As shown in table 1, CMS and TMA contract with numerous firms to perform many of the functions necessary to administer the Medicare and TRICARE programs. In addition, state agencies administer the Medicaid program. Federal contractors and state Medicaid agencies perform a wide variety of functions that require the use of personal health information. Such information may include medical diagnosis and treatment records and patient identifiers, such as name, address, date of birth, Social Security number, and evidence of insurance coverage. For example, when making a claims payment determination, federal contractors and state Medicaid agencies verify patient eligibility and assess whether the services provided were medically necessary. In some cases, assessing medical necessity requires a review of the patient’s medical history and treatment records. In addition to claims processing, federal contractors and state Medicaid agencies use personal health information when enrolling beneficiaries, operating telephone call centers, conducting disease management programs, administering pharmaceutical benefit management services, and performing fraud investigations. A number of laws provide protection for personal health information. Under the HIPAA Privacy Rule, certain health care organizations and individuals—known as covered entities—are required to ensure that patients’ personal health information is not improperly disclosed. Covered entities—health care providers, health plans, and health care clearinghouses—must develop policies and procedures for protecting health information. These include restricting the amount of information disclosed to the minimum necessary to accomplish the intended purpose and to the workforce needing access. Other requirements under the HIPAA Privacy Rule include designating a privacy official and training employees on the covered entity’s privacy policies. Certain HIPAA Privacy Rule safeguards also apply to “downstream users”—whether or not they are covered entities—through contractual agreements. The HIPAA Privacy Rule requires covered entities to enter into “business associate agreements” with other firms or individuals to which they transfer personal health information for certain clinical, operational, or administrative functions. Business associate agreements must establish the conditions under which a downstream vendor may use and disclose personal health information and the privacy safeguards they must apply. Covered entities are not required, under the rule, to monitor their business associates’ use of privacy safeguards, but must take corrective action if they become aware of a pattern of activity or practice that amounts to a material breach of the agreement. The HIPAA Privacy Rule applies directly to state Medicaid agencies, Medicare Advantage contractors, and TRICARE contractors that act as health plans or providers, and indirectly to Medicare FFS contractors and other TRICARE contractors. Specifically, state Medicaid agencies, Medicare Advantage, and TRICARE contractors that act either as health plans or providers are covered entities under the HIPAA Privacy Rule, while Medicare FFS contractors and the remaining TRICARE contractors are considered business associates to CMS and TRICARE, respectively, in their capacity as program contractors. Requirements under the HIPAA Privacy Rule also apply to certain downstream vendors that receive personal health information from federal contractors and state Medicaid agencies through outsourcing arrangements. In addition to the HIPAA Privacy Rule, U.S. law includes a number of statutes that provide privacy protections, and some of them are applicable only to federal agencies and their contractors. The Privacy Act of 1974, for example, places limitations on agencies’ collection, disclosure, and use of privacy information. Furthermore, the Federal Information Security Management Act of 2002 generally concerns the protection of personal information in the context of securing federal agencies’ information, and requires agencies to develop information security programs that include contractors. Finally, the Social Security Act requires that state Medicaid agencies limit the use and disclosure of personally identifiable information to purposes directly related to administering the state’s Medicaid program. A majority of the federal contractors and state Medicaid agencies we surveyed engage domestic vendors to perform services involving personal health information, but rarely transfer personal health information directly offshore. However, offshore outsourcing is initiated by some domestic vendors, which transfer personal health information to offshore locations. The actual prevalence of offshore outsourcing by domestic vendors may be greater than reported, as many federal contractors and state Medicaid agencies did not know whether their domestic vendors further transferred personal health information. A majority of federal contractors and state Medicaid agencies use domestic vendors to perform services involving personal health information. (See table 2.) At the same time, only one Medicare Advantage contractor and one state Medicaid agency reported direct offshore outsourcing of services involving personal health information. No Medicare FFS contractors or TRICARE contractors reported direct offshore outsourcing. When outsourcing domestically, the federal contractors and state Medicaid agencies typically rely on more than one vendor, although the extent to