Traditionally, HCFA’s claims administration contractors performed most of Medicare’s program safeguard functions. These five functions are intended to ensure that Medicare pays only appropriate claims for covered services performed by legitimate providers to eligible beneficiaries. They include: medical reviews of claims to identify claims for noncovered, medically unnecessary, or unreasonable services, conducted both before the claims are paid (prepayment review) and after payments are made (postpayment review); reviews to identify other primary sources of payment, such as private health insurers, that are responsible for paying claims mistakenly billed to Medicare; audits of cost reports submitted by institutional providers to determine if their costs are allowable and reasonable; identification and investigation of possible fraud cases that are referred to the Department of Health and Human Services Office of Inspector General (HHS OIG) for investigation and possible prosecution by the Department of Justice; and provider education and training related to Medicare coverage policies and appropriate billing practices. In May 1999, HCFA selected 12 entities to act as PSCs, using a competitive bidding process. These entities represent a mix of health insurance companies, information technology businesses, and several other types of firms. To be selected as a PSC, potential contractors had to indicate that they were capable of performing four of HCFA’s five program safeguard activities—either directly or through subcontracts with other organizations. Almost all of the PSCs have had experience as HCFA contractors: Six are currently Medicare claims administration contractorsand an additional five have other types of contracts with HCFA. HCFA awarded each of the PSCs an indefinite delivery/indefinite quantity contract. This type of contract allows HCFA to select a contractor and outline in broad terms the activities to be performed. When HCFA identifies a specific function to be performed, it issues a task order proposal for that work, and the PSCs compete to receive the task order contract. HCFA can issue numerous task orders covering one, several, or the entire range of program safeguard activities, and it can award multiple task orders to an individual PSC. HCFA is exploring different ways to use and pay the PSCs to combat fraud, waste, and abuse in the Medicare program. Because the PSCs represent a new means of promoting program integrity, HCFA took an incremental approach to implementing its specialized contracting authority and awarding the task orders. This incremental approach gave HCFA the opportunity to test multiple options for how the PSCs will function. These options include, for example, a PSC performing all safeguard functions in a particular region of the country and PSCs conducting work targeted at specific types of providers or benefits considered particularly vulnerable to fraud and abuse. In addition, HCFA plans to experiment with different methods of paying PSCs to enhance their performance. Finally, HCFA recently revised its approach to monitoring and evaluating the PSCs’ performance because of their growing role in program integrity. In September 1999, about 3 years after HIPAA was enacted, HCFA awarded its first PSC task order. Officials emphasized that they needed time to consider how best to implement HCFA’s contracting authority. This included the time necessary to develop the indefinite delivery/indefinite quantity contract and the proposed regulations governing their new program integrity efforts. By April 2001, HCFA had awarded 15 task orders focusing on different aspects of program integrity, such as fraud detection and medical review of claims. HCFA first awarded task orders for projects that would not disrupt the processing of Medicare claims; for example, several projects involved reviewing claims after they have been processed. In developing the initial task orders in 1999, HCFA was concerned about the potential effects of the year 2000 conversion on its claims processing systems and the possibility that one or more of the claims administration contractors would leave the program. HCFA decided that its initial task orders would either be focused on tasks that were independent of claims processing or that supplemented, but did not replace, the claims administration contractors’ program safeguard activities. Subsequent task orders have, in many cases, given the PSCs greater safeguard responsibility for performing work, including replacing the functions traditionally performed by the claims administration contractors. Based on our assessment, the 15 task orders can be divided into four categories representing different ways of structuring the PSCs’ responsibilities. As shown in table 1, these categories cover a wide range of options, from discrete, narrowly focused task orders related to a particular service or provider type to task orders with a broad focus that can have a national impact on Medicare’s program safeguard activities. HCFA is testing these options to identify how the PSCs can make the most significant contributions to program integrity. The task orders in the first category represent special projects that focus attention on particular