Medicare Contracting Reform: Agency Has Made Progress with Implementation, but Contractors Have Not Met All Performance Standards
Published: 2010-03-25T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 significantly reformed contracting for payment of Medicare's $310 billion per year in fee-for-service claims. The Centers for Medicare & Medicaid Services (CMS) is transitioning claims administration to 19 new entities known as Medicare Administrative Contractors (MAC) and plans to complete the process ahead of October 1, 2011, the date required by law. In 2005, GAO reported that CMS's plan to accelerate the transition could create challenges and was based on estimated costs and savings that were uncertain. In this report GAO examined (1) how CMS has implemented Medicare contracting reform; (2) how CMS assessed the performance of the MACs and what the results of its assessments have been; and (3) what CMS's costs and savings have been for Medicare contracting reform. GAO selected a sample of 6 transitions to review from among the 10 MAC contracts awarded as of June 2008, based on factors such as geographic diversity, volume of claims workload, and transition complexity. GAO analyzed CMS documents related to the MAC transitions, including performance assessments for 3 of the 6 MACs in the sample that had results available for three types of reviews as of March 2009, and interviewed CMS officials, contractors, and provider groups.
section_title: What GAO Found
paragraphs: CMS took numerous steps to facilitate the complex implementation of Medicare contracting reform, but certain decisions led to challenges during the six MAC transitions we reviewed, such as payment delays to providers. For example, CMS's accelerated implementation schedule overlapped with other Medicare initiatives that affected claims processing, such as requiring that providers re-enroll in order to be paid, which resulted in claims payment delays. In addition, despite regular workload monitoring of the former contractors during the MAC transitions, CMS gave the MACs inaccurate workload estimates. For example, one MAC originally planned on receiving 15,000 appeals cases but actually inherited 46,500 cases, which led to processing backlogs and delayed payments to providers. However, CMS also incorporated lessons learned and made midcourse adjustments to address some of these challenges. CMS has assessed the MACs using a program it developed, and in the reviews we examined the MACs did not meet all standards and metrics. CMS's assessment program includes an initial review of each MAC's internal controls and two subsequent reviews to assess performance. One of these reviews compares a MAC's performance to standards in accordance with its contract and the other provides an incentive award fee if the MAC meets selected metrics that are designed to reflect high performance. Results available as of March 2009 from the assessments of three of the six MACs in GAO's sample show that the three MACs improved their performance over time but did not meet all metrics. For example, while the three MACs consistently met or partially met a metric that assesses contract management, they did not meet some beneficiary and provider service metrics. In addition, because they did not meet all incentive metrics, they did not receive full award fees. CMS's total costs and savings to date for Medicare contracting reform are uncertain because CMS does not track and provide information on all related costs and savings. The agency provided information on costs associated with contracts, which totaled a little over $300 million for fiscal years 2004 through 2008. It also provided information on some internal agency costs for conducting contracting reform, but did not track others, such as agency staff salaries. Although CMS expected contracting reform to generate substantial savings from reduced spending on administrative functions and savings to the Medicare trust funds due to improved claims review to detect payments that should not be made, as of April 2009, CMS was unable to provide information on total savings. CMSprovided some information on savings due to reductions in operational spending, but the extent to which these savings were attributable to contracting reform is uncertain. CMS did not track or provide information on savings to the Medicare trust funds due to reduced improper payments related to contracting reform activities. CMS reviewed a draft of this report and generally agreed with GAO's findings.

section_title: Letter
paragraphs: Since the enactment of Medicare in 1965, claims administration  contractors have played a vital role in the program. The program was  designed so that the federal government could contract with health  insurers or similar companies experienced in handling physician and  hospital claims to pay Medicare claims. These Medicare claims  administration contractors process and pay claims, handle the first-level  appeals of denied claims, and serve as providers’ primary contact with  Medicare. In addition, they answer complex inquiries from beneficiaries  related to Medicare claims-processing or coverage rules. In fiscal year  2008, these contractors processed almost 1.2 billion fee-for-service claims  and issued about $310 billion in payments for Medicare health services.
Medicare claims administration contracting prior to 2003 had unique  features in statute that differed from most other federal contracting.  Before 2003, the Centers for Medicare & Medicaid Services (CMS)—the  agency within the Department of Health and Human Services (HHS) that  administers the Medicare program—awarded Medicare claims  administration contracts to entities now referred to as legacy contractors  that were not selected through a competitive process. The agency’s  authority to terminate these contracts also was limited. Beginning in the  1980s, HHS asked Congress for changes in authority regarding the  selection of claims administration contractors. HHS cited several reasons  for such reform, including providing the agency with greater flexibility to  administer the program, promoting competition, improving services to  beneficiaries and providers, achieving cost savings, and increasing CMS’s  ability to reward Medicare contractors that performed well.
In 2003, Congress included such reform in the Medicare Prescription Drug,  Improvement, and Modernization Act of 2003 (MMA). Specifically, the  MMA repealed limitations on the types of contractors CMS could use and  required CMS to use competitive procedures to select new contracting  entities to process medical claims, provide incentives for them to provide  quality service, develop performance standards including standards for  customer satisfaction, and comply with the Federal Acquisition Regulation  (FAR), except where inconsistent with specific MMA provisions. The  MMA also required CMS to complete implementation of the reform by  October 2011 and to recompete the contracts at least once every 5 years.  Additionally, the MMA required the Secretary of HHS to submit an  implementation plan report on contracting reform to Congress in 2004 and  an interim report on the reform’s progress in October 2008.
CMS is in the process of implementing MMA contracting reform  requirements by transferring all claims administration tasks from the 51  legacy contractors to 19 new entities known as Medicare Administrative  Contractors (MAC). Specifically, 15 MACs will process both Part A and  Part B Medicare claims (A/B MAC), and 4 MACs will process durable  medical equipment (DME) claims (DME MAC). (Apps. I and II provide  maps of the MAC contract regions, known as jurisdictions.) The agency  chose to implement the MAC transition in three cycles: the Start-Up Cycle,  including all 4 DME MACs and 1 A/B MAC, and Cycle 1 and Cycle 2, each  consisting of 7 A/B MACs. As of September 2009, CMS had fully  implemented 9 A/B MACs and 4 DME MACs. The contracts for the  remaining 6 A/B MACs were awarded, but the awards were protested.  CMS is taking corrective actions on these remaining awards.
CMS initially anticipated that it could complete the claims administration  transfer from legacy contractors to MACs by July 2009, before the   October 1, 2011, MMA deadline. In August 2005, we highlighted CMS’s  accelerated timeline as a concern because it did not leave time for  adjustments to be made for unforeseen obstacles, such as bid protests by  unsuccessful offerers, which generally halt implementation until they are  resolved. In that report, we indicated that the accelerated implementation  schedule and other risks such as the volume and complexity of anticipated  claims-processing workload transitions, and the potential for contractor  withdrawals, had the potential to disrupt claims administration services,  possibly resulting in delayed or improper payments to providers.  Although CMS did not agree with our 2005 recommendation to extend its  MAC implementation schedule to allow more time for planning and  midcourse adjustments, the agency did acknowledge it needed to develop  certain critical areas in its plan to help it manage the transition. In our  2005 report, we also questioned the likelihood of CMS’s achieving the  predicted cost savings that it had used as one rationale for the accelerated  timeline.
You asked us to evaluate and report on Medicare contracting reform  efforts. We examined (1) how CMS has implemented Medicare contracting  reform, (2) how CMS assessed the performance of the MACs and what the  results of its assessments have been, and (3) what CMS’s costs and savings  have been for Medicare contracting reform.
