CMS, an operating division of HHS, administers Medicare, Medicaid, and the State Children’s Health Insurance Program. As administrator of Medicare, which paid about $215 billion in benefits to approximately 39.5 million Medicare beneficiaries in fiscal year 2000, CMS is the nation’s largest health insurer. Although most participating providers comply with Medicare billing rules, inadvertent errors or intentional misrepresentations that result in overpayments to providers do occur. These overpayments represent money owed back to Medicare. According to the HCFA Financial Report for Fiscal Year 2000, about $8.0 billion out of $8.1 billion of the debts reported owed to CMS originated in the Medicare program. CMS Medicare debts consist largely of overpayments to hospitals, skilled nursing facilities, physicians, and other providers of covered services and supplies under Part A (hospital insurance) and Part B (supplemental medical insurance) of the Medicare program. We examined two types of Medicare debts: Medicare secondary payer (MSP) debts. MSP debts arise when Medicare pays for a service that is subsequently determined to be the financial responsibility of another payer. Cases that result in MSP debts include those in which beneficiaries have (1) other health insurance furnished by their employer or their spouse’s employer (or, in certain instances, another family member) that covers the medical services provided, (2) occupational injuries, illnesses, and conditions covered by workers’ compensation, and (3) injuries, illnesses, and conditions related to a liability or no-fault insurance settlement, judgment, or award. Non-MSP debts. Although Medicare is phasing out this payment method, Medicare has paid certain institutional providers interim amounts based on their historical service to beneficiaries. Medicare contractors retrospectively adjust these payments based on their review of provider costs. When a provider's cost-reporting year is over, the provider files a report specifying its costs of serving Medicare beneficiaries. Cost report debts arise when the cost report settlement process, which includes audits and reviews by Medicare contractors, determines that the amount an institution was paid based on its cost report exceeds the final settlement amount. Another type of non-MSP debt related to cost reporting is unfiled cost report debt. If an institutional provider fails to submit a timely cost report, CMS establishes an unfiled cost report debt. The amount of the debt equals the full amount disbursed for the year in which the provider failed to submit a timely report. Most providers have an ongoing business relationship with the Medicare program; therefore, contractors are able to collect most non-MSP debts by offsetting subsequent Medicare payments to providers. However, if offsetting subsequent payments does not fully liquidate the debt (e.g., because the provider has left the Medicare program), unpaid balances more than 180 days delinquent are subject to DCIA’s debt-referral requirements. CMS refers its eligible MSP and non-MSP debts to PSC, which provides debt management services for certain HHS operating divisions. Under DCIA, federal agencies are required to refer all eligible debts that are more than 180 days delinquent to Treasury or a Treasury-designated debt collection center. In 1999, Treasury designated PSC a debt collection center for HHS, allowing PSC to service certain debts, including MSP and unfiled cost report debts. PSC is responsible for attempting to collect MSP debts, obtaining cost reports for unfiled cost report debts, reporting MSP and unfiled cost report debts to TOP, and referring other types of Medicare debts to Treasury’s FMS for cross-servicing. In September 2000, we reported that CMS was slow to implement DCIA but could increase Medicare overpayment collections if it fully implemented the referral requirements of the act. We recommended, and CMS agreed, that CMS fully implement DCIA by transferring Medicare debts to PSC or Treasury for collection as soon as they became delinquent and were determined to be eligible. We also recommended that CMS refer the backlog of eligible Medicare debts to PSC as quickly as possible. We noted in the report that CMS had two pilot projects under way that were designed to expedite the transfer of delinquent Medicare debts for collection action. One pilot covered certain MSP debts valued at $5,000 or more, and the other covered certain non-MSP debts, primarily related to cost report audits, of $100,000 or more.Contractors participating in the pilots were to (1) verify the amount of a delinquent debt and ensure that it was still uncollected, (2) issue a DCIA intent letter indicating that nonpayment would result in the debt’s referral to PSC, and (3) record the debt in a central CMS database used to transmit the debt to PSC for collection.CMS’s goal is to have referred all eligible Medicare debts for collection action by the end of fiscal year 2002. As shown in table 1, CMS reported that about $6.6 billion of Medicare