Federal agencies are generally permitted to contract with any qualified entity for any authorized purpose so long as that entity is not prohibited from receiving government contracts and the contract is not for an inherently governmental function. Agencies are required to use contractors that have a satisfactory record of integrity and business ethics, a record of successful past performance, and the financial and other resources needed to perform the contract. The FAR generally requires agencies to conduct full and open competition for contracts. Under the FAR, a federal agency may terminate a contract either for the government’s convenience or if the agency determines that the contractor is in default. The contractor does not have similar rights to terminate its contract with the government. The FAR also provides agencies with several methods to pay contractors—some of which allow for financial incentives for meeting performance goals. Because of provisions in the Social Security Act, Medicare claims administration contracting had unique features that differed from most other federal contracting. Before Medicare was enacted in 1965, providers had been concerned that the program would give the government too much control over health care. To increase providers’ acceptance of the new program, the Congress ensured that health insurers like Blue Cross and Blue Shield, which already served as payers of health care services to physicians and hospitals, became the contractors paying providers for Medicare services. Medicare’s authorizing legislation specified that contractors called fiscal intermediaries would administer Part A and Part B claims paid to hospitals and other institutions, such as home health agencies. Contractors called carriers would administer the majority of Part B claims for the services of physicians and other providers. By law, Medicare was required to choose its fiscal intermediaries from among organizations that were first selected by associations representing providers, a process called provider nomination. Medicare was also required to choose health insurers or similar companies to serve as its carriers and, by statute, did not have to award the contracts through competition. In addition, Medicare contracts were generally renewed each year. As a result, since the inception of the program, most Medicare claims administration contracts have been awarded and renewed on a noncompetitive basis, with limited exceptions. Contractors could not be terminated from the program unless they were first provided with an opportunity for a public hearing—a process not afforded under the FAR. Unlike other federal contractors, claims administration contractors could terminate their contracts. In addition, the contractors were paid on the basis of their allowable costs, generally without financial incentives to encourage superior performance. The MMA required CMS to significantly change its contracting arrangements and follow the FAR, except to the extent inconsistent with a specific requirement of the MMA. The MMA removed the specific procedures for selecting fiscal intermediaries and carriers, and unlike CMS’s existing contracts, MAC contracts must be fully and openly recompeted at least every 5 years. In addition, the new contracts will also contain performance incentives for contractors. Finally, MACs will not be permitted to default on their contracts or terminate their contracts as allowed under current contracting practices. Contract termination will follow the requirements of the FAR, which allow the government to terminate contracts for its convenience or for contractor default. MACs will assume work that is currently performed by 51 claims administration contractors. At present, there are 25 fiscal intermediaries and 18 carriers. In addition, four durable medical equipment (DME) regional carriers pay claims submitted by suppliers of DME, prosthetics, orthotics, and supplies, and four regional home health intermediaries process home health and hospice (HH) claims. CMS plans to select 23 MACs to serve specific jurisdictions, including 15 A/B MACs, which will process both Part A and Part B claims; 4 DME MACs, which will process claims for DME, prosthetics, orthotics, and supplies; and 4 HH MACs, which will process claims for HH care. CMS’s current schedule calls for the full fee-for-service contracting workload to be transferred to MACs by July 2009. CMS plans to conduct competitions for existing Medicare contractor workloads beginning with a start-up acquisition and transition cycle for the 4 DME MACs and 1 A/B MAC. The start-up cycle will be followed by two additional acquisition and transition cycles. Appendix VI shows CMS’s schedule and timing for competing all of the MAC contracts. MACs will be responsible for most of the functions currently performed by fiscal intermediaries and carriers. They will process and pay claims, handle first-level appeals of denied claims, and serve as providers’ primary contact with Medicare. In addition, they will coordinate with CMS’s functional Medicare contractors that perform limited Medicare functions on a national or regional basis, such as answering the 1-800-MEDICARE help line, coordinating Medicare and other insurance benefits, and conducting program safeguard activities. For example, the functional Program Safeguard Contractors (PSC) conduct activities to prevent or address improper payments—such as investigating potential fraudulent billing related to the claims paid by the claims administration contractors. MACs’ responsibilities for medical reviews of claims; benefit integrity, which involves the investigation of suspected fraud; and beneficiary inquiries will differ in some respects from those of the current claims administration contractors. Currently, three of the four DME regional carriers conduct their own medical reviews and benefit integrity activities for the claims they process. Under contracting reform, PSCs will be responsible for performing all medical reviews and benefit integrity activities related to the claims processed by the DME MACs. These responsibilities will be allocated differently for A/B MACs. All A/B MACs will conduct medical reviews of the Part A and Part B claims they will process, while PSCs will be responsible for conducting benefit integrity activities related to these claims. The current Medicare claims administration contractors respond to beneficiaries’ questions that are specific to their claims, while staff from 1-800-MEDICARE answer general questions on the telephone help line. In the future, staff at beneficiary contact centers (BCC) will answer calls placed to 1-800-MEDICARE and assume the role of responding to general and claims-specific questions. MACs will be responsible for responding to more complex inquiries from beneficiaries that require a more advanced understanding of Medicare claims processing or coverage rules. CMS’s plan for contracting reform provides detailed information—and an appropriate framework for implementation—in some, but not all, critical areas. For example, the plan presents detail on the proposed schedule for MAC implementation. Nevertheless, as figure 1 shows, the plan does not provide detailed information on the risks associated with contracting reform, some aspects of CMS’s implementation approach, and the integration of reform activities with other initiatives. CMS has recently taken steps to address areas of the plan where details and complete information were lacking, as part of its ongoing planning efforts. However, key decisions relating to critical areas are yet to be made and incorporated into its plan. CMS’s plan provides a clear discussion of the reasons for implementing contracting reform, including the restrictions and weaknesses in the current system, as shown in table 1. The plan also recognizes the benefits of improving Medicare contracting for beneficiaries and providers, such as providing a single point of contact for providers’ claims-related inquiries. The plan also provides maps of the current jurisdictions of Medicare contractors and future jurisdictions of MACs. A CMS official told us that the agency took beneficiaries’ patterns of care into account when drawing jurisdictional lines. In addition, according to the plan, CMS designed the new MAC jurisdictions, which were based on state boundaries, to achieve operational efficiencies, promote competition, and better balance the allocation of workloads. For example, there are one fiscal intermediary and three carriers currently serving New York, as well as two fiscal intermediaries and one carrier serving Connecticut. Under contracting reform, one A/B MAC will administer Part A and Part B claims for beneficiaries residing in these two states. Currently, different claims administration contractors handle Part A and Part B claims in the majority of states. For example, in Michigan, United Government Services processes Part A claims, and Wisconsin Physicians Service Insurance Company processes Part B claims. In addition, while some current contractors serve one state, others serve several— sometimes noncontiguous—states. For example, Blue Cross Blue Shield of Arizona processes Part A claims exclusively in Arizona, while National Heritage Insurance Company processes Part B claims on the East Coast in Maine, New Hampshire, Vermont, and Massachusetts and, on the West Coast, in California. The varying