Centers for Medicare and Medicaid Services: Internal Control Deficiencies Resulted in Millions of Dollars of Questionable Contract Payments
Published: 2007-11-15T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) established a voluntary outpatient prescription drug benefit, which is administered by the Centers for Medicare and Medicaid Services (CMS). CMS relies extensively on contractors to help it carry out its basic mission. Congress appropriated to CMS $1 billion for start-up administrative costs to implement provisions of MMA. Because CMS had discretion on how to use the appropriation, Congress asked GAO to determine (1) how CMS used the $1 billion MMA appropriation, (2) whether CMS's contracting practices and related internal controls were adequate to avoid waste and to prevent or detect improper payments, and (3) whether payments to contractors were properly supported as a valid use of government funds. To address objectives two and three above, our review extended beyond contract amounts paid with MMA funds.
section_title: What GAO Found
paragraphs: CMS expended over 90 percent of the MMA appropriation by the end of December 2006. The majority, about $735 million, was paid to contractors and vendors for a variety of services. For example, because the volume of calls to the 1-800-MEDICARE help line significantly increased with the new outpatient prescription drug benefit, two contractors were paid about $234 million to support the help line. CMS also made payments to other federal agencies for services such as printing and mailing; to state agencies to fund educating the public; for CMS employee payroll and travel costs; and for purchase card transactions to acquire office supplies, equipment, and outreach materials. CMS management has not allocated sufficient resources, both staff and funding, to keep pace with recent increases in contract awards and adequately perform contract and contractor oversight. This operating environment created vulnerabilities in the contracting process. Specifically, CMS did not adequately fulfill critical contractor oversight, such as working with contractors to establish indirect cost rates. Further, certain contracting practices, such as the frequent use of cost reimbursement contracts, increased risks to CMS. After contract award, pervasive internal control deficiencies increased the risk of improper payments. Because CMS did not have clear invoice review guidance, invoice review procedures were often flawed or did not take place. CMS also had not taken steps to ensure contracts were closed within required deadlines and had a backlog of approximately 1,300 contracts as of September 30, 2007. GAO identified numerous questionable payments totaling nearly $90 million. These payments were for costs not compliant with contract terms, which could be potentially improper; costs for which we could not obtain adequate support to determine whether the costs were allowable; and potential waste caused by risks in CMS's contracting practices. Importantly, in some cases, because we were not able to determine whether or to what extent the costs were allowable, some of the questioned amounts may relate to allowable costs that are not recoverable. The table below summarizes the questionable payments GAO identified.

section_title: Letter
paragraphs: In the most significant change to the Medicare program since its inception,  the Medicare Prescription Drug, Improvement, and Modernization Act of  2003 (MMA) established a voluntary outpatient prescription drug benefit,  known as the Part D benefit. This benefit, which became available in  January 2006, is intended to help seniors and persons with disabilities pay  for outpatient prescription drugs. The Centers for Medicare and Medicaid  Services (CMS) is the agency within the Department of Health and Human  Services (HHS) that administers the Medicare program and Part D benefit.  CMS relies extensively on contractors to carry out its basic mission. For  example, the contractors that process and administer medical claims have  played a critical role in serving both Medicare beneficiaries and health  care providers. During fiscal year 2006, CMS awarded contracts valued at  $3.8 billion.
Congress appropriated to CMS $1 billion for start-up administrative costs  to implement MMA provisions. These MMA funds were available for  obligation through September 2006. Because CMS was granted broad  discretion on how to use the appropriation, you asked us to determine   (1) how CMS used the $1 billion MMA appropriation (2) whether CMS’s  contracting practices and related internal controls were adequate to avoid  waste and to prevent or detect improper payments, and (3) whether  payments to contractors were properly supported as a valid use of  government funds.
To address these objectives, we analyzed CMS obligation information and  disbursement information from January 2004 through December 2006;  discussed this information with CMS officials; and assessed contracts,  interagency agreements, and related supporting documentation, including  statements of work, vendor invoices, and contract files. We also  interviewed CMS officials about their contractor oversight responsibilities  and analyzed relevant CMS policies, procedures, and training. We used  GAO’s standards for internal control and Federal Acquisition Regulation  (FAR) requirements as a basis to assess CMS’s contracting practices and  related internal controls. We selected contractors and contracts to test  based on amounts paid with MMA funds and other risk factors. We  performed data mining and forensic auditing techniques to select specific  contract transactions for detailed testing. Specifically, for these selected  transactions, we analyzed additional supporting documentation obtained  from contractors and discussed billed amounts with contractor officials.
While we identified instances of questionable payments, our work was  not designed to identify all questionable payments or to estimate their  extent. Because CMS funded some invoices with funding sources in  addition to MMA, the questionable payments we identified may not be  solely associated with the MMA appropriation.
Appendix II provides additional details of our scope and methodology. We  conducted this performance audit 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. We  conducted our audit work in Washington, D.C. and Baltimore, Maryland  from March 2006 through September 2007.
subsections: section_title: Background
paragraphs: Contracts of federal executive agencies that use appropriated funds are  administered in accordance with laws, FAR, agency-specific FAR  supplements, the Cost Accounting Standards (CAS), and the terms of the  contract. HHS’ FAR supplement, the Health and Human Services  Acquisition Regulations (HHSAR), contains additional requirements not  found in the FAR, such as disallowing payments to contractors for  independent research and development costs. The purpose of CAS is to  help achieve uniformity and consistency in contractors’ cost accounting  practices and provide rules for estimating, accumulating, and reporting  costs under government contracts and subcontracts. For example, CAS  requires certain contractors to prepare a disclosure statement that  describes their accounting practices and requires that similar costs be  treated in the same manner. Contractor compliance with CAS is monitored  by a contractor’s cognizant federal agency.
The cognizant federal agency is usually the agency with the largest dollar  amount of negotiated contracts, including options, with the contractor. To  help ensure continuity and ease of administration, FAR recommends that  once an agency assumes cognizant federal agency responsibilities for a  contractor, it generally retains cognizant status for at least 5 years. If, at  the end of the 5-year period, another agency has the largest dollar amount  of negotiated contracts including options, the two agencies coordinate and  determine which one will assume the responsibilities. In addition to  monitoring CAS compliance, the cognizant federal agency is responsible  for determining if the contractor’s billing and accounting systems are  adequate to record and bill costs in accordance with FAR. The cognizant  federal agency also establishes provisional indirect cost rates based on an  audit of information provided by the contractors that contractors use to  estimate indirect costs on their invoices. The cognizant federal agency also  establishes final indirect cost rates based on an audit of actual costs of the  contractor during the year. The final indirect cost rates are used to adjust  contractor billings (based on provisional indirect cost rates) for actual  costs and may result in an additional cost or savings to the government.  The final indirect cost rates established by the cognizant federal agency  are utilized by agencies dealing with the contractor. Because other  agencies rely on this cost information and oversight, it is particularly  important that the cognizant federal agency fulfills its responsibilities.
MMA significantly changed Medicare law covering CMS’s contracting for  Medicare claims administration services. CMS refers to these changes,  which are intended to improve service to beneficiaries and health care  providers, as Medicare contracting reform. The implementation of  contracting reform, which CMS is required to complete by October 2011,  will fundamentally change Medicare claims administration contracting  practices. Specifically, MMA requires CMS to use competitive procedures  to select Medicare Administrative Contractors (formerly referred to as  claims administration contractors) and to follow FAR except where  specific MMA provisions differ. Prior to MMA, CMS was generally exempt  from these requirements for its claims administration contractors.  According to data provided by CMS’s Office of Acquisition and Grants  Management (OAGM), during fiscal year 2006 CMS awarded contracts  valued at about $3.8 billion. Of that amount, about half represented  Medicare claims administration contracts that were not previously subject  to FAR. The other half was already covered by FAR and is the category of  contract primarily covered by this report.
subsections: section_title: Contract Life Cycle, Contract Types, and Contract Risks
paragraphs: The contract life cycle includes many acquisition and administrative  activities. Prior to award, an agency identifies a need; develops a  requirements package; determines the method of contracting; solicits and  evaluates bids or proposals; and ultimately awards a contract. After  contract award, the agency performs contract administration and contract  closeout. Contract administration involves the agency monitoring the  contractor’s progress and processing payments to the contractor. The  contract closeout process involves verification that the goods or services  were provided and that administrative matters are completed. Also during  contract closeout, a contract audit of costs billed to the government may  be performed and the agency processes the final invoice with an  adjustment for any over- or underpayments.
Agencies may choose among different contract types to acquire goods and  services. This choice is the principal means that agencies have for  allocating risk between the government and the contractor. Contract types  can be grouped into three broad categories: fixed price contracts, cost  reimbursement contracts, and time and materials (T&M) contracts. As  discussed below, these three types of contracts place different levels of  risk on the government, which the government generally manages through  oversight.
For fixed price contracts, the government agrees to pay a set price for  goods or services regardless of the actual cost to the contractor. A  fixed price contract is ordinarily in the government’s interest when a  sound basis for pricing exists as the contractor assumes the risk for  cost overruns.
Under cost reimbursement contracts, the government agrees to pay  those costs of the contractor that are allowable, reasonable, and  allocable to the contract. The government assumes most of the cost  risk because the contractor is only required to provide its best effort to  meet contract objectives within the estimated cost. If this cannot be  done, the government would provide additional funds to complete the  effort, fail to provide additional funds, or terminate the contract. The  FAR requires agencies to mitigate risks through adequate government  surveillance (oversight) during the performance of the contract. In  addition, the contractor must have adequate accounting systems to  record and bill costs.
For T&M contracts, the government agrees to pay fixed per-hour labor  rates and to reimburse other costs directly related to the contract, such  as materials, equipment, or travel, based on cost. Like cost  reimbursement contracts, the government assumes the cost risk  because the contractor is only required to make a good faith effort to  meet the government’s needs within a ceiling price. In addition, since  these contracts provide no positive profit incentive for the contractor  to control costs or use labor efficiently, the government must conduct  appropriate surveillance of contractor performance to ensure efficient  methods and effective cost controls are being used.
section_title: Roles in CMS Contracting Activities
paragraphs: At CMS, OAGM manages contracting activities and is responsible for,  among other things, (1) developing policy and procedures for use by  acquisition staff; (2) coordinating and conducting acquisition training; and  (3) providing cost/price analyses and evaluations required for the review,  negotiation, award, administration, and closeout of contracts. Multiple key  players work together to monitor different aspects of contractor  performance and execute preaward and postaward contract oversight. All  but one of the players described below are centralized in OAGM. Project  officers are assigned from CMS program offices.
Contracting officers are responsible for ensuring performance of all  necessary actions for effective contracting, overseeing contractor  compliance with the terms of the contract, and safeguarding the  interests of the government in its contractual relationships. The  contracting officer is authorized to enter into, modify, and terminate  contracts.
Contracting specialists represent and assist the contracting officers  with the contractor, but are generally not authorized to commit or bind  the government. Additionally, the contracting specialist assists with the  invoice review process.
