Medicare Contracting Reform
CMS's Plan Has Gaps and Its Anticipated Savings Are Uncertain Gao ID: GAO-05-873 August 17, 2005The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) significantly reformed contracting for the administration of claims for Part A, Medicare's hospital insurance, and Part B, which covers outpatient services such as physicians' care. The MMA required the Centers for Medicare & Medicaid Services (CMS)--the agency within the Department of Health and Human Services (HHS) that administers Medicare--to conduct full and open competition for all of its claims administration contracts and to transfer the work to Medicare administrative contractors (MAC) by October 2011. The MMA required the Secretary of HHS to submit a report to the Congress and GAO on the plan for implementing Medicare contracting reform and for GAO to evaluate the plan. To address this mandate, GAO reviewed the extent to which (1) the plan provides an appropriate framework for implementing Medicare contracting reform and (2) the plan's cost and savings estimates are sound enough to support decisions on implementation.
CMS's plan provides an appropriate framework to implement contracting reform in some critical areas but not in others. For example, the plan indicates the rationale for reform but lacks a detailed schedule to coordinate reform activities with other major initiatives CMS intends to implement at the MACs during the same period. Further, CMS's plan does not comprehensively detail steps to address potential risks during the transitions of the claims workload from the current contractors, such as failing to pay providers or paying them improperly. These transitions will be complex to manage because they require moving multiple claims workloads from current contractors to a single MAC with new jurisdictional lines. As many as nine separate segments of current contractors' workload will be moved to the first A/B MAC. CMS has accelerated its schedule to transfer the current contractor claims workload to MACs by 2009, more than 2 years ahead of the MMA's time frame. This schedule leaves little time for CMS to adjust for any problems encountered. CMS's estimates of costs and savings are too uncertain to support decisions on contracting reform implementation. First, CMS's internal cost estimate for a 6-year implementation period of about $666 million is based on reasonable data but questionable assumptions about contract awards. Second, its estimate of $1.4 billion in savings from reductions in improper payment by MACs depends on questionable evidence and assumptions that were never validated by knowledgeable CMS staff. However, the $1.4 billion estimate prompted CMS to accelerate its implementation schedule to accrue savings as rapidly as possible. While it is reasonable to assume that contracting reform will result in savings, the actual amount could differ greatly from the estimate. Basing an accelerated implementation schedule on uncertain savings raises concerns that CMS has unnecessarily created additional challenges to effectively managing the risk of these transitions.
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Director: Team: Phone:GAO-05-873, Medicare Contracting Reform: CMS's Plan Has Gaps and Its Anticipated Savings Are Uncertain
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Report to Congressional Committees:
United States Government Accountability Office:
GAO:
August 2005:
Medicare Contracting Reform:
CMS's Plan Has Gaps and Its Anticipated Savings Are Uncertain:
GAO-05-873:
GAO Highlights:
Highlights of GAO-05-873, a report to congressional committees:
Why GAO Did This Study:
The Medicare Prescription Drug, Improvement, and Modernization Act of
2003 (MMA) significantly reformed contracting for the administration of
claims for Part A, Medicare‘s hospital insurance, and Part B, which
covers outpatient services such as physicians‘ care. The MMA required
the Centers for Medicare & Medicaid Services (CMS)”the agency within
the Department of Health and Human Services (HHS) that administers
Medicare”to conduct full and open competition for all of its claims
administration contracts and to transfer the work to Medicare
administrative contractors (MAC) by October 2011. The MMA required the
Secretary of HHS to submit a report to the Congress and GAO on the plan
for implementing Medicare contracting reform and for GAO to evaluate
the plan. To address this mandate, GAO reviewed the extent to which (1)
the plan provides an appropriate framework for implementing Medicare
contracting reform and (2) the plan‘s cost and savings estimates are
sound enough to support decisions on implementation.
What GAO Found:
CMS‘s plan provides an appropriate framework to implement contracting
reform in some critical areas but not in others. For example, the plan
indicates the rationale for reform but lacks a detailed schedule to
coordinate reform activities with other major initiatives CMS intends
to implement at the MACs during the same period. Further, CMS‘s plan
does not comprehensively detail steps to address potential risks during
the transitions of the claims workload from the current contractors,
such as failing to pay providers or paying them improperly. These
transitions will be complex to manage because they require moving
multiple claims workloads from current contractors to a single MAC with
new jurisdictional lines. As the figure shows, as many as nine separate
segments of current contractors‘ workload will be moved to the first
A/B MAC. CMS has accelerated its schedule to transfer the current
contractor claims workload to MACs by 2009, more than 2 years ahead of
the MMA‘s time frame. This schedule leaves little time for CMS to
adjust for any problems encountered.
Part A and Part B Transitions That Will Occur in One MAC Jurisdiction:
[See PDF for image]
[End of figure]
CMS‘s estimates of costs and savings are too uncertain to support
decisions on contracting reform implementation. First, CMS‘s internal
cost estimate for a 6-year implementation period of about $666 million
is based on reasonable data but questionable assumptions about contract
awards. Second, its estimate of $1.4 billion in savings from reductions
in improper payment by MACs depends on questionable evidence and
assumptions that were never validated by knowledgeable CMS staff.
However, the $1.4 billion estimate prompted CMS to accelerate its
implementation schedule to accrue savings as rapidly as possible. While
it is reasonable to assume that contracting reform will result in
savings, the actual amount could differ greatly from the estimate.
Basing an accelerated implementation schedule on uncertain savings
raises concerns that CMS has unnecessarily created additional
challenges to effectively managing the risk of these transitions.
What GAO Recommends:
GAO recommends that CMS extend its implementation schedule from 2009 to
2011, to be better prepared to manage contracting reform. CMS did not
concur with the recommendation, but GAO believes that extending the
time frame is the most prudent approach to manage contracting reform
risks.
www.gao.gov/cgi-bin/getrpt?GAO-05-873.