jurisdictions for contractors that process Part A and Part B claims have resulted in what CMS’s plan terms “a patchwork of responsibility and service.” CMS has developed 15 distinct, nonoverlapping geographic jurisdictions for the A/B MACs. Appendixes VII, VIII, IX, X, XI, and XII show the jurisdictional maps for the current fiscal intermediaries, the current carriers, the current regional home health intermediaries, the current DME regional carriers, the 15 new A/B MACs, and the 4 new DME MACs and 4 new HH MACs. A CMS official stated that while the A/B MACs’ jurisdictions continue to vary somewhat in size and workload, they are reasonably balanced in terms of the numbers of fee-for-service beneficiaries and providers served. However, CMS officials have stated that companies might be able to win more than one MAC contract, and, if so, their workloads in multiple jurisdictions would potentially be greater than those of companies that win contracts for a single jurisdiction. In addition to providing information on MACs’ jurisdictions, CMS’s plan provides timelines for implementing MAC contracting, including anticipated contract award dates for the start-up cycle and two subsequent cycles. CMS plans to monitor each cycle, including transitions, and to adjust the implementation schedule if necessary. The start-up cycle, which will result in the award of four contracts to DME MACs and one contract to an A/B MAC, should provide CMS with experience that can be applied to the next two cycles. For example, the start-up cycle will allow new CMS personnel to obtain additional expertise, if needed, on contracting activities. It will also allow CMS to examine its acquisition and transition efforts and apply lessons learned to future cycles. Recognizing that open communication with stakeholders is important to the successful implementation of contracting reform, CMS’s plan incorporates a written strategy to provide information and solicit questions, comments, and feedback on Medicare contracting reform from potential MACs, providers, and beneficiaries. This communication strategy includes periodically holding open meetings and establishing a Medicare contracting reform Web site. For example, CMS hosted a series of open meetings in 2004 and 2005 to share information and seek input on aspects of its contracting reform plan, including MAC jurisdictions, draft statements of work, and proposed performance standards. In addition, CMS’s Web site is routinely updated to provide answers to questions about contracting reform and provide access to important documents, such as its Report to Congress. The Web site also provides a link to a federal procurement Web site, where draft and final versions of MAC statements of work can be found. Interested parties, including organizations interested in competing for MAC contracts, provided feedback on these drafts through CMS’s open meetings and its Web site. In developing certain areas of the contracting reform plan, CMS also sought input from its headquarters and regional office staff. For example, CMS teams worked collaboratively to develop the draft statements of work for A/B MACs and DME MACs. While CMS’s contracting reform plan provides detailed information in some areas, it does not comprehensively address (1) contracting reform risks and how the agency plans to mitigate them; (2) the intended approach for implementing certain aspects of MAC contracting, including details on how CMS will monitor MACs’ performance; and (3) coordination of contracting reform activities with other complex initiatives that CMS is implementing. While a comprehensive contracting reform plan was due in October 2004, we found that the plan was still incomplete as of June 2005. The agency has begun to develop, but has not completed, a more detailed plan in critical implementation areas. Nevertheless, without having all of the critical elements of its plan in place, the agency is undertaking an accelerated schedule and intends to transfer all claims processing work to MACs by July 2009, more than 2 years ahead of the MMA’s time frame. CMS’s plan does not comprehensively address three major risks and indicate the steps that the agency plans to take to mitigate them. These are CMS’s proposed implementation schedule, the volume and complexity of anticipated claims processing workload transitions, and the potential for voluntary contractor withdrawals. Each of these risks has the potential to disrupt claims administration services, resulting in delayed or improper payments to providers. The Report to Congress—one of the documents in CMS’s contracting reform plan—briefly noted that the anticipated implementation schedule “will require substantial risk management and schedule precision to minimize possible operational disruption.” CMS’s proposed implementation schedule calls for all work to be transferred to MACs by July 2009—more than 2 years ahead of the MMA’s time frame. The initial start-up acquisition cycle is taking place in a 27-month period—from April 2005 to July 2007—during which about 9 percent of the national claims possessing workload will be transferred to MACs. If CMS chooses current contractors that are administering claims in the MAC jurisdictions, the percentage of the workload transferred would be less. In the first phase of the start-up cycle, CMS will select and transfer workload to 4 DME MACs. In the second phase, CMS will select and transfer workload to 1 A/B MAC. Following the initial start-up cycle, CMS is planning two acquisition cycles, which will last from September 2006 to July 2009, during which it will select and transfer the remaining current contactors’ work to 14 A/B MACs and 4 HH MACs. As part of these two cycles, in the 22 months from September 2007 to July 2009, CMS plans to manage transitions of as much as 91 percent of the annual Medicare claims processing workload, which represent an estimated $250 billion in payments to providers. The transition period for cycle one is 1 year, from September 2007 to September 2008, and the transition period for cycle two is 10 months, from September 2008 to July 2009. In 13 of the past 15 years, CMS has transferred at least one contractor’s workload. These transitions took an average of 6 to 9 months, with some lasting as long as a year. CMS decided on a more compressed schedule after initially considering a longer implementation period. In November 2004, CMS officials told us that they were planning to move to MAC contracting using six acquisition cycles to be completed around April 2011. According to the Report to Congress, CMS officials believed that the potential savings from contracting reform suggested that transferring larger portions of the workload to MACs in a shorter time frame would allow savings to accrue more quickly to the Medicare program. Despite the ambitious time frame for implementation, CMS’s plan does not provide detailed information on the risks involved in transferring large segments of Medicare’s claims processing workload on an accelerated schedule or outline contingency plans for the transitions to MACs. CMS’s accelerated schedule for cycles one and two leaves little time for CMS to examine its acquisition and transition efforts, apply lessons learned, and resolve disagreements about the agency’s award process with companies that were not selected. Furthermore, due to the accelerated cycle, interested companies—some of which may be among the best qualified to perform as MACs—may decide not to compete to win multiple MAC contracts because developing concurrent proposals or assuming the workload for more than one jurisdiction simultaneously might strain their resources. In addition, it may prove difficult for CMS staff to evaluate proposals, award contracts, and manage concurrent transitions within the proposed time frame. CMS’s plan does not provide details on its strategy for managing these compressed transitions with its anticipated staff resources. CMS officials expressed concerns to us that many of the staff most experienced in handling transitions were, or were close to being, eligible to retire and that CMS might have to manage these transitions with less experienced staff. In addition, CMS staff have never had to manage as many simultaneous transitions, which is likely to add to the challenge of managing them so that they are as smooth as possible for providers. As we reported previously, the lack of sufficient staff resources has hampered other transitions. The volume and complexity of claims workload transitions is a second risk that CMS’s plan does not adequately address. Although CMS has regularly managed the transitions of claims administration contractors’ workloads and functions and has much experience in doing so, recent transitions have affected only about 10 percent of the claims for Part A and Part B in any year. Nevertheless, CMS is planning to transfer 91 percent of current contractors’ workload to MACs in less than 2 years. Furthermore, the MAC transitions will be more complex than past contractor transitions because both Part A and Part B workloads will be transferred from multiple contractors to a single MAC in a new jurisdiction. These changes mean, for example, that under the initial A/B MAC contract that is awarded—one that involves less than 3 percent of the national workload in a six-state jurisdiction—CMS will simultaneously transfer as many as nine separate