Traditionally, HCFA’s claims administration contractors performed most of Medicare’s program safeguard functions. These five functions are intended to ensure that Medicare pays only appropriate claims for covered services performed by legitimate providers to eligible beneficiaries. They include: medical reviews of claims to identify claims for noncovered, medically unnecessary, or unreasonable services, conducted both before the claims are paid (prepayment review) and after payments are made (postpayment review); reviews to identify other primary sources of payment, such as private health insurers, that are responsible for paying claims mistakenly billed to Medicare; audits of cost reports submitted by institutional providers to determine if their costs are allowable and reasonable; identification and investigation of possible fraud cases that are referred to the Department of Health and Human Services Office of Inspector General (HHS OIG) for investigation and possible prosecution by the Department of Justice; and provider education and training related to Medicare coverage policies and appropriate billing practices. In May 1999, HCFA selected 12 entities to act as PSCs, using a competitive bidding process. These entities represent a mix of health insurance companies, information technology businesses, and several other types of firms. To be selected as a PSC, potential contractors had to indicate that they were capable of performing four of HCFA’s five program safeguard activities—either directly or through subcontracts with other organizations. Almost all of the PSCs have had experience as HCFA contractors: Six are currently Medicare claims administration contractorsand an additional five have other types of contracts with HCFA. HCFA awarded each of the PSCs an indefinite delivery/indefinite quantity contract. This type of contract allows HCFA to select a contractor and outline in broad terms the activities to be performed. When HCFA identifies a specific function to be performed, it issues a task order proposal for that work, and the PSCs compete to receive the task order contract. HCFA can issue numerous task orders covering one, several, or the entire range of program safeguard activities, and it can award multiple task orders to an individual PSC. HCFA is exploring different ways to use and pay the PSCs to combat fraud, waste, and abuse in the Medicare program. Because the PSCs represent a new means of promoting program integrity, HCFA took an incremental approach to implementing its specialized contracting authority and awarding the task orders. This incremental approach gave HCFA the opportunity to test multiple options for how the PSCs will function. These options include, for example, a PSC performing all safeguard functions in a particular region of the country and PSCs conducting work targeted at specific types of providers or benefits considered particularly vulnerable to fraud and abuse. In addition, HCFA plans to experiment with different methods of paying PSCs to enhance their performance. Finally, HCFA recently revised its approach to monitoring and evaluating the PSCs’ performance because of their growing role in program integrity. In September 1999, about 3 years after HIPAA was enacted, HCFA awarded its first PSC task order. Officials emphasized that they needed time to consider how best to implement HCFA’s contracting authority. This included the time necessary to develop the indefinite delivery/indefinite quantity contract and the proposed regulations governing their new program integrity efforts. By April 2001, HCFA had awarded 15 task orders focusing on different aspects of program integrity, such as fraud detection and medical review of claims. HCFA first awarded task orders for projects that would not disrupt the processing of Medicare claims; for example, several projects involved reviewing claims after they have been processed. In developing the initial task orders in 1999, HCFA was concerned about the potential effects of the year 2000 conversion on its claims processing systems and the possibility that one or more of the claims administration contractors would leave the program. HCFA decided that its initial task orders would either be focused on tasks that were independent of claims processing or that supplemented, but did not replace, the claims administration contractors’ program safeguard activities. Subsequent task orders have, in many cases, given the PSCs greater safeguard responsibility for performing work, including replacing the functions traditionally performed by the claims administration contractors. Based on our assessment, the 15 task orders can be divided into four categories representing different ways of structuring the PSCs’ responsibilities. As shown in table 1, these categories cover a wide range of options, from discrete, narrowly focused task orders related to a particular service or provider type to task orders with a broad focus that can have a national impact on Medicare’s program safeguard activities. HCFA is testing these options to identify how the PSCs can make the most significant contributions to program integrity. The task orders in the first category represent special projects that focus attention on particular areas that are considered vulnerable to fraud and abuse. For example, in recent years, community mental health center services have been the target of investigations by law enforcement agencies, including the HHS OIG and the Federal Bureau of Investigation. These investigations were due, in part, to concerns