The cost/price team serves as an in-house consultant to others involved  in the contracting process at CMS. By request, the team, which consists  of four contract auditors, provides support for contract administration  including reviewing cost proposals, consultations about the  allowability of costs billed on invoices, and assistance during contract  closeout.
Project officers serve as the contracting officer’s technical  representative designated to monitor the contractor’s progress,  including the surveillance and assessment of performance and  compliance with project objectives. The project officer also reviews  invoices and conducts periodic analyses of contractor performance and  cost data.
Within HHS, its cognizant federal agency oversight responsibilities are  divided between different agencies and offices. In 2002, HHS designated  the National Institutes of Health (NIH) responsible for establishing  provisional and final indirect cost rates when requested by other HHS  agencies to perform such duties. Other responsibilities, such as monitoring  a contractor’s compliance with CAS, belonged to the individual HHS  agency or office, such as CMS, that primarily works with the contractor.  Because certain cognizant federal agency responsibilities at HHS were  assigned to CMS, we refer to CMS as the cognizant federal agency. At  CMS, the cost/price team was assigned these other cognizant federal  agency responsibilities. CMS could also pay another agency to assist it  with the necessary oversight. For example, within the Department of  Defense (DOD), the Defense Contract Audit Agency (DCAA) performs  contract audits, including those required to fulfill DOD’s responsibilities as  a cognizant federal agency. When requested and for a fee, DCAA will  perform contract audits for other agencies.
section_title: CMS Paid Most of the $1 Billion of MMA Funds to Contractors
paragraphs: Congress appropriated to CMS $1 billion to fund start-up administrative  costs to implement MMA provisions. CMS received $975 million, and  Congress transferred the remaining $25 million to the HHS Office of the  Inspector General (OIG) for oversight of the Part D program, including  detecting and preventing fraud and abuse and the design and maintenance  of a drug pricing database. CMS’s $975 million appropriation was  available for obligation through September 2006. According to CMS  financial data, CMS obligated $974.6 million and, from January 2004  through December 2006, expended over $908 million, of which about  $735 million or 81 percent was paid to contractors and vendors for a  variety of services. Payments were also made for services provided by  other federal and state agencies, for CMS employee-related expenses, and  for purchase card transactions. Figure 1 summarizes the amounts CMS  paid to various recipients.
subsections: section_title: Payments to Contractors and Vendors
paragraphs: CMS paid $735.4 million to over 250 different contractors and vendors. Of  this amount, CMS paid about $521.2 million to 16 major contractors, $26.7  million to several Medicare contractors serving as fiscal intermediaries  and carriers that administer Medicare benefits on behalf of CMS, and an  additional $187 million to over 200 other contractors and vendors. Our  assessment of CMS’s contracting practices and related internal controls  was based primarily on specific controls over the contracts funded with  MMA money for the 16 major contractors listed in table 1.
Based on our analysis of contracts and invoices paid with MMA funds,  figure 2 summarizes the types of activities provided by contractors and  vendors such as information technology, the 1-800-MEDICARE help line,  outreach/education, program support, and program integrity.
Information technology: CMS paid $244.0 million for a variety of  information technology services including new hardware and software,  updates to existing systems, and the development of new systems. For  example, CMS used MMA funds to modify its existing contract with  CGI Federal (CGI) to update the system that handles Medicare claims  appeals so that the system could also handle prescription drug claims.  CMS also used MMA funds to modify its contract with Computer  Sciences Corporation for the redesign of the beneficiary enrollment  and payment system so that the system could also handle prescription  drug beneficiaries. CMS also contracted with Iowa Foundation for  Medical Care (IFMC) to develop a system to facilitate studies of  chronic condition care, as specifically required by MMA.    1-800-MEDICARE help line: CMS paid $234.4 million for the  operation of the 1-800-MEDICARE help line, a CMS-administered help  line used to answer beneficiaries’ questions about Medicare eligibility,  enrollment, and benefits. Because the help line’s call volume  significantly increased with the anticipation of the new prescription  drug benefit, CMS used MMA funds to expand help line operations  and fund a portion of help line costs. CMS contracted with both NCS  Pearson (Pearson) and Palmetto GBA (Palmetto) for help line  operations.
Outreach/education: CMS paid $98.9 million for a variety of outreach  and education activities, including $67.3 million to inform beneficiaries  and their caregivers about the changes to Medicare benefits and $31.6  million to meet the information and education needs of Medicare  providers. For example, CMS paid Ketchum, a public relations and  marketing firm, $47.3 million to provide outreach and education to the  public. Ketchum assisted with a number of initiatives, including a  nationwide bus tour, which traveled to targeted cities across America  to promote key messages regarding Medicare prescription drug  coverage. To further the television advertising campaign, Ketchum  facilitated a number of media buys (the buying of advertising space) for  commercials to inform the public about the new prescription drug  benefit. CMS paid $31.6 million to Medicare contractors serving as  fiscal intermediaries and carriers that administer Medicare benefits on  behalf of CMS. These contractors, such as Blue Cross Blue Shield,  assisted with provider customer service as required by MMA to meet  the information and education needs of providers.
Program support: CMS paid $61.4 million for program support  activities to assist with the implementation of the changes to the  Medicare program. For example, CMS contracted with Booz Allen  Hamilton (BAH) to perform an analysis of the prescription drug  industry, review MMA legislative requirements, and develop application  requirements for the prescription drug plans. CMS also contracted with  BAH to support the development of the statements of work for the 1- 800-MEDICARE help line contracts, including assisting CMS with  monitoring and oversight of the contracts.
Program integrity: CMS paid $14.3 million for program integrity  (antifraud and abuse) activities. For example, CMS paid one contractor  $810,000 to assist CMS as one of the Medicare Drug Integrity  Contractors. These contractors assist CMS in antifraud and abuse  efforts related to the prescription drug benefits. Other examples of  program integrity activities include oversight of the prescription drug  card and coordination of benefit payments to prevent mistaken  payment of Medicare claims.
section_title: Payments to Other Recipients
paragraphs: In addition to the $735.4 million that CMS paid to contractors and vendors,  based upon information in CMS’s disbursement data and descriptions in  interagency agreements and on invoices, we determined that CMS also  made payments to other federal agencies, for employee-related costs, to  state agencies, and for purchase card transactions.
Payments to federal agencies: CMS paid $105.0 million to other  federal agencies. These payments included $27.5 million to the U.S.  Postal Service for mailing services; $26.2 million to the Government  Printing Office for printing services; $5.8 million to the Office of  Personnel Management for various services, including the development  of training courses; and about $19 million to other HHS divisions for  human resources, legal, and other services. CMS also paid about $24  million to the General Services Administration (GSA) for services  including telephone and network services, building renovations, and  renovating a leased facility to include a new training center and  additional office space.
Payments for CMS employee-related costs: CMS paid $42.1 million  for employee-related costs, including $38.2 million for payroll costs and  $3.9 million for travel costs. The payroll costs covered about 500 new  employees hired in response to MMA and did not include payroll costs  for existing CMS employees working on MMA. While these new  employees were hired to work in divisions throughout CMS and in  various regions of the country, the largest group of employees, 174, was  hired to work in CMS’s Center for Beneficiary Choices, which is  responsible for operations related to the prescription drug plans.
Payments to state agencies: CMS paid $23.8 million to state agencies  as grants under the State Health Insurance Assistance Program. Under  the program (which operates in all 50 states, the District of Columbia,  the Virgin Islands, Puerto Rico, and Guam) the agencies provide  advisory services to Medicare-eligible individuals and their caregivers.  CMS relied on these state agencies to play a significant role in  providing counseling and education services on the changes to  Medicare, including the new prescription drug benefit.
Payments using purchase cards: CMS paid $2.0 million using  purchase cards to acquire office supplies, outreach materials, and  information technology equipment. An example of outreach materials  was $148,391 that CMS paid for 25,000 paperweights to be distributed  at MMA outreach events, such as during the nationwide bus tour. CMS  also made a number of audio and video equipment purchases for its  television studio. Purchase cards were also used to pay for training  such as training for MMA new hires, computer training, and  preretirement training.
section_title: Internal Control Deficiencies over Contracting and Contract Payments Increased the Risk of Waste and Improper Payments
paragraphs: The CMS operating environment created vulnerabilities in the contracting  process and increased the risk of waste and improper payments. Over the  past several years, resources allocated to contract oversight at CMS have  not kept pace with the dramatic increase in contract awards. Additionally,  CMS did not allocate adequate funding for contract audits and other  contractor oversight activities essential to effectively fulfilling its critical  cognizant federal agency responsibilities. Further, risks in CMS’s  contracting practices made CMS vulnerable to waste. For example, CMS  did not always benefit from the effects of competition when awarding  contracts. In addition, CMS frequently used a contract type—cost  reimbursement—under which the government assumes most of the cost  risk. In some cases, this contract type was used by CMS contrary to FAR  requirements. In addition, CMS’s approval of certain subcontractor  agreements may have increased the costs to obtain services.
CMS often applied flawed procedures to review and approve invoices. The  flawed procedures were caused, in part, by pervasive internal control  deficiencies, such as a lack of policies and procedures that provide  sufficient guidance for reviewing invoices and that require adequate  supporting documentation for invoices that would enable a review.  Additionally, CMS did not sufficiently train its key staff in appropriate  invoice review techniques, including identifying risks to the government  based on contract type. Further, CMS’s payment process, called negative  certification, did not provide incentive for staff to review invoices, as  payments would be made without a certification of review. Finally, CMS  did not closeout contracts within time frames set by FAR. With only one  OAGM contracting officer tasked with closing contracts, CMS has  accumulated approximately 1,300 contracts with a total contract value of  about $3 billion needing closeout as of September 30, 2007.
subsections: section_title: CMS’s Operating Environment Created Vulnerabilities in the Contracting Process
paragraphs: Over the past several years, CMS resources allocated to contract oversight  have not kept pace with CMS’s increase in contract awards. Additionally,  CMS did not allocate sufficient funding for contract audits and other  critical contractor oversight activities to fulfill its cognizant federal agency  responsibilities. These contractor oversight responsibilities include  establishing indirect cost rates with the contractor and verifying that the  contractor has the necessary systems and processes in place to accurately  bill the government. Moreover, risks in certain contracting practices  related to noncompetitive contracts, cost reimbursement contracts, and  subcontractor agreements made CMS vulnerable to waste.
subsections: section_title: Emphasis on Contract Oversight Did Not Keep Pace with the Increase in Contract Awards
paragraphs: When an organization places sufficient emphasis on accountability or  dedicates sufficient management attention to systemic problems, it  reduces risk and potential vulnerabilities in operating activities. An  organization’s control environment, that is, management’s overall  approach toward oversight and accountability including a supportive  attitude towards internal control, provides discipline and structure that  influences the way the agency conducts its business. As stated in GAO’s  standards for internal control, a strong control environment is the  foundation for all other elements of internal control. From fiscal year 1997  to 2006, as shown in figure 3, CMS contracting has dramatically increased;  however, contract oversight resources have remained fairly constant.  Specifically, contract awards have increased from about $1.9 billion in  1997 to about $3.8 billion in 2006, an increase of 103 percent, while  oversight resources increased from 79 full time equivalents (FTE) in 1997  to 88 in 2006, an increase of about 11 percent. This trend presents a major  challenge to contracting award and administration personnel who must  deal with a significantly increased workload without additional support  and resources.