To view the full product, including the scope and methodology, click on
the link above. For more information, contact Leslie G. Aronovitz at
(312) 220-7600 or aronovitzl@gao.gov.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
CMS's Plan Does Not Provide an Appropriate Implementation Framework in
All Critical Areas:
Plan's Cost and Savings Estimates Do Not Provide a Reasonable Basis for
Decision Making:
Conclusions:
Recommendation for Executive Action:
Agency Comments and Our Evaluation:
Appendix I: Documents CMS Officials Have Identified as Constituting the
Agency's Plan for Implementing Contracting Reform:
Appendix II: Documents Used by GAO to Develop Criteria for Reviewing
CMS's Plan for Contracting Reform:
Appendix III: GAO's Criteria for Evaluating CMS's Contracting Reform
Plan:
Appendix IV: Scope and Methodology:
Appendix V: Comments from the Department of Health and Human Services:
Appendix VI: CMS's MAC Procurement and Transition Schedule:
Appendix VII: Jurisdictional Map of the Current Fiscal Intermediaries:
Appendix VIII: Jurisdictional Map of the Current Carriers:
Appendix IX: Jurisdictional Map of the Current Regional Home Health
Intermediaries:
Appendix X: Jurisdictional Map of the Current Durable Medical Equipment
Regional Carriers:
Appendix XI: Jurisdictional Map of the 15 New Medicare Administrative
Contractors:
Appendix XII: Jurisdictional Map of the Four DME MACs and the Four HH
MACs:
Tables:
Table 1: CMS's Analysis of Restrictions or Weaknesses in Medicare
Claims Administration Contracting and Their Associated Effects:
Table 2: Key Initiatives Affecting MAC Implementation:
Table 3: CMS's Estimates of Administrative Costs for Medicare
Contracting Reform, Fiscal Years 2006-2011, as of February 2005:
Table 4: CMS's Estimates of Administrative Savings from Medicare
Contracting Reform, Fiscal Years 2006-2011, as of February 2005:
Table 5: CMS's Consultant's Estimates of Savings to the Trust Funds
from Medicare Contracting Reform, Fiscal Years 2006-2011:
Figures:
Figure 1: Areas of Detailed Information in CMS's Contracting Reform
Plan:
Figure 2: Part A and Part B Transitions That Will Occur in One MAC
Jurisdiction:
Figure 3: Estimated Costs of Medicare Contracting Reform, Fiscal Years
2006-2011, as of February 2005:
Figure 4: CMS's Annual Estimates of Administrative Costs and Savings
from Medicare Contracting Reform, Fiscal Years 2006-2011, as of
February 2005:
Figure 5: CMS's MAC Procurement and Transition Schedule:
Abbreviations:
BCC: beneficiary contact centers:
CMS: Centers for Medicare & Medicaid Services:
DME: durable medical equipment:
DOD: Department of Defense:
FAR: Federal Acquisition Regulation:
HH: home health and hospice:
HHS: Department of Health and Human Services:
HIGLAS: Healthcare Integrated General Ledger Accounting System:
IT: information technology:
MAC: Medicare administrative contractor:
MMA: Medicare Prescription Drug, Improvement, and Modernization Act of
2003:
PSC: program safeguard contractor:
United States Government Accountability Office:
Washington, DC 20548:
August 17, 2005:
The Honorable Charles E. Grassley:
Chairman:
The Honorable Max Baucus:
Ranking Minority Member:
Committee on Finance:
United States Senate:
The Honorable Joe Barton:
Chairman:
The Honorable John D. Dingell:
Ranking Minority Member:
Committee on Energy and Commerce:
House of Representatives:
The Honorable William M. Thomas:
Chairman:
The Honorable Charles B. Rangel:
Ranking Minority Member:
Committee on Ways and Means:
House of Representatives:
Since the inception of the Medicare program in 1965, the contractors
that process and administer medical claims have played a critical role
in serving both beneficiaries and providers. For example, in fiscal
year 2004, these contractors processed over 1 billion health care
claims and provided customer service to about 36 million beneficiaries
and over 1 million health care providers. The Medicare Prescription
Drug, Improvement, and Modernization Act of 2003 (MMA)[Footnote 1]
significantly changed Medicare law covering contracting for claims
administration services by the Centers for Medicare & Medicaid Services
(CMS)[Footnote 2]--the agency within the Department of Health and Human
Services (HHS) that administers the program. CMS refers to these
changes, which are intended to improve service to beneficiaries and
health care providers, as Medicare contracting reform.
The implementation of contracting reform will fundamentally change
Medicare claims administration contracting practices. Since the
beginning of the Medicare program, CMS has generally been exempt from
requirements to competitively select claims administration contractors
or follow certain other procedures that usually apply to the selection
and management of government contractors. However, the MMA required CMS
to use competitive procedures to select Medicare administrative
contractors (MAC) and to follow the Federal Acquisition Regulation
(FAR),[Footnote 3] except where specific MMA provisions differ. The MMA
required CMS to transfer the work of current claims administration
contractors to MACs by October 2011. It also required the Secretary of
HHS to submit a report to the Congress and GAO on HHS's plan to
implement the Medicare contracting reform provisions by October 1,
2004. This report was submitted on February 7, 2005.[Footnote 4] CMS
has designated the Report to Congress and related documents, taken
together, as its plan for implementing Medicare contracting reform.
These documents are listed in appendix I.
The MMA also required GAO to evaluate and report on CMS's contracting
reform plan no later than 6 months after the date that CMS's report was
received. To address this mandate, as discussed with the committees of
jurisdiction, we reviewed (1) the extent to which the plan provides an
appropriate framework for implementing Medicare contracting reform and
(2) the extent to which the plan's cost and savings estimates are sound
enough to support decisions on contracting reform implementation.
In preparing this report, we reviewed relevant sections of the MMA,
documents prepared to help CMS plan for contracting reform, and GAO
guidance on assessing federal agencies' procurement functions and
improving how mission-critical work is accomplished. These documents
are listed in appendix II. From these documents, we developed
evaluation criteria and used them to review CMS's contracting reform
plan.[Footnote 5] Our evaluation criteria are presented in appendix
III. We also reviewed the information and assumptions on which the
plan's cost and savings estimates were based. In addition, we
interviewed officials at CMS's headquarters and regional offices, four
current Medicare claims administration contractors, and CMS's actuarial
contractor about the contracting reform plan and how it was developed.