segments of current contractors’ workload to the new MAC. Figure 2 illustrates the transitions that will occur to consolidate the Part A and Part B workload in the first contract to be awarded for an A/B MAC jurisdiction. These transitions will also involve transferring some portions of the work currently being done by the carriers and fiscal intermediaries to functional contractors. For example, CMS will be transferring medical review and benefit integrity work from DME regional carriers to PSCs at the same time that the claims workload transfers to DME MACs. While the start-up cycle transitions are complex, they are planned to affect only 1 A/B MAC and the 4 DME MACs. CMS will be conducting a much greater number of transitions for cycles one and two, as the rest of claims administration work is transferred from current contractors to 14 A/B MACs and 4 HH MACs. Additional factors may add to the complexity of the transitions. For example, if current fiscal intermediaries and carriers choose not to compete or lose competitions for MAC contracts in the jurisdictions where they currently process claims, they may have little incentive to be highly cooperative in the transition activities. In these cases, their knowledgeable staff who would facilitate transitions may seek employment elsewhere. Further, MAC transitions may involve the transfer of workloads to companies new to Medicare operations, which would add complexity to the process. Another risk that CMS’s plan has not fully addressed is the potential impact that voluntary contractor withdrawals may have on the planned transition schedule. CMS has not developed mitigation strategies to deal with these potential withdrawals. Several CMS officials told us that they were concerned that some contractors might voluntarily withdraw before the agency’s planned competition for jurisdictions that included their current service areas because the contractors did not intend to compete as MACs. In addition, contractors that lose competitions may opt to leave the Medicare program before transitions to new MACs have been completed. CMS has the option of paying contractors’ staff retention bonuses, so that key contractor staff can work through transitions, but that may not be enough to convince contractors to stay in the program. Voluntary withdrawals could force CMS to conduct competitions and manage transitions for the affected jurisdictions on a different or more accelerated schedule than originally planned. CMS could elect to choose a Medicare claims administration contractor to briefly perform the withdrawing contractor’s work until a MAC is chosen for the affected jurisdiction, but this could be perceived as limiting competition by favoring one company over others. The ultimate risk from transitions that do not proceed smoothly or on schedule is that providers might not receive payment for the items or services they furnished to beneficiaries or could be paid inappropriately. Interrupting providers’ cash flow by failing to pay them can create significant problems in their operations. On the other hand, any increase in improper payments would create a further drain on the Medicare trust funds. In fiscal year 2004, CMS estimated that Medicare claims administration contractors’ net improper payments amounted to $19.9 billion. CMS has not completed a comprehensive risk mitigation plan to address the risks associated with contracting reform, but the agency has taken some initial steps to manage the risks. CMS has developed a procedure for identifying, analyzing, responding to, and monitoring and controlling risks. As part of this procedure, CMS has identified certain risks that may have an impact on implementation, including the availability of resources to complete scheduled procurement tasks and the difficulty of developing a clear, complete statement of work that minimizes the need for future contract modifications. The agency is currently working on developing a document that lists proposed actions that could mitigate these and other identified risks. However, CMS’s descriptions of proposed mitigation actions lack specificity. For example, to address the risk that CMS may not have the funding to conduct transition activities as scheduled, the proposed mitigation action is to “monitor federal appropriations,” but the document does not indicate how the agency might redeploy resources or restructure its transitions, should a funding gap occur. Further, CMS has not developed mitigation actions for some serious risks, including the failure to create internal processes for managing MACs. Without such internal processes, CMS may not be able to effectively administer MAC contracts. Although CMS has done extensive work toward developing a strategy that outlines how it intends to implement MAC contracting, the agency’s plan lacks important implementation information in some areas. For example, CMS has made final decisions concerning certain elements of the MAC contracting strategy, such as paying performance incentives to encourage contractor innovation, efficiency, and cost effectiveness. However, for A/B MACs, the plan does not provide complete and definitive information on the contract type, performance measures and incentive structure, proposal evaluation criteria, and methods for maintaining a competitive environment and conducting market research to gather information on the number and size of companies that may submit proposals. CMS’s MAC acquisition strategy, which will provide information on these areas, is not yet complete. The agency planned to finalize this strategy in July 2005 and to issue the A/B MAC request for proposals in September 2005. Knowing such critical contracting information well in advance of the issuance of the request for proposals would make it easier for interested parties to develop specific plans for competing to win A/B MAC contracts. Having a robust pool of potential contractors with good proposals would make it easier for CMS to choose applicants likely to be effective as MACs. CMS’s contracting reform plan states that some MAC functions will be integrated with those of other types of Medicare contractors, but the agency has not fully developed the details of this integration. For example, the plan states that CMS expects that PSCs will continue to perform activities such as medical reviews and fraud investigations in the future and will coordinate closely with MACs. In addition, the statements of work for DME MACs and A/B MACs require that they sign agreements with PSCs to define respective roles and responsibilities. Among their responsibilities, DME MACs and A/B MACs will be expected to coordinate with PSCs in referring potential fraud cases when, for example, MACs identify claim forms that have been altered to obtain a higher payment or when it appears that a supplier or provider may have attempted to obtain duplicate payments. MACs’ coordination with PSCs is critical because findings of fraud could affect payments to providers. Coordination with PSCs is also discussed in “concept of operations” documents for DME MACs and A/B MACs. These documents provide high-level information on how MACs will be expected to work with PSCs and other contractors that focus on particular Medicare program functions, such as claims appeals. However, CMS has yet to develop many details, including information on the specific steps that will be used to facilitate contractor coordination. In addition, CMS’s plan does not fully outline how the agency intends to evaluate and manage MACs. CMS’s plan incorporates a strategy paper on evaluating MACs’ performance, which was developed for the agency by a support services contractor. The strategy paper makes a number of recommendations, including establishing a specific office within CMS to gather, validate, and score contractor performance data and to share this information with agency management. CMS officials are currently considering these and other recommendations that were contained in the strategy paper. However, as of June 2005, they had not decided whether to implement any of these recommendations and had not completed their design of an approach for overseeing and evaluating MAC performance. Contractor oversight is an area of considerable concern, because, in the past, CMS’s failure to monitor Medicare claims administration contractors left the Medicare program vulnerable to fraud, waste, and abuse. For example, CMS did not always detect activities, such as the falsification of reports on contractor performance and the improper screening, processing, and paying of claims, that led to additional costs to the Medicare program. In developing the MAC oversight strategy paper, CMS’s contractor drew on the work of a cross-component work group within CMS that was established in April 2003. The work group reported in June 2004 that CMS lacked an integrated and coordinated framework to guide a wide range of evaluation activities and that the agency had difficulty in compiling a comprehensive view of individual contractor performance. The work group also noted that complete and accurate information on contractor performance will be imperative as contracts for MACs are periodically recompeted and determinations about their records of performance become part of the qualification criteria. This information could also be critical in determining the amounts CMS pays to MACs as performance incentives. The