Funding of Contractors for Medicare Claims Processing

GAO discussed: (1) the adequacy of the funding available to contractors who process and pay Medicare claims; (2) the relationship between Medicare funding levels and the accuracy of program payments and quality of services; and (3) the Health Care Financing Administration's (HCFA) use of the competitive authority under the Deficit Reduction Act (DEFRA). While HCFA needs to control contractor costs, GAO does not believe that should be done at the expense of contractor effectiveness in making accurate and timely program payments or providing quality services. Since the inception of Medicare, benefit payments have increased dramatically every year, while intermediary and carrier costs have increased only moderately. HCFA and the contractors have kept Medicare administrative costs relatively low even though they were required to implement many programmatic changes. GAO believes that the administration's budget requests for fiscal years 1985 and 1986 for contractor funding were inadequate and could lead to a degradation of services to beneficiaries and a loosening of safeguards over program payments. Although the Consolidated Omnibus Reconciliation Act promises to relieve the potential budget crunch, most of the recent funding cuts have come from the claims processing subfunction, which is crucial to both the safeguard activities review of claims identification and the timely and accurate payment of claims. To stay within the administration's budget request, HCFA used formula-based contractor cost caps; however, GAO believes that HCFA inappropriately used its authority under DEFRA because the process was based on available funds rather than on a true standard of economy and efficiency and was used to spread estimated budget shortfalls among all contractors rather than to reduce the inefficient contractors' costs. Because of limits on contractor funding, HFCA is permitting contractors to slow down the average time to pay claims and to increase claims backlogs. However, large backlogs and slower claims payment could increase program administrative costs because they could generate more beneficiary and provider inquiries as well as more claim submissions. Although HFCA has interpreted the DEFRA provision as only providing authority to seek competitive bids for cost contracts, GAO believes that HCFA can use the authority to award competitive fixed-priced contracts.