Department of Health and Human Services: Opportunities for Financial Savings and Program Improvements in Medicare and Medicaid Remain
Published: 2012-05-09T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: HHS manages hundreds of complex programs benefiting the health and well-being of Americans, accounting for a quarter of all federal outlays. For fiscal year 2012, HHS is responsible for approximately $76 billion in discretionary spending and for an estimated $788 billion in mandatory spending. The size and critical mission of the two largest HHS programs, Medicare and Medicaid, make it imperative that HHS is fiscally prudent yet vigilant in protecting the populations that depend on these programs. In recent years, GAO has identified shortcomings and recommended actions to enhance operations and correct inefficiencies in Medicare and Medicaid, and HHS has implemented many recommendations, resulting in billions of dollars in savings. Because agencies now must do more with less, recommendations not yet implemented are opportunities for further conserving HHS funds and strengthening oversight of programs serving the nations most vulnerable populations.
GAO was asked to testify on issues related to HHSs budget. This statement draws from GAOs prior work, including work on these two high-risk programs, in which GAO made recommendations related to (1) the management of Medicare and (2) the need for additional oversight of Medicaid. To the extent information was available, GAO updated the status of these recommendations.
section_title: What GAO Found
paragraphs: Over the past several years, GAO has made a number of recommendations to the Centers for Medicare & Medicaid Services (CMS)an agency within the Department of Health and Human Services (HHS)to increase savings in Medicare fee-for-service and Medicare Advantage (MA), which is a private plan alternative to the traditional Medicare fee-for-service program. Open recommendations that could yield billions of dollars in savings remain in many areas, such as the following:
Minimizing improper payments and fraud in Medicare. GAO recommended that CMS require contractors to automate prepayment controls to identify potentially improper claims for medical equipment and supplies, expand current regulations to revoke billing privileges for home health agencies with improper billing practices, designate authorized personnel to evaluate and address vulnerabilities in payment systems, and enhance payment safeguards for physicians who use advanced imaging services.
Aligning coverage with clinical recommendations. GAO recommended that CMS provide coverage for services recommended by clinical experts, as appropriate, given cost-effectiveness and other criteria.
Better aligning payments to MA plans. To ensure that payments to MA plans reflect the health status of beneficiaries, GAO recommended that CMS more accurately adjust for differences between MA plans and traditional Medicare providers in reporting beneficiary diagnoses. GAO also recommended that CMS cancel the MA Quality Bonus Payment Demonstration because its design precludes it from yielding meaningful results.
GAO has made recommendations to CMS regarding Medicaid program oversight. Open recommendations remain in many areas, such as the following:
Improving oversight of Medicaid payments . GAO recommended that CMS adopt transparency requirements and a strategy to ensure that supplemental payments to providers have been reviewed by CMS. These supplemental payments are separate from and in addition to those made at states regular Medicaid rates.
Ensuring Medicaid demonstrations do not increase federal liability. GAO recommended that CMS revise its approval process for demonstrations to ensure they are budget neutral, which GAO subsequently referred to Congress as a matter for consideration.
The size of Medicare and Medicaid requires CMS to focus continually on the appropriateness of the methodology for payments that these programs make and the pre- and postpayment checks that can help ensure that program spending is appropriate, overpayment recovery is expedient, and agency practices with regard to operations for these programs are efficient. Therefore, GAO urges HHS to ensure action is taken on open recommendations to advance its performance and accountability.

section_title: Letter
paragraphs: We are pleased to be here today to discuss budget considerations at the  Department of Health and Human Services (HHS). As the federal  government’s principal agency for protecting the health of Americans and  providing essential human services, especially for vulnerable populations,  HHS manages over 300 highly complex programs, which account for  almost a quarter of all federal outlays. For fiscal year 2012, HHS is  responsible for approximately $76 billion in discretionary spending and  approximately $788 billion in outlays of mandatory spending. With this  funding, HHS provides health care insurance for one in four Americans  through its two largest programs—Medicare and Medicaid—and  administers more grant dollars than all other federal agencies combined.  HHS also funds disease research and prevention, oversees the safety  and effectiveness of medical products, and helps ensure that the nation is  prepared to respond to public health emergencies, among other things.  HHS’s size, diverse programs, and critical mission render its finances  particularly important as Congress and the administration seek to  decrease the cost of government while improving its performance and  accountability.
