The complexity of the environment in which CMS operates the Medicare program cannot be overstated. It is an agency within the Department of Health and Human Services (HHS) but has responsibilities over expenditures that are larger than those of most other federal departments. Medicare alone ranks second only to Social Security in federal expenditures for a single program. Medicare is expected to spend nearly $240 billion in fiscal year 2001; covers about 40 million beneficiaries; enrolls and pays claims from nearly 1 million providers and health plans; and has contractors that annually process about 900 million claims. Among numerous and wide-ranging activities associated with the Medicare program, CMS must monitor the roughly 50 claims administration contractors that pay claims and establish local medical coverage policies; set tens of thousands of payment rates for Medicare- covered services from different providers, including physicians, hospitals, outpatient and nursing facilities, home health agencies, and medical equipment suppliers; and administer consumer information and beneficiary protection activities for the traditional program component and the managed care program component (Medicare+Choice plans). The providers billing Medicare—hospitals, general and specialty physicians, and other practitioners—along with program beneficiaries and taxpayers, create a vast universe of stakeholders whose interests vary widely. Not surprisingly, then, the responsibility to be fiscally prudent has made the agency that runs Medicare a lightening rod for those discontented with program policies. For example, the agency’s administrative pricing of services has often been contentious, even though a viable alternative is not easily identifiable. It is impractical for the agency to rely on competition to determine prices. The reason is that when Medicare is the dominant payer for services or products, the agency cannot use market prices to determine appropriate payment amounts, because Medicare’s share of payments distorts the market. Moreover, Medicare is prevented from excluding some providers to do business with others that offer better prices. In addition, Medicare’s public sector status means that changing program regulations requires obtaining public input. The solicitation of public comments is necessary to ensure transparency in decision-making. However, the trade-off to seeking and responding to public interests is that it is generally a time-consuming process and can thwart efficient program management. For example, in the late 1990s, HCFA averaged nearly 2 years between its publication of proposed and final rules. Consensus is widespread among health policy experts regarding the growing and unrelenting nature of the Medicare agency’s work. The Balanced Budget Act of 1997 (BBA) alone had a substantial impact on HCFA’s workload, requiring, among other things, that the agency develop within a short time frame new payment methods for different post-acute and ambulatory services. It also required HCFA to preside over an expanded managed care component that entailed coordinating a never- before-run information campaign for millions of beneficiaries across the nation and developing methods to adjust plan payments based partially on enrollees’ health status. The future is likely to hold new statutory responsibilities for CMS. For example, some reform proposals call for expanding Medicare’s benefit package to include a prescription drug benefit. As we have previously reported, the addition of a drug benefit would entail numerous implementation challenges, including the potential for the annual claims processing workload to double to about 1.8 billion a year. Tasked with administering this highly complex program, HCFA has earned mixed reviews in managing Medicare. On one hand, the agency presided over a program that is very popular with beneficiaries and the general public. It implemented payment methods that have helped constrain program cost growth and ensured that claims were paid quickly at little administrative cost. On the other hand, HCFA had difficulty making needed refinements to payment methods. It also fell short in its efforts to ensure accurate claims payments and oversee its Medicare claims administration contractors. In recent years, HCFA took steps to achieve greater success in these areas. However, the agency now faces criticism from the provider community for, in the providers’ view, a program that is unduly complex and has burdensome requirements. HCFA was successful in developing payment methods that have helped contain Medicare cost growth. Generally, over the last 2 decades, the Congress required HCFA to move Medicare away from reimbursing providers based on their costs or charges for every service provided and to use payment methods that seek to control spending by rewarding provider efficiency and discouraging excessive service use. Payment development efforts have been largely successful, but making needed refinements to payment methods remains a challenge. For example, Medicare’s hospital inpatient prospective payment system (PPS), developed in the 1980s, is a method that pays providers fixed, predetermined amounts that vary according to patient need. This PPS succeeded in slowing the growth of Medicare’s inpatient hospital expenditures. Medicare’s fee schedule for physicians, phased in during the 1990s, redistributed payments for services based on the relative resources used by physicians to provide different types of care and has been adopted by many private insurers. More recently, as required by the BBA, HCFA worked to develop separate prospective