To determine how CMS has implemented Medicare contracting reform,  and specifically how it has implemented the MAC program, we examined  CMS and MAC documents and conducted interviews with CMS officials. In  particular, we selected 6 MAC jurisdictions from among the 10 where a  final contract award had been made by June 2008, analyzed documents  from the implementation of the MMA provisions in each jurisdiction, and  interviewed CMS staff responsible for coordinating MAC contract awards  and transition from legacy contractors to the MACs. Our sample was  designed to ensure diversity in geographic region, claims workload,  complexity of transition, bid protest experience, and CMS’s assessment of  a jurisdiction’s risk for fraud. In addition, for the 6 jurisdictions we  selected, we interviewed incoming MACs and certain legacy contractors.  We also interviewed health care provider associations located in the  jurisdictions covered by 2 of the 6 MACs to understand how CMS  implemented Medicare contracting reform. Finally, we analyzed  documents and conducted interviews to understand what lessons CMS  may have learned that may help inform future award cycles.
To determine how CMS has assessed the performance of the MACs and to  determine the results of its assessments, we reviewed sections of the FAR  related to performance-based contracting and cost-plus-award-fee  contracts, the type of contract CMS is using for the MACs. We also  analyzed CMS documents to understand the agency’s performance  assessment process for the MACs. In addition, we interviewed officials in  CMS’s Medicare Contractor Management Group responsible for MACs and  legacy contractor oversight to understand the agency’s performance  assessment framework and activities. To report on CMS’s assessments of  the MACs, we analyzed performance results for the three MACs in our  sample that had completed all components of their performance  assessment reviews by March 2009.
To determine what CMS’s costs and savings have been for Medicare  contracting reform, we reviewed and analyzed relevant documents,  including CMS’s budget and estimates of potential costs and savings. We  also interviewed CMS officials responsible for development and oversight  of contracting reform budgets and estimates of potential costs and savings  to understand CMS’s process for tracking and reporting the financial  status of contracting reform. We found the CMS-reported internal and  external cost data for contracting reform and CMS-reported spending data  for selected Medicare operational activities sufficiently reliable for  the purposes of this report, based on relevant interviews and document  reviews.
We conducted this performance audit from May 2008 through March 2010  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. Appendix III includes a more  detailed discussion of our scope and methodology.
subsections: section_title: Background
subsections: section_title: Medicare Claims Administration Contracting before 2003
paragraphs: Prior to 2003, CMS was required by statute to select the two types of  Medicare contractors it used at the time—fiscal intermediaries and  carriers—from particular organization types. Congress limited the type of  contractors CMS could use for claims administration activities when  Medicare was enacted in 1965, in part because providers were concerned  that the program would give the government too much control over health  care. To increase providers’ acceptance of the new program and to  assuage their concerns, Congress required that health insurers that already  served as payers of health care services to physicians and hospitals  become the Medicare claims administration contractors. Specifically, prior  to 2003, CMS was required by law to select the first type of claims  administration contractor, fiscal intermediaries—contractors that paid  Part A and Part B claims for institutions such as hospitals—from among  companies that were nominated by health care provider associations.  Medicare law further required CMS to select the other type of contractor,  carriers—contractors that paid the majority of Part B claims, such as for  services provided by physicians and other providers—from among health  insurers or similar companies.
During this period, Medicare claims administration contracts were  typically renewed every year, and CMS could not terminate the contracts  unless the contractors were first provided with an opportunity for a public  hearing. The contractors themselves could terminate their contracts and  have their termination costs reimbursed by CMS irrespective of which  party terminated the contract. In addition, the claims administration  contractors were paid on the basis of their allowable costs, generally  without financial incentives to encourage superior performance.
section_title: Changes in Contracting following Enactment of MMA
paragraphs: The MMA requirement that CMS follow competitive procedures and the  FAR in awarding contracts to MACs—except where MMA provisions  explicitly differed—introduced key differences in how the agency would  have to conduct its MAC contracting compared to how it had conducted  its legacy contracting prior to 2003. Notably, under the FAR,  agencies are generally required to conduct full and open competition  for contracts and are permitted to contract with any qualified entity for  any authorized purpose, with some exceptions;  agencies are permitted to terminate contracts either for the  government’s convenience or if they determine that the contractor is in  default; and  agencies are permitted to include financial incentives to contractors  for meeting or exceeding performance goals.
The MMA provided more specificity on certain aspects of CMS’s Medicare  claims administration contracting processes. For example, CMS is to  conduct a competition for MACs at least every 5 years,    develop performance requirements and measurement standards for  set forth the performance requirements in the MAC contracts,  ensure the performance requirements and standards are used to  evaluate MAC performance and are consistent with the MACs’  statement of work (SOW), and    develop a measurement standard for provider and beneficiary  satisfaction.
CMS selected a contract type for the MACs that allows it to provide  incentives tied to service and efficiency of operations. CMS opted to  establish MAC contracts as cost-plus-award-fee contracts, a type of cost- reimbursement contract that allows an agency to provide financial  incentives to contractors if they achieve performance goals. A MAC may  earn an incentive, known as an award fee, based on performance, in  addition to reimbursement for allowable costs and a base fee for the  contract, which is fixed at the inception of the contract.
The FAR provides additional guidance for performance-based contracts.  If such a contract is used, the FAR requires that the agency establish  methods that enable it to assess work performance against measurable  performance standards. In addition, the FAR requires that the agency  conduct performance evaluations and inform contractors about their  performance and the areas in which improvement is expected. The FAR  further states that agencies should prepare a quality assurance  surveillance plan in conjunction with the SOW, which documents the  agency’s approach to evaluating performance, and a review of the  contractor’s quality control program.
section_title: MAC Responsibilities
paragraphs: In the new contracting environment, MACs are responsible for most of the  functions previously performed by the legacy contractors. They are  responsible for processing and paying claims, handling the first level of  appeal—redeterminations of denied claims, conducting medical review of  claims, putting computerized edits into their portion of the claims- processing system to help ensure proper payment, serving as providers’  primary contact with Medicare by enrolling providers, conducting provider  outreach and education, responding to provider inquiries, and auditing  provider cost reports. In addition, MACs are responsible for coordinating  with other CMS contractors that perform limited Medicare functions that  serve beneficiaries and providers. For example, the 1-800-MEDICARE help  line answers calls for general and claims-specific beneficiary inquiries and  forwards a relatively small number of complex beneficiary inquiries to the  MACs to respond. The MACs also are required to provide required reports  and other documents, known as deliverables, to CMS within generally  specified time frames.
section_title: CMS’s Plans for Contracting Reform
paragraphs: In its February 2005 report to Congress, Medicare Contracting Reform: A  Blueprint for a Better Medicare, HHS outlined CMS’s plans for  implementing contracting reform and highlighted anticipated  improvements, including improved customer service, streamlined service  delivery by integrating claims-processing functions, and savings from  reducing program costs (see fig. 1).
CMS designed the new MAC jurisdictions to achieve operational  efficiencies by consolidating the number and types of contractors and  better balancing workloads. In the legacy contracting environment,  different contractors handled Part A and Part B claims in the majority of  states, and multiple contractors were responsible for regions in which they  processed claims across several—sometimes noncontiguous—states. In  its 2005 report to Congress, CMS called the varying legacy contractors that  processed Part A and Part B claims “a patchwork of responsibility and  service,” a problem it hoped to solve with consolidation. Whereas in the  legacy environment, a single state might have been served by multiple  contractors handling Part A and B claims in their separate regions, in the  MAC environment, CMS established MAC jurisdictions, which were based  on contiguous state boundaries, such that a single A/B MAC handled all  Part A and B claims—other than DME claims—in its jurisdiction. (See   Part A and B claims—other than DME claims—in its jurisdiction. (See   fig. 2.)  fig. 2.)