As the cognizant federal agency, CMS was responsible for ensuring that  certain critical contractor oversight was performed, including establishing  provisional and final indirect cost rates, assessing the adequacy of  accounting systems, and monitoring compliance with CAS. CMS did not  have sufficient procedures in place to ensure its cognizant federal agency  responsibilities were fulfilled, to readily know the contractors it was  responsible for as the cognizant federal agency, or to readily know which  contractors were subject to CAS, which would require additional oversight  to be performed.
We requested a listing of contractors for which CMS was the cognizant  federal agency to determine whether the oversight activities were  performed for the contractors in our review. However, because of missing  and conflicting data in the information provided by CMS, we  independently examined the contract files and spoke with contractors,  NIH, DCAA, and CMS officials to determine that at the end of fiscal year  2006, CMS was the cognizant federal agency for 8 of the 16 contractors in  our review. The contracts in our review for these 8 contractors had a total  value of nearly $1 billion as of August 2007. As shown in table 2, we found  that CMS did not ensure that critical cognizant federal agency duties were  performed or that those duties were only partially or insufficiently  performed. Table 2 also shows that CMS did not fully ensure that its  cognizant federal agency duties were completely performed for any of the  8 contractors.
We found that the listings CMS provided of the contractors for which it  was the cognizant federal agency and other contractors were not complete  or accurate. CMS provided us with two listings, one prepared in 2005 and  another prepared in 2007. The 2005 listing included data fields to record  the applicable cognizant federal agency and the status of the cognizant  federal agency responsibilities listed in table 2. However, this listing was  missing key information for several contractors. For example, there was  no information regarding the cognizant federal agency for Ketchum or the  status of the cognizant federal agency responsibilities. The 2007 listing  included a data field to record the applicable cognizant federal agency, but  did not have data fields to record the status of cognizant federal agency  responsibilities. In addition, the listings did not clearly or consistently  identify whether CMS was the cognizant federal agency. For example, in  the 2005 listing, CMS was identified as the cognizant federal agency for  IFMC; however, IFMC was not included in the 2007 listing. Subsequently,  we verified with CMS officials that CMS was still the cognizant federal  agency for IFMC but it was inadvertently excluded from the 2007 listing.
The CAS states that agencies shall establish internal policies and  procedures to govern how to monitor contractors’ CAS compliance, with a  particular emphasis on interagency coordination activities. CMS did not  have agency-specific policies and procedures in place to help ensure that  its cognizant federal agency responsibilities were properly performed,  including the monitoring of contractors’ CAS compliance. Of the eight  contractors in our review, for which CMS was the cognizant federal  agency, seven were subject to CAS at the end of fiscal year 2006.  Generally, CMS requested DCAA to perform audit work for some of its  cognizant federal agency duties. Further, for HHS, NIH was the agency  assigned responsibility for auditing provisional and final indirect rates.  However, NIH would not know this work is needed, unless CMS makes a  request. In January 2007, one contractor sent a letter to CMS indicating  that while CMS had performed some of the cognizant federal agency  functions “on an ad hoc basis over the past year,” the contractor wanted  “to have a more formal relationship in place.” The contractor noted that  until its indirect cost rates are audited and finalized, it will be “unable to  submit final closeout invoices on  cost reimbursable work.”
Because other agencies rely on the work performed by cognizant federal  agencies in their own contracting activities, CMS’s failure to ensure its  cognizant federal agency responsibilities were fulfilled not only increased  risks to CMS, but also to other federal agencies that use the same  contractors. For example, we noted that according to one contractor’s  audited financial statements, as of December 31, 2005, the contractor  reported a liability of about $3.8 million for billing the government more  than its actual costs, including about $2.8 million associated with CMS  contracts and $1.0 million related to a DOD contract. At the time of our  review, CMS, as the contractor’s cognizant federal agency, had not  established its final indirect cost rates for years after 2004, which would be  necessary for CMS and DOD to collect the overbilled amounts.
CMS officials and cost/price team members attributed their limited ability  to request contract audits—those required by FAR to fulfill cognizant  federal agency responsibilities and for the contract closeout process—to  the lack of sufficient allocation of funds for these efforts. For example,  OAGM provided us with documentation that it requested from CMS  management about $1.2 million for fiscal year 2005 and about $3.5 million  for fiscal year 2006 to pay for proposal evaluations, accounting system  reviews, and disclosure statement reviews to help CMS comply with FAR  requirements. Despite these requests, OAGM was provided $30,000 in  fiscal year 2005 and $18,320 in fiscal year 2006. Moreover, no funds were  provided for this purpose in fiscal year 2007. Consistent with this, the  cost/price team indicated that contract audits often “fall by the way-side”  since its resources are limited. Not funding contract audits may limit  CMS’s ability to closeout contracts, as well as to detect and recover  improper payments. Further, based on our review of payments to  contractors, the contractors that we identified as having more  questionable payments were contractors for which CMS was the cognizant  federal agency.
section_title: Risks in Contracting Practices
paragraphs: Contracting and procurement has been identified as an area that poses  significant challenges across the federal government. Our work and that of  agency inspectors general has found systemic weaknesses in key areas of  acquisition that put agencies at risk for waste and mismanagement. At  CMS we found risks resulting from CMS’s failure to allocate sufficient  resources for effective contract and contractor oversight, and we found  that CMS engaged in certain contracting practices that made the agency  more vulnerable to waste. For example, CMS did not always take  advantage of the benefits of competition and frequently used a contract  type—cost reimbursement—that by nature poses more risk to the  government because the government assumes most of the cost risk. In  addition, CMS approved some subcontractor agreements that may have  unnecessarily increased the costs of obtaining those services. We also  noted that, when awarding contracts, contracting officers did not always  follow advice from others such as the cost/price team and HHS Office of  General Counsel that could have mitigated some of these risks.
CMS is generally required to obtain competition for the goods and services  it procures. The FAR provides procedures for making price  determinations and emphasizes the use of full and open competition in  the acquisition process. Because a competitive environment generally  provides more assurance of reasonable prices than a noncompetitive one,  CMS is exposed to contracting vulnerabilities and potential waste due to  practices that limit competition. About 45 percent of the contracts  included in our review (representing about $499.1 million in total contract  value) were awarded without the benefit of competition. According to  CMS, noncompetitive procedures were used on the contracts in our review  because (1) there was an unusual or compelling urgency for the work, (2),  the award was made under the Small Business Administration (SBA) 8(a)  criteria, or (3) the contracted activities were considered to be a logical  follow-on to prior work. While these are permissible reasons to limit  competition, in the examples of the noncompetitive contracts described  below, CMS’s contracting practices may not have sufficiently protected the  government’s interest in obtaining the best value, in terms of fair and  reasonable prices.
The FAR allows for noncompetitive procedures when there is an  unusual and compelling urgency that the government would be  seriously injured unless competition is limited. When this exemption is  used, an agency prepares a written justification and requests offers  from as many potential sources as is practicable. Prior to a  noncompetitive award to Maximus ultimately valued at about $6.5  million, the HHS Office of General Counsel reviewed CMS’s  justification for other than full and open competition and had concerns  with the legal sufficiency of the justification. The Office found that  CMS did not demonstrate how it had met the FAR requirement to  obtain offers from as many sources as possible or how the agency  would be seriously injured if the exemption is not used. Additionally,  according to the Office of General Counsel, the urgent and compelling  justification did not support procurements in excess of a “minimum  amount of time,” and suggested limiting the contract to a 5-month term  and recompeting the contract during that time. Despite the advice of  the Office of General Counsel, 2 days later CMS awarded the contract  to Maximus for a 9-month period, never recompeted the contract, and  eventually extended the period of performance another 17 months for a  total of 26 months.
For multiple awards to Z-Tech, CMS justified the sole-source  noncompetitive awards using SBA’s 8(a) exceptions to competition  subject to contract value thresholds. To use these exceptions, generally  an agency obtains a written authorization from SBA, which places a  limit on the dollar value of the contract. For one Z-Tech contract, CMS  obtained authorization to award a contract for an amount up to $3.6  million. SBA also indicated that no other increases would be authorized  under this contract and that further increases should be competed  under a new contract. Nevertheless, CMS exceeded the SBA-authorized  amounts and made awards to Z-Tech totaling about $4.4 million.  Further, we found an agency internal document in a contract file that  expressed concern that contract awards to Z-Tech may have been  divided to avoid the dollar threshold that would require competition for  8(a) procurements.
The FAR allows for limiting competition on the issuance of task orders  under multiple award contracts if doing so is in the interest of economy  and efficiency because it is a logical follow-on to an earlier task order that  had been subject to competition. However, the frequent use of the logical  follow-on exemption to competition may hinder an agency’s ability to  obtain the best value for the taxpayer. About 24 percent of the contracts  and task orders in our review, with a total value of nearly $390 million,  were issued with no competition as a logical follow-on to a prior task  order. Two of these logical follow-on task orders had total values of $234.6  million and $67.8 million.
One role of the contracting officer is to select the contract type that is in  the best interest of the government, places reasonable risk on the  contractor, and provides the contractor with the greatest incentive for  efficient and economical performance. Cost reimbursement contracts are  suitable for use only when uncertainties involved in contract performance  do not permit costs to be estimated with sufficient accuracy to use any  type of fixed-price contract. We found that about 78 percent of the  contracts we reviewed were cost reimbursement contracts. These cost  reimbursement contracts had a total contract value of $1.2 billion. Some  CMS officials told us that CMS was a “cost-type shop,” meaning that at  CMS they prefer cost reimbursement contracts. When cost reimbursement  contracts are utilized, FAR requires additional procedures to mitigate the  increased risk such as adequate government surveillance. However, as  discussed later in this report, CMS did not implement sufficient oversight  required for cost reimbursement contracts. In addition, before awarding a  cost reimbursement contract, the contracting officer is required by FAR to  verify that the contractor has an adequate accounting system for  determining costs applicable to the contract, which helps provide the  government assurance that the contractor has systems in place to  accurately and consistently record and bill costs in accordance with FAR.
During our review of CMS’s contract files, we found that contracting  officers did not always proactively ensure the adequacy of contractors’  accounting systems prior to award of the cost reimbursement contracts.