plan also lacks detailed information on organizational changes to better realign agency personnel to support the management and oversight of new MAC contracts because CMS has not made final decisions in this area. While CMS currently administers some types of contracts that are governed by the FAR, MAC contracts generally will be larger, more complex, and more challenging to administer. CMS’s past oversight of claims administration contractors was hindered by organizational weaknesses, and at present, multiple central office components and regional offices have responsibilities to help oversee and manage claims administration contractors. Having an organizational structure that is appropriately aligned for CMS to manage and oversee MACs will make it easier for the agency to routinely evaluate its contractors on the basis of a variety of newly established performance measures. CMS has reorganized the central office component that will be responsible for awarding MAC contracts and has been considering ways to use regional offices’ staff expertise to support MAC contracting efforts. However, CMS has not completed its plan for organizational changes, including the division of labor and responsibilities for management and oversight of Medicare contractors among CMS components and between the central and regional offices. CMS has not developed an approach that fully integrates the planning and scheduling of Medicare contracting reform with other initiatives that will affect Medicare contractors, beneficiaries, and providers over the next several years. As CMS works toward implementing contracting reform, it is also focusing on several critical initiatives that must be integrated, or implemented concurrently, with Medicare contracting reform. These include the Medicare prescription drug benefit and the expansion of the existing options available to Medicare beneficiaries who enroll in private health plans. According to CMS officials, these initiatives may compete with contracting reform for agency resources. Other key planned initiatives, such as major systems upgrades or replacement, will directly affect Medicare claims administration operations and are anticipated to be fully or partially implemented between now and 2009 in conjunction with contracting reform. Information on these interrelated initiatives is provided in table 2. As we have previously reported, planning for IT system transitions has often been problematic in federal agencies. Coordinating the schedule for implementing these initiatives in conjunction with Medicare contracting reform is crucial to ensuring that claims administration operates smoothly during the transition to MACs. HIGLAS, in particular, provides an example of why effective integration is essential. Most outgoing contractors will not be utilizing HIGLAS at the time their workloads are transferred to MACs. Therefore, CMS will have to coordinate HIGLAS transition activities, including data preparation and data conversion testing, between the MACs that will be using HIGLAS and the outgoing contractors that have been using the existing financial management systems. Given that the HIGLAS implementation strategy calls for “just in time” data conversion to HIGLAS format by outgoing contractors at the time the work is transferred to the MACs, problems or delays in this conversion could delay MAC transitions. Therefore, the scheduling for HIGLAS will have to be carefully managed to allow sufficient time for the data conversion. Although CMS has begun initial efforts to integrate the planning and scheduling of several major initiatives that will affect contractors, an agency official told us that there are no planning documents to provide a detailed integration framework and that he did not know when such documents would be available. He said that CMS is attempting to determine the appropriate sequencing and interdependencies of the multiple initiatives occurring in the agency. To focus its sequencing efforts, CMS has designated the contracting reform implementation schedule as the anchor around which it will schedule the implementation of HIGLAS and other critical initiatives. For example, since CMS plans call for MACs moving to HIGLAS either before or with MAC claims workload transitions, the MAC implementation plan will be pivotal in determining when the HIGLAS transitions will be accomplished. CMS is also examining each project’s resource requirements to help ensure that the agency is able to fund the initiatives in the sequence planned. Delays in the implementation of MAC-related initiatives could potentially have a significant impact on the timing, scope of work, costs, and ultimate success of MAC implementation. For example, CMS has already begun to experience schedule slippage for its initiative to consolidate the contractors’ data centers. These data centers, which are provided by current carriers and fiscal intermediaries, conduct the physical processing of Medicare claims and as a result, play a crucial role in efficient and accurate claims administration. The agency had intended to award contracts for four data centers that would consolidate the work of 14 current centers before awarding the DME MAC contracts, which are anticipated to be awarded in December 2005. However, it suspended the request for proposals on May 3, 2005, because it was unable to consider the large number of comments that were received on its draft request. It reissued its solicitation on June 27, 2005, for two, instead of four, data centers. Delays or other problems in implementing the consolidation of its data centers could affect the efficiency and effectiveness of MACs’ claims processing transitions. CMS’s Report to Congress stated that having the new data centers would be critical to achieving the greatest efficiency from the MAC transitions, in part because some of the information services and support to be provided by MACs would depend on the modernized platform. Currently, CMS expects that one of the new DME MACs will be managing a data center for all of the DME MACs as a stopgap measure and plans to award the contract for the two data centers in February 2006. Implementation of the data centers is planned to coincide with implementation of the first A/B MAC selected. The data center consolidation effort faces some of the same complexities that might occur during the transition of the claims processing contracts. If claims administration contractors operating data centers opt to leave the program before the conclusion of their contracts, CMS will have to find other data center contractors to temporarily take over that workload. Furthermore, because the data center consolidation is planned to occur during the MAC transition period, the two data center contractors will have to support claims administration contractors moving in or out of the program, while also integrating some of the prior data center contract work into their new data center responsibilities. CMS generally envisioned multiple data center transitions overlapping, but the schedule for data center consolidation is uncertain. CMS has not indicated how it intends to handle the risks associated with moving data center work at the same time claims processing workload is being transferred to MACs. CMS’s plan includes estimated costs and savings for Medicare as a result of contracting reform, but the estimates are too uncertain to provide a reasonable basis for making implementation decisions. Because CMS has never undertaken an effort comparable to full-scale contracting reform, the plan’s cost and savings projections were based on questionable evidence and assumptions about a contracting environment that differs considerably from its current one. As a result, the costs to implement contracting reform and the savings generated from it could be significantly greater or less than CMS has anticipated. In its plan, CMS estimated that the costs to implement contracting reform from 2006 to 2011 would total about $666 million. The plan’s cost estimate is higher than indicated in the Report to Congress, which included only the fiscal year 2006 budget request of $58.8 million to support a single year of contracting reform implementation costs. CMS opted not to include its estimates for funds that would likely be requested in its budgets for fiscal years 2007 through 2011. The Report to Congress indicated that contracting reform would require “substantial additional investment in subsequent years.” The costs CMS anticipates incurring each year are shown in figure 3. The estimated $666 million in costs is divided into four categories, as noted in table 3. The largest cost component is for the termination and transition of the current Medicare contractors, which CMS has estimated at $331.5 million. When a Medicare contract is terminated, contractors can have costs for items such as lease termination, equipment depreciation, and severance pay for contractors’ employees. The current Medicare contracts may require CMS to pay many of these termination costs when contractors leave the Medicare program. Similarly, when a Medicare contract workload is transferred from an outgoing contractor to another one, transition costs are incurred. Such transition costs include expenses related to transferring Medicare records and updating records related to Medicare benefit payments, including overpayments and other accounts receivable, so