As of September 2009, CMS told us it had awarded and implemented 13  MAC contracts, worth at least $3 billion. Each contract is for 1 year  (referred to as a base year), with up to 4 “option years,” should CMS  choose to exercise them. During the MAC’s base year, the legacy  contractors transitioned their workload over a period that generally lasted  about 7 months for the 6 MACs in our study, ranging from 4 to 10 months.  CMS instructed the MACs and legacy contractors to work together to  transfer data and records and required the MACs to educate providers  about the change. CMS also assigned responsibility to the MACs for  consolidating computerized claims edits (used during processing to  determine whether to accept, adjust, or reject a claim) that may have  differed among the multiple legacy contractors into one consistent set of  edits for each newly consolidated MAC jurisdiction. Furthermore, within  their respective jurisdictions, A/B MACs were required to consolidate the  legacy contractors’ policies that determine what services Medicare covers  in a jurisdiction—called local coverage determinations—into one  consistent set of policies within each jurisdiction.
section_title: CMS Components Principally Responsible for Contracting Reform
paragraphs: Two CMS components are principally responsible for Medicare  contracting reform: the Office of Acquisition and Grants Management  (OAGM) and the Center for Medicare Management (CMM). While the  OAGM is responsible for awarding Medicare administrative contracts,  divisions within the CMM are responsible for MAC program and  operations management, development, and performance assessment, as  well as for developing and executing both the Medicare contracting reform  budget and the MAC operating budgets. (See app. IV for a CMS  organizational chart of the components involved in Medicare contracting  reform.) Other parts of CMS coordinate with these two components, such  as the Office of Financial Management, which establishes many program  requirements for MACs, including, but not limited to, financial reporting.  To manage the complex transition and to conduct oversight of the MACs,  CMS assembled a staff with experience in acquisitions, contract  management, and program management, as well as technical advisors in  areas such as information technology and claims processing.
section_title: CMS Has Taken Steps to Facilitate the Complex Implementation of Medicare Contracting Reform, but Certain Decisions Have Led to Challenges
paragraphs: While CMS officials took numerous steps to facilitate Medicare  contracting reform, we identified several CMS decisions that led to  challenges. For example, we found that CMS underestimated the volume  of appeals the MACs would inherit, which led to claims-payment delays  and additional workload for incoming MACs. In some cases, CMS was able  to make midcourse adjustments by incorporating lessons learned.
subsections: section_title: CMS Has Taken Steps to Facilitate the Complex Implementation of Medicare Contracting Reform
paragraphs: CMS has taken steps to facilitate the complex process of implementing  Medicare contracting reform, which we described as an inherently high- risk activity in our 2005 report. Medicare contracting reform represents  the largest transition of claims administration workload since the  inception of the Medicare program and was more complex than smaller- scale transitions CMS conducted in the past with legacy contractors.  These earlier transitions were often “turnkey” operations, with incoming  contractors retaining outgoing contractors’ staff and equipment.  Furthermore, past transitions did not involve the transfer of as many  Medicare Part A and B claims or the significant reconfiguration of the  associated functional contractors and jurisdictions.
This was also the first time that CMS awarded claims administration  contracts under requirements for full and open competition. The agency  faced the challenge of selecting contractors able to carry out complex  activities critical to Medicare administration using procedures consistent  with the FAR. In doing so, the agency decided to emphasize past  experience and past performance with similar work of organizations that  sought to become MACs. For the initial competition for 19 MAC  contracts, only three of the organizations seeking contracts lacked  Medicare experience. All awards as of September 2009 were made to  organizations with previous Medicare experience.
Recognizing its challenge to manage the complex transitions, CMS took  steps to facilitate implementation activities in a number of areas, including  developing an integrated implementation schedule, developing training,  hiring support staff, documenting lessons learned, and making midcourse  adjustments. In particular:  CMS established a “cross-component” team to facilitate  communication across the agency and developed an integrated  implementation schedule. CMS reported that this team developed  integrated schedule for the MAC implementation and other major  Medicare initiatives, monitored implementation of cross-cutting initiatives,  and identified effects that cut across initiatives. For example, CMS  provided us with an integrated timeline the agency had developed that  detailed important dates for each of these initiatives. This technical team  was responsible for providing weekly updates to the directors of their  respective components, who would then elevate issues as needed to CMS’s  executive leadership.
CMS developed training and manuals for agency staff, MACs, and  legacy contractors. CMS held training classes to define the roles and  responsibilities of contract administration staff, such as contracting  officers and project officers, involved in the award and management of  MAC contracts. The agency published a contract administration manual  for staff with guidance on processing MAC deliverables and cost reports.  In addition, CMS developed educational materials for MACs and legacy  contractors, including handbooks that outlined CMS’s policies on issues,  such as required meetings and deliverables, and interaction with  functional contractors.
CMS hired an Implementation Support Contractor to assist in A/B  MAC implementation. CMS contracted with Chickasaw Nation  Industries (CNI) to conduct various tasks such as monitoring  implementation status, performing risk assessments, reviewing the  completeness and timeliness of the MACs’ status reports and meeting  minutes, and bringing issues and suggestions to CMS regarding the  implementation.
CMS required the MACs to provide detailed plans and reports to  facilitate implementation in each jurisdiction and to submit  reports of lessons learned. CMS required that each A/B MAC submit a  Jurisdiction Implementation Project Plan to detail overall transition plans  and a Segment Implementation Project Plan to delineate transition work  more specifically for each part of the transition, and that each DME MAC  submit an Implementation Project Plan. The MACs were required to  update these plans on a biweekly basis during the transition, including  details of how each MAC would accomplish the requirements in their  SOWs and the time frames for taking these steps. The agency also required  that the MACs and CNI submit reports of lessons learned to provide  insight on how to improve future transitions, and it requested that legacy  contractors submit such reports.
Documenting lessons learned helped some aspects of later  implementations. For example, lessons learned documents provided to  CMS revealed challenges associated with transferring records from legacy  contractors to the MACs. Two contractors we interviewed noted that they  had to sort through over 100,000 boxes of paper files, as either a legacy  contractor or the incoming MAC. One of these contractors reported that  these files spanned multiple jurisdictions and estimated that it would cost  $11 million to sort and move these records, which they described as  unlikely to ever be needed. CMS told us that based on lessons learned  documents they recognized a need to begin planning for file transfer as  soon as possible. CMS began suggesting that the MACs bring a file transfer  plan to their first meeting with the outgoing contractor, and the outgoing  contractor bring descriptions of its current files, organization and volume,  and file search and retrieval methods.
CMS made midcourse corrections to facilitate its response to bid  protests. As of July 2009, CMS reported that bid protests had been filed in  11 of the 19 jurisdictions and as of September 2009, 6 jurisdictions still had  final award decisions pending. Bid protests delayed implementation of 3 of  the 6 MAC jurisdictions that we reviewed. CMS indicated that responding  to bid protests was very time consuming for staff. As CMS gained  experience with MAC-related bid protests, the agency told us that it made  changes to better respond to them. For example, because CMS initially  assigned the same staff to work on procurements for several jurisdictions  at a time, when a bid protest occurred in one jurisdiction, CMS shifted  staff resources to manage the protest, ultimately delaying award decisions  for other jurisdictions not under bid protest. In response, CMS established  separate jurisdiction-based review panels, which allowed other staff to  continue their work in jurisdictions that were not involved in bid protests.  In addition, CMS identified a need to improve its management of MAC- related proposal evaluation documents. The agency has since hired an  outside contractor that provided a tool to assist with managing the  agency’s documentation of proposal assessments in Cycles 1 and 2 to help  the agency respond more quickly should a bid protest occur.
section_title: Certain CMS Decisions Have Led to Challenges during the Implementation of Medicare Contracting Reform
paragraphs: While MACs we interviewed generally described CMS’s facilitation steps  as helpful, we identified certain agency decisions that led to challenges for  the implementation of Medicare contracting reform. Some of these  decisions, for example, caused delays in payments to providers. CMS  sometimes, but not always, used lessons learned from MACs and legacy  contractors to make midcourse adjustments to decisions that initially led  to challenges. The decisions we identified include the following:  CMS underestimated the number of appeals and provider call  volumes, and the legacy contractors did not reduce their appeals  workloads to target levels before the MAC transitions. Three of the  six MACs we interviewed and CMS reported that some legacy contractors  turned over a larger-than-expected appeals workload, resulting in delays  in resolving appeals and, in some cases, higher customer service call  volumes than CMS estimated. (See table 1.) CMS required all legacy  contractors to set workload processing goals to reduce the number of  appeals transferred to the MACs during the transition, and to submit  weekly and monthly workload reports. CMS reviewed these reports to  check whether the legacy contractors were meeting their workload  processing goals. Despite regular workload monitoring during the MAC  transitions, CMS underestimated the appeals and provider call volumes. As  a result, three MACs we interviewed and CMS reported large appeals  workload backlogs for several months, leading to delays in resolving  appeals, which in some cases led to more calls from providers with  unresolved appeals. CMS officials reported that, in some cases, they  required the MACs to take corrective actions, such as hiring additional  staff, which two contractors noted were most often temporary staff. The  agency also reported having revised workload estimates for subsequent  MAC transitions.