about steep increases in the cost per patient treated and increases in the number of these providers in certain regions of the country. Further, the nebulizer task order was awarded because nebulizer drugs have historically been a source of fraud and abuse—including kickbacks from suppliers to beneficiaries and physicians. The second category represents task orders in which the PSC supplements or replaces some of the routine program integrity activities of one or more claims administration contractors. For example, the Benefit Integrity Support Center task order calls for the PSC to work with all the claims administration contractors that have jurisdiction over the New England states to identify potential cases of fraud and abuse. In addition, the PSC staff are also supplementing the work conducted by fraud control units at four of these contractors—partly because these units have few staff. The PSC that was awarded the Western Integrity Center task order is replacing some of the safeguard activities—including postpayment reviews and fraud case development—of two claims administration contractors that serve 12 western states. The third category, in which a PSC performs all program safeguard functions, consists solely of the Durable Medical Equipment task order. This task order is important in that it represents a test for determining whether a PSC can effectively replace the safeguard activities performed by the claims administration contractors. These activities include the performance of prepayment medical reviews by the PSCs. These reviews must be completed before the claims can be processed and paid by the responsible claims administration contractor. This process poses a challenge because the PSC must complete an assessment of whether claims should be paid without delaying the processing and payment of appropriate claims to legitimate providers by the claims administration contractors. Although this is the only task order being used to test this option, the results may provide HCFA with important insights regarding how to identify improper claims prior to payment without creating undue processing delays. The task orders in the fourth category are national in scope and aim to build HCFA’s knowledge base and systems to enhance the prevention and detection of fraud, waste, and abuse. For example, the PSCs that were awarded the Systems Requirement task order are identifying potential changes to existing claims processing systems to enable PSCs’ automated systems to be fully integrated with those of the claims processors. The Therapy Services task order requires the development of a plan that all contractors could use for reviewing the appropriateness of physical, speech, and occupational services—services that the HHS OIG has identified as prone to improper Medicare payments. HCFA expects the PSC’s efforts on this task order will reduce payment error rates for therapy services without disrupting the delivery of these services to Medicare beneficiaries. HCFA plans to explore a variety of methods for paying PSCs to determine which are most appropriate for the specific functions required in the task orders. These methods fall under the general categories of cost- reimbursement, fixed-price, and cost-plus-incentive contracts. Most of the task orders are currently paid on some variation of a cost-reimbursement basis. Under a cost-reimbursement contract, HCFA reimburses the PSCs for their allowable costs—including such items as salaries, travel, and subcontractors needed to perform the activities specified in the task order. This type of contract provides the least incentive for a PSC to manage its costs because HCFA assumes most of the risk for inefficient performance. Thirteen of the 15 task orders are paid on this basis. A fixed-price contract requires a PSC to assume most of the risk for managing its costs and provides it with the greatest incentive for efficient performance. Despite these potential benefits for HCFA, a fixed-price contract has been used for only one task order. Establishing fixed-price contracts is difficult because HCFA has no prior experience with using task orders for program safeguards. HCFA officials told us that this type of contract currently may not be feasible for most task orders because the agency generally lacks the data necessary to reasonably estimate costs. As a result, neither HCFA nor the PSCs can have a complete understanding of the costs associated with meeting the contract requirements. Without reliable cost data, HCFA officials fear that PSCs could submit high bids that include excessive profits or low bids that lead to disagreements over the scope of work and subsequent requests for additional funds. To address these concerns, HCFA officials stated that they are developing a new reporting system to obtain cost data associated with different program safeguard activities. They believe this system, which may be implemented by the end of 2001, will establish an independent data source to assess the reasonableness of the PSCs’ estimated costs and will ultimately provide a stronger basis for competing future task order contracts on a fixed-price basis. For example, in regard to a task order for prepayment medical review, HCFA could use this data system to estimate the cost for a registered nurse to review 1,000 claims. Certain types of program safeguard work, however—such as the development of fraud cases—might not be amenable to a fixed-price contract due to the uncertainties inherent in detecting, investigating, and developing such cases.