.  These debts remained at the  contractor even though they were well beyond the 60-day time frame CMS  specified for referring debts to PSC after a DCIA intent letter is sent. The  responsible contractor official was unable to explain why the debts had not  been referred for collection action.
Before our review, CMS had not developed or implemented policies and  procedures for monitoring contractors’ referral of MSP debts.  As a result,  CMS did not monitor the extent to which contractors referred specific MSP  debts to PSC and did not identify specific contractors, such as those  mentioned above, that failed to identify and refer all eligible debts.  Without  such monitoring, CMS could not take prompt corrective action.  This lack  of procedures for monitoring contractors and the resulting lack of  monitoring are inconsistent with the comptroller general’s Standards for  Internal Control in the Federal Government.  The standards state that  internal controls should be designed to assure that ongoing monitoring  occurs in the course of normal operations and that it should be performed  continually and ingrained in agency operations.
In response to our work, CMS officials stated that in June 2001 they had  begun to review selected contractors’ MSP debt referrals.  A CMS official  said that the 10 CMS regional offices would assume a more active role in  ensuring that contractors promptly refer eligible MSP debts to PSC.  As of  September 2001, CMS had not developed formal written procedures for  monitoring contractors, but agency officials stated that they planned to  develop such procedures.
section_title: CMS Policy to Close Out Older MSP Debts Also Limited Referrals of MSP Debts
paragraphs: Many MSP debts will never be referred to PSC because of a CMS decision  to close out older MSP debts.  In February 2001, CMS issued guidance to its  contractors directing them to methodically terminate collection action on  or close out MSP debts delinquent more than 6 years and 3 months. CMS  officials stated that the agency selected this delinquency criterion because  the statute of limitations prevents the Department of Justice from litigating  to collect debts more than 6 years after they become delinquent.  Also,  these debts, because they are closed out, will never be reported to FMS for  TOP, which has been FMS’s most effective debt collection tool. For fiscal  year 2000, Treasury found that the collection rate for the small amount of  MSP debt that had been reported to TOP was about 10.5 percent, which is  higher than TOP’s average collection rate.  The February 2001 guidance  was a continuation of CMS policy set forth in the agency’s instructions to  contractors at the start of the MSP pilot project in fiscal year 2000, which  authorized contractors to identify and refer only debts up to 6 years old.
A CMS official stated that older MSP debts were closed out because it was  not cost-effective to collect them. However, CMS could not provide any  documentation to support the assertion that it is not cost-effective to  attempt to collect older MSP debts, and CMS did not test this assumption in  its MSP pilot project.
Age alone is not an appropriate criterion for terminating collection action  on a debt.  The agency should pursue all appropriate means of collection on  a debt and determine, based on the results of the collection activity,  whether the debt is uncollectible.  According to discussions with  contractor officials, collection activity prior to the termination of the debts  likely involved only the issuance of demand letters, as required by CMS’s  Budget and Performance Requirements for contractors.
The CMS official said she was not aware of any assessment performed to  determine the total dollar amount of debts that will be designated as  eligible for close-out because of this age threshold.  During our review,  CMS had already approved close-out of about $86 million of MSP debts at  the contractors we visited.  About $85 million of these debts were less than  10 years old and therefore could have been referred to PSC for collection  action, including reporting to TOP.
In a related matter, CMS has not established a process, including providing  authorization to PSC, to report closed-out MSP debts to IRS.  The Federal  Claims Collection Standards and Office of Management and Budget (OMB)  Circular No. A-129 require that agencies, in most cases, report closed-out  debt amounts to IRS as income to the debtor, since those amounts  represent forgiven debt, which is considered income and therefore may be  taxable at the debtor’s current tax rate.  Thus, reporting the discharge of  indebtedness to IRS may benefit the federal government, through increased  income tax collections.  CMS stated that agency officials and the CMS  Office of General Counsel are discussing the reporting of closed-out MSP  debts to IRS but did not specify when actions, if any, would be taken to  report such debts to IRS.