According to CMS staff, concern that legacy contractors might terminate  their contracts prior to the MAC transition and cause claims payment  disruptions contributed to a decision by the agency to pay incentive  bonuses to 15 legacy contractors, which as of July 2009 were worth a  total of about $5 million. However, CMS officials reported that, as of July  2009, payment of these bonuses was not contingent upon legacy  contractors meeting specific workload reduction metrics and therefore  was not used as a mechanism to ensure that legacy contractors reduced  their workloads to specified levels prior to the MAC transition. For  example, a bonus was given to a legacy contractor in a jurisdiction we  reviewed in which the new MAC reported inheriting larger-than-expected  numbers of appeals from the legacy contractors.
The concurrent implementation of the MAC transition with other  Medicare initiatives caused payment delays and other operational  challenges. CMS reported that it accelerated MAC implementation to  prevent potential disruptions in claims processing if legacy contractors  that were not awarded MAC contracts terminated their operations  prematurely. We first noted concerns about CMS’s accelerated schedule in  our 2005 report, including that CMS had not integrated the planning and  scheduling of MAC implementations with other initiatives. CMS did not  agree with our 2005 recommendation to extend its MAC implementation  schedule to allow more time for planning and midcourse adjustments.  Instead, CMS reported to us that it had established a team that developed  integrated schedules for the MAC implementation and other major  Medicare initiatives across the agency. (See fig. 3.) Overlapping initiatives  that posed particular challenges for the MAC transition included the  establishment of a new standard unique provider identification number,  the National Provider Identifier (NPI), which providers had to use to be  paid; CMS’s establishment of Enterprise Data Centers (EDC) to house  Medicare claims-processing software systems beginning in March 2006;  and CMS’s implementation of the Healthcare Integrated General Ledger  Accounting System (HIGLAS), a new CMS financial management system  designed to incorporate information from contractor and agency financial  ial  transactions, including claims payment, beginning in May 2005.  transactions, including claims payment, beginning in May 2005.
EDCs (3/2006–7/2009) EDCs (3/2006–7/2009)
MAC mandated deadline (October 2011)
CMS Action: Implement HIGLAS,  CMS Action: Implement HIGLAS,  CMS’s new financial management CMS’s new financial management  and accounting system designed to  and accounting system designed to  incorporate information from incorporate information from  contractor and agency financial contractor and agency financial  transactions including claims transactions including claims  payment. payment.
CMS Action: Implement  CMS Action: Implement NPI program, which assigns  NPI program, which assigns a unique identification number that  a unique identification number that  is required for claims payment to  is required for claims payment to health care providers. health care providers.
CMS Action: Consolidate and  CMS Action: Consolidate and  transition the EDC, which are  transition the EDC, which are data centers that house Medicare  data centers that house Medicare  claims processing software claims processing software  systems, reducing the total  systems, reducing the total  number from more than 20 number from more than 20  different facilities to 2. different facilities to 2.
HIGLAS is a major CMS initiative to modernize Medicare’s accounting and financial  management systems by creating a single, integrated financial accounting system to be  used by CMS and all Medicare contractors. CMS began planning the transition to HIGLAS  in 2001 to satisfy the objectives of the Federal Financial Management Improvement Act and  the Joint Financial Management Improvement Program, but implementation was delayed  until the MAC implementation began in 2005.
In particular, the concurrent MAC and NPI implementations led to  provider enrollment workload backlogs and, subsequently, claims  payment and processing challenges, as providers were not paid until  provider enrollment applications were processed. According to CMS, three  of the six MACs we studied inherited a backlog of unprocessed provider  enrollment applications from the legacy contractors (see table 2), which  led to claims payment delays. CMS officials told us they were aware that  the mandated deadline for legacy contractors and MACs to enroll  providers in the NPI program overlapped with the MAC transition  schedule in five jurisdictions, but acknowledged that they did not initially  understand the full effect that the overlap with the NPI implementation  would have on the MAC transitions.
To a lesser extent, CMS reported other MAC operational challenges  implementing the EDCs and HIGLAS in conjunction with the MACs.  According to CMS officials, implementing the EDCs in conjunction with  the MACs was challenging, in part because each legacy contractor had  unique claims-processing system features that either had to be  consolidated in the broader MAC jurisdictions or discontinued. For  example, a legacy contractor may have configured its claims-processing  system with 150 to 200 unique computer applications, each with  specialized functions. CMS reported establishing a workgroup that was  responsible for reviewing these unique claims-processing system  applications and determining whether or not the application would be  transferred to the EDC for use by the new MAC.
CMS officials said implementing HIGLAS in conjunction with the MACs  was most problematic in MAC jurisdictions where some legacy  contractors had transitioned to HIGLAS prior to the MAC transition and  others had not. For example, in one case a MAC had to maintain two  financial management systems temporarily until the entire jurisdiction was  converted to HIGLAS. CMS’s HIGLAS timeline initially required legacy  contractors to convert data into HIGLAS format just before cutover to the  MAC. In response to these and other challenges, officials reported that  the agency is now implementing HIGLAS on a jurisdiction-by-jurisdiction  basis after the transition to each MAC is complete.
Prior to the MAC transition, CMS did not adequately monitor  legacy contractors’ implementation of mandated claims-payment  policy changes, generating unanticipated work for the MACs and  causing provider relations challenges. In four of the six MAC  jurisdictions we studied, CMS or the MAC told us that the MACs  discovered and corrected claims-processing errors made by legacy  contractors, which, in some cases, had generated improper payments to  providers and added additional work for the MACs in order to make the  corrections themselves during the transition. These errors were largely  due to legacy contractors not properly implementing certain CMS payment  policies and revealed that CMS had not routinely checked to ensure that  legacy contractors were making changes required by CMS to pay claims  correctly. Although discovering and correcting these errors eventually led  to more accurate Medicare payment, the errors generated unanticipated  work for the MACs and caused provider relations challenges. For example,  CMS reported that a legacy contractor had made improper payments to  providers for scheduled, nonemergency ambulance transportation, a  service covered by Medicare only under limited circumstances, which was  discovered by the MAC. The MAC corrected the error, stopping improper  payments to providers. A MAC in another jurisdiction told us that a legacy  contractor had paid claims that should not have been paid for decades  because it had not fully implemented requirements for certain edits related  to rented equipment maintenance and service. In another example from  the same jurisdiction, CMS reported that the MAC discovered the legacy  contractor’s system was ineffective in ensuring that a provider had  submitted documents required for payment. The HHS Office of Inspector  General estimated that, because of this claims-processing error, Medicare  paid approximately $127 million to providers who had not submitted the  required documentation in 2006. Although CMS officials told us the  agency monitored the legacy contractors through periodic reviews of  contractor edits, it did not discover or correct these particular errors;  instead, the MACs did.