which this occurs varies across the three insurance programs. In our survey, Medicare Advantage contractors reported outsourcing services involving personal health information to a median of 20 domestic vendors per contractor. In contrast, TRICARE contractors and Medicaid agencies reported a median of 7 domestic vendors, while Medicare FFS contractors reported a median of 3 domestic vendors per contractor. Although only one federal contractor and one state Medicaid agency reported transferring personal health information directly to an offshore vendor, contractors and Medicaid agencies also reported offshore outsourcing through the activities of their domestic vendors. Specifically, federal contractors and state Medicaid agencies reported that their domestic vendors further transfer personal health information either to the vendors’ offshore locations or to another vendor located outside the United States through downstream outsourcing. Nineteen percent—33 of 173—of the Medicare Advantage contractors who responded to our survey reported that one or more of their largest domestic vendors transfer personal health information to a location outside of the United States. Four percent (2 of 45) of Medicare FFS contractors and 2 percent (1 of 45) of Medicaid agencies reported offshore outsourcing initiated by domestic vendors. Although each respondent indicated that these offshore transfers involved personal health information, we did not ask for detailed information about amount of data transferred. No TRICARE contractors reported offshore outsourcing by their domestic vendors. Our survey results may underestimate the full extent of offshore outsourcing of services involving personal health information. Some federal contractors and state Medicaid agencies did not always know whether their domestic vendors engaged in further transfers of personal health information—domestically or offshore—while others indicated that they did not have mechanisms in place to obtain such information. Medicare Advantage contractors—which have more domestic vendors per contractor than other federal contractors or state agencies in our survey— were least likely to have information about whether further data transfers were occurring on behalf of their program. When asked about their three largest domestic vendors, 57 percent of Medicare Advantage contractors reported that they did not know whether these vendors further transferred personal health information. Similarly, 29 percent of Medicare FFS contractors and 26 percent of Medicaid agencies reported that they did not have this information for all three of their largest domestic vendors. (See table 3.) According to our survey, most instances of offshore outsourcing by vendors occur when the domestic vendor transfers personal health information to one of its own locations outside of the United States or to an affiliated entity, such as a subsidiary, located in another country. Of the 33 Medicare Advantage contractors that reported offshore outsourcing by vendors, 30 described instances that fit this pattern. For example, one Medicare Advantage contractor reported outsourcing to a Midwest vendor a contract to scan paper claims and create and store electronic records. The vendor, which has multiple domestic and several international locations, performs these services in Mexico. In another case, a Medicare Advantage contractor reported using its wholly owned subsidiary to provide claims data entry services. Rather than using employees at its U.S. location, the subsidiary transfers the personal health information to a location it has in India, where the data entry services are performed. A Medicare FFS contractor reported a similar instance in describing its vendor’s offshore outsourcing. Its domestic vendor transfers personal health information to the vendor’s own facility in Jamaica to process Medicare claims. Offshore outsourcing was also reported to occur when domestic vendors transfer data to independent, third-party vendors located in other countries. According to our survey, this type of offshore outsourcing is less common than the type in which the offshore vendor is related to the domestic vendor. Three of the 33 Medicare Advantage contractors who reported vendor-initiated offshore outsourcing indicated that their domestic vendors transfer personal health information to an independent foreign vendor. For example, a Medicare Advantage contractor reported using a domestic subsidiary to provide claims data entry services. This subsidiary, in turn, engages in downstream outsourcing with an independent vendor located in India, where the data entry services for the Medicare Advantage contractor are performed. Medicare Advantage contractors were not the only respondents to report such downstream outsourcing relationships. A state Medicaid agency reported that its domestic vendor for customer services, which include handling call center operations and member enrollment, relies on an independent vendor located in India to perform these services. Although our survey identified several countries as locations for offshore vendors, India was the predominant destination for outsourcing services that involve personal health information. Of the 33 Medicare Advantage contractors whose domestic vendors were responsible for most of the offshore outsourcing reported in our survey, 25 reported that personal health information had been transferred to workers located in India. Less common locations included Ghana and