Prior to 2003, CMS was required by statute to select the two types of Medicare contractors it used at the time—fiscal intermediaries and carriers—from particular organization types. Congress limited the type of contractors CMS could use for claims administration activities when Medicare was enacted in 1965, in part because providers were concerned that the program would give the government too much control over health care. To increase providers’ acceptance of the new program and to assuage their concerns, Congress required that health insurers that already served as payers of health care services to physicians and hospitals become the Medicare claims administration contractors. Specifically, prior to 2003, CMS was required by law to select the first type of claims administration contractor, fiscal intermediaries—contractors that paid Part A and Part B claims for institutions such as hospitals—from among companies that were nominated by health care provider associations. Medicare law further required CMS to select the other type of contractor, carriers—contractors that paid the majority of Part B claims, such as for services provided by physicians and other providers—from among health insurers or similar companies. During this period, Medicare claims administration contracts were typically renewed every year, and CMS could not terminate the contracts unless the contractors were first provided with an opportunity for a public hearing. The contractors themselves could terminate their contracts and have their termination costs reimbursed by CMS irrespective of which party terminated the contract. In addition, the claims administration contractors were paid on the basis of their allowable costs, generally without financial incentives to encourage superior performance. The MMA requirement that CMS follow competitive procedures and the FAR in awarding contracts to MACs—except where MMA provisions explicitly differed—introduced key differences in how the agency would have to conduct its MAC contracting compared to how it had conducted its legacy contracting prior to 2003. Notably, under the FAR, agencies are generally required to conduct full and open competition for contracts and are permitted to contract with any qualified entity for any authorized purpose, with some exceptions; agencies are permitted to terminate contracts either for the government’s convenience or if they determine that the contractor is in default; and agencies are permitted to include financial incentives to contractors for meeting or exceeding performance goals. The MMA provided more specificity on certain aspects of CMS’s Medicare claims administration contracting processes. For example, CMS is to conduct a competition for MACs at least every 5 years, develop performance requirements and measurement standards for set forth the performance requirements in the MAC contracts, ensure the performance requirements and standards are used to evaluate MAC performance and are consistent with the MACs’ statement of work (SOW), and develop a measurement standard for provider and beneficiary satisfaction. CMS selected a contract type for the MACs that allows it to provide incentives tied to service and efficiency of operations. CMS opted to establish MAC contracts as cost-plus-award-fee contracts, a type of cost- reimbursement contract that allows an agency to provide financial incentives to contractors if they achieve performance goals. A MAC may earn an incentive, known as an award fee, based on performance, in addition to reimbursement for allowable costs and a base fee for the contract, which is fixed at the inception of the contract. The FAR provides additional guidance for performance-based contracts. If such a contract is used, the FAR requires that the agency establish methods that enable it to assess work performance against measurable performance standards. In addition, the FAR requires that the agency conduct performance evaluations and inform contractors about their performance and the areas in which improvement is expected. The FAR further states that agencies should prepare a quality assurance surveillance plan in conjunction with the SOW, which documents the agency’s approach to evaluating performance, and a review of the contractor’s quality control program. In the new contracting environment, MACs are responsible for most of the functions previously performed by the legacy contractors. They are responsible for processing and paying claims, handling the first level of appeal—redeterminations of denied claims, conducting medical review of claims, putting computerized edits into their portion of the claims- processing system to help ensure proper payment, serving as providers’ primary contact with Medicare by enrolling providers, conducting provider outreach and education, responding to provider inquiries, and auditing provider cost reports. In addition, MACs are responsible for coordinating with other CMS contractors that perform limited Medicare functions that serve beneficiaries and providers. For example, the 1-800-MEDICARE help line answers calls for general and claims-specific beneficiary inquiries and forwards a relatively small number of complex beneficiary inquiries to the MACs to respond. The MACs also are required to provide required reports and other documents, known as deliverables, to CMS within generally specified time frames. In its February 2005 report to Congress, Medicare Contracting Reform: A Blueprint for a Better Medicare, HHS outlined CMS’s plans for implementing contracting reform and highlighted anticipated improvements, including improved customer service, streamlined service delivery by integrating claims-processing functions, and savings from reducing program costs (see fig. 1). CMS designed the new