CMS administers the Medicare program with the assistance of about 50 claims administration contractors. As part of their duties, contractors deny claims that are the responsibility of other insurers. In addition, they are required to recover mistaken payments that were made before it could be determined that the beneficiary had other insurance—such as an EGHP, an automobile or other liability insurance plan, workers’ compensation, or other types of coverage. To ensure that contractors adequately perform these tasks, CMS periodically monitors and evaluates their performance. Contractors are required to record recovery information pertaining to EGHP debt cases in the MPaRTS database. MPaRTS tracks the status of each EGHP case and provides CMS with information on the amount of mistaken payments identified, the amount demanded to be repaid, the amount recovered, and whether the case is currently open or closed. Although CMS does not have a database for tracking liability and workers’ compensation cases that is comparable to MPaRTS, CMS requires contractors to submit quarterly accounts receivable reports for these and other types of cases. These reports show the aggregate amount of outstanding debt, but do not provide detail at the individual case level. To prevent mistaken MSP payments, Medicare claims administration contractors match beneficiaries’ health care claims against information contained in Medicare’s Common Working File (CWF)—a repository of claims and beneficiary enrollment data—to determine whether Medicare is the primary or secondary payer. Claims are paid if the CWF indicates that Medicare is the primary payer. However, the CWF may not always contain accurate information. The MSP status of some beneficiaries is sometimes in a state of flux—for example, a retired beneficiary may return to the workforce and receive coverage under an EGHP for 6 months, and then leave that job. This information may not be recorded in a timely manner, leading to mistaken payments. In addition, the CWF can also contain inaccurate information if beneficiaries do not notify CMS of their insurance status when they become eligible for Medicare or if they provide incorrect insurance information. Furthermore, although the CWF is periodically updated with new insurance information, there is a lag between the time beneficiaries obtain coverage and when CMS learns of this coverage. In the interim, contractors may mistakenly pay beneficiaries’ claims. To identify mistaken MSP payments when an EGHP is the primary payer, claims administration contractors use information provided by CMS and the Coordination of Benefits Contractor (COBC). The COBC is a specialized contractor that does not process Medicare claims. Instead, the COBC is charged with developing information on beneficiaries who may have other primary health insurance through a process known as the data match. The purpose of the data match is to identify beneficiaries or their spouses who are employed and thus may be covered by an EGHP. To facilitate data matching, the Social Security Administration sends the Internal Revenue Service a list containing the Social Security numbers of Medicare beneficiaries. The Internal Revenue Service then matches the list against beneficiary income tax return data and sends the results to the COBC for further analysis. For example, if tax records show that an employer paid a beneficiary at least $10,000 during the previous year, the COBC would contact the beneficiary’s employer to determine whether he was covered by that employer’s group health plan. CMS compares information developed by the COBC to the national claims history file, the most comprehensive source of paid claims information. This comparison allows CMS to determine whether Medicare may have mistakenly paid claims on behalf of the beneficiary. If the mistakenly paid claims total at least $1,000, CMS assigns the case to the claims administration contractor that processed and paid the claims. Upon receipt of the EGHP debt case, claims administration contractors have 60 days to perform certain tasks to determine whether an attempt should be made to recover the debt. The contractor must first verify that the information being used as a basis for recovering the debt is correct and that it has not already recouped the mistaken payments. If the case passes this initial validation process, the contractor will initiate recovery by sending a demand letter to the beneficiary’s employer and insurance company or third-party administrator, requesting payment within 60 days. If there is no response to the demand letter within 60 days, interest begins to accrue on the debt. Contractors then send a second letter explaining that if a response or payment is not received within another 60 days, the matter will be referred to the Department of the Treasury for collection. Responses to these letters can include repayment with interest or an explanation as to why the employer and associated health insurer are not responsible for the debt. This explanation may include documentation indicating that the employee retired and thus discontinued health coverage or never obtained coverage through the employer. The procedures followed by contractors to recover mistaken payments from liability insurers and workers’ compensation plans differ from those used when the primary payer of an MSP debt is an EGHP. In