areas that are considered vulnerable to fraud and abuse. For example, in recent years, community mental health center services have been the target of investigations by law enforcement agencies, including the HHS OIG and the Federal Bureau of Investigation. These investigations were due, in part, to concerns about steep increases in the cost per patient treated and increases in the number of these providers in certain regions of the country. Further, the nebulizer task order was awarded because nebulizer drugs have historically been a source of fraud and abuse—including kickbacks from suppliers to beneficiaries and physicians. The second category represents task orders in which the PSC supplements or replaces some of the routine program integrity activities of one or more claims administration contractors. For example, the Benefit Integrity Support Center task order calls for the PSC to work with all the claims administration contractors that have jurisdiction over the New England states to identify potential cases of fraud and abuse. In addition, the PSC staff are also supplementing the work conducted by fraud control units at four of these contractors—partly because these units have few staff. The PSC that was awarded the Western Integrity Center task order is replacing some of the safeguard activities—including postpayment reviews and fraud case development—of two claims administration contractors that serve 12 western states. The third category, in which a PSC performs all program safeguard functions, consists solely of the Durable Medical Equipment task order. This task order is important in that it represents a test for determining whether a PSC can effectively replace the safeguard activities performed by the claims administration contractors. These activities include the performance of prepayment medical reviews by the PSCs. These reviews must be completed before the claims can be processed and paid by the responsible claims administration contractor. This process poses a challenge because the PSC must complete an assessment of whether claims should be paid without delaying the processing and payment of appropriate claims to legitimate providers by the claims administration contractors. Although this is the only task order being used to test this option, the results may provide HCFA with important insights regarding how to identify improper claims prior to payment without creating undue processing delays. The task orders in the fourth category are national in scope and aim to build HCFA’s knowledge base and systems to enhance the prevention and detection of fraud, waste, and abuse. For example, the PSCs that were awarded the Systems Requirement task order are identifying potential changes to existing claims processing systems to enable PSCs’ automated systems to be fully integrated with those of the claims processors. The Therapy Services task order requires the development of a plan that all contractors could use for reviewing the appropriateness of physical, speech, and occupational services—services that the HHS OIG has identified as prone to improper Medicare payments. HCFA expects the PSC’s efforts on this task order will reduce payment error rates for therapy services without disrupting the delivery of these services to Medicare beneficiaries. HCFA plans to explore a variety of methods for paying PSCs to determine which are most appropriate for the specific functions required in the task orders. These methods fall under the general categories of cost- reimbursement, fixed-price, and cost-plus-incentive contracts. Most of the task orders are currently paid on some variation of a cost-reimbursement basis. Under a cost-reimbursement contract, HCFA reimburses the PSCs for their allowable costs—including such items as salaries, travel, and subcontractors needed to perform the activities specified in the task order. This type of contract provides the least incentive for a PSC to manage its costs because HCFA assumes most of the risk for inefficient performance. Thirteen of the 15 task orders are paid on this basis. A fixed-price contract requires a PSC to assume most of the risk for managing its costs and provides it with the greatest incentive for efficient performance. Despite these potential benefits for HCFA, a fixed-price contract has been used for only one task order. Establishing fixed-price contracts is difficult because HCFA has no prior experience with using task orders for program safeguards. HCFA officials told us that this type of contract currently may not be feasible for most task orders because the agency generally lacks the data necessary to reasonably estimate costs. As a result, neither HCFA nor the PSCs can have a complete understanding of the costs associated with meeting the contract requirements. Without reliable cost data, HCFA officials fear that PSCs could submit high bids that include excessive profits or low bids that lead to disagreements over the scope of work and subsequent requests for additional funds. To address these concerns, HCFA officials stated that they are developing a new reporting system to obtain cost data associated with different program safeguard activities. They believe this system, which may be implemented by the end of 