section_title: CMS Faces Challenges in Effectively Managing Future Medicare Debt Referrals
paragraphs: Even with CMS’s non-MSP debt-referral system operating again and its MSP  and non-MSP referral requirements extended to all of its contractors, the  agency still faces obstacles to effectively managing its Medicare debt  referrals.  As mentioned earlier, in fiscal year 2001 CMS expanded debt- referral requirements from the pilot projects to include all 55 Medicare  contractors. CMS lacks complete and accurate debt information, however,  and this shortcoming will likely hamper the agency’s ability to adequately  monitor contractors’ debt referrals.  In addition, CMS’s referral instructions  to contractors currently do not cover some types of Medicare debts,  including MSP liability debts. Without a comprehensive plan in place that  covers all types of Medicare debts, CMS faces significant challenges to be  able to achieve its goal of referring all eligible Medicare debts by the end of  fiscal year 2002.
subsections: section_title: Lack of Complete and Accurate Debt Information Hampers CMS’s Ability to Monitor Debt Referrals
paragraphs: All Medicare contractors are now responsible for identifying eligible debts  from their debt portfolio, sending out DCIA intent letters to debtors, and  referring eligible debts to PSC.  To help ensure that all eligible Medicare  debts are promptly identified and referred for collection, CMS must  monitor contractors’ debt-referral practices.  To monitor effectively, the  agency needs comprehensive, reliable debt information from its  contractors, but CMS systems currently do not contain complete and  accurate information on all CMS Medicare debts.
subsections: section_title: CMS Lacks a Centralized Database for MSP Debts
paragraphs: One of CMS’s most daunting financial management challenges continues to  be the lack of a financial management system that fully integrates CMS’s  accounting systems with those of its Medicare contractors. Because CMS  does not have a fully integrated accounting system, each MSP debt is  maintained only in the internal system of the specific contractor that holds  the debt. CMS has no centralized database that includes all MSP debts held  by contractors. As a result, the agency cannot effectively monitor the  extent to which its various contractors are promptly identifying eligible  MSP debts and referring them to PSC for collection.  CMS is developing a  system that is to include a database containing all MSP debts.  However, the  agency plans to phase the system in, and it is not scheduled to be fully  implemented at all contractors until the end of fiscal year 2006.
section_title: CMS’s Non-MSP Debt-Tracking Systems Contain Inaccurate Information
paragraphs: CMS has two debt-tracking systems for its non-MSP debts, one for Part A  debts and one for Part B debts.  Medicare contractors are responsible for  entering non-MSP debts into the systems and updating the debts’ status  (with respect to bankruptcy, appeals, etc.) as appropriate.  According to  CMS officials, the agency intends to use these systems to monitor  contractors to ensure that they are promptly identifying and referring  eligible debts to PSC.
Accurate tracking information is critical for monitoring debt-referral  practices.  CMS found, however, that its non-MSP debt-tracking systems  contain inaccurate information because a significant number of  contractors have not been adequately updating information in the systems.  CMS performed contractor performance evaluations for fiscal year 2000 on  25 contractors and found that 19 were not adequately updating information  in the non-MSP debt-tracking systems.  For 5 of the 19 contractors, CMS  considered the problems to be significant enough to require the contractors  to develop written performance improvement plans.
Our work at the 2 selected contractors involved in the non-MSP pilot  project corroborated CMS’s own findings.  CMS periodically sent non-MSP  pilot contractors a list of eligible Part A debts from the agency’s debt- tracking system for possible referral to PSC.  For the 2 non-MSP  contractors we reviewed, CMS selected $1.3 billion of debts from the Part A  non-MSP debt-tracking system.  The contractors determined that  $289 million of the debts, or about 23 percent, were actually ineligible for  referral because they were in bankruptcy, under appeal, or under  investigation for fraud.  In addition, we identified $21 million of debts that 1  of the 2 non-MSP pilot contractors had misclassified on the CMS debt- tracking system as bankruptcy debt and ineligible for referral.  These debts  had actually been dismissed from the bankruptcy proceedings and  therefore should have been reported in the debt-tracking system as eligible  for referral.  In this case, the contractor had not updated its own internal  system for $8 million of the debts and was therefore not pursuing  postdismissal collection actions on them.  For the remaining $13 million,  the contractor had updated its internal system and was pursuing collection  but had failed to properly update the CMS debt-tracking system.
section_title: CMS’s Non-MSP Debt-Tracking Systems Do Not Enable the Agency to Monitor Promptness of Debt Referral
paragraphs: To effectively monitor contractor performance, CMS must have the ability  to determine whether contractors are referring debts promptly.  However,  CMS’s non-MSP debt-tracking systems lack the capacity to indicate  whether contractors are promptly entering non-MSP debts into the debt- referral system after they mail DCIA intent letters because the systems do  not track the date of status code changes (e.g., the date when the DCIA  letter was issued).  We found that CMS’s non-MSP debt-tracking system for  Part A debts did not identify $5.2 million of debts that had been pending  referral for at least 9 months at one of the two non-MSP contractors that we  reviewed.  In response to our work, CMS officials stated that they are in the  process of modifying the non-MSP debt-tracking systems to allow the  agency to monitor how promptly contractors are referring debts in the  future.