they are ready for the incoming contractor to use. Although CMS’s estimate for termination and transition costs is based on cost data from prior years, it is impossible to predict with certainty the termination or transition costs that will be incurred through implementing contracting reform. CMS’s estimate for termination and transition costs is based on the agency’s experience with both types of costs from 1995 to 2001. The estimate assumes that current contractors will win the majority of the MAC contracts and retain about 60 percent of their current workload. However, CMS officials do not know how many of the existing contractors will win MAC contracts for particular jurisdictions, so this assumption is speculative. Additionally, some of CMS’s prior contractor transitions were “turnkey” operations, in which an incoming contractor simply assumed the prior contractor’s business arrangement and staff without needing to incur some of the usual start-up costs, such as equipment purchases. Likewise, in turnkey transitions, CMS did not have to cover severance pay, because the outgoing contractor’s existing staff could be employed by the incoming contractor. As a result, the prior transitions may have cost less than the transitions that will occur during contracting reform because CMS is not requiring MACs to retain outgoing contractors’ work sites or staff. Contracting reform will allow CMS to pay performance incentives that are designed to reward MACs with exceptional performance. However, it is impossible to know the amount of incentive fees contractors will earn in the full-scale MAC environment until the contracts are awarded and CMS has more experience with contractor performance. These performance incentives are projected to cost 5.5 percent of the total estimated costs of the MAC contracts, or $190.6 million for fiscal years 2006 through 2011. CMS based this estimate on its prior experience in managing contractor incentive programs on a much smaller scale. Several IT modernization projects designed to support MACs by facilitating electronic claims processing are included in CMS’s estimate of contracting reform costs. These IT project costs include CMS’s planned consolidation of its current data centers. However, delays in the data consolidation initiative may affect the amount of these costs. The IT modernization costs also include plans to standardize the front end, or the way that electronic claims enter the DME MACs’ automated processing systems. CMS did not include similar costs for A/B MACs, because the agency had not made a decision to standardize the A/B MAC front ends at the time these estimates were made. CMS’s $132.5 million estimate for IT and other costs included $78.7 million in IT costs needed to support Medicare contracting reform, primarily the cost of data center consolidations. The final type of costs CMS estimated was for surveys of providers to assess their opinions about MAC performance. The MMA required that MAC performance be assessed in part based on provider satisfaction. CMS plans to begin surveying providers to measure their satisfaction with their MAC’s performance after MACs begin operating. The cost estimate for these surveys is $11.7 million and was based on an internal CMS analysis. A potential operational cost not part of CMS’s implementation estimate is funding for MAC contract modifications. Under the current contract arrangements, CMS is able to develop new tasks for contractors to complete. The agency may pay more for these tasks to be completed, regardless of the initial requirements set for the year, or may direct the contractor to do the work within its existing budget, if CMS’s review of the contractor’s spending pattern indicates that new funding is not needed to complete the new tasks. In the MAC environment, unless they become part of the statement of work, CMS will not be able to add new tasks to the MAC contracts without negotiating payment for them. Because contractors will submit proposals based on the tasks described in the original statement of work, work required after the contract is awarded could require CMS to negotiate with MACs. This could be the case, for example, if new legislation requires CMS to implement a major program change that was not anticipated in the established MAC contract costs. For example, in 2001, we reported that the Department of Defense (DOD) was not including contract adjustments when budgeting for its contracts with the insurers delivering health care to DOD employees. We warned that this approach could become quite costly, because in fiscal year 2001, it led to a $500 million shortfall in the DOD budget. When an agency is negotiating changes with an existing contractor, the competitive aspect of the negotiations is lost. As a result, the federal government may not always receive the best price. If CMS has to negotiate new tasks with the MACs for greater payment, contracting costs could rise above the agency’s estimates. To address this concern, CMS has instructed companies interested in becoming DME MACs to assume a level of effort for a specific number of changes. As long as the extra work to implement program changes does not exceed the level of effort in the statement of work, the Medicare program would not incur additional operational expenses. Based on estimates generated both internally and by a consultant, CMS expects that contracting reform will generate significant savings to Medicare’s administrative budget and to the Medicare trust funds. While it is rational to assume some level of savings, these estimates are highly uncertain because they project the outcome of contracting processes and protocols that CMS has not used before. Furthermore, the consultant’s estimates relied on questionable evidence and were not reviewed by CMS program staff with the expertise to confirm whether the assumptions upon which they are based are realistic. CMS’s estimate of savings from 2006 to 2011 for the administrative budget totals $459.5 million, as shown in table 4. These savings are estimated to come from two sources. First, CMS anticipates that the competed MAC contracts will cost less than the current agreements and encourage more innovative efforts among contractors, which will allow them to operate at lower cost. CMS estimates that the introduction of competition will lower the contractor budget for awarded MAC contracts by 6 percent in the first year and 12 percent in each succeeding year. Second, CMS anticipates that the consolidation of its 14 Medicare data centers will lower operating costs. Both of the savings estimates shown in table 4 will be highly dependent upon contractor performance and the outcome of the competitive process. For instance, any savings CMS incurs from competing the MAC contracts will substantially depend on their final costs. CMS’s annual estimates of savings for the administrative budget increase significantly from fiscal year 2006 to fiscal year 2011. As shown in figure 4, these estimated savings would begin to outpace CMS’s estimated administrative costs in 2009, and by 2011, they would exceed estimated costs by $100 million. CMS anticipates that the bulk of the savings from Medicare contracting reform will occur through funds it can avoid spending from the Medicare trust funds, but the basis for this estimate is uncertain. CMS’s consultant estimated the total projected savings to the trust funds through fiscal year 2011 to be over $1.4 billion. The savings to the trust funds are expected to come from the three main sources shown in table 5. The consultant who created these savings estimates explained that while it is logical to assume some level of savings to the Medicare program, there are “enormous uncertainties” at this stage of the implementation process, which make it difficult to project the savings with much accuracy. Ultimately, each of these sources of savings assumes that contracting reform will lead to a lower rate of improperly paid claims. Further, while the estimate for each of the three sources is based on a different methodology and formula, the basis for each is similar enough that the savings accrued through each may overlap, resulting in possible double counting. Therefore, whether contracting reform will actually achieve the $1.4 billion savings is highly uncertain. The consultant’s estimate anticipates that MACs could detect a larger amount of improper payments because they will be examining both Part A and Part B claims, but there is little evidence to support the amount of savings assumed. Currently, Part A and Part B medical reviews are generally conducted by different contractors, which lessens their focus on problematic billing that spans both parts. The consultant estimated that having MACs conduct joint Part A and Part B medical reviews would lower the amount of improperly paid Medicare claims by 0.08 percent. However, CMS’s senior medical review staff indicated that they had no prior knowledge of this actuarial estimate until we showed it to them. The staff told us that there is no evidence to realistically estimate the amount of savings that may result from consolidating the medical review responsibility for both parts. Furthermore, according to CMS staff, the greatest savings would likely come through computerizing medical reviews to automatically examine and compare Part A and Part B claims before they are paid. However, this capability