Medicare: Contractors and Private Plans Play a Major Role in Administering Benefits
Published: 2014-03-04T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Since the enactment of Medicare in 1965, contractors have played a vital role in the administration of the program. The original FFS program was designed so that the federal government contracted with health insurers or similar private organizations experienced in handling physician and hospital claims to process and pay Medicare claims rather than having the federal government do so. CMS now also contracts with private organizations that provide covered services under the MA program and the Part D prescription drug program.
This statement provides an overview of the manner in which CMS has contracted with private organizations to administer benefits in (1) original FFS Medicare, (2) MA, and (3) the Part D prescription drug program. It is based primarily on products that GAO has issued regarding CMS contracting with claims administration contractors to administer the FFS program, and with other private organizations as part of MA and the Part D prescription drug benefit programs. These products were issued from November 1989 through January 2014 using a variety of methodologies, including reviews of relevant laws, policies, and procedures; data analysis; and interviews with contractors, stakeholders, and CMS officials. We have supplemented information from our prior products with publicly-available data on Medicare private plan contracts and enrollment, CMS-issued guidance for Medicare private plans, and a review of relevant literature. GAO has made numerous recommendations to CMS in these previous products and is not making any new recommendations at this time.
section_title: What GAO Found
paragraphs: The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) reformed the way the Centers for Medicare & Medicaid Services (CMS), the agency that administers Medicare, contracts with claims administration contractors. From its inception, the process for selecting Medicare fee-for-service (FFS) claims administration contractors was stipulated by Congress and differed from most other federal contracts in that, among other things, the Medicare contracts were not awarded through a competitive process. The MMA repealed limitations on the types of contractors CMS could use and required that CMS use competitive procedures to select new contracting entities to process medical claims and provide incentives for contractors to provide quality services. CMS has implemented the MMA contracting reform requirements by shifting and consolidating all claims administration tasks to new entities called Medicare Administrative Contractors. CMS is currently in the process of further consolidating these contracts. The agency also uses other contractors to review claims to ensure payments are proper and investigate potential fraud.
CMS contracts with private organizations to administer benefits under Medicare Advantage (MA), but has an important administrative and oversight role. MA is the private plan alternative to FFS and differs from FFS in that CMS contracts with private entities, known as Medicare Advantage organizations (MAOs), to provide covered health care services to beneficiaries who enroll. MAOs are paid a predetermined monthly amount for each beneficiary enrolled in one of their health plans and must provide coverage for all FFS services (except hospice care), but may also provide additional coverage. The government first began contracting with private plans in 1973. Several laws since then have changed how the MAOs are paid and the types of plans that can participate. While contract requirements for MAOs and parameters of the program are largely derived from statute, CMS has responsibility to implement the program and ensure compliance with these requirements.
CMS also contracts with private organizations, called plan sponsors, to provide the outpatient prescription drug benefit under Part D. Through the Part D contracts, plan sponsors offer prescription drug plans which may have different beneficiary cost-sharing arrangements (such as copayments and deductibles) and charge different monthly premiums. The Part D program relies on sponsors to generate prescription drug savings through negotiating price concessions with entities such as drug manufacturers, pharmacy benefit managers, and pharmacies, and managing beneficiary use. While CMS contracts with plan sponsors to provide the Part D benefit, the agency has oversight responsibilities. For instance, CMS is responsible for making accurate payments to plan sponsors and ensuring the accuracy of information submitted by plan sponsors to the beneficiary-focused Medicare Plan Finder website. Medicare actuaries have attributed lower-than-projected expenditures in Part D to a combination of factors, including lower-than-projected Part D enrollment, slower growth of drug prices in recent years, greater use of generic drugs, and higher-than-expected rebates from pharmaceutical manufacturers to the prescription drug plans.

