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.