debts were more than 180 days delinquent or classified as currently not collectible (CNC) as of September 30, 2000. This information was reported in the Medicare Trust Fund Treasury Report on Receivables Due from the Public (TROR), which contained the most recent agency-certified information available during our review. Debts classified as CNC are written off the books for accounting purposes—that is, they are no longer carried as receivables. A write-off does not extinguish the underlying liability for a debt, and collection actions may continue to be taken on debts classified as CNC. Of the $6.6 billion of Medicare debts reported as more than 180 days delinquent or classified as CNC, CMS reported that it had referred approximately $2 billion of debts and had excluded from referral approximately $1.8 billion of debts. CMS also reported in the TROR that about $1.6 billion in unfiled cost reports were delinquent more than 180 days. Because CMS does not recognize amounts associated with unfiled costs reports as receivables for financial reporting purposes, the agency reports unfiled cost report debts more than 180 days delinquent as a separate, additional item in the TROR. With these exclusions and additions, CMS reported about $6.4 billion of Medicare debts eligible for referral to PSC for collection action as of September 30, 2000. Of the approximately $6.4 billion of Medicare debts that CMS had reported as eligible for referral by the end of fiscal year 2000, the agency reported that about $4.3 billion of the debts had not been referred to Treasury or a Treasury-designated debt collection center. About $2.6 billion of the unreferred amount was non-MSP debt, and the remainder was MSP debt. CMS’s goal for fiscal year 2001, which the agency met, was to refer an additional $2 billion of unreferred eligible debts. CMS’s goal for fiscal year 2002 is to refer the remainder of eligible Medicare debts. Our objectives were to determine whether (1) CMS was promptly referring eligible Medicare debts for collection action, (2) any obstacles were hampering CMS from referring eligible Medicare debts, and (3) CMS was appropriately using exclusions from referral requirements. Although CMS also administers Medicaid and the State Children’s Health Insurance Program, we limited our review to Medicare debts because the Medicare program is the source of the vast majority of CMS’s reported delinquent debt. To address our objectives, we obtained and analyzed the Medicare Trust Fund TROR for the fourth quarter of fiscal year 2000, which was the most recent agency-certified report available at the completion of our fieldwork, and other financial reports prepared by CMS. The most recent year-end TROR should contain the most reliable information available because Treasury requires that agency chief financial officers (or their designees) certify year-end data as accurate. We interviewed CMS and PSC officials to obtain an understanding of the debt-referral process and any obstacles that may be hampering referral of eligible debts. In addition, we reviewed CMS policies and procedures on debt referrals and examined current and planned CMS efforts to refer eligible delinquent debts. We also met with representatives from 4 selected CMS contractors that process and pay Medicare claims, and we discussed how they identified and referred eligible Medicare debts to PSC. At the time of our review, CMS had 55 Medicare contractors that processed claims and collected on overpayments. We used two criteria to select the 4 contractors: (1) the size of their debt portfolio and (2) whether the contractor participated in the CMS pilot projects. Specifically, 1 of the selected contractors had the largest amount of debt overall and the largest amount of Part A debt, 1 other selected contractor had the largest amount of Part B debt, and another of the selected contractors had the largest amount of MSP debt. We selected the fourth contractor to ensure that our review covered at least one-third of all the debt maintained at the CMS contractors. Three of the 4 contractors that we selected participated in the MSP pilot project, and 2 participated in the non-MSP pilot project. As agreed with your office, we did not test selected debts that were excluded from referral because the HHS OIG was performing detailed testing of CMS’s implementation of DCIA and the effectiveness of its debt collection and debt management activities. As part of its work, the OIG tested selected debts at CMS and its Medicare contractors to determine whether the status of debts had been appropriately categorized. We also did not independently verify the reliability of certain information that CMS and PSC provided (e.g., debts reported as more than 180 days delinquent). We performed our work from November 2000 to September 2001 in accordance with U.S. generally accepted government auditing standards. We requested written comments on a draft of this report from the administrator of CMS or his designated representative. CMS’s letter is reprinted in appendix I.