section_title: Letter
paragraphs: We are pleased to be here today to discuss the Centers for Medicare &  Medicaid Services’ (CMS) contracting in the agency’s administration of  the Medicare program. Since the enactment of Medicare in 1965,  contractors have played a vital role in the administration of the program.  In fact, the original Medicare program was designed so that the federal  government contracted with health insurers or similar organizations  experienced in handling physician and hospital claims to pay Medicare  claims. In addition to contracting with organizations to process and pay  claims in the original Medicare fee-for-service (FFS) system, CMS also  contracts with private organizations to provide covered health services  under the Medicare Advantage (MA) program, and outpatient prescription  drug coverage under Medicare Part D. With MA and the prescription  drug program, private organizations that sponsor health plans are  responsible not only for paying claims, but also for ensuring beneficiaries  can access their benefits.
In fiscal year 2014 the Medicare program will cover more than 50 million  elderly and disabled beneficiaries at an estimated cost of $595 billion. order to administer benefits to Medicare beneficiaries, CMS relies  extensively on contractors to assist in carrying out its responsibilities,  including program administration, management, oversight, and benefit  delivery. In fiscal year 2014, approximately 38 million Medicare  beneficiaries will be enrolled in original FFS Medicare and more than   1.2 billion claims will be processed and paid for those beneficiaries by  claims administration contractors. In February 2014, Medicare had   571 contracts with MA organizations to provide medical benefits, and  offer prescription drug benefits, to over 15.3 million beneficiaries, and an  additional 85 contracts with organizations that provide prescription drug  benefits outside of the MA program.
Congressional Budget Office, Medicare—May 2013 Baseline. (Washington, D.C.:   May 14, 2013). This number only includes benefit payments.
This statement provides an overview of the manner in which CMS has  contracted with private organizations to administer benefits under   (1) original FFS Medicare, (2) Medicare Advantage, and (3) the Part D  prescription drug program. It is based primarily on previous products that  we have issued regarding CMS contracting with claims processors to  administer the FFS program, and with other private organizations as part  of the MA and Part D prescription drug programs. These products were  issued from November 1989 through January 2014 using a variety of  methodologies, including reviews of relevant laws, policies, and  procedures; data analysis; and interviews with contractors, stakeholders,  and CMS officials. We have made numerous recommendations to CMS in  these previous products and are not making any new recommendations  at this time. We have supplemented information from our prior products  with publicly-available data on Medicare private plan contracts and  enrollment, CMS-issued guidance for Medicare private plans, and a  review of relevant literature. Our work was performed in accordance with  generally accepted government auditing standards. Those standards  require that we plan and perform the audit to obtain sufficient, appropriate  evidence to provide a reasonable basis for our findings and conclusions  based on our audit objectives. We believe that the evidence obtained  provides a reasonable basis for our findings and conclusions based on  our audit objectives.
subsections: section_title: Medicare Modernization Act Reformed the Way CMS Contracts with Organizations to Process and Pay FFS Claims
paragraphs: From its inception, the process for selecting Medicare claims  administration contractors was stipulated by Congress and differed from  the process for awarding most other federal contracts in that, among  other things, the Medicare contractors were not selected through a  competitive process. Before Medicare was enacted in 1965, providers  were concerned that the program would give the government too much  control over health care. To increase providers’ acceptance of Medicare,  Congress ensured that health insurers like Blue Cross and Blue Shield  would play a key role in administering Medicare, as they already had  experience as payers for health care services to physicians and hospitals.  Medicare’s authorizing legislation required that the claims administration  contracts be awarded to carriers and fiscal intermediaries—now referred  to as legacy contractors. By law, CMS was required to select carriers  from among health insurers or similar companies and to choose fiscal  intermediaries from organizations that were first nominated by  associations representing providers, without the application of competitive  procedures. In addition, CMS could not terminate these contracts unless  the contractors were first provided with an opportunity for a public  hearing, whereas the contractors themselves were permitted to terminate  their contracts, unlike other federal contractors. The contractors were paid  based on their allowable costs and generally did not have financial  incentives that were aligned with quality performance.
Pub. L. No. 108-173, Title II, 117 Stat. 2066, 2167 (2003). recompete the contracts at least once every 5 years.