payment methods for post-acute care services—services provided by skilled nursing facilities, home health agencies, and inpatient rehabilitation facilities—and for hospital outpatient departments. Prospective payment methods can help constrain the overall growth of Medicare payments. But as new payment systems affected provider revenues, HCFA often received criticism about the appropriateness and fairness of its payment rates. HCFA had mixed success in marshaling the evidence to assess the validity of these criticisms and in making appropriate refinements to these payment methods to ensure that Medicare was paying appropriately and adequately. HCFA also had success in paying most claims within mandated time frames and at little administrative cost to the taxpayer. Medicare contractors process over 90 percent of the claims electronically and pay “clean” claims on average within 17 days after receipt. In contrast, commercial insurers generally take longer to pay provider claims. Under its tight administrative budget, HCFA kept processing costs to roughly $1 to $2 per claim—as compared to the $6 to $10 or more per claim for private insurers, or the $7.50 per claim paid by TRICARE—the Department of Defense’s managed health care program. Costs for processing Medicare claims, however, while significantly lower than other payers, are not a straightforward indicator of success. We and others have reported that HCFA’s administrative budget was too low to adequately safeguard the program. Estimates by the HHS Inspector General of payments made in error amounted to $11.9 billion in fiscal year 2000, which, in effect, raises the net cost per claim considerably. At the same time, HCFA estimated that, in fiscal year 2000, program safeguard expenditures saved the Medicare program more than $16 for each dollar spent. Taken together, these findings indicate that increasing the investment in CMS’ administrative functions is a cost that can ultimately save program dollars. However, HCFA’s payment safeguard activities have raised concerns among providers about the clarity of billing rules and the efforts providers must make to remain in compliance. To fulfill the program’s stewardship responsibilities, claims administration contractors conduct medical reviews of claims and audits of providers whose previous billings have been questionable. These targeted reviews have been a cost-effective approach in identifying overpayments. Providers whose claims are in dispute, however, have complained about the burden of reviews and audits and about the fairness of some specific steps the contractors follow. Their concerns about fairness may also emanate from the actions of other agencies involved in overseeing health care—such as the HHS Office of Inspector General and the Department of Justice—which, in the last several years, have become more aggressive in pursuing health care fraud and abuse. CMS faces a difficult task in finding an appropriate balance between ensuring that Medicare pays only for services allowed by law and making it as simple as possible for providers to treat Medicare beneficiaries and bill the program. While an intensive claims review is undoubtedly vexing for the provider involved, very few providers actually undergo such reviews. In fiscal year 2000, Medicare contractors conducted complex medical claims reviews of only 3/10 of 1 percent of physicians—1,891 out of a total of more than 600,000 physicians who billed Medicare that year.We are currently reviewing several aspects of the contractors’ auditing and review procedures for physician claims to assess how they might be improved to better serve the program and providers. Congressional concern has recently heightened regarding the regulatory requirements that practitioners serving Medicare beneficiaries must meet. Of the several studies we have under way to examine the regulatory environment in which Medicare providers operate, one study, conducted at the request of this Committee, examines ways in which explanations of Medicare rules and other provider communications could be improved. The preliminary results of our review of several information sources from selected carriers—the contractors that process physicians’ claims— indicate a disappointing performance record. In particular: Bulletins. Contractor bulletins, which are newsletters from carriers to physicians outlining changes in national and local Medicare policy, are viewed as the primary source of communication between the agency and providers. However, providers have complained that the information in these bulletins is often difficult to interpret, incomplete, and untimely. We reviewed the bulletins issued since February 2001 by nine carriers to determine, among other things, whether they included notices about four new billing procedures that were going into effect in early July 2001. The bulletins of five carriers either did not contain notices about the billing procedures until after the procedures had gone into effect or had not published this information as of mid-July. We also found that many of the bulletins contained lengthy discussions with significant technical and legalistic language. Telephone call centers. Call centers are intended to serve as another important information source for providers on a variety of matters, including clarification of Medicare’s billing rules. Contractors maintain these call centers to respond to the roughly 80,000 provider inquiries made each day. We placed about 60 calls to 5 carrier call centers to obtain answers to common questions (those found on the “Frequently Asked Questions” Web pages at various carriers’ web sites).