Mexico, with nine and six instances of offshore outsourcing, respectively. (See table 4.) Privacy experts have emphasized that the contracts between firms and their vendors are important to ensuring privacy when outsourcing services that involve personal information. They also suggest safeguard measures that should be considered to protect privacy when outsourcing. These include measures to be taken during the vendor selection process and after personal health information has been outsourced. Federal contractors and state Medicaid agencies responding to our survey varied substantially in their reported use of these safeguard measures. Privacy experts indicated that having specific provisions in contractual agreements is key to ensuring that personal information is properly protected when transferred to a vendor. They noted that contracts should specify the vendors’ responsibilities for maintaining safeguards to protect personal information, circumstances under which personal information may be disclosed, and rules for subcontracting. In fact, the HIPAA Privacy Rule requires such contractual agreements to protect against unauthorized disclosure of personal health information by vendors that receive such information from covered entities to perform certain clinical, operational, or administrative functions. The Privacy Rule further specifies certain contract elements, including the conditions and safeguards for uses and disclosures of personal health information. To ensure that these conditions and safeguards also apply to downstream vendors, the Privacy Rule requires a firm’s or individual’s business associates to agree in writing that any subcontractor to which they subsequently transfer personal health information will also contractually agree to the same set of safeguards. At the same time, however, privacy experts point out that differences in national data privacy laws may influence the significance of a firm’s contracts with its vendors. Countries differ in the scope of their data privacy laws, with some offering broader data privacy protections than those available in the United States and others with essentially no legal protections for data privacy. For example, personal data transferred to a member country of the European Union (EU) would have to be handled in a manner consistent with the European Commission’s Data Protection Directive, which is generally considered to require more comprehensive data protection than does the United States. By contrast, India has no law that establishes protections for personal data. When a U.S. firm does business with a vendor in a country with relatively weak or narrow data privacy protections, experts noted that the contract between the outsourcing firm and the vendor can be used to help ensure data privacy. In the United States, vendors could be held liable according to the terms of their contract with the covered entity, which they are required to have by the HIPAA Privacy Rule. To make certain that data are similarly protected when outsourcing to a country with weaker privacy protections, experts indicate that the contract should be used to specify, in detail, the vendor’s privacy practices and the right to terminate the contract in the event of a privacy breach. The contract also may specify which country’s laws will be applied to resolve disputes that arise under the contract, which has implications for both interpretation and enforcement of the contract. When considering the implications of foreign privacy laws on data transferred offshore, another factor to consider is the legal status of the vendor. The experts we consulted generally agreed that transferring personal data to an entity with an offshore location may afford—at least in theory—the same level of privacy protections available in the United States, if the offshore entity is subject to U.S. law, such as may be the case with entities with offshore locations that are incorporated in the United States. For firms seeking data protections beyond those afforded by contracts, experts recommend several safeguard measures. Specifically, experts suggest that firms transferring personal health information to vendors should assess potential vendors’ privacy practices when selecting a vendor, monitor vendor performance on privacy practices, and be aware of downstream outsourcing. Experts recommended that in the vendor selection process, firms assess potential vendors’ privacy practices. In addition to evaluating a vendor’s written policies, experts suggested that the overall importance afforded privacy within the organization’s culture may be an equally significant factor, as it drives the likely implementation of written privacy policies. Experts noted different approaches to evaluating potential vendors. Describing his organization’s informal approach, the privacy officer for a large provider group explained that he consults with other clients of the vendor about their level of satisfaction and considers the vendor’s long- term stability and reputation. In contrast, the chief privacy officer for a large information technology company described her firm’s formal process for evaluating potential vendors. Using written risk-rating criteria, her firm’s legal and procurement departments evaluate potential vendors’ privacy practices. Beyond informing selection decisions, the criteria subsequently serve as the basis for vendor evaluation and auditing. When considering a potential vendor, some experts suggested that the extent of the