Appendix IV includes a more detailed discussion of our scope and
methodology. We performed our work from November 2004 through July 2005
in accordance with generally accepted government auditing standards.
Results in Brief:
CMS's plan for contracting reform provides detailed information and an
appropriate implementation framework in some critical areas but not in
others. For example, the plan provides detailed information on the
reasons for, and benefits expected from, contracting reform; the
organization of current and future Medicare claims administration
contractors; the MAC contracting implementation schedule; and CMS's
strategy for communicating information to potential contractors,
providers, and beneficiaries. On the other hand, the plan does not
provide detailed information on the risks of contracting reform and
steps to mitigate them. Implementation of contracting reform is an
inherently high-risk activity because it will involve complex
transitions of claims workloads from current contractors to MACs. CMS
has experience in transferring up to 10 percent of the claims
administration workload in a year. In 13 of the past 15 years, CMS has
transferred at least one contractor's workload, during transitions that
took an average of 6 to 9 months, with some lasting as long as a year.
However, the scale of the proposed transitions is much greater, since
CMS plans to transfer as much as 91 percent of the annual Medicare
claims processing workload--which represents an estimated $250 billion
in payments to providers--to MACs in less than 2 years. Furthermore,
CMS is proposing to transfer all work to MACs by July 2009, which is
more than 2 years ahead of the MMA's specified time frame. If these
transitions go awry, physicians and other providers could experience
payment delays and errors. Further, the plan does not fully detail how
CMS intends to implement MAC contracting. For example, the plan does
not fully explain CMS's strategy for monitoring MACs' performance. In
addition, the plan does not fully explain how CMS will manage
contracting reform while also implementing the Medicare prescription
drug benefit and the expansion of options available to Medicare
beneficiaries who enroll in private plans. Finally, it does not detail
how CMS will coordinate the scheduling of contracting reform activities
with other interrelated initiatives that must be implemented
concurrently at the MACs, such as upgrades to CMS's information and
accounting systems. Having a schedule for implementing the interrelated
initiatives is critical, because delays in one initiative could easily
affect others. CMS officials have taken initial steps to deal with
critical areas that are not fully developed, but they have not
completed planning for them. For example, officials have identified
some factors that may pose a risk to MAC implementation, but they have
not decided on steps to mitigate them.
The plan's cost and savings estimates are too uncertain to support
decisions on contracting reform implementation because they are based
on future developments that are difficult to predict. CMS estimates
that contracting reform would cost about $666 million to implement
during a 6-year period, a much higher amount than the one indicated in
the Report to Congress, because that document did not include funding
anticipated to be needed beyond 2006. CMS used its data on the costs of
previous transitions of claims workloads from one contractor to another
as a basis to develop a transition cost amount. However, to develop an
overall cost estimate, CMS had to make assumptions about how many
contractors will take on new claims workloads and the size of these
workload transitions. Because CMS does not know which contractors will
compete and win contracts for specific workloads, it is difficult to
predict how much contracting reform implementation will cost. Second,
the total savings estimate of over $1.9 billion for a 6-year
implementation period relies on the expectation that MACs will reduce
improper payments by over $1.4 billion through more effective medical
reviews of claims. The $1.4 billion savings estimate, which was
developed by an external consultant, is based on questionable evidence
and assumptions that were not validated by the CMS staff who oversee
medical reviews. While it is reasonable to assume that contracting
reform will eventually lead to program savings, the exact level of
savings is impossible to predict and could differ greatly from the
consultant's estimates. Despite this, in order to benefit from the
projected savings as soon as possible, CMS accelerated its
implementation schedule for contracting reform. Basing an accelerated
implementation schedule on such uncertain savings raises concerns that
CMS has unnecessarily created additional challenges to effectively
managing the risks and complexities of contracting reform. As a result,
we recommend that CMS extend its implementation schedule to complete
its workload transitions by October 2011, so that the agency can be
better prepared to manage its contracting reform activities.
In its written comments on a draft of this report, CMS did not concur
with our recommendation. (See app. V). CMS stated that it would be able
to achieve savings to the Medicare trust funds and operational
efficiencies more quickly by fully implementing MAC contracting in
2009. We believe that our recommendation to extend the time frame for
implementation represents a prudent approach that would allow more time
for planning and better enable CMS to manage complex transitions and
make needed midcourse adjustments.
Background:
Federal agencies are generally permitted to contract with any qualified
entity for any authorized purpose so long as that entity is not
prohibited from receiving government contracts and the contract is not
for an inherently governmental function. Agencies are required to use
contractors that have a satisfactory record of integrity and business
ethics, a record of successful past performance, and the financial and
other resources needed to perform the contract. The FAR generally
requires agencies to conduct full and open competition for contracts.
Under the FAR, a federal agency may terminate a contract either for the
government's convenience or if the agency determines that the
contractor is in default. The contractor does not have similar rights
to terminate its contract with the government. The FAR also provides
agencies with several methods to pay contractors--some of which allow
for financial incentives for meeting performance goals.