We also noted instances when CMS knowingly awarded cost  reimbursement contracts to a contractor with a deficient accounting  system, contrary to the FAR requirement. Specifically, the CMS cost/price  team noted numerous significant deficiencies in how Palmetto accounted  for costs and determined that Palmetto’s accounting system could not  adequately account for its direct labor and indirect costs. The cost/price  team notified the contracting specialist of the accounting system  deficiencies and also stated that “corrections to  system  cannot be completed by the time this contract is awarded.” Despite this  determination by the cost/price team, the contracting officer awarded two  cost reimbursement contracts included in our review to Palmetto with a  total contract value of $157.3 million. Further, the contracting officer  awarded a third contract valued at $3.3 million to Palmetto without  verifying whether or not Palmetto’s accounting system deficiencies were  resolved.
CMS also encouraged a contractor to use a cost reimbursement contract,  even though the cost/price team raised concerns regarding the  contractor’s proposal of certain costs as direct costs and the contractor’s  ability to accumulate and record direct and indirect costs. Despite these  concerns, CMS did not inquire with DCAA about whether or not an  accounting system audit had been performed until after the contract was  awarded. CMS eventually requested an accounting system audit about a  year and a half after contract award. Further, the contractor expressed  concerns regarding the cost reimbursement contract type requested by  CMS because it did not have prior experience with the contract type. CMS  documented in the contract file that “after much deliberation, the  contractor realized it was in  best interest to accept a [cost  reimbursement] contract.” In some instances, contractors’ inadequate  accounting systems inhibited our ability to audit costs billed to the  government because the contractors were unable to substantiate the costs  billed.
While it is not inappropriate for a prime contractor to use subcontractors  to achieve the contract’s objectives, CMS’s approval of some  subcontractor agreements may have increased the cost to obtain the  services through additional indirect costs and fees. For the contracts we  reviewed, several of the prime contractors subcontracted for significant  volumes of work. For example, on one task order between February 2004  and February 2005, Ketchum billed about $34.7 million of which about  $33.8 million, or 97 percent, was for subcontractor costs. Furthermore,  about $32.3 million of these costs were related to a single subcontractor.  During this same period Ketchum billed only $59,509 for direct labor  (which would include Ketchum’s oversight of the subcontractors) yet  received about $694,000 in fees, or over 10 times more than the direct  labor Ketchum provided under the contract.
The contracts for the operation of the 1-800-MEDICARE help line are  another example of cost increases caused by subcontractor agreements.  CMS hired two contractors to operate the help line—Pearson and  Palmetto. While each contractor had its own contract with CMS that  required them to provide similar services, Pearson and Palmetto  subsequently subcontracted with each other, again for the same services.  Consequently, the costs to operate the help line were increased through  additional indirect costs and fees. Specifically, CMS paid Palmetto an  additional $3.6 million (for indirect costs and fees applied to the Pearson  services included with Palmetto’s invoices) that may not have been paid  absent the subcontract agreement, such as if Pearson provided the  services under its own prime contract. In addition, CMS paid Pearson an  additional $630,000 in fees that may not have been paid absent the  subcontract agreement.
section_title: Pervasive Internal Control Deficiencies Increased the Risk of Improper Payments
paragraphs: In addition to increased risks associated with CMS’s operating  environment and certain contracting practices, pervasive internal control  deficiencies in its invoice review and approval process increased the risk  of improper payments. These deficiencies were caused in part by  inadequate policies and procedures for invoice review and insufficient  training of key personnel. CMS also did not perform timely contract  closeout procedures, including contract audits to determine the  allowability of billed amounts.
subsections: section_title: Inadequate Invoice Review and Approval Process
paragraphs: GAO’s standards for internal control state that control activities are the  policies, procedures, and mechanisms that address risk and are an integral  part of an organization’s stewardship of government resources. Effective  controls are even more important given CMS’s risks and vulnerabilities in  the contracting process caused by its operating environment. Effective  policies and procedures for reviewing and approving contractor invoices  help to ensure that goods and services were actually received and amounts  billed represent allowable costs, and are comprised of numerous control  activities. At CMS, the project officer’s role is to review the invoices for  technical compliance and accuracy of quantities billed whereas the  contracting specialists’ role is to determine if the amounts billed comply  with contract terms such as indirect cost rates or ceiling amounts.
We found that CMS often used flawed procedures to review and approve  contractor invoices. These flawed procedures were caused, in part, by a  lack of specific guidance and procedures for the contracting officials to  follow as well as insufficient training.
Inadequate policies and procedures over invoice review: CMS’s  policies and procedures did not provide adequate details on how to  review invoice cost elements. For example, CMS’s acquisition policy  for invoice payment procedures simply states that “the project officer  shall certify whether or not the invoice is approved for payment” and  “the contracting specialist will review the invoice and (the project  officer’s certification).” The policy did not give specific instructions or  guidance on how to review an invoice or which invoice elements  receive the most review given the nature of the services provided or the  contract type.
Lack of requirements for invoice detail: CMS did not have  requirements for contracting officers to ensure that contractors  provide a certain level of detail supporting their invoices to allow  responsible CMS personnel to sufficiently review key elements. As a  result, CMS often did not require contractors to provide adequate detail  in invoices to review billed costs, such as labor charges or travel. For  example, some contractors included only lump sum amounts showing  the number of hours worked and the associated dollar amount for  labor costs but did not provide a list of hours worked by employee or  respective labor rates. Without this information, it was not possible for  CMS to verify whether the amounts billed corresponded to employees  who actually worked on the project. One contractor stated that CMS  requested only lump sum amounts for travel with no detailed  information or travel receipts. Without this information, CMS could not  verify that travel costs were related to the contract or were in  accordance with FAR requirements.
Insufficient training: CMS did not sufficiently train staff on how to  adequately review invoices, such as identification of risks to the  government based on contract type and how to verify labor rates or  hours worked. As a result, project officers and contracting specialists  were not always aware of their invoice review responsibilities. Some  project officers told us that they had only received training “on-the- job.” Further, several staff we interviewed referred to the Project  Officer Handbook as a source for guidance on the project officer’s  responsibilities. We reviewed this handbook and found that it did not  provide any practical guidance on how to review invoices and focused  more on the acquisition process (i.e., developing statements of work  and preparing acquisition planning documents). In addition, two  contracting officers said they attended a 2-hour training sponsored by  CMS’s Office of Financial Management (OFM) and that it was helpful in  providing guidance on how to review invoices. We also reviewed this  training material and found that the training did not sufficiently cover  invoice review procedures. The training materials included one slide  that indicated that it was the project officers’ responsibility to review  invoices, but it did not provide specific examples of invoice review  procedures. An OFM official told us that the training was intended to  provide detailed guidance on budgeting and appropriation procedures  and not invoice review.
Lack of incentive to review invoices: CMS uses a payment  process—negative certification—whereby OFM paid contractor and  vendor invoices without knowing whether or not such invoices were  reviewed and certified. Negative certification is used, in part, to help  the agency meet Prompt Payment Act requirements. However, this  process is the default for all invoice payments regardless of factors that  may increase risk to the agency, including contract type or prior billing  problems with the contractor. By contrast, DOD allows for contractors  to participate in direct billing, a process similar to negative  certification, only if the contractors meet certain criteria such as  adequate accounting systems, billing rates established based upon  recent reviews, and timely submissions of cost information as required  by FAR. CMS’s negative certification process provides little incentive  for personnel to perform timely reviews of invoices or for reviews to  even take place. In our review of contract files, we found that  certificates of review by the project officer were not always included in  the contract files, and when the certificates were included in the file,  they generally did not include evidence to document the review, such  as tickmarks or notes, and they were not always signed.
Without sufficient policies and procedures, training, and incentives to  review invoices, we found that key staff often used flawed procedures.  Contracting officers, specialists, and project officers told us they reviewed  invoice costs, such as labor rates for cost reimbursement contracts, based  on amounts proposed by the contractor prior to award. However, this  practice has little value for cost reimbursement contracts because FAR  calls for the payment of actual allowable costs, rather than costs  proposed prior to performance of the contract.
Contracting specialists and project officers also told us they reviewed  invoices by comparing current invoices to prior months and to burn rates  (the rate at which CMS is expending dollars that are obligated to the  contract). This procedure provides no assurance that the amounts billed  are allowable. Additionally, several project officers told us that they  compared invoices to monthly reports prepared by the contractors. This  procedure has limited value because it does not involve verifying amounts  billed to source documents, such as time sheets, payroll registers, or  vendor invoices. Also, when we reviewed the monthly reports, we noted  that the reports were not always reconcilable to the invoices, which would  hinder the project officer’s ability to use the monthly reports in  determining the validity of the billed amounts. As described later in this  report, we found payments for potentially unallowable costs that could  have been identified had proper invoice review procedures been in place.
Further, contracting and project officers did not call for additional  oversight procedures when they approved complex subcontractor  arrangements such as when a contractor provides the same services as  both a prime contractor and as a subcontractor to another contractor.  When these types of relationships exist, improper payments or double- billings may go undetected if a contractor bills the same services on both  its prime contract invoices (which are reviewed by the government) and  its subcontract invoices (which are reviewed by the other prime  contractor). Further, some officials indicated that they relied on contract  audits rather than invoice review procedures to catch improper payments.  One contracting officer stated that it was not the contracting officer’s or  specialist’s responsibility to review invoices for fraudulent billings, such as  double-billings, because such billings would only be found during a  closeout audit. While an audit during the closeout process may provide a  detective control to identify improper payments after they were made,  timely invoice review procedures provide the necessary preventive  controls to help ensure that improper payments are not made and would  allow CMS to take corrective actions, if necessary. For example, it would  be more effective to review the accuracy of labor billings while the  contractor is still performing services rather than after the fact during the  closeout process, which may be several years later.
section_title: Untimely Contract Closeout
paragraphs: CMS did not perform its contract closeout procedures in accordance with  FAR time frames, and until recently, did not have contract closeout  policies. The FAR requires agencies to closeout a contract after the work  is physically completed (i.e., goods or services are provided). The  closeout process is an important internal control, in part, because it is  generally the last opportunity for the government to detect and recover  any improper payments. The closeout process includes verifying that  administrative matters are completed, adjusting provisional indirect cost  rates for actual final indirect cost rates, performing a contract audit of  costs billed to the government, and making final payments. The  complexity and length of the process can vary with the extent of oversight  performed by the agency and the contract type. The FAR generally calls  for fixed price contracts to be closed within 6 months; contracts requiring  the settlement of indirect costs rates, such as cost reimbursement  contracts, to be closed within 36 months; and all other contracts to be  closed within 20 months. These time frames begin in the month in which  the contracting official receives evidence of physical completion of the  contract.
According to information provided by OAGM management, as of  September 30, 2007, CMS’s contract closeout backlog was approximately  1,300 contracts with a total contract value of approximately $3 billion. The  backlog report indicated that 407 contract closeouts were overdue  according to FAR timing requirements. Currently, CMS has only one  contracting officer responsible for the closeout process. Several of the  contracts on the backlog list completed contract performance as far back  as 1999. CMS established agency-specific contract closeout policies in  February 2007. One CMS official stated that prior to the closeout policies,  some contracting officials and specialists often passed on contract files to  the closeout staff before compiling all required documentation. Because of  this, the sole staff member responsible for CMS’s contract closeout  procedures has to spend time tracking down required documents rather  than performing actual closeout procedures.