MAC jurisdictions to achieve operational efficiencies by consolidating the number and types of contractors and better balancing workloads. In the legacy contracting environment, different contractors handled Part A and Part B claims in the majority of states, and multiple contractors were responsible for regions in which they processed claims across several—sometimes noncontiguous—states. In its 2005 report to Congress, CMS called the varying legacy contractors that processed Part A and Part B claims “a patchwork of responsibility and service,” a problem it hoped to solve with consolidation. Whereas in the legacy environment, a single state might have been served by multiple contractors handling Part A and B claims in their separate regions, in the MAC environment, CMS established MAC jurisdictions, which were based on contiguous state boundaries, such that a single A/B MAC handled all Part A and B claims—other than DME claims—in its jurisdiction. (See Part A and B claims—other than DME claims—in its jurisdiction. (See fig. 2.) fig. 2.) As of September 2009, CMS told us it had awarded and implemented 13 MAC contracts, worth at least $3 billion. Each contract is for 1 year (referred to as a base year), with up to 4 “option years,” should CMS choose to exercise them. During the MAC’s base year, the legacy contractors transitioned their workload over a period that generally lasted about 7 months for the 6 MACs in our study, ranging from 4 to 10 months. CMS instructed the MACs and legacy contractors to work together to transfer data and records and required the MACs to educate providers about the change. CMS also assigned responsibility to the MACs for consolidating computerized claims edits (used during processing to determine whether to accept, adjust, or reject a claim) that may have differed among the multiple legacy contractors into one consistent set of edits for each newly consolidated MAC jurisdiction. Furthermore, within their respective jurisdictions, A/B MACs were required to consolidate the legacy contractors’ policies that determine what services Medicare covers in a jurisdiction—called local coverage determinations—into one consistent set of policies within each jurisdiction. Two CMS components are principally responsible for Medicare contracting reform: the Office of Acquisition and Grants Management (OAGM) and the Center for Medicare Management (CMM). While the OAGM is responsible for awarding Medicare administrative contracts, divisions within the CMM are responsible for MAC program and operations management, development, and performance assessment, as well as for developing and executing both the Medicare contracting reform budget and the MAC operating budgets. (See app. IV for a CMS organizational chart of the components involved in Medicare contracting reform.) Other parts of CMS coordinate with these two components, such as the Office of Financial Management, which establishes many program requirements for MACs, including, but not limited to, financial reporting. To manage the complex transition and to conduct oversight of the MACs, CMS assembled a staff with experience in acquisitions, contract management, and program management, as well as technical advisors in areas such as information technology and claims processing. While CMS officials took numerous steps to facilitate Medicare contracting reform, we identified several CMS decisions that led to challenges. For example, we found that CMS underestimated the volume of appeals the MACs would inherit, which led to claims-payment delays and additional workload for incoming MACs. In some cases, CMS was able to make midcourse adjustments by incorporating lessons learned. CMS has taken steps to facilitate the complex process of implementing Medicare contracting reform, which we described as an inherently high- risk activity in our 2005 report. Medicare contracting reform represents the largest transition of claims administration workload since the inception of the Medicare program and was more complex than smaller- scale transitions CMS conducted in the past with legacy contractors. These earlier transitions were often “turnkey” operations, with incoming contractors retaining outgoing contractors’ staff and equipment. Furthermore, past transitions did not involve the transfer of as many Medicare Part A and B claims or the significant reconfiguration of the associated functional contractors and jurisdictions. This was also the first time that CMS awarded claims administration contracts under requirements for full and open competition. The agency faced the challenge of selecting contractors able to carry out complex activities critical to Medicare administration using procedures consistent with the FAR. In doing so, the agency decided to emphasize past experience and past performance with similar work of organizations that sought to become MACs. For the initial competition for 19 MAC contracts, only three of the organizations seeking contracts lacked Medicare experience. All awards as of September 2009 were made to organizations with previous Medicare experience. Recognizing its challenge to manage the complex transitions, CMS took steps to facilitate implementation activities in a number of areas, including developing an integrated implementation schedule, developing training, hiring support staff, documenting lessons learned, and making midcourse adjustments. In particular: CMS established a “cross-component” team to facilitate communication across the agency and developed an integrated implementation schedule. CMS reported that this team developed integrated schedule for the MAC implementation and other major Medicare initiatives, monitored implementation of cross-cutting initiatives, and identified effects that cut across initiatives.