assessment should be determined by the perceived data privacy risk— such as the sensitivity of the data being transferred. Experts also emphasized the importance of ongoing oversight of vendors and their activities, noting that monitoring vendor performance on privacy practices helps to ensure that contractual agreements are implemented. Experts described monitoring activities as a good risk management practice, and particularly important if the vendor is performing a critical business function or handling very sensitive personal health information. As one approach, a privacy expert suggested that outsourcing firms should require regular reports from vendors describing compliance efforts, privacy violations, and the use of any downstream vendors. While privacy experts recognized monitoring as a valuable safeguard, some said that adequate monitoring may be a challenge to implement. Vendors—especially those with substantial market power—may be reluctant to allow monitoring of their operations. In other cases, outsourcing firms may find it impractical or may not have sufficient resources to monitor each of their vendors. In such a situation, experts suggested that monitoring efforts should be focused on vendors that handle the most sensitive information, handle the largest volume of personal data, or have the highest risk for privacy breaches. With respect to monitoring the operations of geographically distant vendors, experts stressed that alternatives to traditional monitoring may be used to minimize logistical challenges, such as hiring a third-party audit organization to conduct regular on-site visits. Experts stressed that information about the number, and identity, of vendors that handle personal information is critical to the outsourcing firm’s ability to assess and mitigate privacy risks. One expert we spoke with explained that with information about its vendors’ downstream data transfers, the outsourcing firm is in a better position to monitor how its data are being handled. Some outsourcing firms require their vendors to obtain approval prior to subcontracting, while others require vendors to report regularly on all subcontractors. In some cases, however, information about downstream vendors can be difficult to obtain, experts noted. One expert on corporate compliance cautioned that vendors may resist such prior approvals and reporting requirements, citing the need for flexibility in responding quickly to changes in workload. Federal contractors and state Medicaid agencies that outsource services involving personal health information varied substantially in their reported use of the three expert-recommended safeguard measures. For example, 39 percent of Medicare FFS contractors reported taking steps to assess potential vendors’ privacy practices compared with 67 percent of state Medicaid agencies. With respect to monitoring vendors’ privacy practices, 42 percent of Medicare FFS contractors reported doing so compared with 100 percent of TRICARE contractors. Forty-five percent of Medicare Advantage contractors reported awareness of downstream outsourcing compared with 74 percent of Medicaid agencies. With respect to the three recommended measures together, Medicare Advantage and Medicare FFS contractors reported the lowest use rates, at 27 and 29 percent, respectively. Use of the three recommended measures was more common among Medicaid agencies, at 51 percent, and TRICARE contractors, with 60 percent. (See table 5.) Our survey results show that a substantial number of federal contractors and state Medicaid agencies reported privacy breaches involving personal health information. However, TMA and CMS—the federal agencies that oversee the TRICARE, Medicare, and Medicaid programs—differ in their requirements for notification of privacy breaches involving personal health information. TMA requires reports of privacy breaches from all of its contractors. CMS collects such information from FFS contractors but not from Medicare Advantage contractors or from state Medicaid agencies. In responding to our survey, over 40 percent of federal contractors and state Medicaid agencies indicated that they, or one of their vendors, experienced a privacy breach involving personal health information in 2004 or 2005. Among Medicare Advantage contractors, 47 percent reported recent privacy breaches, as did 42 percent of Medicare FFS contractors, 44 percent of Medicaid agencies, and 38 percent of TRICARE contractors. (See table 6.) These rates are comparable to the rate recently reported by commercial health insurers. In a 2005 health care industry survey, 45 percent of commercial health insurers reported the occurrence of at least one privacy breach from January through June 2005. It is difficult to interpret these data, because we did not ask respondents for information about the frequency or severity of their privacy breaches. The reported privacy breaches could have involved inappropriate disclosure of limited personal health information, such as mailing an insurance statement to the wrong address, or extensive disclosures, such as privacy breaches that involved information on many individuals or that occurred repeatedly. The federal agencies with responsibility for these programs vary in their requirements with respect to notification of privacy breaches. Since 2004, TMA has required all TRICARE contractors to report monthly on privacy breaches, including those experienced by each vendor handling enrollees’ personal health information and