Because of provisions in the Social Security Act, Medicare claims
administration contracting had unique features that differed from most
other federal contracting. Before Medicare was enacted in 1965,
providers had been concerned that the program would give the government
too much control over health care. To increase providers' acceptance of
the new program, the Congress ensured that health insurers like Blue
Cross and Blue Shield, which already served as payers of health care
services to physicians and hospitals, became the contractors paying
providers for Medicare services. Medicare's authorizing legislation
specified that contractors called fiscal intermediaries would
administer Part A and Part B claims paid to hospitals and other
institutions, such as home health agencies.[Footnote 6] Contractors
called carriers would administer the majority of Part B claims for the
services of physicians and other providers. By law, Medicare was
required to choose its fiscal intermediaries from among organizations
that were first selected by associations representing providers, a
process called provider nomination. Medicare was also required to
choose health insurers or similar companies to serve as its carriers
and, by statute, did not have to award the contracts through
competition. In addition, Medicare contracts were generally renewed
each year. As a result, since the inception of the program, most
Medicare claims administration contracts have been awarded and renewed
on a noncompetitive basis, with limited exceptions.[Footnote 7]
Contractors could not be terminated from the program unless they were
first provided with an opportunity for a public hearing--a process not
afforded under the FAR. Unlike other federal contractors, claims
administration contractors could terminate their contracts. In
addition, the contractors were paid on the basis of their allowable
costs, generally without financial incentives to encourage superior
performance.[Footnote 8]
The MMA required CMS to significantly change its contracting
arrangements and follow the FAR, except to the extent inconsistent with
a specific requirement of the MMA. The MMA removed the specific
procedures for selecting fiscal intermediaries and carriers, and unlike
CMS's existing contracts, MAC contracts must be fully and openly
recompeted at least every 5 years. In addition, the new contracts will
also contain performance incentives for contractors. Finally, MACs will
not be permitted to default on their contracts or terminate their
contracts as allowed under current contracting practices. Contract
termination will follow the requirements of the FAR, which allow the
government to terminate contracts for its convenience or for contractor
default.
MACs will assume work that is currently performed by 51 claims
administration contractors. At present, there are 25 fiscal
intermediaries and 18 carriers. In addition, four durable medical
equipment (DME) regional carriers pay claims submitted by suppliers of
DME, prosthetics, orthotics, and supplies, and four regional home
health intermediaries process home health and hospice (HH) claims.
CMS plans to select 23 MACs to serve specific jurisdictions, including
15 A/B MACs, which will process both Part A and Part B claims; 4 DME
MACs, which will process claims for DME, prosthetics, orthotics, and
supplies; and 4 HH MACs, which will process claims for HH care. CMS's
current schedule calls for the full fee-for-service contracting
workload[Footnote 9] to be transferred to MACs by July 2009.[Footnote
10] CMS plans to conduct competitions for existing Medicare contractor
workloads beginning with a start-up acquisition and transition cycle
for the 4 DME MACs and 1 A/B MAC. The start-up cycle will be followed
by two additional acquisition and transition cycles. Appendix VI shows
CMS's schedule and timing for competing all of the MAC contracts.
MACs will be responsible for most of the functions currently performed
by fiscal intermediaries and carriers. They will process and pay
claims, handle first-level appeals of denied claims,[Footnote 11] and
serve as providers' primary contact with Medicare. In addition, they
will coordinate with CMS's functional Medicare contractors that perform
limited Medicare functions on a national or regional basis, such as
answering the 1-800-MEDICARE help line, coordinating Medicare and other
insurance benefits, and conducting program safeguard activities. For
example, the functional Program Safeguard Contractors (PSC) conduct
activities to prevent or address improper payments--such as
investigating potential fraudulent billing related to the claims paid
by the claims administration contractors.[Footnote 12]
MACs' responsibilities for medical reviews of claims;[Footnote 13]
benefit integrity, which involves the investigation of suspected
fraud;[Footnote 14] and beneficiary inquiries will differ in some
respects from those of the current claims administration contractors.
Currently, three of the four DME regional carriers conduct their own
medical reviews and benefit integrity activities for the claims they
process.[Footnote 15] Under contracting reform, PSCs will be
responsible for performing all medical reviews and benefit integrity
activities related to the claims processed by the DME MACs. These
responsibilities will be allocated differently for A/B MACs. All A/B
MACs will conduct medical reviews of the Part A and Part B claims they
will process, while PSCs will be responsible for conducting benefit
integrity activities related to these claims.[Footnote 16] The current
Medicare claims administration contractors respond to beneficiaries'
questions that are specific to their claims, while staff from 1-800-
MEDICARE answer general questions on the telephone help line. In the
future, staff at beneficiary contact centers (BCC) will answer calls
placed to 1-800-MEDICARE and assume the role of responding to general
and claims-specific questions. MACs will be responsible for responding
to more complex inquiries from beneficiaries that require a more
advanced understanding of Medicare claims processing or coverage rules.
CMS's Plan Does Not Provide an Appropriate Implementation Framework in
All Critical Areas:
CMS's plan for contracting reform provides detailed information--and an
appropriate framework for implementation--in some, but not all,
critical areas. For example, the plan presents detail on the proposed
schedule for MAC implementation. Nevertheless, as figure 1 shows, the
plan does not provide detailed information on the risks associated with
contracting reform, some aspects of CMS's implementation approach, and
the integration of reform activities with other initiatives. CMS has
recently taken steps to address areas of the plan where details and
complete information were lacking, as part of its ongoing planning
efforts. However, key decisions relating to critical areas are yet to
be made and incorporated into its plan.
Figure 1: Areas of Detailed Information in CMS's Contracting Reform
Plan:
[See PDF for image]
[End of figure]
CMS's Plan Provides Useful Information about Some Aspects of
Implementation:
CMS's plan provides a clear discussion of the reasons for implementing
contracting reform, including the restrictions and weaknesses in the
current system, as shown in table 1. The plan also recognizes the
benefits of improving Medicare contracting for beneficiaries and
providers, such as providing a single point of contact for providers'
claims-related inquiries.
Table 1: CMS's Analysis of Restrictions or Weaknesses in Medicare
Claims Administration Contracting and Their Associated Effects:
Restriction or weakness in current system: Lack of full and open
competition;
Effects of current restriction or weakness: CMS lacks the flexibility
to choose qualified organizations to process Medicare claims through
full and open competition. Provider institutions, such as hospitals,
nominate fiscal intermediaries to process Part A claims, which limits
CMS's ability to manage the program effectively. The Secretary of HHS
is required, by law, to choose Part B carriers from health insurers or
similar companies and did not have to compete these contracts.