A key element of the closeout process is the contract audit of costs billed  to the government. This audit is used to verify that the contractor’s billed  costs were allowable, reasonable, and allocable, which is critical for a cost  reimbursement contract. This audit is even more important at CMS  because of CMS’s dependence on cost reimbursement contracts and the  reliance placed on the contract audits instead of invoice review  procedures. As previously mentioned, CMS has not allocated sufficient  resources to ensure contract audits take place. As a result, CMS has  limited its ability to detect and recover improper payments from  contractors.
section_title: CMS Made Nearly $90 Million of Questionable Payments to Contractors
paragraphs: Because of the risks in CMS’s contracting practices and pervasive internal  control deficiencies, CMS was highly vulnerable to waste and improper  payments. Due to this increased risk, we selected contractor transactions  to test and found nearly $90 million of payments to contractors that we  questioned because the payments were potentially improper,  unsubstantiated, or wasteful. Potentially improper payments include  payments for costs that did not comply with the terms of the contract or  applicable regulation. Unsubstantiated payments are related to costs that  were not adequately supported. Wasteful payments are those for which  risks in CMS’s contracting practices may have resulted in CMS not  obtaining the best value. In some cases, a portion of the questionable  payment most likely relates to allowable costs, but due to the facts and  circumstances involved, we were unable to determine whether or to what  extent the costs were allowable, reasonable, and allocable. As a result,  some portion of the total amount of questionable payments we identified  ultimately may be determined by CMS to be allowable and therefore not  recoverable from the contractor. Table 3 summarizes the questionable  payments we identified. Appendix I provides a summary by contractor of  the questionable payments we identified.
Because CMS sometimes used other funding sources in addition to MMA  to pay invoices for one contract, we were not always able to identify  specific costs that were paid with MMA funds. As a result, the scope of our  review extended beyond payments made with MMA funds for some  contracts and the amount of questionable payments we identified may not  have been paid solely with MMA funds. Given CMS’s poor control  environment and the fact that our work was not designed to identify all  questionable payments made by CMS or to estimate their extent, CMS may  have made other questionable payments. Appendix II provides details on  the amounts by contractor that we reviewed and the amounts paid with  MMA funds.
subsections: section_title: Questionable Payments for Costs Not Compliant with Contract Terms or Regulations
paragraphs: Contracts contain the terms and provisions that set the parameters for  allowable costs and the necessary documentation required to support the  contractor’s billings. For example, contracts may set ceiling limits on the  amount of indirect costs a contractor may bill or the amount a contractor  may bill for subcontractor costs. Additionally, contracts also incorporate  numerous FAR provisions that the contracting officer determines to be  applicable to the contract that may require the contractor to follow CAS or  may restrict the contractor’s travel costs. The contractor is required to bill  the government in accordance with the terms of the contract and, as part  of its invoice review and approval process, the government’s responsibility  is to ensure that billings comply with those terms. We identified numerous  questionable payments totaling about $24.5 million that represent  potentially improper payments for contractor costs not compliant with the  terms of the contract or applicable regulation.
Labor categories outside the terms of the contract – $1.7  million: CMS paid CGI, BAH, International Business Machines (IBM),  and IFMC for labor categories which were not specifically listed in the  terms of the task orders. For example, CGI’s task order specified  “should the contractor wish to utilize additional GSA IT labor  categories…prior CMS approval must be obtained.” CGI did not seek  and CMS did not give approval for the use of four labor categories,  totaling about $1.3 million. Also, CMS paid BAH about $208,000 for  labor categories that were not specifically listed in the terms of the task  order. BAH told us that in its proposal for a modification to the task  order, it proposed using the additional labor categories. However,  according to the task order, the modification, and other CMS internal  contract documents, no additional labor categories were added to the  contract. During our review, we also identified payments to IBM and  IFMC of about $231,000 and $3,000, respectively for labor categories  that were not specifically listed in the terms of the task orders. In these  four instances, CMS made questionable payments of over $1.7 million.
Indirect cost rates exceeded contract ceiling rates – $17.6  million: CMS paid Palmetto, TrailBlazer, and Maximus for indirect  costs that exceeded amounts allowed under indirect cost rate ceilings  established in the respective contracts. The contract between CMS and  Palmetto included acceptable indirect cost rates, based upon the  indirect costs proposed by Palmetto, and applicable ceiling rates.  Overhead was not included in the contract as an accepted indirect cost.  Nevertheless, Palmetto billed, and CMS paid, at least $16.2 million of  overhead costs. CMS told us that the contract was not modified to  include overhead and that “for the government to continue business  with  in good faith... had to work with Palmetto as it  transitioned to becoming CAS and FAR compliant.” Palmetto notified  CMS that an overhead rate was added to its billing structure, yet CMS  did not modify the contract to include the overhead rate. In addition,  TrailBlazer billed nearly twice as much as the contract allowed for  overhead. During 2006, CMS paid TrailBlazer $1.4 million for G&A and  overhead costs greater than the amount allowed by rate ceilings in the  contract between CMS and TrailBlazer. TrailBlazer told us that the  indirect cost rate ceilings incorporated into its contract at the time of  award were based on its accounting system that, at the time, was not  compliant with CAS. Subsequently, in January 2006, when TrailBlazer  changed its accounting system to be CAS compliant, the rate ceilings  were no longer reflective of its billing structure. In June 2007,  TrailBlazer submitted to CMS, its cognizant federal agency, a cost  report supporting an increase to its indirect cost rates for 2006.  However, CMS did not issue a modification to amend the contract and  increase the indirect cost rate ceilings. CMS also paid Maximus $16,000  in excess of its G&A rate ceiling. In these three instances, CMS made  questionable payments of over $17.6 million.
Subcontractor costs exceeded approved amount – $489,000: CMS  paid CGI about $489,000 for subcontractor costs above the not-to- exceed amount established when CMS approved CGI’s use of  subcontractors.
Improper use of contract type – $4.5 million: In February 2005,  CMS issued a sole-source, T&M task order to IBM under a commercial  Army contract to procure commercial services. Because the FAR  prohibited the use of other than fixed-price contracts to procure  commercial services at the time the task order was awarded, we  questioned the payments to IBM under this task order totaling  approximately $4.5 million.
Travel costs exceeding limits – $11,000: CMS paid ViPS and CGI  for travel costs that exceeded FAR limits incorporated in their  contracts. The FAR prohibits contractors from billing for other-than- coach transportation or above set limits for hotels, meals and  incidentals, and mileage reimbursement. In several instances, ViPS  billed the government $299 or more a night, in one case as high as $799  a night, excluding taxes, for hotel stays in Manhattan. During the  applicable period, the federal hotel per diem limit for Manhattan was at  most $200 a night. Additionally, the contractor billed the government  for business class train travel and amounts that exceeded the meals  and incidentals per diem. Each of the 14 ViPS travel vouchers we tested  included costs that exceeded allowed amounts. In total, we identified  questionable payments of nearly $10,000 for ViPS travel. CMS also  reimbursed CGI about $1,000 for travel costs in excess of allowed per  diem limits.
Inappropriate calculation of labor – $9,000: CMS paid Ketchum for  labor costs that exceeded Ketchum’s actual costs for those services on  a cost reimbursement contract. Ketchum did not adjust its hourly labor  rates to bill for actual labor costs when exempt salaried employees  (employees not eligible for overtime compensation) worked more than  the standard hours in a pay period. By not adjusting (decreasing) the  hourly labor rate to reflect the number of hours actually worked when  an employee worked more than the standard hours, Ketchum charged  the government more than its cost—the employee’s salary. For  example, if an exempt employee earns $4,000 for working a 40-hour  week, the employee’s hourly rate would be $100 ($4,000/40 hours). If  that employee worked 50 hours in a week, the employee still earns  $4,000 and the hourly rate would be adjusted to $80 ($4,000/50 hours).  In this scenario, if the hourly rate were not adjusted, the contractor  would have billed $5,000 ($100 * 50 hours) when its actual costs were  only $4,000. Based on the labor transactions we selected for review  totaling about $214,000, we estimated that CMS made about $9,000 of  questionable payments as a result of Ketchum not adjusting its hourly  labor rates.
Labor costs inappropriately billed – $20,000: CMS paid nearly  $20,000 to IFMC for vacation and sick leave that IFMC billed directly to  the government. The FAR defines a direct cost as a cost that benefits a  single cost objective (e.g., a contract) and an indirect cost as a cost that  benefits more than one cost objective. Costs such as employees’  fringe benefits, vacation and sick leave, and other headquarters costs  are common indirect costs. IFMC billed vacation and sick leave directly  to contracts that an employee worked on only at the time the leave was  taken. By billing vacation and sick leave as direct costs, IFMC may  have billed more than CMS’s portion of the costs to CMS. For example,  if an employee worked on one contract for 11 months and a new  contract in the twelfth month and also took leave in the twelfth month,  only the contract that the employee worked on in the twelfth month  would bear the entire cost of the leave. Had IFMC included its costs  associated with vacation and sick leave in its indirect cost rates, these  costs would have been proportionally allocated to all of IFMC’s  contracts. Therefore, some of the nearly $20,000 of questionable  payments would likely be offset by an increase in the indirect cost  rates; however, we could not determine what that amount would be. In  total, IFMC billed CMS about $4.3 million for direct labor from June  2005 through January 2006. Because we only reviewed $152,000 of  labor charges, the total labor billed by IFMC may include additional  costs associated with vacation and sick leave.
Labor rates in excess of contract terms – $31,000: CMS paid CGI  for one labor category at rates higher than the rates allowed in its T&M  contract, resulting in additional costs of about $31,000. According to  CGI, it intends to issue a credit to CMS for the overbilling.
Duplicate billing – $95,000: CMS paid about $95,000 for equipment  that CGI billed twice. CGI discovered the double billing for equipment  as a result of our audit and subsequently issued a credit to CMS for the  double billing.
section_title: Questionable Payments for Unsupported Contractor Costs
paragraphs: Under a cost reimbursement contract, in which a contractor bills the  government for allowable costs to achieve the contract objectives, the  FAR requires the contractor to maintain adequate accounting systems and  other documentation to support the amounts the contractor bills. For  example, the FAR requires contractors to maintain documentation, such  as time sheets, pay information, or vendor invoices. Additionally, FAR  stipulates that supporting documentation must be maintained for 3 years  after the final payment. We identified about $62.7 million of questionable  payments for unsubstantiated contractor costs that were not adequately  supported. For each of the questionable payments described below, a  portion of the questionable payment most likely relates to allowable costs,  but due to the different facts and circumstances involved, we were unable  to determine whether or to what extent the costs were allowable,  reasonable, and allocable. As a result, some portion of the total amount of  questionable payments we identified ultimately may be determined by  CMS to be allowable and therefore not recoverable from the contractor.