by health care providers. According to TRICARE officials, monthly reports provide detailed information about each privacy breach, including the contractor’s assessment of the “root cause” of the breach and steps taken to prevent further occurrences. TMA officials indicated that most privacy breaches occur at the vendor level or with health care providers, rather than with TRICARE contractor staff. During 2005, three large regional TRICARE contractors reported more than 130 separate privacy breaches to TMA officials. TMA officials told us that most breaches occurred inadvertently, such as when personal information was transferred to the wrong person because of incorrect mailing addresses (electronic and paper mail) or fax errors. In other cases, breaches occurred when health care providers or contractor staff—such as call center employees—inappropriately discussed personal health information with other employees. TMA officials said that the agency analyzes trends in the monthly reports and follows up with federal contractors that report recurring lapses in privacy. In May 2005, CMS began requiring Medicare FFS contractors—but not Medicare Advantage contractors or Medicaid agencies—to report privacy breaches. CMS officials told us that in prior years, FFS contractors reported privacy breaches to CMS regional office staff responsible for contractor oversight. The agency changed its approach to monitoring privacy breaches by establishing a policy for federal contractors to notify CMS central office staff directly. Under the new policy, CMS requires FFS contractors to provide written notice, within 30 days of discovery, of all known or suspected privacy breaches, including those experienced by a vendor. These federal contractors must describe the privacy breach and subsequent corrective action plan—including any changes to policies, procedures, or employee training. From May through December 2005, under the new reporting requirement, CMS received eight reports of privacy breaches from four FFS contractors. CMS officials noted that most breaches occurred as a result of accidental disclosure of personal information. For example, the most commonly reported incident during 2005 occurred when beneficiary health information was mailed by a FFS contractor to the wrong health care provider. CMS does not have comparable notice requirements for privacy breaches occurring with personal health information held by Medicare Advantage contractors or state Medicaid agencies. Agency officials told us that they do not require routine reporting of privacy breaches that may occur at these federal contractors and state Medicaid agencies or their vendors. However, based on our survey results, these contractors and agencies, and their vendors, are likely to experience privacy breaches at a rate similar to FFS contractors. When federal contractors and state Medicaid agencies outsource services involving personal health information, they typically engage U.S. vendors that may further transfer the personal health information they receive to downstream domestic or offshore workers. CMS and TMA officials have only recently taken steps to oversee their federal contractors’ and vendors’ management of sensitive health information. While reporting data transfers and data privacy breaches is now required under the TRICARE program and the Medicare fee-for-service program, CMS has yet to establish a reporting requirement for Medicare Advantage contractors and Medicaid agencies. We believe that federal contractors and state Medicaid agencies should be held accountable for how well personal health information, held by them or disclosed to their vendors, is protected. To help ensure that the personal health information entrusted to federal and state health programs is being adequately protected and to facilitate prompt corrective action when appropriate, the privacy breach notification requirements that currently apply to TRICARE and Medicare FFS contractors should also apply to other Medicare contractors that handle personal health information (such as Medicare Advantage contractors) and to state Medicaid agencies. We recommend that the Administrator of CMS require all Medicare contractors responsible for safeguarding personal health information and state Medicaid agencies to notify CMS of the occurrence of privacy breaches. We received written comments on a draft of this report from CMS and DOD. CMS agreed with our recommendation and described recent steps the agency has taken to obtain information on privacy breaches from Medicare Advantage contractors. Specifically, CMS highlighted its June 9, 2006, memo to Medicare Advantage contractors requiring them to notify agency officials of breaches involving personal health information. CMS noted that it is developing specific instructions for its regional and central office staff about how to respond to such reports of privacy breaches. CMS also indicated that the HHS Office of Inspector General will be assisting the agency in assessing the adequacy of the Medicare Advantage contractor’s systems for securing personal health information. In addition, CMS stated that it sent privacy reminder notices to the FFS contractors and selected other CMS contractors that handle beneficiaries’ personal health information. Although the administration of the new Medicare Part D outpatient prescription drug benefit was outside the scope of our work, CMS noted that its new requirements for reporting privacy breaches will also apply to