In recent years, we have examined a broad range of issues, identified  program design and oversight shortcomings, and made numerous  recommendations to enhance agency operations. In particular, many of  these recommendations relate to the Medicare and Medicaid programs— which are the responsibility of the Centers for Medicare & Medicaid  Services (CMS), an agency within HHS. HHS has implemented many of  these recommendations, resulting in billions of dollars of savings. Other  recommendations have led to program improvements that, while not  always quantifiable, have nonetheless enhanced the efficiency of agency  operations. For example, in 2004, we reported on CMS’s management of  its Medicare Secondary Payer debt, which occurs when Medicare pays  for services that are subsequently determined to be the financial  responsibility of another payer. CMS’s implementation of our  recommendation that it reduce the number of contractors managing this  workload resulted in savings of $86 million from 2006 through 2010. More  recently, greater savings have been realized as a result of work on CMS’s  oversight of states’ Medicaid supplemental payment arrangements. In  2007, we reported on a CMS oversight initiative established in response  to our work, which increased the agency’s scrutiny of state Medicaid  financing arrangements and resulted in savings of approximately   $3.4 billion from fiscal year 2007 through 2012.
While HHS has successfully implemented many of our recommendations,  our remarks today will focus on spending for which HHS is responsible in  the context of recommendations we have made that it has yet to  implement and that we therefore consider open. Specifically, we will  concentrate on our recommendations to improve the Medicare and  Medicaid programs. We have designated both as high-risk programs, in  part because of their size, complexity, susceptibility to improper  payments, and the need to improve program management. The recommendations that we will discuss include those that were recently  made, those not yet fully implemented, and others for which no actions  have been taken, although several years have elapsed since they were  made. These recommendations—some of which could result in financial  savings—include those that address (1) missed opportunities for savings  in the management of Medicare and (2) the need for additional oversight  of Medicaid.
GAO, 2012 Annual Report: Opportunities to Reduce Duplication, Overlap and  Fragmentation, Achieve Savings, and Enhance Revenue, GAO-12-342SP (Washington,  D.C.: Feb. 28, 2012); Follow-up on 2011 Report: Status of Actions Taken to Reduce  Duplication, Overlap, and Fragmentation, Save Tax Dollars, and Enhance Revenue,   GAO-12-453SP (Washington, D.C.: Feb. 28, 2012); and Opportunities to Reduce Potential  Duplication in Government Programs, Save Tax Dollars, and Enhance Revenue,   GAO-11-318SP (Washington, D.C.: Mar. 1, 2011). implementation of these recommendations in May 2012. Detailed  information on the scope and methodology for our prior work can be  found in the reports that we have cited throughout this testimony. We  conducted the underlying performance audits in accordance with  generally accepted government auditing standards. Those standards  require that we plan and perform the audits 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 statement today.
subsections: section_title: Missed Opportunities for Savings in Medicare
paragraphs: In the past several years, we have made a number of recommendations  for CMS to address missed opportunities for savings in the Medicare  program, which the agency has not fully implemented. These include  recommendations related to the Medicare fee-for-service (FFS) and  Medicare Advantage (MA) programs.
subsections: section_title: Medicare Fee-for-Service
paragraphs: Minimizing improper payments and fraud. We have a body of issued  and ongoing work about improper payments in Medicare. In 2007, we  reported on program integrity activities conducted by CMS contractors to  minimize improper payments for medical equipment and supplies. We  recommended that CMS require its contractors to develop automated  prepayment controls to identify potentially improper claims when billing  reaches atypical levels. CMS agreed with the recommendation, but has  not implemented it. The agency has added other prepayment controls to  flag claims for services that were unlikely to be provided in the normal  course of medical care. However, implementing our recommendation and  adding additional prepayment controls could enhance identification of  improper claims before they are paid to reduce reliance on “pay and  chase” strategies. In 2009, we reported that fraudulent and abusive  practices in home health agencies, such as overstating the severity of a  beneficiary’s condition, contributed to Medicare home health spending   To strengthen controls on improper payments in home  and utilization.health agencies, we recommended that CMS amend current regulations  to expand the types of improper billing practices that are grounds for  revocation of billing privileges. CMS told us that it has begun to explore its  authority to expand the types of practices that are grounds for revocation  of billing rights. We believe that CMS should do so expeditiously.