CMS implemented the MMA contracting reform requirements by shifting  claims administration tasks from 51 legacy contracts to new entities called  Medicare Administrative Contractors (MACs). Originally, CMS selected   15 MACs to process both Part A and B Medicare claims (known as A/B  MACs) and 4 MACs to process durable medical equipment (DME) claims  (known as DME MACs). CMS also selected 4 A/B MACs to process  claims for home health care and hospice services. CMS began awarding  the MAC contracts in 2006; however, bid protests and consolidation of  some of the MAC jurisdictions delayed some of the MACs from being fully  operational. By 2009, most of the legacy contracts had been transitioned  to MACs and by December 2013, CMS completed that transition.
Under the FAR, agencies may generally select from two broad categories  of contract types: fixed-price and cost-reimbursement. When  implementing contractor reform, CMS chose to structure the MAC  contracts as cost-plus-award-fee contracts, a type of cost-reimbursement  contract. This type of contract allows CMS to provide a financial  incentive—known as an award fee—to contractors if they achieve certain  performance goals. In addition to reimbursement for allowable costs and  a contract base fee (which is fixed at the inception of the contract), a MAC  can earn the award fee, which is intended to incentivize superior  performance. In 2010, we reviewed three MACs that had undergone  award fee plan reviews and found that all three received a portion of the  award fee for which they were eligible, but none of the three received the  full award fee.
In the new contracting environment, MACs are responsible for a variety of  claims administration functions, most of which were previously performed  by the legacy contractors. MACs are responsible for processing and  paying claims, handling the first level of appeal (often referred to as  redeterminations of denied claims), and conducting medical review of  claims—which is done before or after payment to ensure that the  payment is made only for services that meet all Medicare requirements  for coverage, coding, and medical necessity. In addition, the MACs serve  as providers’ primary contact with Medicare, including enrolling providers,  conducting outreach and education, responding to inquiries, and auditing  provider cost reports.
CMS is moving toward further consolidation of MAC contracts in hopes  that consolidation will further improve CMS’s procurement and  administration processes. Since the original implementation, CMS chose  to consolidate the 15 A/B MACs into 10 jurisdictions and is in the process  of that consolidation. Currently, there are 5 consolidated A/B MACs that  are fully operational, 7 A/B MACs that will eventually be consolidated into  5 jurisdictions, and 4 DME MACs that are fully operational.
While CMS has relied on contractors to conduct claims administration  functions since Medicare’s inception and has worked to consolidate these  contracts, the agency has been granted additional statutory authority in  recent years to award new types of contracts to conduct specialized tasks  within the Medicare program. From 1965 to 1996, the legacy contractors  were not only responsible for paying claims but also for tasks related to  program integrity, such as working with law enforcement on cases of  suspected fraud. However, the Health Insurance Portability and  Accountability Act of 1996 established the Medicare Integrity Program,  authorizing CMS to award separate contracts for program integrity  activities such as investigating suspected fraud. These contracts are  now handled by Zone Program Integrity Contractors and are generally  aligned with the same jurisdictions as the MACs. In 2003, the MMA  directed CMS to develop a demonstration project testing the use of  contractors to conduct recovery audits in Medicare.known as recovery auditors, conduct data analysis and review claims that  have been paid to identify improper payments. While other contractors  that review claims are given a set amount of funding to conduct reviews,   These contractors,  recovery auditors are paid contingency fees on claims they have  identified as improper. To increase efforts to identify and recoup improper  payments, Congress passed the Tax Relief and Health Care Act of 2006,  which, among other things, required CMS to implement a permanent and  national recovery audit contractor program.
section_title: Private Plans Administer Benefits for Beneficiaries Enrolled in Medicare Advantage, But CMS has an Important Administrative and Oversight Role
paragraphs: Unlike Medicare FFS, in which contractors process and pay claims, in  Medicare Part C, CMS contracts with private organizations, known as  Medicare Advantage organizations (MAOs), to offer MA health plans and  provide covered health care services to enrolled beneficiaries. CMS pays  MAOs a pre-determined, fixed monthly payment for each Medicare  beneficiary enrolled in one of the MAO’s health plans. MA plans must  provide coverage for all services covered under Medicare FFS, except  hospice care, and may also provide additional coverage not available  under Medicare FFS. MA plans, with some exceptions, must generally  allow all Medicare beneficiaries who reside within the service area in  which the plan is offered to enroll in the plan.meet all federal requirements for participation, including maintaining and  monitoring a network of appropriate providers under contract; having  benefit cost-sharing amounts that are actuarially equivalent to or lower  than Medicare FFS cost-sharing amounts; and developing marketing  materials that are consistent with federal guidelines.