section_title: CMS Lacks a Comprehensive Referral Plan That Covers All Types of Eligible Debt
paragraphs: CMS has not developed a comprehensive plan that covers all types of  Medicare debt eligible for referral.  The agency lacks information on the  total dollar amount of eligible debts not covered by its current referral  instructions to the Medicare contractors, and it has not developed a  detailed plan or specific time frame for referring these debts.  Without a  comprehensive plan in place, CMS faces significant challenges to be able to  achieve its goal of referring 100 percent of eligible debts in fiscal year 2002.
Types of debt for which CMS has not yet established a referral plan include,  but are not limited to, the following:
MSP liability.  MSP liability debts arise when Medicare covers expenses  related to accidents, malpractice, workers’ compensation, or other  items not associated with group health plans that are subsequently  determined to be the responsibility of another payer.
Part A claims adjustments.  Part A claims receivables are created when  previously paid claims are adjusted.  Reasons for claims adjustments  include duplicate processing of charges or claims, payment for items or  services not covered by Medicare, and incorrect billing.  The CMS debt- tracking system does not track these debts.  Debts resulting from claims  adjustments are generally offset from subsequent Medicare payments  and require no further collection action.  Should subsequent Medicare  payments be unavailable for offset, however, no requirements exist for  Medicare contractors to perform any other collection actions, such as  issuing a demand letter.
We found that as of September 30, 2000, the four contractors we reviewed  held about $9.6 million of MSP liability debts and about $10.7 million of  debts related to Part A claims adjustments.  CMS officials stated that the  agency intends to refer both types of debt to PSC in the future.
section_title: CMS Does Not Provide Reliable Medicare Debt Information to Treasury
paragraphs: The amounts of eligible debt CMS reported in the September 30, 2000,  Medicare Trust Fund TROR were not reliable.  CMS did not properly report  the delinquency aging for certain debts, including debts previously  transferred to regional offices for collection.  CMS also did not properly  report its exclusions from referral requirements.  For example, the agency  inappropriately reported as excluded $149 million of non-MSP debts that  had been referred to CMS regional offices for collection.In addition, CMS  did not report any exclusion amounts for MSP debts, even though we noted  that certain MSP debts were involved in litigation, or for non-MSP debts  under investigation for fraud.  Finally, because of a data-entry error, CMS  inadvertently overstated debt referrals by $67 million.
It is imperative that CMS provide Treasury with reliable information on  eligible Medicare debt.  Treasury uses the information to monitor agencies’  implementation of DCIA.  In addition, the TROR is Treasury’s only  comprehensive means of periodically collecting data on the status and  condition of the federal government’s nontax debt portfolio, as required by  the Debt Collection Act of 1982 and DCIA.  CMS’s delinquent Medicare  debts represent a significant portion of delinquent debts governmentwide.  Therefore, they must be reported accurately if governmentwide debt  information is to be useful to the president, the Congress, and OMB in  determining the direction of federal debt management and credit policy.
According to CMS officials, the agency is revising its method for  determining eligible debt amounts.  For example, CMS officials stated that  the agency no longer reports debts referred to regional offices as  exclusions and is in the process of identifying and reporting exclusion  amounts for MSP debts.
section_title: Conclusions
paragraphs: Although CMS made progress in referring eligible Medicare debts to PSC in  fiscal year 2001 and met its referral goal for the year, a substantial portion  of Medicare debts—particularly MSP debts—are still not being promptly  referred for collection action.  Inadequate contractor monitoring, resulting  partly from CMS’s debt system limitations, has contributed to the slow pace  of MSP debt referrals.  In addition, CMS has not begun referring certain  types of eligible Medicare debts, such as MSP liability debts, and those  debts will continue to age until CMS completes and implements a  comprehensive referral plan.  Since recovery rates decrease dramatically  as debts age, CMS cannot accomplish DCIA’s purpose of maximizing  collection of federal nontax debt unless it refers eligible debts promptly.