In 2010, we recommended that CMS designate responsible personnel  with authority to evaluate and promptly address vulnerabilities identified to  reduce improper payments. CMS concurred with this recommendation  and has begun to implement this process, but does not yet have written  policies and procedures for a fully developed corrective action process  that includes monitoring of actions taken. Likewise, we recently testified  before the Senate Committee on Finance regarding CMS efforts to  combat Medicare fraud. We reiterated our prior recommendation and  noted that CMS could do more to strengthen provider enrollment  screening to avoid enrolling those intent on committing fraud, improve  pre- and postpayment claims review to identify and respond to patterns of  suspicious billing activity more effectively, and identify and address  vulnerabilities to reduce the ease with which fraudulent entities can obtain  improper payments.
Enhancing payment safeguard mechanisms. In 2008, we reported on  rapid spending growth for advanced imaging services. We recommended that CMS examine the feasibility of adding front-end  approaches, such as prior authorization, to improve payment safeguard  mechanisms. CMS has not implemented our recommendation, but is  currently engaged in a demonstration project to assess the  appropriateness of physicians’ use of advanced diagnostic imaging  services furnished to Medicare beneficiaries.
Aligning coverage for services with clinical recommendations. We  reported in early 2012 that Medicare beneficiaries’ use of preventive  services did not always align with the U.S. Preventive Services Task  Force’s recommendations. We concluded that opportunities exist to  improve the appropriate use of preventive services through means such  as revising coverage and cost-sharing policies and educating  beneficiaries and physicians. In the case of osteoporosis screening, for  instance, Medicare coverage rules may preclude utilization of the  recommended screening by all those for whom the service is  recommended. Conversely, given that the Task Force recommended  against prostate cancer screening for men aged 75 or older, the absence  of cost sharing for that population may encourage inappropriate use of  this service. To better align preventive service use with clinical  recommendations, we recommended that CMS provide coverage for  Task Force recommended services, as appropriate, given cost- effectiveness and other criteria. In response to our recommendation, the  agency stated that it had recently used its authority to expand benefits to  cover several new preventive services. This additional coverage,  however, does not address the misalignment that remains between  Medicare coverage for certain services and the corresponding Task Force  recommendations. We also offered a matter for congressional  consideration. We suggested that Congress consider requiring  beneficiaries to share the cost of the services if they receive services the  Task Force recommends against.