CMS allowed local Medicare coverage policy to be consolidated to  a stricter standard in a region and did not require MACs to make  this change clear, causing payment denials providers did not  anticipate. Originally, CMS instructed MACs to select the “least  restrictive” local coverage determination already in place in the  jurisdiction. CMS later changed its guidance to advise MACs to implement  the “most clinically appropriate” local coverage determination in place in  the jurisdiction, because a legacy contractor may not have had a policy in  place for some topics. This led some providers to face more restrictive  coverage determinations than they had prior to the MAC transition. For  example, one provider group we interviewed reported that the incoming  MAC instituted documentation criteria for treating a type of skin lesion  that had not been required by the legacy contractor. Two of the three  provider groups we interviewed reported that there was a lack of clear  communication about this change in guidance, which caused confusion  once the local coverage determinations were finalized and claims were  rejected. In addition, in two jurisdictions we studied where the MACs  invited providers to comment on more than 100 draft policies, two  provider groups we interviewed said draft policies would be clearer if they  identified which areas were changes from old policies, and one provider  group said physicians’ time constraints made it difficult to review such  large volumes of information.
CMS did not initially require Joint Operating Agreements (JOA)  between MACs and all functional contractors, resulting in  communication challenges between MACs and some key functional  contractors. Initially, CMS did not require JOAs—agreements that  establish roles and responsibilities—between MACs and all related  contractors. CMS officials noted that in considering JOA requirements, the  agency determined whether a JOA was appropriate for each particular  MAC relationship. Specifically, CMS initially did not require JOAs between  MACs and the EDCs, but did require JOAs between MACs and certain  other contractors, such as the Beneficiary Contact Center, which runs the  1-800-MEDICARE help line for beneficiaries. One MAC we interviewed  noted that it was unsuccessful in communicating directly with the EDC in  its jurisdiction because there was no JOA in place. Instead, it had to direct  all communication to CMS officials, who would then contact the EDC on  behalf of the MAC. CMS made a midcourse correction to address this  inefficiency, and required JOAs between MACs and all functional  contractors (including EDCs) in implemented jurisdictions. CMS informed  us that as of February 2009, these JOAs had been executed or were in  progress.
section_title: CMS Has Begun Evaluating MACs Using an Assessment Program, and the MACs Whose Reviews We Examined Did Not Meet All Standards and Metrics
paragraphs: CMS has developed a performance assessment program for MACs that  includes three reviews—the Quality Control Plan review, the Quality  Assurance Surveillance Plan review (QASP), and the Award Fee Plan  review. As of March 2009, CMS had completed all three reviews for three  of the MACs in our sample. CMS’s on-site visits in 2007 and 2008 to review  implementation of the MACs’ Quality Control Plans found that two of the  three MACs’ plans required modification, which those MACs provided to  CMS. Although CMS’s QASP evaluations indicated improvement from the  first review period to the most recent review period we examined, the  three MACs whose evaluations we examined did not meet all the QASP  performance standards. Award Fee Plan reviews by CMS also indicated  improved performance, based on the incentive metrics that the MACs met  and the total award fee percentage they earned from the first review  period to the most recent review period we examined. However, because  the MACs did not meet all incentive metrics, they did not receive full  award fees for which they were eligible.
subsections: section_title: CMS’s Performance Assessment Program Comprises Three Reviews
paragraphs: CMS developed the MAC Performance Assessment Program to include  three reviews—the Quality Control Plan review, the QASP review, and the  Award Fee Plan review. (See fig. 4.) CMS designed these reviews in part to  reflect MMA and FAR requirements for assessing contractor performance.  For example, CMS developed an annual Medicare Contractor Provider  Satisfaction Survey in 2005 and used the survey results to develop a QASP  performance standard in order to meet the MMA requirement for a  performance standard related to provider satisfaction.
CMS selects performance standards in  accordance with the statement of work  to develop the QASP for each MAC  annually.
CMS annually develops an Award  Fee Plan for each MAC that contains  incentives to achieve superior  performance. In order to obtain the  full amount of the potential award fee,  a MAC must meet or exceed  every metric.
CMS conducts a review to assess  MAC compliance with the QASP  performance standards.
CMS conducts a review to determine  performance against metrics.
CMS conducts an on-site visit to  determine whether the MAC has  operationalized its Quality Control Plan.
The QASP has three parts: (1) the roles and  responsibilities of CMS staff; (2) a summary of  the performance standards and the methods  CMS will use to determine whether a MAC is  meeting them; and (3) an excerpt from the FAR  that lists policies and procedures for contract  quality assurance.
CMS makes an award fee  determination based on its review  of the MAC’s performance.
CMS officials told us that although they are  conducting Award Fee Plan reviews annually as  of April 2009, in previous years some reviews  were conducted semiannually.
The MAC Performance Assessment Program is supplemented by ongoing  monitoring activities carried out by staff from various CMS divisions.  These activities include communicating with MAC staff, such as  conducting biweekly telephone meetings with MACs, and reviewing MAC  audits and monthly status reports to oversee contractor performance. As  noted in each MAC’s statement of work, MACs are required to submit  monthly status reports that include information related to problems and  risks encountered during the review period and the actions taken to  address the problems.
Quality Control Plan Review: A Quality Control Plan is submitted to  CMS and is designed to describe the plans, methods, and procedures—or  internal controls—that a contractor will use to meet performance  standards in the statement of work such as those related to quality,  quantity, time frames, responsiveness, and customer satisfaction. The plan  details how the MAC intends to meet CMS’s seven required quality-control  program elements outlined in the statement of work: (1) maintaining an  inspection and audit system; (2) establishing a method of identifying  deficiencies in services performed; (3) developing a formal system to  implement corrective action; (4) documenting procedures and processes  for services to ensure that services meet contractor performance  requirements; (5) documenting a change-management program that  ensures correct procedures and processes are followed when  implementing CMS-required changes resulting from legislation, litigation,  and policy; (6) providing a file to CMS of all quality records relating to  inspections and audits conducted by the contractor and the corrective  action implemented; and (7) providing for CMS inspections and audits.  Lack of a fully functioning Quality Control Plan can potentially weaken a  MAC’s internal controls.
A MAC is required to submit its Quality Control Plan to CMS for review no  later than 45 days after the contract is awarded. CMS is to conduct an on- site visit to examine implementation of the Quality Control Plan after the  MAC has become fully operational to determine whether the MAC’s  internal controls are in place. CMS reports the results of its review in the  Quality Control Plan Review Report, and if the plan is deemed satisfactory,  it is officially accepted by the agency.
Quality Assurance Surveillance Plan (QASP) Review: The QASP has  three parts: (1) an outline of the roles and responsibilities of CMS staff  involved in the QASP review, (2) a summary of the QASP performance  standards CMS developed in accordance with the statement of work and a  description of the methods the agency will use to determine whether a  MAC is meeting them, and (3) an excerpt from the FAR that lists policies  and procedures for contract quality assurance. CMS categorizes the QASP  performance standards according to several “functional areas,” or areas of  Medicare operation. CMS has flexibility in choosing functional areas with  applicable performance standards to use for each of the review periods,  which have ranged from 6 months to 1 year. For example, CMS may  choose performance standards in financial management, a functional area  that relates to a MAC’s financial reporting activity, including ensuring the  effective and efficient use of Medicare funds.
CMS is to use the QASP review to evaluate a MAC’s performance against a  subset of performance standards in accordance with the statement of  work. According to CMS, if a MAC does not meet a performance standard,  the agency requires an action plan to address the deficiency. The CMS  project officer communicates the action plan request to the MAC. If the  CMS project officer and other CMS staff agree that there are extenuating  circumstances, the requirement for the action plan can be waived.  However, a written justification for the waiver must be documented. (See  app. V for additional information on the QASP review.)
Award Fee Plan Review: The Award Fee Plan is CMS’s method for  providing financial incentives to MACs based on their performance. CMS  creates an Award Fee Plan for each MAC annually, for review periods that  have ranged from 6 to 12 months. For each MAC Award Fee Plan, CMS  develops incentive metrics. CMS officials explained that MAC award-fee  incentive metrics are generally designed to be more challenging than the  standards outlined in the statement of work in order to provide incentives  for the MACs to exceed those standards. For example, the claims- processing timeliness metric states that the MAC will process 97 percent  of clean claims within statutorily specified time frames, a level that is set  higher than the standard in the statement of work, which states that the  MAC must process 95 percent of clean claims in these time frames. CMS  assigns a value to, or weights, each metric to determine what percentage  of the award fee can be earned by the MAC for that metric. (See app. VI for  a listing of the weights assigned to each incentive metric for the three  MACs we studied.)