In addition, MA plans must  Medicare beneficiaries can generally elect to enroll in an MA plan if one is  offered in their community. As of February 1, 2014, approximately  15.3 million beneficiaries—nearly thirty percent of all Medicare  beneficiaries—were enrolled in MA plans—an all-time high. Those plans  were offered through 571 contracts between MAOs and CMS.
Substantial changes in the law regarding contract requirements and other  parameters of the program—including payment rates—have contributed  to fluctuations in the number of contracts and enrolled beneficiaries over  the years. Under authority provided by the Social Security Amendments  of 1972, CMS first began contracting with private plans to provide care to  enrolled beneficiaries in 1973. benefits covered under Medicare FFS and to meet certain other  standards. Plans were generally paid on the basis of their costs during  these early years of contracting. By 1979, the government had   33 contracts with organizations offering private plans.
The law required plans to provide  A decade after the Social Security Amendments of 1972, the Tax Equity  and Fiscal Responsibility Act of 1982 authorized the first full-risk plans  that were paid a fixed monthly amount per beneficiary that was set at 95  percent of the expected spending for beneficiaries in Medicare FFS. The payment for each beneficiary was adjusted by demographic and  other factors. The accuracy of this adjustment was criticized by us and  other researchers. The demographic payment adjusters resulted in  excess payments to those plans that enrolled healthier beneficiaries with  below-average health care costs. This, in part, encouraged continued  growth in Medicare private plans and by May 1, 1997, 4.6 million  beneficiaries—nearly 12 percent of all Medicare beneficiaries—were  enrolled in private plans under 280 contracts. At the same time, concerns  were raised that basing plan payment rates on local Medicare FFS  spending—the methodology used to geographically adjust payment  rates—resulted in no or low plan participation in some areas, particularly  rural areas.
Pub. L. No. 92-603, § 226, 86 Stat. 1329,1396 (1972).
The Balanced Budget Act of 1997 (BBA) formally established private  plans as Part C of Medicare and introduced additional changes to the  program. These changes to the program included new types of plans  that could be offered, the standards applied to the contracts, beneficiary  enrollment rules, and payment rules. In an effort to refine the payment  methodology, the BBA required CMS to use health status measures to  adjust payments to plans, added a payment methodology establishing a  minimum amount or floor rate, and limited rate updates in higher payment  counties that, with other refinements, resulted in reducing some of the  payment differences between high and low spending areas. Following  these changes, and coincidental with broad-based dissatisfaction with  managed care practices more generally, organizations offering Medicare  private plans reversed what had been a rapid expansion in the mid-1990s  and began a period of plan withdrawals and declining beneficiary  enrollment in plans. For example, from 1999 through 2003, the number of  Medicare contracts with private plans fell from 309 to 154. During the  same period, private plan enrollment fell from about 6.3 million to   4.6 million beneficiaries. Subsequent legislation providing new methods   of adjusting payments to account for health status, among other things,  did little to entice them back into the program.
Private plan participation in Medicare began to rebound after passage of  the MMA. The law made the program more attractive to plans by  establishing minimum payments of 100 percent of Medicare FFS  spending and pegging the minimum increase to the Medicare national per  capita growth rate, providing substantial annual increases over those  authorized under the BBA. As of December 2009, enrollment had grown  to about 10.9 million beneficiaries.