the contractors that implement this benefit. CMS pointed out that the Social Security Act requires that state Medicaid agencies limit the use and release of personally identifiable information to purposes directly related to administering the state’s Medicaid program. We included a reference to relevant provisions of the Social Security Act in the background section of this report. Finally, CMS indicated that it has added language to its FFS contracts that would require contractors and subcontractors to obtain written approval from CMS prior to performing work at locations outside of the United States. In further discussion, agency officials clarified that CMS will be including this contract language in future Medicare FFS contracts. Thus, the revised language will take effect over the next several years as the current Medicare FFS contracts are competed and awarded to entities called Medicare administrative contractors (MACs). CMS noted that 4 of the 23 MAC contracts have been awarded to date; the agency plans to complete its transition to the new MAC contracts by the end of fiscal year 2009. DOD concurred with our report findings and provided a technical comment which we incorporated. We have reprinted the letters from CMS and DOD in appendixes II and III. We will send copies of this report to the Administrator of CMS, the Secretary of Defense, appropriate congressional committees, and other interested parties. Copies will be made available to others upon request. The report is also available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions about matters discussed in this report, please contact me at (312) 220-7600 or at aronovitzl@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who contributed to this report are listed in appendix IV. We focused our review on Medicare, Medicaid, and the Department of Defense’s TRICARE program, which together cover over 100 million Americans. In this report we (1) examined the extent to which the Medicare and TRICARE federal contractors and state Medicaid agencies outsource—domestically or offshore—services involving the use of personal health information; (2) identified measures recommended by privacy experts for safeguarding outsourced personal information and examined use of these measures by the federal contractors and state Medicaid agencies; and (3) determined whether the federal contractors and state Medicaid agencies have experienced privacy breaches and whether the federal agencies that oversee Medicare, Medicaid, and TRICARE require notice from them when privacy breaches occur. To determine the extent of service outsourcing, use of recommended practices, and experience with privacy breaches, we surveyed the federal contractors and state Medicaid agencies responsible for performing many of the administrative tasks associated with the day-to-day operations of Medicare, Medicaid, and TRICARE. In August 2005, we sent our survey to all 56 state Medicaid agencies, 252 Medicare Advantage contractors, 59 Medicare fee-for-service (FFS) contractors, and 11 TRICARE contractors. The federal contractors included in our survey were all those that held contracts with the Department of Health and Human Services’ Centers for Medicare & Medicaid Services (CMS) and the Department of Defense’s TRICARE Management Activity (TMA) to participate in these programs at the national level, as of January 2005. In some cases, a firm could have more than one contract. For example, the 59 Medicare FFS contracts included in our study were held by 42 firms in January 2005. In these instances, we sent the firms a separate survey for each of their contracts with the federal agencies. Consequently, for analysis and reporting purposes, we considered each contract separately. Survey response rates ranged from 69 percent (Medicare Advantage contractors) to 80 percent (state Medicaid agencies). (See table 7.) Survey questions addressed whether the federal contractor or state Medicaid agency outsourced services during 2005—domestically or offshore—that involved the use of personal health information. We asked the federal contractors and state Medicaid agencies that used outsourcing to provide the total number of domestic and offshore outsourcing agreements. To obtain information about downstream outsourcing, we asked respondents whether each of their three largest vendors further transferred personal health information, and if so, to which country. For most survey items, we did not independently verify information provided by respondents. However, we performed quality checks, such as reviewing survey data for inconsistency errors and completeness. When necessary, we contacted survey respondents to obtain clarification before conducting our analyses. Our analysis of respondents and nonrespondents in each survey group, on variables such as entity size, type, and geographic location, did not identify substantial differences, suggesting that the risk of respondent bias is low. Among the survey items we reported on, we did not find substantial variation in item response rate. Based on these efforts, we determined that the survey data were sufficiently reliable for the purposes of this report. To identify privacy practices recommended by industry experts to protect personal information from inappropriate disclosure when outsourcing, we reviewed relevant literature on privacy practices, domestic outsourcing, and offshore outsourcing. Our review included perspectives from the health care and financial business