is not currently possible, because Part A and Part B claims are processed on different payment systems, and developing a combined Part A and Part B claims processing system that could automatically compare Part A and Part B claims before payment would take years to complete. Potential savings from improved fraud detection are also impossible to quantify, based on current information. The PSCs currently conduct fraud detection activities for both Part A and Part B in 40 states, the District of Columbia, Puerto Rico, and the Virgin Islands. As CMS implements contracting reform, the jurisdictions in which PSCs will conduct fraud detection for both parts may change. While CMS considers having a single PSC handling both Part A and Part B fraud detection a way to make its contractors more efficient, a senior official acknowledged that the agency had no evidence with which to determine whether having the PSCs conduct combined fraud reviews has been more effective in detecting fraud than having these reviews conducted by separate contractors for Part A and Part B. The consultant’s estimate also anticipated that MACs will be able to pay claims more accurately than the current Medicare contractors, due to more effective medical review of claims, thus increasing claims denial rates. While noting that some elements of claim denials are not associated with contractor performance, the consultant assumed that better contractor performance could be equated with increased claims denial rates. The calculation for this assumption was based on the projection that contractor denial rates would increase and that half of these increased denials would lead to program savings. However, CMS program staff told us that they do not consider denial rates in their evaluation of contractor performance but instead evaluate claims administration contractors’ rates of paying claims properly. The CMS program staff told us that they were not sure of the basis for the consultant’s calculations, and one senior official stated that it was unclear whether more denials would occur with new MACs. Finally, the consultant projected that if CMS awards contracts competitively, contractors will have an incentive to operate more efficiently and to adopt the leading industry innovations that improve performance. The consultant expected these efforts to result in lower levels of improperly paid claims. This projection was based on a 1995 GAO report that estimated that if Medicare contractors adopted the technology and capabilities used by private insurers to detect improper payments through automated claims reviews, Medicare payments for physicians’ services and supplies could be reduced by 1.8 percent. Since that report was issued, CMS has made additional efforts to reduce improper payments. In addition, CMS was not certain that GAO’s assumed savings were achievable. Recognizing this, the consultant reduced this portion of the savings estimate to a 0.09 percent reduction in Medicare fee-for-service payments. In the consultant’s opinion, this adjusted for current error rates and CMS’s opinion that the initial 1995 GAO estimate was too high. However, when we followed up with CMS in April 2005, a senior official stated that while it would be realistic to expect some level of savings in the new competitive contracting environment, she did not know how the amount could be accurately quantified. The millions of dollars in savings that CMS envisions achieving through contracting reform in the early years of implementation are largely based on questionable estimates. However, these anticipated savings have been the driving force behind the agency’s decision to accelerate its schedule for contracting with MACs. The agency has opted to transfer the entire current contractor workload to MACs 2 years ahead of the MMA time frame, in the hope of garnering savings to Medicare as quickly as possible. The accelerated schedule raises concerns for a number of reasons. First, CMS has never before undertaken a project of this scope and magnitude— one that affects more than 35 million beneficiaries and 1 million health care providers. If transitions do not run smoothly, operational disruptions could lead to delayed payments to providers and increased improper payments by contractors. With Medicare net improper payments estimated to be almost $20 billion annually, any potential increase is cause for concern. Second, while CMS’s plan provides detailed information in some areas, other critical areas of the agency’s plan are still being developed. Although the agency is employing a start-up cycle that will provide an opportunity to gain valuable FAR contracting experience, the ambitious schedule for the subsequent two cycles leaves little time for the agency to learn from the experience and resolve problems that might arise. Finally, attempting complex transitions of almost all of the claims administration workload in less than 2 years, in conjunction with changes in the data centers and financial management systems, significantly increases the risk that providers’ claims will be paid improperly or not be paid at all. As CMS undertakes this important challenge, it is critical that the agency proceed at a prudent pace in order to apply lessons learned from early implementation experiences to future contracting cycles. To better ensure the effective implementation of Medicare contracting reform, we recommend that CMS extend its implementation schedule to complete its workload transitions by October 2011, so that the agency can be better prepared to manage this initiative. In its written comments on a draft of this report, CMS noted that implementing Medicare contracting reform would enable the agency to improve the efficiency of the services delivered to Medicare beneficiaries and providers. CMS agreed that implementing contracting reform was a significant undertaking, but did not concur with our recommendation to extend its implementation schedule. CMS stated that by fully implementing MAC contracting 2 years earlier than required, it would achieve savings to the trust funds and operational efficiencies more quickly. In addition, CMS stated that extending the transition schedule would increase the risk of current contractors leaving the program before MAC contracts are awarded and eliminate the agency’s flexibility to adjust its schedule in response to unforeseen changes and still meet the mandated implementation date. We believe that by accelerating its implementation schedule to transfer the entire Medicare claims processing workload to MACs by July 2009, CMS is assuming an unnecessary risk. While it is true that lengthening the implementation schedule could increase the possibility that one or more contractors might withdraw from Medicare prematurely, we see greater risk in attempting complex transitions without sufficient time for adequate planning and midcourse adjustments. When the considerable risk associated with accelerated implementation is considered in light of uncertain savings, a more prudent approach would be to use the time frame established in the MMA to fully develop implementation plans, evaluate lessons learned, and apply them to future acquisition cycles. In recommending that CMS extend its implementation schedule, we assume that the agency would allow sufficient time at the end of the final transition to adjust for problems and unforeseen circumstances and still meet the mandated implementation date of October 1, 2011. CMS agreed that it would need sufficient time for this kind of adjustment and has not developed plans for all contingencies. For example, CMS responded to a relatively short schedule slippage for its enterprise data center implementation by including in contract language the option for one of the DME MACs to run a data center on an interim basis. However, CMS will still have to develop the details of the contract and choose the most appropriate company to perform this work. This is one example of the many adjustments that will undoubtedly have to be made before all of the transitions are finished. CMS also stated that it disagreed with our conclusion about its readiness to conduct transitions to MACs. Our report did not conclude that CMS would not be ready to conduct transitions according to its proposed schedule. However, having a fully developed plan in place would assist CMS in conducting these transitions as smoothly as possible. As we stated in the report, CMS has recognized that it needs to develop certain critical areas in its plan and is taking steps to address them. For example, it is clear from its comments that the agency is very concerned about the risks involved in the complex transitions of claims workload and is planning mitigation actions—such as hiring a contractor to help manage the effort. CMS’s comments provide additional information on other steps that it is taking to reduce or mitigate significant risks, coordinate the schedule for MAC implementation with other agency fee-for-service initiatives, develop detailed integrated implementation schedules, and address other GAO concerns. Nevertheless, the additional information provided by the agency generally reinforces our point that the agency’s implementation plan, which was due to the Congress and to us in October 2004, is still a work in progress. For example, as we pointed out in the report, CMS’s comments indicate that it has not completed its