Restriction or weakness in current system: Separate processing of Part
A and Part B claims;
Effects of current restriction or weakness: Part A and Part B claims
are generally processed by separate claims administration contractors
and claims processing systems. For example, a beneficiary with a
hospital stay followed by home health care will have hospital and some
home health claims paid by a fiscal intermediary, while other home
health and physician claims will be paid by a carrier. This division of
responsibilities for claims payment sometimes makes it difficult for
beneficiaries and providers to have their questions answered quickly.
Providers also face increased expenses due to separate processing and
are limited in their ability to understand and coordinate services on
behalf of their patients.
Restriction or weakness in current system: Specialization restrictions;
Effects of current restriction or weakness: CMS is limited in its
ability to award separate contracts for individual claims
administration activities in which certain companies may excel, such as
operating data centers or educating providers about program rules.
Restriction or weakness in current system: Absence of performance-based
incentives;
Effects of current restriction or weakness: Contractors work under cost-
based reimbursement contracts through which they are reimbursed for the
necessary and proper costs of carrying out Medicare activities, but do
not have financial incentives to improve their performance.
Restriction or weakness in current system: Cumbersome termination
procedures;
Effects of current restriction or weakness: Contractors are allowed to
terminate their contracts without cause, simply by providing 180 days
notice. CMS, on the other hand, has to demonstrate that a poorly
performing or unresponsive contractor has failed substantially to carry
out its contract, or that continuation of the contract is
disadvantageous or inconsistent with the effective administration of
Medicare before it is able to terminate a contract. CMS is also
required to provide the contractor an opportunity for a hearing before
termination.
Restriction or weakness in current system: Outdated information
technology (IT);
Effects of current restriction or weakness: Medicare's IT
infrastructure is inadequate for the program's expanding needs and does
not take advantage of current technologies (e.g., use of the Internet
to submit and track claims) that would improve customer service and
result in additional cost savings.
Source: GAO analysis of CMS's Report to Congress.
[End of table]
The plan also provides maps of the current jurisdictions of Medicare
contractors and future jurisdictions of MACs. A CMS official told us
that the agency took beneficiaries' patterns of care into account when
drawing jurisdictional lines. In addition, according to the plan, CMS
designed the new MAC jurisdictions, which were based on state
boundaries, to achieve operational efficiencies, promote competition,
and better balance the allocation of workloads. For example, there are
one fiscal intermediary and three carriers currently serving New York,
as well as two fiscal intermediaries and one carrier serving
Connecticut. Under contracting reform, one A/B MAC will administer Part
A and Part B claims for beneficiaries residing in these two states.
Currently, different claims administration contractors handle Part A
and Part B claims in the majority of states.[Footnote 17] For example,
in Michigan, United Government Services processes Part A claims, and
Wisconsin Physicians Service Insurance Company processes Part B claims.
In addition, while some current contractors serve one state, others
serve several--sometimes noncontiguous--states. For example, Blue Cross
Blue Shield of Arizona processes Part A claims exclusively in Arizona,
while National Heritage Insurance Company processes Part B claims on
the East Coast in Maine, New Hampshire, Vermont, and Massachusetts and,
on the West Coast, in California. The varying jurisdictions for
contractors that process Part A and Part B claims have resulted in what
CMS's plan terms "a patchwork of responsibility and service."[Footnote
18] CMS has developed 15 distinct, nonoverlapping geographic
jurisdictions for the A/B MACs.[Footnote 19] Appendixes VII, VIII, IX,
X, XI, and XII show the jurisdictional maps for the current fiscal
intermediaries, the current carriers, the current regional home health
intermediaries, the current DME regional carriers, the 15 new A/B MACs,
and the 4 new DME MACs and 4 new HH MACs. A CMS official stated that
while the A/B MACs' jurisdictions continue to vary somewhat in size and
workload, they are reasonably balanced in terms of the numbers of fee-
for-service beneficiaries and providers served.[Footnote 20] However,
CMS officials have stated that companies might be able to win more than
one MAC contract, and, if so, their workloads in multiple jurisdictions
would potentially be greater than those of companies that win contracts
for a single jurisdiction.
In addition to providing information on MACs' jurisdictions, CMS's plan
provides timelines for implementing MAC contracting, including
anticipated contract award dates for the start-up cycle and two
subsequent cycles. CMS plans to monitor each cycle, including
transitions, and to adjust the implementation schedule if necessary.
The start-up cycle, which will result in the award of four contracts to
DME MACs and one contract to an A/B MAC, should provide CMS with
experience that can be applied to the next two cycles. For example, the
start-up cycle will allow new CMS personnel to obtain additional
expertise, if needed, on contracting activities. It will also allow CMS
to examine its acquisition and transition efforts and apply lessons
learned to future cycles.
Recognizing that open communication with stakeholders is important to
the successful implementation of contracting reform, CMS's plan
incorporates a written strategy to provide information and solicit
questions, comments, and feedback on Medicare contracting reform from
potential MACs, providers, and beneficiaries. This communication
strategy includes periodically holding open meetings and establishing a
Medicare contracting reform Web site.[Footnote 21] For example, CMS
hosted a series of open meetings in 2004 and 2005 to share information
and seek input on aspects of its contracting reform plan, including MAC
jurisdictions, draft statements of work,[Footnote 22] and proposed
performance standards.[Footnote 23] In addition, CMS's Web site is
routinely updated to provide answers to questions about contracting
reform and provide access to important documents, such as its Report to
Congress. The Web site also provides a link to a federal procurement
Web site,[Footnote 24] where draft and final versions of MAC statements
of work can be found. Interested parties, including organizations
interested in competing for MAC contracts, provided feedback on these
drafts through CMS's open meetings and its Web site. In developing
certain areas of the contracting reform plan, CMS also sought input
from its headquarters and regional office staff. For example, CMS teams
worked collaboratively to develop the draft statements of work for A/B
MACs and DME MACs.