a liability or workers’ compensation case, mistaken payments made on behalf of a beneficiary are not related to a period of insurance coverage, but to a particular incident—for example, an automobile accident or workplace injury. The task of the contractor in such cases is to identify all paid medical claims related to the incident and to inform the beneficiary or the beneficiary’s attorney of the responsibility to repay Medicare in the event that they receive an insurance settlement for their medical expenses. Because beneficiaries may require protracted medical treatment for their injuries, it may take several years before the total amount of payments related to the injury is known. In the interim, a contractor may repeatedly review the beneficiary’s claims history to determine whether Medicare has paid new claims related to the injury. We previously reported that CMS maintained a substantial backlog of uncollected debt in fiscal year 2000. Although the Debt Collection Improvement Act of 1996 required that agencies refer debt delinquent for more than 180 days to the Department of the Treasury, CMS still had not fully implemented this requirement. Prior to 2000, CMS did not instruct claims administration contractors to refer delinquent EGHP cases to the Department of the Treasury for collection. As a result, CMS maintained a substantial backlog of older cases that remained open, but inactive, for many years. CMS’s administration of the Medicare program will undergo significant changes over the next several years as the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) is implemented. MMA provides CMS with increased flexibility in contracting with new entities to assist it in operating the Medicare program. While CMS has relied primarily on the claims administration contractors to perform most of the key business functions of the program, the new law authorizes CMS to enlist a variety of contractors to perform these tasks. For example, CMS could use new contractors to process and pay claims and to perform financial management and payment safeguard activities. CMS is just beginning to develop plans to implement MMA’s contracting reform provisions. Phase-in of the amendments to contracting reform takes effect on October 1, 2005. The competitive bidding of all contracts is required for contract periods that begin on or after October 1, 2011. The agency expects to issue its implementation plan for contracting by October 1, 2004. Since fiscal year 2000, the cost-effectiveness of EGHP recovery activities has significantly declined. The decline in cost-effectiveness occurred because the volume of EGHP debt cases significantly decreased—in fiscal year 2003, almost half of the contractors were assigned fewer than 50 cases—while, at the same time, the cost to CMS for maintaining debt collection capabilities at all claims administration contractors increased slightly. Moreover, CMS funded eight contractors who were not assigned any EGHP debt cases. The recovery process is also constrained by procedures that prevent contractors from maximizing their recoveries of mistaken payments. Because contractors have access only to claims that they have paid, they cannot identify, and thus collect, mistaken payments made by other contractors. In addition to these structural problems, we found that in 3 of the last 4 years CMS did not transmit a substantial number of EGHP cases to the claims administration contractors, resulting in missed recoveries. EGHP recovery activities are no longer cost-effective. To measure cost- effectiveness, we compared the amount that CMS spent on contractor recovery activities for a given fiscal year with the amount recovered from all cases that were opened during the same year—regardless of when the funds were recovered. While Medicare recovered about $2.49 for each dollar it spent on EGHP recovery activities in fiscal year 2000, this ratio declined to $1.80 in 2001. Although there are no comparable data for fiscal year 2002 because CMS did not open any new EGHP cases that year, thus allowing contractors time to reduce their backlog of old cases, the decline in cost-effectiveness continued in fiscal year 2003 when CMS resumed opening new EGHP cases. In that year, Medicare lost money on EGHP recovery activities, recovering only 38 cents for every dollar spent. (See table 1.) The lack of cost-effectiveness of the EGHP recovery process resulted partly from a declining workload, which limited the potential for recovery. The number of new MSP EGHP debt cases has decreased by more than 80 percent in recent years, from 49,240 cases in fiscal year 2000 to 7,634 cases in fiscal year 2003. CMS officials told us that improvements in identifying beneficiaries with other insurance before a claim is paid have reduced the number of mistakenly paid MSP claims. Consequently, according to CMS officials, this has lessened the need to recover these payments via the EGHP recoveries. These officials also projected that the number of EGHP cases assigned to contractors could continue to decline. Not only have the number of EGHP cases declined since fiscal year 2000, but the complexity of these cases and the resources required to process many of them have also decreased. Since fiscal year 2000, the claims administration contractors closed more than half of the cases during their initial computer screening process.