CMS uses the Award Fee Plan review to assess a MAC’s performance  against each metric to determine the amount of the award fee earned for  that metric. If a MAC does not meet some of its incentive metrics, it may  still receive an award fee for other metrics that it meets or partially  meets. For example, if CMS assigned a value of 8 percent to the claims- processing timeliness metric, and this was the only metric the MAC met,  then the MAC would receive 8 percent of the total award fee. According to  CMS, agency officials can change incentive metrics every review period,  depending on which aspects of the MAC’s performance need to be  emphasized during that period. For example, CMS officials stated that one  MAC may not initially have a provider enrollment incentive metric in its  Award Fee Plan, but agency officials can incorporate it in a subsequent  review period if they want the MAC to improve in this area. In  determining the award fee, CMS also considers overall contract  performance, such as the QASP results and other CMS monitoring  activities. (See apps. V and VI for additional information on the Award Fee  Plan review.)
section_title: CMS Found that MACs’ Quality Control Plans Required Modifications, which the MACs Provided
paragraphs: In examining implementation of the Quality Control Plans during its on- site visits to the MACs in 2007 and 2008, CMS found that the plans of two  of the three MACs whose reviews we examined required modifications.  For example, CMS’s Quality Control Plan Review Report for one MAC  indicated an inconsistency in the contractor’s process for closing action  plans in its Part B Overpayments Recovery area. The MAC management  staff agreed to modify the action plan process and a CMS official  confirmed that the MAC submitted a revised Quality Control Plan, which  the agency accepted. CMS’s Quality Control Plan Review Report for the  other MAC indicated that modifications were needed to help mitigate risks  to the agency and its beneficiaries. For example, there were problems with  its process for identifying and reporting deficiencies and managing  corrective actions, such as the lack of a formal system for implementing  corrective actions. A CMS official told us that the MAC submitted a revised  Quality Control Plan, which the agency accepted.
section_title: CMS’s QASP Reviews Found the MACs Improved Their Performance but Did Not Meet All Standards
paragraphs: CMS’s QASP reviews for the three MACs showed that they had improved  their performance from the first review period to the most recent review  period we reviewed but did not meet all standards in any one review  period. As of March 2009, CMS had completed two or three QASP reviews  for each of the three MACs we studied. While the three MACs met from 41  to 67 percent of their performance standards in their first review periods,  by the later review periods, each MAC had met a higher number of  performance standards, achieving 52 to 75 percent of standards met. (See  fig. 5.)
None of the three MACs met all of its QASP performance standards in any  review period, however. Specifically, CMS found that these MACs did not  meet a number of QASP performance standards in six of the nine  functional areas reviewed during those periods. (See app. VII for details  on the QASP performance of the three MACs, including which functional  areas were reviewed.) Performance was generally poorest in the  functional areas of Appeals and Medicare Secondary Payer. For example,  CMS indicated that one MAC experienced challenges in some functional  areas, such as Appeals, that hindered its ability to meet relevant  performance standards. The project officer requested an action plan that  outlined how the MAC intended to work down the appeals backlogs.
section_title: CMS Award Fee Plan Reviews Showed Improved Performance, but Because the MACs Did Not Meet All Incentive Metrics, They Did Not Receive Full Award Fees
paragraphs: CMS’s Award Fee Plan reviews showed that each of the three MACs  improved its performance on incentive metrics from its initial review  period to its later review period. As is shown in figure 6, both the  percentage of incentive metrics met and the percentage of the total award  fee earned increased. Each MAC was paid less than half of the full award  fee for which it was eligible in its first review period, but earned a higher  percentage in subsequent periods for metrics it met. For example, MAC III  met two of seven metrics, or 29 percent, and received 47 percent of the full  award fee in the first review period. For its second review period, it met  four of seven metrics, or 57 percent, and received 60 percent of the full  award fee. By its last review period, the MAC met seven of eight metrics,  or 88 percent, and was paid 86 percent of the full award fee.
While all three MACs received a portion of the award fees for which they  were eligible as a result of the incentive metrics they met in their Award  Fee Plan reviews, they did not meet some incentive metrics, particularly  metrics in areas related to beneficiary and provider service. All three of  the MACs consistently met or partially met the Contract Administration  metric—a measure that assessed the contractors’ service to CMS in  contract management, such as providing quality deliverables on time.  However, in some cases, they did not meet some beneficiary and provider  service metrics for superior performance in areas CMS assessed, such as  (1) Provider Relations—Accuracy, which assessed the accuracy of  responses to providers’ Medicare policy questions; (2) Claims Processing  Timeliness; (3) Appeals; (4) Beneficiary Inquiries, which measured the  timeliness of responses to beneficiaries; and (5) support to the Qualified  Independent Contractor, a contractor that handles the second-level  appeals of denied claims. (See app. VIII for details on the award-fee  performance of the three MACs, including which areas were reviewed.)  For example, MAC II did not meet more than half of the incentive metrics  it was assessed against in its first and second review periods in areas such  as Appeals, Beneficiary Inquiries, and Provider Relations—Accuracy.
section_title: CMS’s Total Costs and Savings to Date for Medicare Contracting Reform Are Uncertain
paragraphs: CMS has not tracked and provided information on all of its costs and  savings related to Medicare contracting reform, and so the total costs and  savings for Medicare contracting reform are uncertain. The agency has  provided information on its external costs associated with establishing  and supporting contracts, but has not provided information on its internal  costs for conducting contracting reform activities, such as salaries.  Similarly, CMS has not provided information on the total savings related to  contracting reform. The agency provided information on some savings due  to reductions in operational spending that it attributes to contracting  reform and other activities related to claims payment; however, it has not  provided information on what it had previously estimated would be the  major source of savings, reduced improper payments to providers  resulting from contracting reform.
subsections: section_title: CMS Routinely Tracks Some, but Not All, Costs Associated with Contracting Reform, Leading to Uncertainty about Total Costs
paragraphs: CMS tracked and provided information on contracting reform costs of  about $300 million from fiscal year 2004 through fiscal year 2008, but could  not readily account for certain internal administrative costs for  implementing the MAC program, such as agency staff salaries and  overhead. In response to our request for total costs of Medicare  contracting reform, CMS provided information on external costs beginning  in fiscal year 2005 for areas such as contractor transition and termination  costs, provider surveys, contract support activities, and technology  associated with contracting reform, including information management  systems and developing the EDCs.
Of the approximately $300 million in external costs CMS indicated was  spent for contracting reform from fiscal year 2004 through fiscal year 2008,  most (approximately $260 million) were incurred in fiscal year 2007 and  fiscal year 2008. (See table 3.) From fiscal year 2004 through fiscal year  2006, CMS paid contracting reform costs out of a lump-sum appropriation  for program management, as CMS did not receive appropriations  specifically for contracting reform until fiscal year 2007. Funds that were  appropriated for contracting reform for fiscal years 2007 and 2008 were  available for 2 fiscal years, instead of the usual 1 fiscal year; these are  referred to in this report as “2-year funding.” For both fiscal year 2007 and  fiscal year 2008, CMS indicated that it spent less than the amount  appropriated for contracting reform and carried over the unused portion  of the funding to the next fiscal year. The appropriations act for fiscal year  2009 made $108.9 million available for contracting reform and designated  it as 2-year funding.