CMS's Contracting Reform Plan Does Not Fully Address Three Critical
Implementation Areas:
While CMS's contracting reform plan provides detailed information in
some areas, it does not comprehensively address (1) contracting reform
risks and how the agency plans to mitigate them; (2) the intended
approach for implementing certain aspects of MAC contracting, including
details on how CMS will monitor MACs' performance; and (3) coordination
of contracting reform activities with other complex initiatives that
CMS is implementing. While a comprehensive contracting reform plan was
due in October 2004, we found that the plan was still incomplete as of
June 2005. The agency has begun to develop, but has not completed, a
more detailed plan in critical implementation areas. Nevertheless,
without having all of the critical elements of its plan in place, the
agency is undertaking an accelerated schedule and intends to transfer
all claims processing work to MACs by July 2009, more than 2 years
ahead of the MMA's time frame.
Plan Does Not Fully Address Implementation Risks:
CMS's plan does not comprehensively address three major risks and
indicate the steps that the agency plans to take to mitigate them.
These are CMS's proposed implementation schedule, the volume and
complexity of anticipated claims processing workload transitions, and
the potential for voluntary contractor withdrawals. Each of these risks
has the potential to disrupt claims administration services, resulting
in delayed or improper payments to providers.
The Report to Congress--one of the documents in CMS's contracting
reform plan--briefly noted that the anticipated implementation schedule
"will require substantial risk management and schedule precision to
minimize possible operational disruption."[Footnote 25] CMS's proposed
implementation schedule calls for all work to be transferred to MACs by
July 2009--more than 2 years ahead of the MMA's time frame. The initial
start-up acquisition cycle[Footnote 26] is taking place in a 27-month
period--from April 2005 to July 2007--during which about 9 percent of
the national claims possessing workload will be transferred to MACs. If
CMS chooses current contractors that are administering claims in the
MAC jurisdictions, the percentage of the workload transferred would be
less. In the first phase of the start-up cycle, CMS will select and
transfer workload to 4 DME MACs. In the second phase, CMS will select
and transfer workload to 1 A/B MAC. Following the initial start-up
cycle, CMS is planning two acquisition cycles, which will last from
September 2006 to July 2009, during which it will select and transfer
the remaining current contractors' work to 14 A/B MACs and 4 HH MACs.
As part of these two cycles, in the 22 months from September 2007 to
July 2009, CMS plans to manage transitions of as much as 91 percent of
the annual Medicare claims processing workload, which represent an
estimated $250 billion in payments to providers.[Footnote 27] The
transition period for cycle one is 1 year, from September 2007 to
September 2008, and the transition period for cycle two is 10 months,
from September 2008 to July 2009. In 13 of the past 15 years, CMS has
transferred at least one contractor's workload. These transitions took
an average of 6 to 9 months, with some lasting as long as a year.
CMS decided on a more compressed schedule after initially considering a
longer implementation period. In November 2004, CMS officials told us
that they were planning to move to MAC contracting using six
acquisition cycles to be completed around April 2011. According to the
Report to Congress, CMS officials believed that the potential savings
from contracting reform suggested that transferring larger portions of
the workload to MACs in a shorter time frame would allow savings to
accrue more quickly to the Medicare program.
Despite the ambitious time frame for implementation, CMS's plan does
not provide detailed information on the risks involved in transferring
large segments of Medicare's claims processing workload on an
accelerated schedule or outline contingency plans for the transitions
to MACs. CMS's accelerated schedule for cycles one and two leaves
little time for CMS to examine its acquisition and transition efforts,
apply lessons learned, and resolve disagreements about the agency's
award process with companies that were not selected. Furthermore, due
to the accelerated cycle, interested companies--some of which may be
among the best qualified to perform as MACs--may decide not to compete
to win multiple MAC contracts because developing concurrent proposals
or assuming the workload for more than one jurisdiction simultaneously
might strain their resources. In addition, it may prove difficult for
CMS staff to evaluate proposals, award contracts, and manage concurrent
transitions within the proposed time frame.
CMS's plan does not provide details on its strategy for managing these
compressed transitions with its anticipated staff resources. CMS
officials expressed concerns to us that many of the staff most
experienced in handling transitions were, or were close to being,
eligible to retire and that CMS might have to manage these transitions
with less experienced staff. In addition, CMS staff have never had to
manage as many simultaneous transitions, which is likely to add to the
challenge of managing them so that they are as smooth as possible for
providers. As we reported previously, the lack of sufficient staff
resources has hampered other transitions.[Footnote 28]
The volume and complexity of claims workload transitions is a second
risk that CMS's plan does not adequately address. Although CMS has
regularly managed the transitions of claims administration contractors'
workloads and functions and has much experience in doing so, recent
transitions have affected only about 10 percent of the claims for Part
A and Part B in any year. Nevertheless, CMS is planning to transfer 91
percent of current contractors' workload to MACs in less than 2 years.
Furthermore, the MAC transitions will be more complex than past
contractor transitions because both Part A and Part B workloads will be
transferred from multiple contractors to a single MAC in a new
jurisdiction. These changes mean, for example, that under the initial
A/B MAC contract that is awarded--one that involves less than 3 percent
of the national workload in a six-state jurisdiction--CMS will
simultaneously transfer as many as nine separate segments of current
contractors' workload to the new MAC.[Footnote 29] Figure 2 illustrates
the transitions that will occur to consolidate the Part A and Part B
workload in the first contract to be awarded for an A/B MAC
jurisdiction. These transitions will also involve transferring some
portions of the work currently being done by the carriers and fiscal
intermediaries to functional contractors. For example, CMS will be
transferring medical review and benefit integrity work from DME
regional carriers to PSCs at the same time that the claims workload
transfers to DME MACs. While the start-up cycle transitions are
complex, they are planned to affect only 1 A/B MAC and the 4 DME MACs.
CMS will be conducting a much greater number of transitions for cycles
one and two, as the rest of claims administration work is transferred
from current contractors to 14 A/B MACs and 4 HH MACs.
Figure 2: Part A and Part B Transitions That Will Occur in One MAC
Jurisdiction:
[See PDF for image]
[End of figure]
Additional factors may add to the complexity of the transitions. For
example, if current fiscal intermediaries and carriers choose not to
compete or lose competitions for MAC contracts in the jurisdictions
where they currently process claims, they may have little incentive to
be highly cooperative in the transition activities. In these cases,
their knowledgeable staff who would facilitate transitions may seek
employment elsewhere. Further, MAC transitions may involve the transfer
of workloads to companies new to Medicare operations, which would add
complexity to the process.