sectors, including syntheses of best practices. Using a structured interview guide, we then interviewed privacy experts to identify commonly recommended business practices for protecting the privacy of personal information when outsourcing. We selected individuals to interview based upon literature they published on the topics of outsourcing and privacy protections and through referrals from other experts. We interviewed experts representing industry, consumer, and regulatory perspectives. We did not independently evaluate the feasibility, potential cost, or effectiveness of implementing experts’ recommended practices. Survey questions asked whether federal contractors and state Medicaid agencies routinely use these expert- recommended practices. We did not review to what extent the practices used by the federal contractors and Medicaid agencies comply with existing statutory and administrative requirements. Through the survey, we also asked the federal contractors and state Medicaid agencies to report on their experience with privacy breaches during the previous 2 years. To obtain information on federal agencies’ requirements for notification of privacy breaches experienced by the federal contractors and state Medicaid agencies, we interviewed officials at TMA and CMS—the federal agency with oversight responsibility for Medicare and Medicaid. We asked agency officials to provide us with summary data on the number and type of privacy breaches reported by federal contractors and state Medicaid agencies during 2004 and 2005. We did not provide a definition of privacy breach in the survey. We also examined the Health Insurance Portability and Accountability Act and its implementing regulations, but did not assess compliance with them or with other federal laws and regulations. In addition, we reviewed information on data privacy laws in selected countries that are destinations for offshore outsourcing. We conducted our work from October 2004 through July 2006 in accordance with generally accepted government auditing standards. In addition to the contact named above, Rosamond Katz, Assistant Director; Manuel Buentello; Adrienne Griffin; Jenny Grover; Kevin Milne; and Daniel Ries made key contributions to this report.

Summary: Federal contractors and state Medicaid agencies are responsible for the day-to-day operations of the Medicare, Medicaid, and TRICARE programs. Because these entities may contract with vendors to perform services involving the use of personal health data, outsourcing and privacy protections are of interest. GAO surveyed all federal Medicare and TRICARE contractors and all state Medicaid agencies (a combined total of 378 entities) to examine whether they (1) outsource services--domestically or offshore--and (2) must notify federal agencies when privacy breaches occur. Survey response rates ranged from 69 percent for Medicare Advantage contractors to 80 percent for Medicaid agencies. GAO interviewed officials at the Department of Health and Human Services' Centers for Medicare & Medicaid Services (CMS), which oversees Medicare and Medicaid, and the Department of Defense's TRICARE Management Activity (TMA), which oversees TRICARE. Federal contractors and state Medicaid agencies widely reported domestic outsourcing of services involving the use of personal health information but little direct offshore outsourcing. Among those that completed GAO's survey, more than 90 percent of Medicare contractors and state Medicaid agencies and 63 percent of TRICARE contractors reported some domestic outsourcing in 2005. Typically, survey groups reported engaging from 3 to 20 U.S. vendors (commonly known as subcontractors). One federal contractor and one state Medicaid agency reported outsourcing services directly offshore. However, some federal contractors and state Medicaid agencies also knew that their domestic vendors had initiated offshore outsourcing. Thirty-three Medicare Advantage contractors, 2 Medicare fee-for-service (FFS) contractors, and 1 Medicaid agency indicated that their domestic vendors transfer personal health information offshore, although they did not provide information about the scope of personal information transferred offshore. Moreover, the reported extent of offshore outsourcing by vendors may be understated because many federal contractors and agencies did not know whether their domestic vendors transferred personal health information to other locations or vendors. In responding to GAO's survey, over 40 percent of the federal contractors and state Medicaid agencies reported that they experienced a recent privacy breach involving personal health information. (The frequency or severity of these breaches was not reported.) By survey group, 47 percent of Medicare Advantage contractors reported privacy breaches within the past 2 years, as did 44 percent of Medicaid agencies, 42 percent of Medicare FFS contractors, and 38 percent of TRICARE contractors. TMA and CMS differ in their requirements for notification of privacy breaches. TMA requires monthly reports on privacy breaches from its TRICARE contractors and follows up with contractors that report recurring lapses in privacy. While CMS requires Medicare FFS contractors to report privacy breaches within 30 days of discovery, such oversight is lacking for privacy breaches that may occur with personal health information held by state Medicaid agencies and Medicare Advantage contractors, as CMS does not require reports of privacy breaches from these entities.