2001, will establish an independent data source to assess the reasonableness of the PSCs’ estimated costs and will ultimately provide a stronger basis for competing future task order contracts on a fixed-price basis. For example, in regard to a task order for prepayment medical review, HCFA could use this data system to estimate the cost for a registered nurse to review 1,000 claims. Certain types of program safeguard work, however—such as the development of fraud cases—might not be amenable to a fixed-price contract due to the uncertainties inherent in detecting, investigating, and developing such cases. The third type of contractor payment incorporates the use of financial incentives, such as performance awards or fees, that a contractor can earn for meeting certain performance goals. For example, HCFA has begun to experiment with financial incentives on the Comprehensive Error Rate Testing program task order. This task order requires the PSC to evaluate the accuracy of a random sample of claims processed by the claims administration contractors. The PSC has the opportunity to earn two separate award fees: One is based on the PSC’s success in obtaining medical records from providers after the claims have been submitted, and the second is based on having few successful appeals of its medical review decisions. HCFA chose the first measure because obtaining relevant medical records is critical to the PSC’s ability to accurately determine if a claim was paid correctly, while the second measure is an indicator of the quality of the PSC’s medical review decisions. HCFA’s initial efforts to manage the task orders generally have focused on the PSCs’ start-up activities. HCFA has worked closely with the PSCs to ensure that they acquire and develop the resources and systems needed to ultimately fulfill contract requirements. This focus on the PSCs’ early efforts has resulted in HCFA’s central office assuming a major role in overseeing the PSCs and managing the individual task orders. HCFA recognized that as the PSCs play a larger role in its program integrity efforts, it would be appropriate to reconsider its approach to PSC monitoring and evaluation. Consistent standards for monitoring and evaluating PSC performance are important for developing a common understanding of how to use PSCs most effectively. We have previously reported that HCFA’s regional office staff charged with monitoring the work performed by the claims administration contractors were given wide discretion in how they conducted their oversight, resulting in inconsistent evaluations. We subsequently reported that HCFA was taking a number of steps to strengthen its oversight of the claims administration contractors, such as providing detailed direction to the regions to improve the quality and consistency of contractor reviews. HCFA has revised its approach to PSC monitoring and evaluation to more effectively assess the PSCs’ progress in accomplishing the task orders’ specific objectives. Until recently, the same staff who generally monitored the PSCs’ day-to-day progress were also responsible for periodically evaluating these contractors’ performance in completing certain tasks. HCFA has since assigned primary responsibility for day-to-day monitoring of the PSCs to the regional offices. To ensure independence, the central office will be responsible for separately evaluating the PSCs. This approach should help HCFA maintain an appropriate level of objectivity and independence in these assessments. HCFA has not followed a systematic, strategic approach for testing and evaluating how best to use the PSCs to promote program integrity. Also, HCFA has not yet developed clear, measurable criteria to evaluate PSCs’ performance on the individual task orders. By addressing both of these issues, HCFA would be in a better position to ensure that the PSCs are used most effectively. HCFA lacks a strategy for determining how best to use the PSCs in the long term. During our review, HCFA officials could not provide us with specific goals and objectives for using the PSCs to combat fraud, waste, and abuse or their evaluation criteria for assessing which PSC options work best under different circumstances. While an incremental, experimental approach for implementing its new contracting authority may be prudent in the short term, a long term strategy would help HCFA to better target its PSC resources and provide a basis for deciding where and how to use the PSCs to promote program integrity. Without a clearly defined strategic direction, HCFA has issued the task orders ad hoc. This ad hoc approach has provided HCFA significant flexibility in targeting its task orders on known problem areas and in using the PSCs in different ways. However, it does not represent a strategy for systematically testing different PSC options and for building upon the results of one task order to issue future task orders—a strategy we believe would provide HCFA with a sound basis for deciding how best to use its PSC resources. Currently, HCFA relies on its staff to identify and develop proposals for work that the PSCs should perform. Task orders are also developed as opportunities arise—such as when a claims administration contractor leaves the program, creating