CMS did not include certain internal expenses as part of its accounting of  Medicare contracting reform costs, leading to uncertainty about the total  cost of the effort. In response to our request, CMS was able to compile  selected internal costs for contracting reform in fiscal year 2008 totaling  almost $661,000 and told us that, in general, the internal costs associated  with contracting reform are small compared to the external costs. (See  table 4.) The contracting-reform-related internal costs CMS provided  information on for fiscal year 2008 included categories such as travel,  overtime, training, and supplies, but did not include internal costs for  agency staff salaries, including legal services to address bid protests, and  overhead. CMS said that internal costs comparable to those it provided  information on for fiscal year 2008 were not readily available for other  years. In addition, CMS officials told us that the agency does not routinely  track the internal costs such as staff salaries related to initiatives like  contracting reform, mainly because CMS’s accounting system does not  allocate payroll costs by specific project.
section_title: CMS Did Not Provide Information on Total Savings, and the Extent to Which Identified Savings Can Be Attributed to Contracting Reform Is Uncertain
paragraphs: Although CMS estimated that it would achieve savings from two sources— reduced spending on administrative functions and savings from the  Medicare trust funds related to better claims review leading to reduced  improper payments—the agency has provided information only on  administrative savings, making the total amount of any savings and the  extent to which they are due to contracting reform uncertain. In 2005, we  reported that CMS expected contracting reform to generate savings  totaling over $1.9 billion from reduced spending on Medicare  administration and from reduced improper payments. However, as of April  2009, CMS was unable to quantify and provide information on total savings  realized. Most of the estimated savings were expected to occur from funds  it could avoid spending from the Medicare trust funds by reducing  improper payments for Medicare services, with fewer savings anticipated  from reducing administrative spending. As of April 2009, CMS had  indicated to us reduced spending on operational activities that it  considered administrative savings due to contracting reform. However, it  had not provided information on any savings to the Medicare trust funds  based on a reduction in improper payments due to contracting reform. As  of November 2008, the estimated percentage of Medicare fee-for-service  payments that were improper had been declining since fiscal year 2004  and CMS attributed some of the reduction in improper payments to  contracting reform activities. However, according to CMS, the agency is  not tracking savings to the Medicare trust funds from contracting reform  and therefore is unable to quantify total savings. Further, in November  2009, CMS reported that an estimated $24.1 billion fee-for-service  payments from April 2008 to March 2009 were improper, which was higher  than its November 2008 estimate of $10.4 billion for claims paid from April  2007 to March 2008. CMS also reported that it had changed its  methodology for conducting the error-rate measurement, which could  make a trend comparison with the past years’ estimates unreliable. These  changes make it more uncertain what savings to the Medicare trust funds,  if any, may be due to contracting reform.
Incongruence between the spending categories CMS used in its estimated  savings in 2005 and the categories CMS used to provide information on  reduced spending for selected Medicare operational activities from fiscal  year 2005 through fiscal year 2008 makes it impossible to directly compare  CMS’s estimated and actual savings to date. CMS indicated that spending  for certain Medicare operational activities began decreasing in fiscal year  2006 and continued decreasing through fiscal year 2008. (See fig. 7.) The  agency provided information to show a decrease in the annual operating  cost of these Medicare operational activities from fiscal year 2005 through  fiscal year 2008, when spending reached just over $1.8 billion. According  to CMS, the agency spent nearly $280 million less for these selected  Medicare operational activities in fiscal year 2008 than it did in fiscal  year 2005, the year with the highest level of spending for these activities  during this period.
CMS indicated that savings as a result of reduced spending for these  selected Medicare operational activities are due to several factors,  including efficiencies gained from Medicare contracting reform. For  example, CMS officials said that consolidation of program functions as a  result of contracting reform led to cost reductions. Specifically, the agency  noted that consolidating data processing functions under the EDCs, which  CMS includes as part of contracting reform, resulted in lower operating  costs than data processing in the legacy environment. In addition, CMS  noted that increased competition led contractors to implement cost- cutting measures, such as site closures, to achieve a competitive  advantage in obtaining a MAC contract. However, the agency was unable  to quantify these savings specifically and to isolate the effects of  contracting reform on spending for operational activities from the effects  of other activities related to claims payment. Therefore, it could not  quantify the extent to which these and other examples of reduced  spending were due to Medicare contracting reform, resulting in  uncertainty about savings due specifically to contracting reform.
section_title: Agency and Medicare Administrative Contractor Comments
paragraphs: We provided a draft of this report to HHS for comment and received  written comments from the agency, which are reproduced in appendix IX.  We also solicited comments on our draft report from representatives of  the six MACs in our sample as well as the three provider associations we  interviewed. Of those invited to review the draft report, three MAC  representatives accepted and provided oral comments to us. In addition to  the overall comments discussed below, we received technical comments  from HHS and MAC representatives, which we incorporated as  appropriate.
subsections: section_title: HHS Comments
paragraphs: We obtained written comments on our draft report from HHS, on behalf of  CMS. HHS generally agreed with our draft report findings and praised  GAO for recognizing the progress CMS has made in implementing  Medicare fee-for-service contracting reform.
In response to the draft report’s discussion on the implementation of  Medicare contracting reform, HHS indicated that it agreed with our finding  that CMS took several steps to implement contracting reform, particularly  noting that it was one of the most complex operational initiatives that the  agency has ever undertaken. HHS also generally agreed with our finding  regarding CMS’s performance assessments of three MACs whose reviews  we examined. In one of its technical comments, HHS noted that there are  other performance-related reviews it considers when evaluating MAC  performance that we did not highlight in the draft report. These reviews  relate to a broader set of activities than those within the scope of the  report; we focused specifically on the three key reviews administered  through the MAC Performance Assessment Program because CMS officials  reported to us that these reviews are the key components of the program.  Finally, HHS generally agreed with our finding regarding the uncertainty of  the total costs and savings for contracting reform. HHS noted, however,  that CMS provided us with information supporting reduced spending on  Medicare fee-for-service operations after 2005 that was not fully captured  in the draft report. Our draft report included information that showed  accrued savings due to reduced spending on Medicare fee-for-service  operational activities after fiscal year 2005; however, we excluded fiscal  year 2009 information because, at the time of our review, CMS reported  fiscal year 2009 costs as estimates. We also noted that CMS was unable to  isolate the effects of contracting reform spending for Medicare operational  activities from the effects of other activities related to claims payment.
section_title: MAC Comments
paragraphs: The three MAC representatives who reviewed the draft report generally  agreed that it accurately reflected challenges during the implementation of  Medicare contracting reform. Two of the MAC representatives provided  additional detail on the challenges created because CMS and the outgoing  contractors did not accurately estimate workloads during the transitions.  In addition, they elaborated on the challenges created by CMS’s  concurrent implementation of the MAC transition with other Medicare  initiatives, such as NPI and HIGLAS. One representative attributed some of  the workload increase to a failure by providers to apply for their new NPIs  by the national deadline. Another MAC representative indicated that once  the transition challenges began, CMS responded quickly and efficiently to  address them. However, this representative also stated that he expected  more discussion in the draft report of the MAC procurement process,  particularly the delays and uncertainties resulting from the bid protests in  some jurisdictions. Our report focused on the MAC jurisdictions where a  final award had been made by June 2008 rather than on the procurement  process leading up to the MAC awards.
As agreed with your offices, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date. At that time, we will send copies of this report to the Secretary  of Health and Human Services and other interested parties. In addition, the  report will be available at no charge on GAO’s Web site at  http://www.gao.gov.