section_title: Medicare Advantage
paragraphs: Better reflecting beneficiary health status in payments to MA plans.  In 2010, the federal government spent about $115 billion on the MA  program, a private plan alternative to the Medicare FFS program. In  January 2012, we reported that CMS could achieve billions of dollars in  additional savings by more accurately adjusting for differences between  MA plans and Medicare FFS providers in the reporting of beneficiary  diagnoses.construct a risk score for each beneficiary. Higher risk scores result in   CMS uses this diagnosis data and other information to  increased Medicare payments to plans, while lower risk scores result in  reduced Medicare payments to plans. Risk scores should be the same  among all beneficiaries with the same medical conditions and  demographic characteristics, regardless of whether they are in MA or  Medicare FFS. MA plans have an incentive to code diagnoses more  comprehensively because doing so affects plan payments, which is not  the case in Medicare FFS. CMS is required by law to make an adjustment  to MA risk scores to bring them in line with those of Medicare FFS. In this  report, we found that CMS’s adjustment for diagnostic coding differences  was too small. We estimated that MA beneficiary risk scores in 2010 were  from 4.8 to 7.1 percent higher than they likely would have been if they  had been enrolled in FFS, while CMS’s adjustment for diagnostic coding  differences was only 3.4 percent. Compared to CMS’s analysis, our  analysis incorporated more recent beneficiary data and accounted for  additional beneficiary characteristics that affect risk scores, such as  health status and sex. A revised methodology that incorporated this  information could have saved Medicare between $1.2 billion and   $3.1 billion in 2010 in addition to the $2.7 billion in savings from the  adjustment CMS made. We expect that savings in 2011 and future years  would be even greater. CMS has continued to use its 2010 adjustment  method for 2011 and 2012, even though both we and CMS noted an  upward trend in the impact of coding differences over time. To improve  the accuracy of the adjustment made for differences in coding practices  over time, we recommended that the Secretary of HHS direct the  Administrator of CMS to incorporate the most recent data available in its  estimates; identify and account for all years of diagnostic coding  differences that could affect the payment year for which any adjustment is  made; account for the upward trend of the annual impact of coding  differences in its estimates; and to the extent possible, account for all  relevant differences in beneficiary characteristics between the MA and  Medicare FFS populations. CMS stated that it found our findings  informative, but did not comment on our recommendations.
Canceling the MA Quality Bonus Payment Demonstration. We  recently reported that CMS could achieve billions of dollars in savings by  canceling the MA Quality Bonus Payment Demonstration—which CMS’s  Office of the Actuary has estimated will cost more than $8 billion over   10 years.in the 2010 Patient Protection and Affordable Care Act (PPACA), as  amended, CMS is conducting a nationwide demonstration to test whether  a scaled bonus structure would lead to larger and faster annual quality  improvement for MA plans at various performance levels. Compared with  PPACA’s quality bonus payment system, the demonstration extends the  bonuses to average-performing plans, accelerates the phase-in of the  bonuses for plans with above-average performance, and increases the  size of the bonuses in 2012 and 2013. We found that the demonstration’s  estimated $8.35 billion cost offsets more than one-third of PPACA’s MA  payment reductions during its 3-year time frame and that most of the  additional spending will go to average-performing plans rather than to  high-performing plans. The MA Quality Bonus Payment Demonstration  dwarfs all other Medicare demonstrations—both mandatory and  discretionary—conducted since 1995 in its estimated budgetary impact. It  is at least seven times larger than that of any other Medicare  demonstration conducted since 1995 and is greater than the combined  budgetary impact of all those demonstrations. For a variety of reasons,  the design of the demonstration precludes a credible evaluation of its  effectiveness in achieving CMS’s stated research goal. We therefore  believe that it is unlikely that the demonstration will produce meaningful  results. Accordingly, we recommended that the Secretary of HHS cancel  the demonstration and allow the MA quality bonus payment system  established by PPACA to take effect. HHS did not concur with our  recommendation, stating that it believed the demonstration supports a  strategy to improve the delivery of health care services, patient health  outcomes, and population health.
section_title: Need for Additional Oversight of Medicaid
paragraphs: We have conducted a substantial body of work on Medicaid program  management. Our recommendations have involved a variety of topics and  have included different aspects of payment arrangements with states.
Improving oversight of supplemental payments. We have reported on  varied financing arrangements involving supplemental payments— disproportionate share hospital (DSH) payments that states are required  to make to certain hospitals and other non-DSH supplemental  payments—that increase federal funding without a commensurate  increase in state funding. Our work has found that while a variety of  federal legislative and CMS actions have helped curb inappropriate  financing arrangements, gaps in oversight remain. For example, while  there are federal requirements designed to improve transparency and  accountability for state DSH payments, similar requirements are not in  place for non-DSH supplemental payments, which may be increasing.  From 2006 to 2010, state-reported non-DSH supplemental payments  increased from   $6.3 billion to $14 billion; however, according to CMS officials, reporting  was likely incomplete. We made numerous recommendations aimed at  improving oversight of supplemental payments. We have recommended  that CMS adopt transparency requirements for non-DSH supplemental  payments and develop a strategy to ensure that all state supplemental  payment arrangements have been reviewed by CMS. CMS has taken  action to address some of these recommendations, but we continue to  believe additional action is warranted. CMS has raised concern that  congressional action may be necessary to fully address our  recommendations.