the opportunity to shift some or all of the contractor’s program safeguard activities to a PSC. HCFA officials said that they believe that it is important to gain some experience with their PSC contracting authority before establishing HCFA’s strategic direction for these contractors. They also told us that they have a vision for consolidating program safeguard activities among the PSCs and fewer claims administration contractors and are currently drafting a plan to this effect. Until May 2001, however, they could not tell us when this plan would be issued or whether it would contain goals and objectives for its PSCs or criteria for evaluating the success or failure of these contractors. In commenting on a draft of this report, HCFA officials identified four general questions they are using to evaluate the PSC options. They also told us that they plan to complete their evaluation of the PSC options by October 2001 in order to have a more clearly defined long-term strategy in place for fiscal year 2002. HCFA has not clearly defined the specific outcomes it would like to achieve under each task order. Instead, we found that many of the specific outcomes outlined in the PSC task orders describe work processes— critical steps to be performed that serve as a substitute for outcomes. For example, under the Benefit Integrity Support Center task order, two of HCFA’s desired outcomes are that the PSC will (1) use a variety of methods to detect potential fraud cases, and, (2) establish good working relations with its law enforcement partners. Both of these are processes that HCFA believes will contribute to accomplishing its desired outcome, developing “quality” fraud cases. Contract specialists told us that it is not always possible to develop specific outcomes during the initial stages of a project and that using processes as proxies for outcomes is therefore acceptable. However, they also said that outcomes could begin to be developed once work has proceeded for a period. As of April 2001, work on 8 of the 15 task orders had been ongoing for at least a year, thereby providing HCFA with information from which to review and better define its expected outcomes on each. HCFA has begun to evaluate the PSCs’ performance. However, HCFA has not developed clear, quantifiable performance measures and standards for most of these task orders. HCFA officials told us that several task order evaluations are under way but none have been completed. They said that the ongoing evaluations generally consist of reviewing the PSCs’ self- assessments, progress reports, and general performance. For most of its task orders, HCFA established seven broad dimensions for assessing PSC performance: (1) cooperation and coordination, (2) innovation, (3) integrity, (4) quality, (5) timeliness, (6) value added, and (7) satisfaction.However, it has not developed measures to determine how well the PSCs performed in these dimensions nor established standards against which to judge whether the PSCs’ performance was satisfactory. To illustrate, as part of the Provider Education task order, HCFA plans to assess the PSC’s cooperation and coordination with stakeholders based, in part, on stakeholder feedback and the number of outstanding issues that reflect a lack of communication. However, HCFA has no written guidance explaining how it will obtain and measure stakeholder feedback. This task order does not explain how HCFA will define an outstanding issue or judge what constitutes a lack of communication between the PSC and a stakeholder. It also does not define the standards against which HCFA will differentiate between PSC performance that is excellent, good, acceptable, poor, or unacceptable. Therefore, HCFA will not have a strong basis for assessing the PSC in this dimension. One of HCFA’s attempts to develop performance measures and standards that are clear and quantifiable has been for the Statistical Analysis Center task order. This task order requires the PSC to develop a wide variety of data analyses for claims data in three states. These measures and standards were drafted by the PSC at HCFA’s request and were recently incorporated into the task order requirements. The PSC’s performance measures for the quality dimension, for example, require that the findings resulting from these data analyses be accurate and able to withstand external validation. The PSC’s standards are that HCFA will rate the quality of the PSC’s data analyses as excellent if 95 percent or more of the PSC’s analyses meet these criteria, while HCFA will rate them unacceptable if the performance measures are met fewer than 86 percent of the time. Contract specialists told us that, ideally, measures and standards should be incorporated into the task orders before work begins, so that all parties agree on how performance will be evaluated. They also emphasized that developing clear, quantifiable performance measures and standards is an evolving process. While HCFA has not yet developed such measures and standards for nearly all of its task orders, we believe that it is best for the agency to now start with fairly simple measures and refine them over time as it gains experience with each task order. It is also important to collect data on various