If you or your staff have any questions about this report, please contact me  at (202) 512-7114 or at kingk@gao.gov. Contact points for our Office of  Congressional Relations and Office of Public Affairs can be found on the  last page of this report. Other major contributors to this report are listed in  appendix X.
section_title: Appendix I: Jurisdictional Map for Part A/B Medicare Administrative Contractors, as of September 2009
section_title: Appendix II: Jurisdictional Map for Durable Medical Equipment Medicare Administrative Contractors, as of September 2009
subsections: section_title: D
section_title: Appendix III: Scope and Methodology
paragraphs: To determine how the Centers for Medicare & Medicaid Services (CMS)  implemented Medicare contracting reform, we selected a sample of   6 Medicare Administrative Contractor (MAC) jurisdictions for in-depth  review from among the 10 where a final award had been made by June  2008. The 6 MAC jurisdictions that we selected for review in this  engagement were among the earliest to be implemented, and thus had the  longest experience from which we could learn about implementation and  performance assessment. Our criteria for selecting the 6 MAC  jurisdictions were designed to ensure diversity in geographic region, in the  volume of claims workload, in the complexity of transition (such as the  number of legacy contractors in the region whose workloads had to be  transitioned to a single MAC), bid protest experience, and CMS’s  assessment of a jurisdiction’s risk for fraud. For example, we selected  MAC jurisdictions based on areas CMS selected for its demonstration  projects that targeted fraudulent business practices. The sample includes 2  MACs that process durable medical equipment claims (DME MAC) and 4  MACs that process both Part A and Part B Medicare claims (A/B MAC). We  also examined documents and conducted interviews with CMS officials.  Specifically, we reviewed documents including CMS’s acquisition strategy,  requests for proposals, implementation handbooks, MAC monthly status  reports, and CMS’s planning tools such as timelines and maps. We  interviewed CMS staff responsible for coordinating the contract  procurement for, and implementation of, the 6 MAC jurisdictions in our  sample, as well as the Implementation Support Contractor CMS hired to  assist it in implementing the A/B MACs. A division within GAO, separate  from the division that conducted this review, is responsible for resolving  certain federal contract protests. Given its role, we did not assess the  solicitation or award of the MAC contracts. In addition, for the 6  jurisdictions we selected, we interviewed incoming MACs and certain  legacy contractors. We also interviewed health care provider organizations  located in three states within 2 of the 6 MAC jurisdictions in our sample,  including three state medical organizations. We selected provider  organizations for interviews based on whether contractors or CMS  officials we interviewed specifically mentioned them as having raised  concerns about the MAC implementation. In addition, to understand the  national scope of contract reform implementation issues from the provider  perspective, we gathered information from national medical, hospital, and  other provider organizations, including the American Medical Association,  the American Hospital Association, and the American Health Care  Association. Finally, we analyzed documents and conducted interview understand what lessons CMS may have learned that may help inform  future award cycles.
CMS completed its pilot of the annual provider satisfaction survey in 2005. The survey is  designed to measure provider satisfaction with key services performed by Medicare fee-for- service contractors, such as the accessibility of provider education and training from a  MAC.
MACs; however, we did analyze the results of CMS’s reviews that h conducted for DME and A/B MACs as of March 2009.
To determine CMS’s c we reviewed and analyzed documents related to CMS’s budget, estimated  costs, and estimated savings, and interviewed CMS officials. Specifically,  we reviewed documents including CMS’s budget justifications for fiscal  years 2005 through 2009; appropriations acts for fiscal years 2004 through  2009; and CMS data on estimated savings, transition and terminat and other costs associated with contracting reform. We also interviewed  CMS officials responsible for development and oversight of contra reform budgets and estimates of potential costs and savings to understand CMS’s process for tracking and reporting the financial status of  contracting reform. Further, we reviewed criteria for good governance  practices to determine the importance of complete information on the  costs of federal programs and activities for the effective management of  government operations and for assisting Congress and internal and  external users in assessing the operating performance and stewardsh program activities. To assess the reliability of CMS-reported internal an external cost data for contracting reform and CMS-reported spending d ata  for selected Medicare operational activities, we conducted interviews withosts and savings for Medicare contracting reform,  knowledgeable agency officials and reviewed for reasonableness the assumptions associated with the collection and compilation of the costs  and savings data. Based on these reviews and discussions, we found the  data reliable for the purposes of this report.
We conducted this performance audit from May 2008 through March 2010 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.
section_title: Appendix IV: Centers for Medicare & Medicaid Services (CMS) Components Involved in Medicare Contracting Reform
subsections: section_title: Office of Acquisition and
section_title: Appendix V: Supplementary Information on the Quality Assurance Surveillance Plan and Award Fee Plan Reviews
paragraphs: The Medicare Administrative Contractor (MAC) Performance Assessment  Program comprises three reviews—the Quality Control Plan review, the  Quality Assurance Surveillance Plan (QASP) review, and the Award Fee  Plan review. This appendix provides supplementary information about the  QASP and Award Fee Plan reviews.
subsections: section_title: Quality Assurance Surveillance Plan (QASP) Review
paragraphs: In implementing a QASP review, Centers for Medicare & Medicaid  Services (CMS) staff who interact with the project officer include business  function leads and technical monitors. Business function leads are  responsible for determining the QASP performance standards and for  deciding whether the review will consist of an on-site visit or a desk  review. They are subject matter experts in Medicare functional areas, such  as claims processing. They inform project officers of performance-related  issues and identify areas that require closer inspection at on-site visits.  CMS officials told us that, for a given MAC, if there is a significant amount  of data to be reviewed at the contractor site, they will make an on-site  visit, or if the MAC’s performance information is available through a CMS  system, they will do a desk review. Technical monitors are responsible for  conducting the QASP reviews for their specialty functional area.  According to CMS officials, technical monitors support project officers by  assessing MAC performance and reporting their findings to the project  officers. They summarize the results of their reviews in a report that  outlines whether a MAC met the standards.
section_title: Award Fee Plan Review
paragraphs: The Award Fee Plans consist of subjective and objective incentive  metrics. Subjective metrics can be classified as met, partially met, or not  met, whereas objective metrics can be classified as met or not met. For the  first contract year, each Award Fee Plan included a contract- administration metric—the only subjective incentive metric in the plan.  This metric assesses the MAC’s efforts in contract management and  providing service to CMS, such as maintenance of the appropriate level of  staff to perform duties outlined in the statement of work, cost  management, communication, and submission of deliverables like the  Quality Control Plan to the agency on time. For this metric, the MACs can  receive all, some, or none of the award fee specifically allocated for it,  using a point scale the agency developed. In addition, agency officials tol us that they selected objective incentive metrics in functional areas they  considered to be the most important for new MACs, such as claims- processing timeliness and beneficiary and provider relations. For each  objective metric, a MAC can receive all or none of its award fee for that  metric, but generally cannot receive a partial fee.
section_title: Appendix VI: Weights Assigned to Award Fee Plan Incentive Metrics for Three Medicare Administrative Contractors
paragraphs: The Centers for Medicare & Medicaid Services (CMS) assigns a value to, or weights, each metric in an Award Fee Plan to determine what percentage  of the award fee can be earned by a Medicare Administrative Contractor  (MAC) for that metric. Figure 8 of this appendix highlights the weights  S  assigned to the Award Fee Plan incentive metrics for three MACs CM assessed from 2006 through 2008.
section_title: Appendix VII: Three Medicare Administrative Contractors’ Quality Assurance Surveillance Plan Performance
paragraphs: The Centers for Medicare & Medicaid Services’s (CMS) Quality Assurance  Surveillance Plan (QASP) reviews for three Medicare Administrative  Contractors (MAC) showed that they had improved their performance  from the first review period to the most recent review period we reviewed  but did not meet all standards in any one review period. Figure 9 of this  appendix provides details on each MAC’s QASP performance assessed  from 2006 through 2008, including which functional areas were reviewed.
section_title: Appendix VIII: Three Medicare Administrative Contractors’ Award Fees Earned
paragraphs: The Centers for Medicare & Medicaid Services’s (CMS) Award Fee Plan  reviews for three Medicare Administrative Contractors (MAC) showed that  they had improved their performance from the first review period to the  most recent review period we reviewed, but because the MACs did not meet all incentive metrics, they did not receive full award fees. Figure 10   ludes information about the award fee earned by each  of this appendix inc MAC and the incentive metrics the MACs were assessed against from 2006through 2008.
section_title: Appendix IX: Comments from the Department of Health and Human Services
section_title: Appendix X: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, Sheila K. Avruch, Assistant  Director; Jennie F. Apter; La Sherri Bush; Jill Center; Helen Desaulniers;  Sarah-Lynn McGrath; Roseanne Price; Kristal Vardaman; Ruth S. Walk;  Jennifer Whitworth; and William T. Woods made key contributions to this  report.