integrated implementation schedule and that it is leaving details concerning contractor coordination to MACs and other contractors. In addition, CMS has not finalized important implementation information, such as key performance measures or its MAC evaluation strategy and evaluation criteria for A/B MACs, or completed its proposal for a new organizational structure to oversee and manage the MACs. While CMS does have a risk management process, its current identification of risks and mitigation strategies lacks specificity and the agency has not completed a comprehensive risk mitigation plan. CMS also disagreed with our assessment of the quality of its cost and savings estimates. CMS said that its estimates of implementation costs were well informed by program experience and were the best available predictions of future costs. As we reported, CMS used information from previous transitions of contractor workload to help estimate its administrative costs. This grounded the estimate in the agency’s past experience. However, CMS had to make assumptions about the amount of claims workload to be transferred and transition costs to be paid, which might turn out to be inaccurate. Unlike previous workload transitions, CMS is not requiring MACs to maintain staff and facilities from the former contractors. This should allow the MACs to gain efficiencies in operations, but CMS may end up paying more in severance pay or for start-up costs than estimated. Similarly, CMS’s experience informed its estimate of administrative savings, but the estimate depends on assumptions about the efficiencies MACs will achieve that are difficult to predict with certainty. While CMS’s assumptions about administrative costs and savings might appear reasonable, if the assumptions are inaccurate, the estimates will not reflect the real costs and savings over time. In addition, CMS indicated that because the costs of contract modifications were for operations after the transfer of claims workload, they should not be included in the implementation cost estimate. As CMS noted, its DME statement of work includes a provision for implementing a specific number of programmatic changes after the contract is awarded, to reduce the possibility that CMS would have to negotiate contract modifications that incurred additional costs. We modified our draft to clarify our discussion of the potential costs of contract modifications. Our greatest concern relates to CMS’s consultant’s estimate of savings to the trust funds. As we indicated in our report, the estimate of savings to the trust funds is generally based on little evidence and its underlying assumptions may not be reasonable, yet it played a significant role in CMS’s decision to compress its implementation schedule. While CMS suggested that the savings estimate is conservative, the consultant who generated this estimate indicated that there were “enormous uncertainties” in estimating savings at this point in the implementation process. In its comments, CMS noted that our report highlighted the lack of direct evidence to support the amount of estimated savings. In response, CMS stated that the savings estimate was the best available, given that the changes proposed are unprecedented. CMS indicated that each of the three elements of the estimate of savings to the trust funds addresses a different aspect of the claims process. However, each of the three elements actually addresses the same aspect—MACs improving their medical and other claims review to increase denials of improper claims. CMS’s comments indicate that its technical staff agree that the assumptions underlying this estimate are reasonable. We discussed these estimates with CMS officials most knowledgeable about medical and other claims review and they did not agree that the assumptions were based on evidence and were reasonable. Further, because each element in the savings estimate assumes improvement in claims review and improper claims denial, we think it is likely that CMS is double counting its potential savings. For example, the consultant estimated that the MACs would have higher claims denial rates, but also separately estimated savings from other aspects of claims review that—if conducted more efficiently—would lead back to higher claims denial rates. We are sending copies of this report to the Secretary of HHS, the Administrator of CMS, appropriate congressional committees, and other interested parties. We will also make copies available to others upon request. This report is also available at no charge on GAO’s Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (312) 220-7600 or 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 made major contributions to this report are Sheila K. Avruch, Assistant Director; Sandra D. Gove; Joy L. Kraybill; Kenneth Patton; and Craig Winslow. The Centers for Medicare & Medicaid Services (CMS) has designated its report, entitled Report to Congress: Medicare Contracting Reform: A Blueprint for a Better Medicare, and the documents underlying this report as its plan for implementing Medicare fee-for-service contracting reform. Documents include the following: maps of jurisdictions for A/B Medicare administrative contractors (MAC), durable medical equipment (DME) MACs, and home health and hospice MACs; CMS’s estimates for savings to the Medicare trust funds, administrative costs and savings, provider and beneficiary savings, and supporting narrative and information; MAC transition timelines; DME and A/B MAC project schedules; requests for information for A/B MACs and DME MACs, as published on FedBizOpps, including concepts of operations, draft statements of work, draft performance standards, and workload implementation handbooks; DME MAC request for proposals and related documents, including the final statement of work, as published on FedBizOpps; materials on beneficiary and provider customer service; materials concerning work on reengineering Medicare fee-for-service BearingPoint, Inc., Health Services Research & Management Group, Contractor Evaluation Improvement Project (CEIP) Strategy Paper, Final Report (McLean, Va.: Mar. 18, 2005); Centers for Medicare & Medicaid Services, Medicare Contracting Reform: Acquisition Strategy for Medicare Administrative Contractors, draft (Baltimore, Md.: Feb. 28, 2005); Centers for Medicare & Medicaid Services, MAC Implementation Project, Risk and Issue Management Process, Schematic (Baltimore, Md.: Jan. 24, 2005); Centers for Medicare & Medicaid Service, MCMG Risk Management Plan for the Medicare Administrative Contractor Implementation Project, draft (Baltimore, Md.: Dec. 7, 2004); Centers for Medicare & Medicaid Services, Medicare Contracting Reform, Communication Plan (Baltimore, Md.: Nov. 10, 2004); LMI Government Consulting, Medicare FFS Contracting Reform: Level Five Work Breakdown Structure and Master Project Plan (McLean, Va.: October 2004); LMI Government Consulting, Medicare Fee-for-Service Contracting Reform: Assessment of Planning Needs (McLean, Va.: August 2004); Centers for Medicare & Medicaid Services, Report to the Medicare Contractor Oversight Board: Integration Issues in Modernizing Medicare, Final Report, submitted by CMS’s fee-for-service project integration team (Baltimore, Md.: July 2, 2004), and related briefing documents; and Logistics Management Institute, Sensitive Assessment Center, Medicare Fee-for-Service Contracting Reform: Key Challenges (McLean, Va.: December 2003). Selected provisions of section 1874A of the Social Security Act, added by section 911 of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA), Pub. L. No. 108-173, 117 Stat. 2066, 2378—2386 (to be codified at 42 U.S.C. § 1395kk-1). Centers for Medicare & Medicaid Services, Contractor Reform—Update, September 22, 2004. Medicare fee-for-service contractor (unnamed), Contractor Suggestions Regarding Implementation of Medicare Administrative Contracts. Comments submitted to CMS by a current Medicare fee-for-service contractor. December 22, 2004. GAO, Business Process Reengineering Assessment Guide, GAO/AIMD- 10.1.15 (Washington, D.C.: May 1997). GAO, An Evaluation Framework for Improving the Procurement Function: A Guide for Assessing Strengths and Weaknesses of Federal Agencies’ Procurement (Exposure Draft), (Washington, D.C.: October 2003). LMI Government Consulting, Medicare Fee-for-Service Contracting Reform: Assessment of Planning Needs (McLean, Va.: August 2004). Does the plan explain contracting reform objectives, such as promoting competition and establishing better communication between contractors and beneficiaries? Does the plan present an overview of how MAC implementation fits into broader agency plans? Does the plan state when major events will take place, including announcing MAC jurisdictions, issuing proposed performance measures for inclusion in A/B MAC contracts and requests for proposals, selecting DME MACs and A/B MACs, and completing the transition to MAC contracting? Does the plan provide key information on budget and costs for contracting reform, such as estimated termination costs for current contractors, MAC operational costs, and performance incentives? Does the plan provide high-level information on performance measures—that is, what constitutes success in contracting reform and how will progress be measured? Does the plan identify a contingency or risk mitigation strategy for potential problems as contracting reform