Unsupported contractor costs – $50.8 million: CMS paid $40.6  million to Palmetto for costs that were not adequately supported and  $10.2 million to Pearson for subcontractor costs related to Palmetto  that were also not adequately supported.
CMS’s cost/price team’s review of Palmetto’s proposal identified  numerous concerns about Palmetto’s ability to record and bill costs.  Specifically, the cost/price team noted that Palmetto’s accounting  practices were not compliant with several CAS requirements, its labor  system did not distinguish between direct labor and vacation time, and  its accounting system did not use indirect cost rates. The cost/price  team also indicated that Palmetto was working on addressing these  issues, but that it would probably be a lengthy process because of the  numerous deficiencies. Despite the concerns about Palmetto’s ability  to record and bill costs, CMS awarded Palmetto three cost  reimbursement contracts, contrary to the FAR requirement that the  contractor must have an adequate accounting system for recording and  billing costs. In this instance, CMS’s decision to award cost  reimbursement contracts to a contractor with accounting system  deficiencies and CMS’s failure to establish Palmetto’s indirect cost  rates inhibited our ability to audit the costs billed to CMS.
In response to our request for transaction-level detailed reports of  costs billed to CMS, Palmetto officials told us that its accounting  systems could not generate a report that summarized the costs billed  to CMS and that invoices were created manually by allocating costs  (direct and indirect) from its cost centers. In addition, we were told  that prior to June 2005, Palmetto did not require its salaried employees  to use time sheets.
Even though Palmetto told us its salaried employees were not required  to use time sheets, Palmetto was able to provide many time sheets to  support labor costs it billed. To gain an understanding of the type of  information available that Palmetto could provide to support its other  direct costs billed, we asked Palmetto to support the costs billed on  four invoices. In response, Palmetto provided travel vouchers,  subcontractor invoices, and numerous cost center reports and  spreadsheets. The travel vouchers and subcontractor invoices  supported the amounts billed to CMS. The cost center information  represented costs that were directly allocated to the CMS contract.  However, Palmetto did not support how it determined the percentages  it used to allocate the costs to the CMS contract. Further, when we  analyzed the cost center information, we noted several unusual  transactions, including depreciation for office and cafeteria furniture,  computer equipment, and basketball goals; building and lawn  maintenance; and janitorial, security, and recycling services. Because  these costs could reasonably benefit more than one cost objective or  contract, these types of costs are generally included in a contractor’s  indirect cost rates rather than billed directly to a contract. Essentially,  to audit these costs, all of Palmetto’s operations—not just the costs  allocated to the three CMS contracts included in our review—would  need to be audited to determine whether the costs were allowable.  This type of contractor oversight is normally performed by the  cognizant federal agency, which for Palmetto is CMS.
Because of the uncertainties associated with Palmetto’s other direct  costs (which based on the cost center reports seem to include  significant allocations of indirect costs) we concluded that we were  unable to audit the other direct costs (excluding travel and  subcontractor costs) totaling $6.1 million billed to CMS prior to June  2005 when Palmetto changed its accounting system to be compliant  with CAS.
In addition, we could not verify the allowability and reasonableness of  $34.5 million of indirect costs billed to CMS on the three Palmetto  contracts covering 2004 through 2006. On a cost reimbursement  contract, indirect costs can be a substantial portion of the total  contract cost. FAR requires that 6 months after the close of a year,  contractors with cost reimbursement contracts must submit a report  of their final costs to their cognizant federal agency. On October 2,  2006, Palmetto submitted to its CMS contracting officer a report of its  2005 final costs. However, CMS may not have realized that Palmetto  submitted this report because, according to a letter from CMS’s  cost/price team to Palmetto dated June 4, 2007, CMS notified Palmetto  that its 2004 and 2005 final cost reports were delinquent according to  FAR. Further, as of October 2007, Palmetto had not provided to CMS  its final cost report for 2006, which is delinquent according to the FAR.  Because Palmetto’s final cost reports for 2004, 2005, and 2006 have not  been audited by CMS its cognizant agency, Palmetto’s final indirect  cost rates have not been established. Further, provisional indirect cost  rates have not been established. Therefore, we did not have support to  verify the allowability and reasonableness of the indirect costs that  were billed. Moreover, as discussed above, it appeared that indirect  costs from Palmetto’s cost centers were directly allocated to the CMS  contract. As a result, there is considerable risk that CMS may have  been billed twice for Palmetto’s indirect costs—once as an allocated  direct cost and again as an indirect cost.
The issues described above related to Palmetto’s other direct costs and  indirect costs also affected the amounts CMS paid to Pearson for  Palmetto as a subcontractor. As a result, additional payments totaling  $10.2 million were unsupported.
Because of these numerous concerns described above and lack of  documentation to verify amounts billed, CMS made questionable  payments totaling $50.8 million ($6.1 million, $34.5 million, and $10.2  million), which represents the direct and indirect costs that were not  adequately supported during our review.
Unsupported contractor costs – $9.7 million: CMS paid about $9.7  million to TrailBlazer for costs that TrailBlazer did not adequately  support related to a cost reimbursement contract ($4.8 million) and a  portion of its Medicare contract ($4.9 million) paid with MMA funds.  After numerous requests spanning over 7 months, TrailBlazer did not  provide us with adequate documentation supporting the amounts billed  to CMS for these contracts. For the cost reimbursement contract, the  $4.8 million that TrailBlazer did not adequately support included $2.4  million of labor costs, $654,000 of other direct costs, and $1.8 million of  indirect costs. For the labor costs, TrailBlazer told us that only its  parent company could provide transaction information, which was  never provided. Instead, TrailBlazer provided several reports  summarizing labor and other direct costs; however, we could not use  these reports because they did not reconcile to the amounts billed to  CMS and often included only summary level information. For the  indirect costs, generally these costs are supported with provisional or  final indirect cost rates that have been audited by a contractor’s  cognizant federal agency. However, as of October 2007, CMS,  TrailBlazer’s cognizant federal agency, has not ensured that  TrailBlazer’s indirect cost rates were audited. TrailBlazer submitted a  cost report of its indirect costs for 2006 to CMS in June 2007.
For the $4.9 related to the Medicare contract, TrailBlazer provided a  one-page document that summarized the total amount by types of  costs, such as salaries, equipment, and fringe benefits. This was not  sufficient for us to review the costs.
Unsupported indirect costs – $1.2 million: CMS paid at least $1.2  million to Ketchum for indirect costs that were not adequately  supported with recently audited provisional or final indirect cost rate  information. From May 2004 through October 2006, CMS paid Ketchum  for indirect costs based on indirect cost information from 1999.  Because FAR calls for indirect cost rates to be based on recent  information and established annually, rates based on information from  1999 did not adequately support costs billed in 2004 through 2006.  Further, in our review of the contract file, we noted documentation  from 2004 that alerted CMS to potential issues with Ketchum’s indirect  cost rates—namely, that the rates were too high. In September 2006,  Ketchum submitted cost reports for its 2001 through 2005 actual  indirect costs. According to Ketchum officials, CMS, as the cognizant  federal agency, has recently initiated an audit of this indirect cost rate  information to establish final rates for these years.
Unsupported labor costs – $383,000: Based on the task orders in  our review, we estimated that $383,000 of BearingPoint’s billings for  labor and fringe benefits costs were not adequately supported.  BearingPoint was unable to provide us with support for certain key  elements of the labor and fringe benefits costs it billed on the five task  orders in our review.
Unsupported transactions – $463,000: During our audit, contractors  could not adequately support several miscellaneous transactions  totaling $463,000.
Palmetto billed CMS for about $79,000 of labor and about $323,000  of Kelly Services costs which it did not support with documentation  such as time sheets or vendor invoices. Therefore, we were unable  to verify the amounts billed.
IFMC billed CMS for about $49,000 of other direct costs such as  referral bonuses and placement fees that IFMC did not adequately  support. In some cases, IFMC provided invoices for the costs but  did not provide support that would enable us to verify that these  costs solely benefited and were directly allocable to the CMS  contract.
BearingPoint billed CMS for about $5,000 of other direct costs  which it did not support with vendor invoices. Therefore, we could  not verify the amounts billed.
CGI billed CMS for about $5,000 of other direct costs which it did  not support with vendor invoices. Therefore, we could not verify the  amounts billed.
Maximus billed CMS for about $2,000 of other direct costs which it  did not support with documentation that would allow us to verify  that these costs were directly allocable to the CMS contract.
Unsupported contractor costs – $60,000: CMS paid BAH more than  $60,000 for intercompany labor costs billed on a cost reimbursement  contract that the contractor did not adequately support the rates billed  to CMS. For example, on one task order, the intercompany hourly  rates, on average, were nearly 14 times higher than the average hourly  rate for other BAH employees and almost 6 times higher than the next  highest BAH employee. We noted that in a proposal review, CMS’s  cost/price team raised a concern that BAH’s proposed intercompany  hourly rates were “excessive and unreasonable” and requested BAH to  provide support for the proposed rates. Even though BAH refused to  provide the support to CMS, CMS awarded the contract. We noted that  some of the rates BAH charged for intercompany labor exceeded the  proposed rates that were questioned by CMS by, on average, 65  percent. BAH did not provide us support for the rates, but stated that  the rates were commercial billing rates priced based on the private  sector market.
Unsupported labor costs – $90,000: CMS paid Ketchum for labor  costs that Ketchum could not support were appropriately allocated to  the CMS contract. For cost reimbursement contracts, contractors  generally calculate an employee’s hourly labor rate by dividing the  employee’s annual salary by 2,080 hours (the standard number of work  hours in a year). Ketchum calculated standard hourly labor rates based  on 1,880 hours, which increased the hourly rates to account for  employees’ leave time. However, this calculation method assigned  costs for leave time regardless of whether the leave was taken (when  the actual cost occurs). Generally, contractors include the costs of  leave time in indirect cost rates, which allocate costs proportionally to  all contracts, and when the indirect cost rates are finalized, billed costs  are adjusted based on actual costs. Because Ketchum incorporated  expected leave time in its hourly labor rates, its billings to CMS would  not be adjusted based on its actual costs. Since we were not able to  verify that the cost of the leave was appropriately allocated to the CMS  contracts, we estimated that CMS made almost $90,000 of questionable  payments as a result of Ketchum using 1,880 hours instead of 2,080 to  calculate hourly rates. A portion of the $90,000 would likely be offset  by an increase in indirect costs if Ketchum had allocated its leave time  to its indirect cost rates.
section_title: Questionable Payments Related to Potential Waste
paragraphs: During our review, we identified certain contracting practices that  increased the risk that CMS did not obtain the best value, thus leading to  potential waste. Therefore, we question whether certain contract costs  were an efficient use of government resources or might have been  avoided. Waste involves the taxpayers in the aggregate not receiving  reasonable value for money. Importantly, waste involves a transgression  that is less than fraud and abuse. Most waste does not involve a violation  of law or regulation but rather relates to mismanagement or inadequate  oversight. We identified $6.6 million of questionable payments for which  CMS may not have received the best value. Because waste is generally  caused by mismanagement or inadequate oversight, the total amount of  questionable payments we identified may not be recoverable from the  contractor.