aspects of PSC performance and test different measures to identify the right combination for motivating the PSCs to perform well. Developing the right mix of measures that will not distort contractor behavior but will lead to the desired outcomes is a challenging task facing HCFA. For example, HCFA officials consider more traditional performance measures for program safeguards—such as the number of fraud referrals to the HHS OIG—to be inappropriate because they might motivate a PSC to be overzealous in its pursuit of marginal cases. While it is important to consider how performance measures can potentially distort contractor behavior, such concerns should not prevent HCFA from developing appropriate measures. For example, testing different combinations can help HCFA identify the right mix of performance measures to minimize such distortions. HCFA officials told us they are trying to develop appropriate performance measures and acknowledge that they need better information to evaluate the PSCs. For example, HCFA plans to contract with a consulting firm to collect data on the performance measures and standards used by private insurers to assess their program safeguard functions. In addition, HCFA is developing error rate data by contractor, benefit category, and provider type as part of the Comprehensive Error Rate Testing program task order. HCFA officials told us that they would eventually like to use these data as the basis for performance measures for future task orders—perhaps judging a PSC by how much it reduces the paid claims error rate for hospitals or for durable medical equipment. HCFA was prudent in using an incremental approach to test the integration of PSCs into Medicare’s program safeguard activities in the short term. However, HCFA now has well over a year’s experience with the PSC task orders and should develop a long-term strategy to ensure that the PSCs are used most effectively. We believe it is important for HCFA to now define its goals for the PSCs and determine how it will evaluate different options for PSC integration into Medicare’s program safeguard efforts. Creating a long-term strategy would enable HCFA to test different options more systematically and to use the results of this testing in the development of future task orders. Although HCFA has already started to evaluate PSC performance on several task orders, it cannot do so effectively because it lacks clear, quantifiable performance measures and standards that are linked to defined outcomes. We recognize that it will take some time for the agency to develop appropriate performance criteria, but we believe it is important to start experimenting with different performance measures, standards, and outcomes to lay the groundwork for effective task order performance evaluations in the future. This need for better performance measures, standards, and outcomes will become especially critical if HCFA adopts more fixed-price contracts containing financial incentives and penalties that are based on PSC performance. To assist HCFA in determining if the PSCs are an effective approach to safeguarding Medicare payments, we recommend that the Acting Deputy Administrator of HCFA define the strategic direction for future use of the PSCs. This should include setting goals and objectives for the PSC program and devising evaluation criteria for assessing the overall effectiveness of the PSCs in promoting program integrity. In addition, as HCFA gains experience with PSC performance, the Acting Deputy Administrator should begin to develop clear, quantifiable performance measures and standards tied to well defined outcomes for each of the task orders. In written comments on a draft of this report, HCFA agreed that our recommendations are critical to ensuring the effectiveness of the PSCs. However, HCFA also expressed concern that we did not sufficiently recognize its efforts in managing the PSCs. In addition, HCFA supplied new information to update us on its management of the PSCs and indicated that it is already taking steps to implement our recommendations. We have included HCFA’s letter as appendix I. HCFA also provided us with technical comments, which we incorporated as appropriate. Regarding our first recommendation, HCFA agreed that it needs to establish a strategic direction for future use of the PSCs, but stated we should give greater recognition to its ongoing planning efforts. HCFA also provided new information regarding its PSC strategy. For example, HCFA noted that it has finalized its PSC Management and Performance Evaluation Strategy and stated that it intends to evaluate five different models as part of its effort to develop a long-term strategy. HCFA also noted that its plan identifies the following critical questions to be used in its evaluation of the PSC models. Did the model achieve the desired outcomes? What was the level of internal and external customer satisfaction? What are the costs and benefits of the model? How well does the model meet HCFA’s implementation criteria? HCFA stated that its goal is to complete the assessment of the PSC models by October 2001 and to develop a more clearly defined long-term strategy for fiscal year 2002. HCFA’s written comments describing its plan contain new