GAO, Medicaid Demonstration Waivers: Recent HHS Approvals Continue to Raise Cost  and Oversight Concerns, GAO-08-87 (Washington, D.C.: Jan. 31, 2008). process through steps such as clarifying the criteria for reviewing and  approving states’ proposed spending limits and ensuring that valid  methods were used to demonstrate budget neutrality. Consequently, we  referred this to Congress for consideration. HHS subsequently reported  taking steps, such as monitoring the budget neutrality of ongoing  demonstrations, to improve its oversight. However, no changes are  planned in the methods used to determine budget neutrality of  demonstrations to ensure that demonstrations do not increase the federal  financial liability.
Improving rate-setting methodologies. In August 2010, we reported  that CMS had not ensured that all states were complying with federal  Medicaid requirements that managed care rates be developed in  accordance with actuarial principles, appropriate for the population and   For example, we found significant  services, and certified by actuaries.gaps in CMS’s oversight of 2 of the 26 states reviewed—CMS had not  reviewed one state’s rate setting in multiple years and had not completed  a full review of another state’s rate setting since the actuarial soundness  requirements became effective in August 2002. Variation in practices  across CMS regional offices contributed to these gaps and other  inconsistencies in the agency’s oversight of states’ rate setting. This work  also found that CMS’s efforts to ensure the quality of the data used to set  rates were generally limited to requiring assurances from states and  health plans—efforts that did not provide the agency with enough  information to ensure the quality of the data used. With limited information  on data quality, CMS cannot ensure that states’ managed care rates are  appropriate, which places billions of federal and state dollars at risk for  misspending. We made recommendations to improve CMS’s oversight of  states by implementing a mechanism to track state compliance with  Medicaid managed care actuarial soundness requirements, clarifying  guidance on rate-setting reviews, and making use of information on data  quality in overseeing states’ rate setting. HHS agreed with these  recommendations, and as of May 2012, CMS officials indicated that they  were reviewing and updating the agency’s guidance and exploring the  incorporation of information about data quality into its review and approval  of Medicaid managed care rates.
section_title: Concluding Observations
paragraphs: Improved financial stewardship of federal programs is becoming  increasingly important as the pressure to reduce spending mounts. In an  agency as large as HHS, the need for vigilance in continuously seeking  out cost savings cannot be overstated. In our work, we have examined  many aspects of HHS operations and made recommendations to help  HHS prevent unnecessary spending, save money, recover funds that  should rightfully be returned, improve the efficiency of agency operations,  and improve service for beneficiaries. HHS has implemented many of our  recommendations that have proven to be financially beneficial while also  enhancing program management. However, there are still  recommendations we have made that remain open. While we recognize  that some of the recommendations we have highlighted today are  relatively new, others are several years old. HHS has made clear that it is  committed to improving the nation’s health and well-being while  simultaneously contributing to deficit reduction. We therefore urge HHS to  expedite action on our open recommendations to further advance its  performance and accountability.
Chairman Stearns, Ranking Member DeGette, and Members of the  Subcommittee, this completes our prepared statement. We would be  pleased to respond to any questions that you may have at this time.
section_title: GAO Contacts and Staff Acknowledgments
paragraphs: If you or your staff have any questions about this testimony, please  contact us at (202) 512-7114 or cosgrovej@gao.gov and  yocomc@gao.gov. Contact points for our Offices of Congressional  Relations and Public Affairs may be found on the last page of this  statement. GAO staff who made key contributions to this testimony are  listed in appendix I.
section_title: Appendix I: GAO Contacts and Staff Acknowledgments
subsections: section_title: GAO Contacts
section_title: Staff Acknowledgments
paragraphs: In addition to the contacts named above, Geri Redican-Bigott, Assistant  Director; Kelly DeMots; Helen Desaulniers; David Grossman; Elizabeth T.  Morrison; and Kate Nast made key contributions to this statement.
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