Excess subcontractor costs – $1.4 million: CMS missed  opportunities to save about $1.4 million associated with costs Z-Tech,  IBM, and CGI billed for subcontractors under T&M contracts.  According to DCAA, the “T&M payments clause,” generally included  in T&M contracts, required that contractors bill the government for  subcontractor labor hours at cost. GSA took the position that prime  contractors should bill for subcontracted labor at the prime  contractor’s own labor rates (regardless of the contractor’s cost).  DCAA stated that such a practice places the government at a greater  risk of paying costs higher than what prime contractors actually pay  without receiving any additional benefits. Further, DCAA noted that the  practice incentivizes contractors to maximize profits by subcontracting  more work and forces the government to expend additional resources  to monitor the subcontracted labor.
We noted three instances where CMS allowed prime contractors to bill  subcontractor labor hours at their own labor rates rather than the  lower actual cost. For example, IBM paid about $1.1 million for its  subcontractor labor but billed CMS about $2.0 million, representing an  increase of about $900,000 or over 80 percent. Likewise, CGI billed  CMS about $420,000, or about 60 percent, more than the amount CGI  paid for subcontractor labor and Z-Tech billed CMS about $91,000, or  nearly 35 percent, more than the amount Z-Tech paid for subcontractor  labor. According to Z-Tech and CGI, they both notified CMS of their  plans to bill subcontractor labor hours under their own labor rates  (rather than actual cost) in their contract proposals, which were  accepted by CMS. Further, because CMS inappropriately issued IBM’s  T&M contract off a commercial contract, as previously discussed, the  commercial contract did not contain the T&M payments clause.  Because CMS did not proactively limit the contractor’s billings for  subcontractor services to cost, CMS missed an opportunity to save, in  total, about $1.4 million.
Additional costs billed by prime contractors – $4.2 million: CMS  paid Palmetto and Pearson additional costs due to subcontracting  arrangements that may have been avoided. As previously mentioned,  Palmetto and Pearson each had a prime contract with CMS and  subcontracted with each other for similar services. For Palmetto’s  prime cost reimbursement contract with CMS, Palmetto applied  indirect costs and fees to the amounts it billed CMS for the  subcontracted work provided by Pearson, which already included  Pearson’s indirect costs and fees. As a result, two layers of indirect  costs and fees were applied to the same services. If CMS had not  permitted this subcontracting relationship, the additional layer of  indirect costs and fees applicable to Palmetto’s billings, totaling $3.6  million, may have been avoided. Likewise, CMS paid Pearson an  additional $630,000 in fees that may not have been paid absent the  subcontract agreement.
Unallowable costs included in indirect cost rates – $953,000:  Prior to September 2005, CMS did not require CGI to exclude  independent research and development (IR&D) costs from its indirect  cost rates. The HHSAR states that IR&D costs are unallowable;  however, according to CGI, CMS did not incorporate the HHSAR clause  into CGI’s contract. CGI agreed to prospectively revise its indirect cost  rates to exclude IR&D once they were made aware of the clause. For  fiscal year 2005, CMS paid CGI about $953,000 for IR&D costs that were  included in CGI’s indirect cost rates. We were unable to calculate the  financial impact prior to fiscal year 2005 because CGI did not  separately quantify the IR&D component of its indirect rates prior to  this point. If CMS failed to include this HHSAR clause in other  contracts with CGI or other contractors, this could result in additional  waste.
section_title: Conclusions
paragraphs: CMS management has not allocated sufficient resources, both staff and  funding, to keep pace with recent increases in contract awards and  adequately perform contract and contractor oversight. This poor operating  environment created vulnerabilities in the contracting process. CMS’s  preaward contracting practices were driven by expediency rather than  obtaining the best value and minimizing the risk to the government.  Likewise, CMS was not proactive in fulfilling its cognizant federal agency  responsibilities, which not only increased its own risk but the risk of other  agencies that use the same contractors. Further, significant deficiencies in  internal controls over contractor payments, such as inadequate policies,  procedures, and training to guide its invoice review process, increased the  agency’s risk of improper payments. By not timely performing contract  closeout audits, CMS may have missed opportunities to detect and recover  improper payments. Without immediate corrective actions and  appropriate high-level management accountability to fix systemic issues,  CMS will continue to be highly vulnerable to waste and improper  payments. Moreover, if these issues are not promptly corrected, the  Medicare claims administration contracting reform called for in MMA will  result in billions of additional dollars of contracting activities being  subject to these same deficient contracting practices and internal controls,  and exacerbate the potential waste and improper payments.
section_title: Recommendations for Executive Action
paragraphs: We are making the following nine recommendations to the Administrator  of CMS to improve internal control and accountability in the contracting  process and related payments to contractors. We recommend that the  Administrator take the following actions:    Develop policies and criteria for preaward contracting activities  including (1) appropriate use of competition exemptions such as  logical follow-on agreements, unusual and compelling urgency, and  SBA’s 8(a) program; (2) analysis to justify contract type selected, as  well as, if applicable, verification of the adequacy of the contractor’s  accounting system prior to the award of a cost reimbursement  contract; and (3) consideration of the extent to which work will be  subcontracted.
Develop policies and procedures to help ensure that cognizant federal  agency responsibilities are performed, including (1) monitoring CAS  compliance, (2) a mechanism to track contractors for which CMS is the  cognizant federal agency, and (3) coordination efforts with other  agencies.
Develop agency-specific policies and procedures for the review of  contractor invoices so that key players are aware of their roles and  responsibilities, including (1) specific guidance on how to review key  invoice elements; (2) methods to document review procedures  performed; and (3) consideration to circumstances that may increase  risk, such as contract type or complex subcontractor agreements.
Prepare guidelines to contracting officers on what constitutes  sufficient detail to support amounts billed on contractor invoices to  facilitate the review process.
Establish criteria for the use of negative certification in the payment of  a contractor’s invoices to consider potential risk factors, such as  contract type, the adequacy of the contractor’s accounting and billing  systems, and prior history with the contractor.
Provide training on the invoice review policies and procedures to key  personnel responsible executing the invoice review process.
Create a centralized tracking mechanism that records the training  taken by personnel assigned to contract oversight activities.
Develop a plan to reduce the backlog of contracts awaiting closeout.
Review the questionable payments identified in this report to  determine whether CMS should seek reimbursement from contractors.
section_title: Agency Comments and Our Evaluation
paragraphs: In written comments on a draft of this report (reprinted in their entirety in  appendix III), CMS stated that it would take action on each of our  recommendations and described steps taken and others planned to  address our recommendations. At the same time, CMS disagreed with  some of our findings. Where appropriate, we incorporated changes to our  report to provide additional clarification.
In its comments, CMS stated that the contract actions we reviewed were  not representative of CMS’s normal contracting procedures and stated that  the unique circumstances of the implementation of MMA, including the  unusually short implementation period, required it to complete an  unusually large number of contract actions on the basis of other than full  and open competition. We acknowledge that the time frames for  implementing MMA added schedule pressures for CMS. At the same time,  the compressed time frames and the resulting contracting practices added  risk to the contracting process. Many of the findings in our report are a  result of the increased risk together with inadequate compensating  controls to mitigate risk.
Further, in its comments, CMS disagreed with our finding that it made  nearly $90 million in questionable payments. CMS also stated its belief that  it was appropriate for contracting officers to approve invoices for payment  based on the information provided with the invoices, and that the  payments were interim payments that would be audited at a later date.  CMS also stated that the questionable payments we identified were based  on our review of the contractors’ books and records rather than the  invoice amounts. CMS stated that it is premature to conclude that  questionable payments exist because it has not conducted a detailed audit  of the invoices for the contracts in question.
We disagree. We found amounts that were clearly questionable. Our report  also clearly states that in some cases, due to the facts and circumstances  involved, we were unable to determine whether or to what extent the  costs we questioned were allowable, reasonable, and allocable. As a result,  some portion of the total amount of questionable payments we identified  ultimately may be determined by CMS to be allowable. However, we also  state that given CMS’s poor control environment and the fact that our  work was not designed to identify all questionable payments made by CMS  or to estimate their extent, other questionable payments may have been  made.
Further, CMS did not always ensure that contractors provided adequate  detail supporting the invoices to allow responsible CMS personnel to  sufficiently review and approve invoices. Regarding contract audits, CMS  had not demonstrated a willingness to allocate the necessary funding; thus  audits have not taken place in a timely manner. In addition, while we agree  that an audit of contract costs can provide a detective control to help  determine whether contractor costs were proper, CMS’s reliance on an  after-the-fact audit is not an acceptable substitute for the real-time  monitoring and oversight of contractor costs—preventative controls—that  we recommend in this report. Effective internal control calls for a sound,  ongoing invoice review process as the first line of defense in preventing  unallowable costs and improper payments. Finally, many of the  questionable payments we identified were based on our review of invoices  and documentation received by CMS at the time of payment and did not  require additional detail from the contractors’ books and records. For  example, our findings regarding indirect costs, labor categories, and  unallowable travel costs could have been identified by CMS with an  adequate review of the invoices and information they received from the  contractors.
In response to our recommendations to improve controls over its  contracting process and related payments, CMS stated in its comments  that it has taken or will take the following actions:    continue to evaluate and update its policies and procedures to make  review its policies and criteria for the use of cost reimbursement  contracts and the need for approved accounting systems,  review and update policies and procedures as appropriate and provide  training regarding subcontracting,    develop appropriate procedures to support HHS in its cognizant federal    update its invoice review and payment policies and procedures as    develop comprehensive training on the invoice review and approval  require the use of a governmentwide system to track the training taken  by personnel assigned to contract oversight,    continue to reduce its backlog of contracts awaiting closeout, and   obtain contract audits related to our identified questionable payments  and seek reimbursement for any costs found to be unallowable.
In addition, our responses to a number of specific CMS comments are  annotated and included at the end of appendix III.
As agreed with your offices, unless you publicly announce its contents  earlier, we plan no further distribution of this report until 30 days from its  date. At that time, we will send copies to the Secretary of Health and  Human Services, Administrator of the Centers for Medicare and Medicaid  Services, and interested congressional committees. Copies will also be  available to others upon request. In addition, the report will be available at  no charge on the GAO Web site at http://www.gao.gov.
If you or your staffs have any questions about this report, please contact  me at (202) 512-9471 or franzelj@gao.gov. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this report. Major contributors to this report are acknowledged in  appendix IV.
section_title: Appendix I: Questionable Payments to Contractors
paragraphs: As shown in table 4, we identified numerous questionable payments  totaling nearly $90 million that represent potentially improper,  unsubstantiated, or wasteful payments. In some cases, due to the facts and  circumstances involved, we were unable to determine whether or to what  extent the costs were allowable, reasonable, and allocable. As a result,  some portion of the total amount of questionable payments we identified  ultimately may be determined by the Centers for Medicare and Medicaid  Services (CMS) to be allowable and therefore not recoverable from the  contractor. Given CMS’s poor control environment and the fact that our  work was not designed to identify all questionable payments made by CMS  or to estimate their extent, other questionable payments may have been  made.