information that is substantively different from the draft version it provided us during the course of our review. Although the new information lacks sufficient detail for us to fully assess its plan, we agree that it is an important step. However, it is difficult for us to assess the evaluation questions without more precise definitions of the terms used, such as the “desired outcomes” for each of the models and the “implementation criteria.” In our view, these questions are too vague to provide a meaningful basis for determining which PSC models are most effective. Moreover, we question whether HCFA will be able to complete its analysis of the models by October 2001 because it will not have had the opportunity to fully test all the PSC models. For example, although the task order that requires the PSC to perform all prepayment and postpayment reviews was awarded last year, the test of its ability to effectively perform prepayment reviews is not scheduled to begin until October 2001—the same month HCFA stated that its analysis would be complete. In responding to our second recommendation, HCFA said it agreed that it should develop improved performance evaluation criteria for individual task orders. However, HCFA pointed out that it has already identified some performance measures in several task orders, such as the Statistical Analysis Center and the Comprehensive Error Rate task orders. We described the performance measures used on these two task orders in our draft report and believe that they represent positive steps. However, as we noted, the majority of the task orders still lack clearly defined performance evaluation criteria. HCFA also said that we should recognize that there are two different methods for evaluating contractor performance—a basic approach that assesses general performance in areas such as quality or timeliness and performance-based contracting which focuses more on outcome than on process. HCFA said we should discuss the two methods it is using for the PSC task orders. We do not believe that such a discussion is necessary. Regardless of which method is used, an effective evaluation of contractor performance depends on the development of well-defined performance measures and standards. Our report recognizes both the difficulty of developing these criteria and HCFA’s initial efforts to do so. As we noted in our report, most of the performance dimensions HCFA has developed thus far are not well defined and lack measurable standards. We believe that HCFA will not be able to effectively evaluate the PSCs until it develops clearly defined performance criteria. Finally, HCFA took issue with our statement that it lacks clear goals and objectives for the PSCs. HCFA stated that these goals and objectives are inherent in the Medicare Integrity Program legislation, which is part of HIPAA. We recognize the importance of these goals and objectives and believe that they provide a foundation on which HCFA can strengthen its program safeguard activities. However, as we noted in our report, we believe that sufficient time has elapsed since the Medicare Integrity Program legislation was enacted to enable HCFA to translate the legislation’s goals and objectives into a more specific and clearly defined role for the PSCs, especially in terms of PSC operations and their future contributions to program integrity. As agreed with your office, unless you announce its contents earlier, we plan no further distribution of this report until 30 days after its issuance date. At that time, we will send copies to the Honorable Tommy Thompson, Secretary of Health and Human Services, Michael McMullan, Acting Deputy Administrator of HCFA, and other interested parties. We will make copies available to others upon request. If you or your staff have any questions about this report, please call me at (312) 220-7600. An additional GAO contact and other staff who made major contributions to this report are listed in appendix II.

Summary: The Health Care Financing Administration (HCFA) chose 12 claims administration contractors in 1999 to act as program safeguard contractors (PSC) for Medicare. This report examines (1) HCFA's progress in implementing its PSC contracting authority and (2) whether HCFA could better manage the PSCs to ensure their most effective use. GAO found that HCFA is experimenting with different options for integrating the PSCs into Medicare's program safeguard activities. Between September 1999 and March 2001, HCFA issued 15 task orders that include different ways of using PSC services. HCFA lacks a long-term strategy to determine how best to use the PSCs. Instead, it has issued task orders in an ad-hoc manner, which has afforded HCFA certain flexibilities, such as targeting its task orders on known problem areas. Although this experimental approach may be prudent in the short-term, it does not represent a process for systematically testing different options for using PSC services in the long-term. Also, HCFA has not set formal criteria and timeframes for determining how the PSCs should be integrated into Medicare's existing program integrity efforts. Finally, HCFA has not established clear, measurable performance criteria to assess the PSCs' performance on individual task orders.