CMS’s policy of closing out eligible MSP debts solely on the basis of their  age, without performing a quantitative study to determine whether  collection action would be cost-effective, has also reduced referrals and  eliminated opportunities for potential collections on those debts. In  addition, by not reporting closed-out debts to IRS, the federal government  may be missing an opportunity to increase government receipts.
Medicare debts are a significant share of delinquent debt governmentwide,  and CMS’s inaccurate reporting to Treasury on exclusion amounts, debt  aging, and referrals may distort governmentwide debt information used to  determine the direction of federal debt management and credit policy.  CMS’s inaccurate reporting of eligible debt amounts also impedes  Treasury’s ability to monitor the agency’s compliance with DCIA.
section_title: Recommendations for Executive Action
paragraphs: To help ensure that CMS promptly refers all eligible delinquent Medicare  debts to PSC, as we recommended in September 2000, and that all benefits  from closed-out debts are realized, we recommend that the administrator  of CMS establish and implement policies and procedures to monitor  contractors’ implementation of CMS’s May 2001 instructions to ensure  the prompt referral of eligible MSP debts;  implement changes to CMS’s non-MSP debt tracking systems so that  CMS personnel will be better able to monitor contractors’ referral of  eligible non-MSP debts as required by CMS’s April 2001 instructions to  contractors; develop and implement a comprehensive referral plan for all eligible  delinquent Medicare debts that includes time frames for promptly  referring all types of debts, including MSP liability and Part A claims  adjustments debts; perform an assessment of MSP debts being closed out because they are  more than 6 years and 3 months delinquent to determine whether to  pursue collection action on the debts, and document the results of the  assessment; establish and implement policies and procedures for reporting closed- out Medicare debts, when appropriate, to IRS; and validate the accuracy of debt-eligible amounts reported in the Medicare  Trust Fund TROR by establishing a process that ensures, among other  things, (1) accurate reporting of the aging of certain delinquent debts,  (2) accurate and complete reporting of debts excluded from referral  requirements, and (3) verification of data entry for referral amounts.
section_title: Agency Comments and Our Evaluation
paragraphs: In written comments on a draft of this report, CMS agreed with five of our  six recommendations and summarized actions taken or planned to address  those five.  CMS expressed confidence that it would attain its goal of  referring all eligible debt to Treasury by year-end as part of its overall  financial plan.
Regarding our recommendation to assess closed-out MSP debts that were  more than 6 years and 3 months delinquent to determine whether to pursue  collection action on them, CMS stated that further collection efforts would  not be cost-effective.  According to CMS, medical services at issue in these  MSP debts are typically from the early 1990s and often involve Medicare  services from the mid- to late 1980s.  CMS indicated that the costs of  validating the debts and the costs and fees associated with DCIA cross- servicing and TOP were too great to justify additional collection efforts.  However, as we stated in the report, CMS could not provide any  documentation to support its position that it is not cost-effective to attempt  to collect older MSP debts, and CMS did not test this assumption in its MSP  pilot project.
CMS’s efforts to collect this debt prior to close-out were not adequate.  The  Federal Claims Collection Standards require that before terminating  collection activity, agencies are to pursue all appropriate means of  collection and determine, based on the results of the collection activity,  that the debt is uncollectible.  According to discussions with Medicare  contractor officials, the collection activity for many of these MSP debts  was limited to issuance of demand letters, which does not satisfy the  requirement that all appropriate means of collection action be pursued on  debts.  In addition, most of the closed-out MSP debts at the Medicare  contractors we visited were less than 10 years delinquent and therefore  could have been referred to PSC for collection action, including reporting  to TOP.  As such, we continue to believe that CMS should assess MSP debt  to determine whether additional collection activity is appropriate in light of  the minimal prior collection activity.
As agreed with your office, unless you announce its contents earlier, we  plan no further distribution of this report until 30 days after its issuance  date. At that time, we will send copies to the chairmen and ranking  minority members of the Senate Committee on Governmental Affairs and  the House Committee on Government Reform and to the ranking minority  member of your subcommittee. We will also provide copies to the secretary  of health and human services, the inspector general of health and human  services, the administrator of the Centers for Medicare & Medicaid  Services, and the secretary of the treasury. We will then make copies  available to others upon request.
If you have any questions about this report, please contact me at (202) 512- 3406 or Kenneth Rupar, assistant director, at (214) 777-5600.  Additional key  contributors to this assignment were Matthew Valenta and Tanisha Stewart.
section_title: Comments from the Centers for Medicare & Medicaid Services
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