Because CMS sometimes used other funding sources in addition to  Medicare Prescription Drug, Improvement, and Modernization Act of 2003  (MMA) funds to pay invoices for one contract, we were not always able to  identify specific costs that were paid with MMA funds. As a result, the  scope of our review extended beyond payments made with MMA funds for  some contracts and the questionable payments we identified may not have  been paid solely with MMA funds.
section_title: Appendix II: Scope and Methodology
paragraphs: To determine how the Centers for Medicaid and Medicare Services (CMS)  used the $1 billion Medicare Prescription Drug, Improvement, and  Modernization Act of 2003 (MMA) appropriation, we obtained obligation  and disbursement transactions from CMS’s financial systems from the  period January 2004 through December 2006 that CMS charged against the  MMA appropriation. We scanned these data files for obvious omissions or  errors in key data fields. To verify the completeness of the files, we  reconciled the total obligated amount to the MMA appropriation and  reconciled the liquidated obligation amount (a field within the obligation  data file) to the disbursement data totals. To determine the recipients of  the MMA appropriation, we categorized disbursement data by payee  category (contractors, government agencies, state government agencies,  etc.) based upon the vendor name in the file. Because CMS recorded about  $536 million of its disbursement to one budget object code, “other  services,” we were unable to use CMS’s budget object codes to determine  the services provided by contractors and vendors. Therefore, to categorize  expenditures to contractors and vendors by activity (information  technology, 1-800-MEDICARE help line, etc.), we reviewed the project  titles in CMS’s contracts database for all contracts with total  disbursements greater than $1 million; if the contract title was unclear, we  reviewed the statement of work in the contract file. We also categorized  some additional contracts based on our detailed review of selected  contractors.
To identify additional details on the services obtained with MMA funds, we  (1) analyzed contract files including statements of work, (2) analyzed  interagency agreements, (3) discussed employee-related costs with CMS  officials, (4) discussed payments to state agencies with CMS officials  overseeing the State Health Insurance Assistance Program as well as  certain state agency officials, and (5) analyzed purchase card transaction  statements and supporting receipts and discussed these purchases with  applicable CMS officials.
To determine whether CMS’s contracting practices and related internal  controls are adequate to avoid waste and to prevent or detect improper  payments, we interviewed CMS officials including contracting officers,  contracting specialists, project officers, cost/price team members,  financial management officials, and Office of Acquisition and Grants  Management (OAGM) management about oversight responsibilities;  analyzed contract files and invoices; and assessed the sufficiency of CMS  policies, procedures, and training. As criteria, we used our Standards for  Internal Control in the Federal Government and the Federal Acquisition  Regulation (FAR). We focused our internal control work on the  contractors that received the most MMA funding, based on the CMS  disbursement data. We also selected contractors with other risk factors  such as billing or accounting system problems for review. Our approach  resulted in the selection of 16 contractors. For these 16 contractors, we  then selected contracts to use for our work based on contracts that were  funded with at least $1.5 million of the MMA appropriation. As a result, we  nonstatistically selected 16 contractors and 67 contracts with a total  contract value of $1.6 billion. One contract selected was a Medicare  contract. Because Medicare contracts were not subject to FAR, we did not  include this contract in our internal control review. Therefore we  evaluated CMS contracting practices and related internal controls for 66  contracts. Additionally, we obtained from CMS information related to  oversight resources from fiscal year 1997 through 2006, the closeout  backlog, and its cognizant federal agency duties. We discussed cognizant  federal agency oversight activities with and obtained documentation such  as indirect cost rate agreements or audit reports from the National  Institutes of Health and the Defense Contract Audit Agency.
To determine whether payments to contractors were properly supported  as a valid use of government funds, we started with the same 67 contracts  we had nonstatistically selected. We further refined the list of 67 contracts  based on individual contract values and other risk factors such as contract  type to arrive at a selection of 47 contracts for which we reviewed CMS  payments to contractors. Because CMS sometimes used other funding  sources in addition to MMA to pay invoices for one contract, we were not  always able to identify specific costs that were paid with MMA funds. As a  result, the scope of our review extended beyond payments made with  MMA funds. This nonstatistical selection methodology resulted in a  selection of CMS payments to contractors totaling $595.4 million, of which  $355.5 million was paid with MMA funds. The following table summarizes  the number of contracts and amounts of CMS payments to contractors  included in our review, as well as the amount paid with MMA funds.
For the 47 contracts, we performed forensic auditing techniques, data  mining, and document analyses to select contractor costs billed to CMS to  test. Because we selected individual or groups of transactions for detailed  testing to determine whether costs were allowable, the amount of contract  payments we tested was lower than the amount of payments included in  our review shown in table 5. Following is a description of the types of  procedures we used to test transactions.
Labor costs: We obtained from contractors their databases of hours  charged to CMS that included detailed information such as employee  name, hours worked per pay period, and pay rate information. Using  this information, we selected labor transactions for testing based on  quantitative factors such as (1) number of hours worked, (2) dollar  amount billed, (3) labor rates, or (4) anomalies in the data. For these  nonstatistical selections, we compared the information to supporting  documentation obtained from the contractor, including time sheets and  payroll registers and discussed billed amounts with contractor officials.
Subcontractor, travel, and other direct costs: When contractor  invoices did not provide sufficient information, we obtained additional  information from the contractor, such as databases of transaction-level  detail, to select specific transactions based on criteria such as amount  billed, vendor names, and potential duplicate payments. We compared  our nonstatistical selections to applicable supporting documentation  such as vendor invoices, travel vouchers and receipts, and subcontract  agreements provided by the contractor.
Indirect costs: We verified the appropriateness of indirect costs billed  by recalculating the amounts and comparing the rates billed to  provisional and final indirect cost rates and contract ceilings.
Analytical procedures: We performed a variety of analytical  procedures including recalculating invoice line items for mathematical  accuracy and reviewing invoice amounts for trends and anomalies.
We questioned payments for costs that were potentially improper by  assessing whether the costs did not comply with the terms of the contract  or applicable regulation (FAR, the Health and Human Services Acquisition  Regulation, and Federal Travel Regulation) or that were unsubstantiated  because the contractor did not provide adequate support for us to  determine whether the costs were allowable. In addition, we questioned  payments for which we had concerns that risks in CMS’s contracting  practices may have resulted in waste. When calculating our questionable  payment amounts, where applicable for costs not compliant with contract  terms and regulations we added the respective indirect costs that the  contractor charged on the item in question. For some of the questionable  payments we identified, a portion of the cost is most likely appropriate;  however, because of certain facts and circumstances involved, we were  unable to determine whether or to what extent the costs were allowable,  reasonable, and allocable. Therefore, we questioned the entire amount  associated with the uncertainties.
Because CMS sometimes used other funding sources in addition to MMA  to pay invoices, the scope of our review extended beyond the payments  made with MMA funds. Therefore, questionable payment amounts do not  relate exclusively to MMA funds. While we identified some payments as  questionable, our work was not designed to identify all questionable  payments or to estimate their extent.
We provided CMS a draft of this report for review and comment. CMS  provided written comments, which are reprinted in appendix III of this  report. We also discussed with CMS contractors any findings that related  to them. We conducted this performance audit 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. We conducted our audit work in Washington D.C. and  Baltimore, Maryland from March 2006 through September 2007.
section_title: Appendix III: Comments from the Centers for Medicare and Medicaid Services
subsections: section_title: GAO Comments
paragraphs: 1.  See “Agency Comments and Our Evaluation” section.  2.  The contracting authority CMS referred to (Section 1857(c)(5)) applies  specifically to Medicare Advantage contracts (formerly referred to as  Medicare+Choice contracts) and prescription drug plan contracts and  does not apply to the types of contracts included in our review.  3.  As stated in our report, CMS paid $735.4 million of its MMA funds for  start-up administrative costs to contractors and vendors. Our review  included 67 contracts with a total contract value of $1.6 billion, of  which $508.4 million was paid with MMA funds. Our sample covered  about 69 percent of the MMA funds paid to contractors and vendors.  4.  CMS compared the percentages of noncompetitively awarded and  logical follow-on task orders that were included in our review to  statistics it calculated for its 2007 contracting actions. The percentages  related to our review are not comparable to the statistics CMS  presented primarily because the percentages were calculated  differently. Our percentages were based solely on the number of  contracts in our review and included several years. Our calculation  showed that 45 percent of contracts in our review were awarded  without the benefit of competition. CMS used fiscal year 2007  contracts, which were outside the scope of our review, to arrive at a  total of $255 million awarded on a noncompetitive basis for that fiscal  year. Furthermore, CMS calculated the percentage of noncompetitive  awards for fiscal year 2007 by comparing the number of  noncompetitive contracts to the total number of contract actions.  Contract actions likely include contract modifications, and one  contract could have several modifications. For example, one of the  large information technology contracts in our review had over one  hundred modifications (contract actions).  5.  CMS stated that it had to use cost reimbursement contracts because  MMA was an entirely new initiative. We present the statistics about  cost reimbursement contracts to add perspective due to the increased  risk associated with these types of contracts.  6.  As stated in our report, CMS awarded cost reimbursement contracts to  Palmetto despite CMS’s own cost/price team’s determination that the  contractor had numerous accounting system deficiencies. The chart  CMS referred to is our summary of CMS’s fulfillment of its cognizant  federal agency responsibilities. The chart illustrates instances in which  CMS did not sufficiently assess the adequacy of the contractor’s  accounting system. The chart is not intended to present a conclusion  about the adequacy of the contractors’ accounting systems.  7.  Because certain cognizant federal agency oversight responsibilities at  HHS were assigned to CMS, as discussed in our report, we believe it is  CMS’s obligation to ensure that those responsibilities are performed.  In addition, we added wording to our report to clarify that we refer to  CMS as the cognizant federal agency in this report because HHS  delegated cognizant federal agency responsibilities to CMS.  8.  We modified our report to clarify that we reviewed CMS’s Acquisition  Policy – 16 Subject: Invoice Payment Procedures, August 2005.  9.  CMS issued the demand letter to Maximus as a result of our  preliminary audit findings.
section_title: Appendix IV: GAO Contact and Staff Acknowledgments
subsections: section_title: Acknowledgments
paragraphs: Staff members who made key contributions to this report include: Marcia  Carlsen (Assistant Director), Richard Cambosos, Timothy DiNapoli, Abe  Dymond, Janice Friedeborn, Leslie Jones, Jason Kelly, Steven Koons, John  Lopez, Meg Mills, Kara Patton, Ronald Schwenn, Omar Torres, Ruth Walk,  and Doris Yanger.