Medicare

GAO evaluated the Health Care Financing Administration's (HCFA) management of Medicare claims processing under noncompetitive cost reimbursement contracts and eight competitively bid fixed-price contracts to determine whether: (1) the advantages of fixed-price competition justify broader use of this method of contracting; and (2) the Department of Health and Human Services' (HHS) current authority is sufficient to achieve increased administrative efficiency without a change in contracting methods.

HHS was given legislative authority to experiment with fixed-price or incentive arrangements with contractors as a way of potentially reducing costs and improving program administration. The Deficit Reduction Act (DEFRA) gave HHS additional authority to use competition on a limited basis to remove poorly performing contractors from the program. GAO found that: (1) the competitive contracts have not demonstrated any clear advantage over cost contracts; (2) HHS has been successful in controlling administrative costs using cost contracts; (3) regular competition would probably increase contractor turnover and the problems associated with changing contractors, such as disrupted services and slower payments; and (4) competitive contracting requires more HHS management resources. However, GAO believes that limited use of competitive contracting would be useful, since it stimulates some cost contractors to improve performance and reduce costs. In 1985, because of budgetary shortfalls, HHS abandoned the traditional budget negotiation process and reduced the funds given to each contractor to carry out its claims processing functions. The cuts: (1) were made without consideration of individual contractor circumstances, since even the most cost-efficient contractors were required to reduce costs; (2) left inadequate funds to implement additional legislative requirements or process claims; and (3) were inconsistent with the congressional intent that cost-cutting measures not adversely affect program payments and the quality of service.

Recommendations

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

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