Another risk that CMS's plan has not fully addressed is the potential
impact that voluntary contractor withdrawals may have on the planned
transition schedule. CMS has not developed mitigation strategies to
deal with these potential withdrawals. Several CMS officials told us
that they were concerned that some contractors might voluntarily
withdraw before the agency's planned competition for jurisdictions that
included their current service areas because the contractors did not
intend to compete as MACs. In addition, contractors that lose
competitions may opt to leave the Medicare program before transitions
to new MACs have been completed. CMS has the option of paying
contractors' staff retention bonuses, so that key contractor staff can
work through transitions, but that may not be enough to convince
contractors to stay in the program. Voluntary withdrawals could force
CMS to conduct competitions and manage transitions for the affected
jurisdictions on a different or more accelerated schedule than
originally planned. CMS could elect to choose a Medicare claims
administration contractor to briefly perform the withdrawing
contractor's work until a MAC is chosen for the affected jurisdiction,
but this could be perceived as limiting competition by favoring one
company over others.
The ultimate risk from transitions that do not proceed smoothly or on
schedule is that providers might not receive payment for the items or
services they furnished to beneficiaries or could be paid
inappropriately. Interrupting providers' cash flow by failing to pay
them can create significant problems in their operations. On the other
hand, any increase in improper payments would create a further drain on
the Medicare trust funds. In fiscal year 2004, CMS estimated that
Medicare claims administration contractors' net improper payments
amounted to $19.9 billion.
CMS has not completed a comprehensive risk mitigation plan to address
the risks associated with contracting reform, but the agency has taken
some initial steps to manage the risks. CMS has developed a procedure
for identifying, analyzing, responding to, and monitoring and
controlling risks. As part of this procedure, CMS has identified
certain risks that may have an impact on implementation, including the
availability of resources to complete scheduled procurement tasks and
the difficulty of developing a clear, complete statement of work that
minimizes the need for future contract modifications. The agency is
currently working on developing a document that lists proposed actions
that could mitigate these and other identified risks. However, CMS's
descriptions of proposed mitigation actions lack specificity. For
example, to address the risk that CMS may not have the funding to
conduct transition activities as scheduled, the proposed mitigation
action is to "monitor federal appropriations," but the document does
not indicate how the agency might redeploy resources or restructure its
transitions, should a funding gap occur. Further, CMS has not developed
mitigation actions for some serious risks, including the failure to
create internal processes for managing MACs. Without such internal
processes, CMS may not be able to effectively administer MAC contracts.
Plan Lacks Detailed Information on MAC Contracting Strategy and
Management and Oversight Approach:
Although CMS has done extensive work toward developing a strategy that
outlines how it intends to implement MAC contracting, the agency's plan
lacks important implementation information in some areas. For example,
CMS has made final decisions concerning certain elements of the MAC
contracting strategy, such as paying performance incentives to
encourage contractor innovation, efficiency, and cost effectiveness.
However, for A/B MACs, the plan does not provide complete and
definitive information on the contract type, performance measures and
incentive structure, proposal evaluation criteria, and methods for
maintaining a competitive environment and conducting market research to
gather information on the number and size of companies that may submit
proposals. CMS's MAC acquisition strategy, which will provide
information on these areas, is not yet complete. The agency planned to
finalize this strategy in July 2005 and to issue the A/B MAC request
for proposals in September 2005.[Footnote 30] Knowing such critical
contracting information well in advance of the issuance of the request
for proposals would make it easier for interested parties to develop
specific plans for competing to win A/B MAC contracts. Having a robust
pool of potential contractors with good proposals would make it easier
for CMS to choose applicants likely to be effective as MACs.
CMS's contracting reform plan states that some MAC functions will be
integrated with those of other types of Medicare contractors, but the
agency has not fully developed the details of this integration. For
example, the plan states that CMS expects that PSCs will continue to
perform activities such as medical reviews and fraud investigations in
the future and will coordinate closely with MACs. In addition, the
statements of work for DME MACs and A/B MACs require that they sign
agreements with PSCs to define respective roles and responsibilities.
Among their responsibilities, DME MACs and A/B MACs will be expected to
coordinate with PSCs in referring potential fraud cases when, for
example, MACs identify claim forms that have been altered to obtain a
higher payment or when it appears that a supplier or provider may have
attempted to obtain duplicate payments. MACs' coordination with PSCs is
critical because findings of fraud could affect payments to providers.
Coordination with PSCs is also discussed in "concept of operations"
documents for DME MACs and A/B MACs. These documents provide high-level
information on how MACs will be expected to work with PSCs and other
contractors that focus on particular Medicare program functions, such
as claims appeals. However, CMS has yet to develop many details,
including information on the specific steps that will be used to
facilitate contractor coordination.
In addition, CMS's plan does not fully outline how the agency intends
to evaluate and manage MACs. CMS's plan incorporates a strategy paper
on evaluating MACs' performance, which was developed for the agency by
a support services contractor. The strategy paper makes a number of
recommendations, including establishing a specific office within CMS to
gather, validate, and score contractor performance data and to share
this information with agency management. CMS officials are currently
considering these and other recommendations that were contained in the
strategy paper. However, as of June 2005, they had not decided whether
to implement any of these recommendations and had not completed their
design of an approach for overseeing and evaluating MAC performance.
Contractor oversight is an area of considerable concern, because, in
the past, CMS's failure to monitor Medicare claims administration
contractors left the Medicare program vulnerable to fraud, waste, and
abuse.[Footnote 31] For example, CMS did not always detect activities,
such as the falsification of reports on contractor performance and the
improper screening, processing, and paying of claims, that led to
additional costs to the Medicare program.