The Patient Protection and Affordable Care Act (PPACA) included several  changes to the MA program, such as bringing payments to plans closer to  Medicare FFS, and rewarding plans for quality. Since March 2010,  enrollment in MA plans has grown from 11.0 million to 15.3 million—an  increase of about 39 percent. While contract requirements for MAOs and  parameters of the program are largely derived from statute, CMS has  responsibility to implement the program and ensure compliance with  these requirements. The agency’s responsibilities include, among other  things, making monthly payments to MA plans, implementing health  status adjustments to the payments, establishing processes for enrolling  and disenrolling beneficiaries, reviewing marketing materials, providing  for independent review of coverage appeals, conducting audits, and  enforcing compliance. The audits typically involve a combination of desk  reviews of documents submitted by MA plans, and at CMS’s discretion,  site visits. To ensure compliance, CMS may take a variety of enforcement  actions, ranging from informal contacts offering technical assistance to  civil money penalties or plan suspension for egregious or sustained  noncompliance.
section_title: Private Plans Also Administer Prescription Drug Coverage Under Part D
paragraphs: Whereas MA offers beneficiaries an alternative way to access their Part A  and B benefits, Part D is structured to provide benefits only through  private organizations under contract to Medicare. Under the Part D  program, which began providing benefits on January 1, 2006, CMS  contracts with private organizations called plan sponsors.sponsors offer outpatient prescription drug coverage either through stand- alone prescription drug plans for those in original FFS Medicare, or  through MA prescription drug plans for beneficiaries enrolled in MA.  Through the Part D contracts, plan sponsors offer prescription drug plans   Part D plan  which may have different beneficiary cost-sharing arrangements (such as  copayments and deductibles) and charge different monthly premiums.
Medicare pays plan sponsors a monthly amount per enrollee independent  of each enrollee’s drug use, therefore creating an incentive for the plan  sponsor to manage spending. Payments to prescription drug plan  sponsors are adjusted according to the risk factors—including diagnoses  and demographic factors—of beneficiaries enrolled in a sponsor’s plans.  However, sponsors still have an incentive to control spending to ensure it  remains below the adjusted monthly payments received from CMS and  payments received from enrolled beneficiaries. Sponsors can lower drug  spending by applying various utilization management restrictions to drugs  on their formularies. The Part D program also relies on sponsors to  generate prescription drug savings, in part, through their ability to  negotiate price concessions, such as rebates and discounts, with entities  such as drug manufacturers, pharmacy benefit managers, and  pharmacies.
Prior to 2011, enrollees exceeding an initial coverage limit were responsible for paying  the full cost of covered drugs until they reached an out-of-pocked maximum. Beginning in  2011, PPACA established the Medicare Coverage Gap Discount Program to assist  beneficiaries who do not receive Part D’s low-income subsidy with their drug costs when  they reach the coverage gap. See GAO, Medicare Part D Coverage Gap: Discount  Program Effects and Brand-Name Price Trends, GAO-12-914 (Washington, D.C.:   Sept. 28, 2012). alone prescription drug plans in 2012 were enrolled in actuarially  equivalent or enhanced benefit plans.
While CMS contracts with plan sponsors to offer the Part D benefit, the  agency has an oversight role. As with MA, CMS is responsible for  ensuring that the payments it makes to plans sponsors are accurate.  Given that final payments to plan sponsors are based, in part, on the  price concessions that plan sponsors have negotiated, CMS is  responsible for ensuring that data plan sponsors submit on price  concessions are accurate. accurate information to the Medicare Plan Finder interactive website,  which helps beneficiaries compare different plans and identify the plan  that best meets their needs. CMS oversees the complaints and  grievances processes and may rely on complaints and grievances data to  undertake compliance actions against specific plan sponsors. CMS also  oversees Part D sponsors’ fraud and abuse programs, which include  compliance plans that must include measures to detect, correct, and  prevent fraud, waste, and abuse.
See GAO, Medicare Part D Prescription Drug Coverage: Federal Oversight of Reported  Price Concessions Data, GAO-08-1074R, (Washington, D.C.: Sept. 30, 2008). use of generic drugs, and higher-than-expected rebates from  pharmaceutical manufacturers to the prescription drug plans.
Chairman Pitts, Ranking Member Pallone, 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 have any questions about matters discussed in this testimony,  please contact Kathleen M. King at (202) 512-7114 or kingk@gao.gov   or James Cosgrove at (202) 512-7114 or cosgrovej@gao.gov.   Contact points for our Offices of Congressional Relations and Public  Affairs may be found on the last page of this statement. Other key  contributors to this report include Lori Achman, Sheila K. Avruch,   George Bogart, Christine Brudevold, Christine Davis, Christie Enders,  and Gregory Giusto.
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