is being implemented? Does the plan address transition concerns and contingency planning for the transitions? Does the plan explain how CMS staff will be organized and who will have specific roles and responsibilities in managing contracting reform? Does the plan provide information on CMS’s intended contractor management and oversight structure for MACs? Does the plan provide an approach for ensuring that the agency has the right staff in the right numbers with the right skills in the right places to accomplish its mission effectively? This approach requires that an agency devote adequate resources to provide its acquisition workforce with the training and knowledge necessary to perform their jobs. It also requires long-range planning, including succession planning, to ensure the workforce has the necessary skills and qualifications to perform the procurement function into the future. Does the plan provide information on MAC jurisdictions, including number and geographic areas? Does the plan provide information on the jurisdictional rollout plan, and how this timeline might be affected by voluntary contractor withdrawals? Does the plan discuss the strategy for combining Part A and Part B and associated implications or risks? Does the plan address the acquisition process for new contracts? Does the plan describe the eligibility criteria expected of MACs? Does the plan describe the functions that MACs will perform, such as developing local coverage decisions, determining payment amounts, making payments, educating beneficiaries, and communicating with providers? Does the plan provide information on functions that will be assigned to non-MAC contracts? Is the plan clear in defining the roles of MACs and other contractors that conduct program integrity functions, so that program integrity efforts are not duplicative? Does the plan explain how MACs and other contractors will interface and coordinate their different program integrity activities? Does the plan provide information on how MACs will deal with chain providers, which is a concern for those with establishments in multiple MAC jurisdictions? Does the plan address the establishment and definition of performance measures for MACs? Does the plan provide clear, transparent, and consistent policies and processes that provide a basis for the planning, award, administration, and oversight of procurement efforts? To conduct this evaluation, we consulted CMS to determine the documents included in its plan for contracting reform. Appendix I lists the documents that were identified by agency officials as included in CMS’s contracting reform plan, including its Report to Congress, that were provided to us through June 3, 2005. We developed evaluation criteria to assess the extent to which CMS’s plan provides an appropriate framework to implement Medicare contracting reform. To develop these criteria, we analyzed the statutory provisions added by section 911 of the MMA, documents and related information prepared to help CMS plan for contracting reform, and GAO guidance on assessing federal agencies’ procurement functions. We also reviewed GAO’s guidance on changing the approach through which mission-critical work is accomplished. These documents are listed in appendix II. The evaluation criteria we developed address contracting reform planning and implementation, contracting reform management and oversight, and CMS’s contracting strategy for MACs and are listed in appendix III. We used these criteria to evaluate CMS’s plan. In addition to this assessment, we also conducted interviews with officials at CMS headquarters and regional offices concerning the process for developing the plan, the implementation schedule, the challenges that CMS faces in implementing contracting reform, lessons learned that have prepared CMS for moving to the MAC environment, and the risks and benefits involved in the transition to MAC contracting. We also interviewed officials from four current Medicare contractors to obtain their views on CMS’s contracting reform plan and the challenges, risks, and benefits involved in undertaking this effort. To assess the extent to which the plan’s cost and savings estimates were sound enough to support decision making on implementation, we reviewed CMS’s estimates for administrative costs and savings, savings to the Medicare trust funds, and supporting documentation. We evaluated the assumptions associated with the estimates. We conducted interviews with CMS officials who have been involved in developing estimates for the costs and savings related to Medicare contracting reform in order to understand the rationale upon which the estimates were based. We interviewed other CMS officials who work in program areas that will be affected by contracting reform to learn how they expect contracting reform to generate costs or savings in their program areas. We also interviewed a representative of CMS’s actuarial contractor, which developed the savings estimates for the Medicare trust funds. We did not verify the reliability of CMS’s data that were used to generate financial estimates. We performed our work from November 2004 through July 2005 in accordance with generally accepted government auditing standards. Figure 5 shows CMS’s procurement and transition schedule for MACs, as of June 2005. During one start-up cycle and two additional transition cycles, CMS will conduct competitions to select a total of 23 MACs. In the first phase of the start-up cycle, CMS will select four MACs that will be administering claims for DME, prosthetics, orthotics, and supplies—called DME MACs. In the second phase of the start-up cycle, CMS will select one of the MACs that will be responsible for paying Part A and Part B claims— called A/B MACs. During cycle one, CMS will select seven A/B MACs. During cycle two, CMS will select seven A/B MACs and four MACs that will be responsible for administering claims for home health and hospice (HH) care, called HH MACs. BCBS SC (Palmetto) BCBS ND (Noridian) BCBS OK (Group Health) BCBS AL (Cahaba) Anthem (AdminaStar) BCBS TN (Riverbend) BCBS FL (First Coast) Appendix VIII: Jurisdictional Map of the Current Carriers BCBS AL (Cahaba) BCBS FL (First Coast) Anthem (AdminaStar) BCBS SC (Palmetto) BCBS ND (Noridian) Triple S, Inc. Appendix IX: Jurisdictional Map of the Current Regional Home Health Intermediaries (Cahaba) (Cahaba) (Palmetto) (CIGNA) (Palmetto) (Palmetto)

Summary: The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) significantly reformed contracting for the administration of claims for Part A, Medicare's hospital insurance, and Part B, which covers outpatient services such as physicians' care. The MMA required the Centers for Medicare & Medicaid Services (CMS)--the agency within the Department of Health and Human Services (HHS) that administers Medicare--to conduct full and open competition for all of its claims administration contracts and to transfer the work to Medicare administrative contractors (MAC) by October 2011. The MMA required the Secretary of HHS to submit a report to the Congress and GAO on the plan for implementing Medicare contracting reform and for GAO to evaluate the plan. To address this mandate, GAO reviewed the extent to which (1) the plan provides an appropriate framework for implementing Medicare contracting reform and (2) the plan's cost and savings estimates are sound enough to support decisions on implementation. CMS's plan provides an appropriate framework to implement contracting reform in some critical areas but not in others. For example, the plan indicates the rationale for reform but lacks a detailed schedule to coordinate reform activities with other major initiatives CMS intends to implement at the MACs during the same period. Further, CMS's plan does not comprehensively detail steps to address potential risks during the transitions of the claims workload from the current contractors, such as failing to pay providers or paying them improperly. These transitions will be complex to manage because they require moving multiple claims workloads from current contractors to a single MAC with new jurisdictional lines. As many as nine separate segments of current contractors' workload will be moved to the first A/B MAC. CMS has accelerated its schedule to transfer the current contractor claims workload to MACs by 2009, more than 2 years ahead of the MMA's time frame. This schedule leaves little time for CMS to adjust for any problems encountered. CMS's estimates of costs and savings are too uncertain to support decisions on contracting reform implementation. First, CMS's internal cost estimate for a 6-year implementation period of about $666 million is based on reasonable data but questionable assumptions about contract awards. Second, its estimate of $1.4 billion in savings from reductions in improper payment by MACs depends on questionable evidence and assumptions that were never validated by knowledgeable CMS staff. However, the $1.4 billion estimate prompted CMS to accelerate its implementation schedule to accrue savings as rapidly as possible. While it is reasonable to assume that contracting reform will result in savings, the actual amount could differ greatly from the estimate. Basing an accelerated implementation schedule on uncertain savings raises concerns that CMS has unnecessarily created additional challenges to effectively managing the risk of these transitions.