In developing the MAC oversight strategy paper, CMS's contractor drew
on the work of a cross-component work group within CMS that was
established in April 2003.[Footnote 32] The work group reported in June
2004 that CMS lacked an integrated and coordinated framework to guide a
wide range of evaluation activities and that the agency had difficulty
in compiling a comprehensive view of individual contractor
performance.[Footnote 33] The work group also noted that complete and
accurate information on contractor performance will be imperative as
contracts for MACs are periodically recompeted and determinations about
their records of performance become part of the qualification criteria.
This information could also be critical in determining the amounts CMS
pays to MACs as performance incentives.
The plan also lacks detailed information on organizational changes to
better realign agency personnel to support the management and oversight
of new MAC contracts because CMS has not made final decisions in this
area. While CMS currently administers some types of contracts that are
governed by the FAR,[Footnote 34] MAC contracts generally will be
larger, more complex, and more challenging to administer. CMS's past
oversight of claims administration contractors was hindered by
organizational weaknesses,[Footnote 35] and at present, multiple
central office components and regional offices have responsibilities to
help oversee and manage claims administration contractors.[Footnote 36]
Having an organizational structure that is appropriately aligned for
CMS to manage and oversee MACs will make it easier for the agency to
routinely evaluate its contractors on the basis of a variety of newly
established performance measures. CMS has reorganized the central
office component that will be responsible for awarding MAC contracts
and has been considering ways to use regional offices' staff expertise
to support MAC contracting efforts. However, CMS has not completed its
plan for organizational changes, including the division of labor and
responsibilities for management and oversight of Medicare contractors
among CMS components and between the central and regional offices.
Plan Does Not Fully Integrate Scheduling of Contracting Reform
Activities with Other Initiatives:
CMS has not developed an approach that fully integrates the planning
and scheduling of Medicare contracting reform with other initiatives
that will affect Medicare contractors, beneficiaries, and providers
over the next several years. As CMS works toward implementing
contracting reform, it is also focusing on several critical initiatives
that must be integrated, or implemented concurrently, with Medicare
contracting reform. These include the Medicare prescription drug
benefit and the expansion of the existing options available to Medicare
beneficiaries who enroll in private health plans. According to CMS
officials, these initiatives may compete with contracting reform for
agency resources. Other key planned initiatives, such as major systems
upgrades or replacement, will directly affect Medicare claims
administration operations and are anticipated to be fully or partially
implemented between now and 2009 in conjunction with contracting
reform. Information on these interrelated initiatives is provided in
table 2. As we have previously reported, planning for IT system
transitions has often been problematic in federal agencies.[Footnote
37] Coordinating the schedule for implementing these initiatives in
conjunction with Medicare contracting reform is crucial to ensuring
that claims administration operates smoothly during the transition to
MACs.
Table 2: Key Initiatives Affecting MAC Implementation:
Initiative: Standard front end;
Description: This initiative will standardize the way that electronic
claims enter the automated processing system;
Implementation schedule and integration issues related to MAC
implementation: Implementation of this initiative will occur within the
DME MACs and the A/B MACs at the same time they are implemented.
Changing claims administration contractors can require providers and
billing agents to adapt to a new front end, which is why standardizing
the front end as part of MAC implementation could minimize future
disruption for providers and billers.
Initiative: Data center consolidation;
Description: CMS plans to consolidate its current 14 operational data
centers that conduct claims processing functions into 2 data centers;
Implementation schedule and integration issues related to MAC
implementation: CMS had initially planned to begin consolidating the
data centers in fiscal year 2006 to overlap with MAC implementation,
but in May 2005, the agency postponed the initiative for about 2
months, due to the extent of public comments received on the draft
request for proposals for data center contracts. Future consolidation
of data centers will affect MACs because they are required to work with
their respective data centers to maintain electronic information. As a
result, delays or difficulties in transferring workload to the chosen
data centers could increase the risks of claims payment problems during
MAC transitions.
Initiative: BCCs;
Description: CMS plans to establish two to three BCC contracts, which
will be responsible for handling beneficiaries' telephone and written
inquiries;
Implementation schedule and integration issues related to MAC
implementation: BCC implementation overlaps with MAC implementation.
CMS plans to award the first BCC contract in the summer of 2006 and
transfer the workload in the summer of 2007. The second BCC contract
will be awarded in fall 2007, and the workload will be transferred in
2008. While BCCs will assist beneficiaries by answering claims-related
inquires, they will need to coordinate with MACs because MACs will be
responsible for answering more complex questions.
Initiative: Healthcare Integrated General Ledger Accounting System
(HIGLAS);
Description: HIGLAS is a major CMS initiative to modernize Medicare's
accounting and financial management systems. CMS's current accounting
systems are fragmented and overlapping and will be replaced with
HIGLAS--a single, integrated financial accounting system;
Implementation schedule and integration issues related to MAC
implementation: HIGLAS implementation overlaps with MAC implementation.
HIGLAS is expected to be fully operational in 2007. In the future, all
MACs will be required to use HIGLAS. However, several current
contractors have begun to use HIGLAS, and other fiscal intermediaries
and carriers will have begun to use HIGLAS before MAC competitions get
under way. For jurisdictions where transitions to HIGLAS are not
complete, CMS will need to coordinate its scheduling of MAC and HIGLAS
implementation because CMS wants all MACs to use HIGLAS as their
financial accounting system.
Initiative: PSCs;
Description: PSCs focus on program safeguard activities, such as the
review of provider activities, including medical, utilization, and
fraud reviews; cost report audits; Medicare secondary payer
determinations; and provider and beneficiary education;
Implementation schedule and integration issues related to MAC
implementation: PSC transitions overlap with MAC implementation. The
medical review and benefit integrity work will transfer from three DME
regions to PSCs simultaneously with the transition to DME MACs. The
work conducted under three PSC medical review contracts for A/B claims
will transfer to the A/B MACs in the affected jurisdictions at the same
time that the A/B MACs assume their other contractual responsibilities.
Initiative: Recovery Audit Contractor initiative;
Description: This initiative is a demonstration initiative required by
the MMA. It includes two Medicare secondary payer recovery audit
contractors and three claims review recovery audit contractors;
Implementation schedule and integration issues related to MAC
implementation: The implementation of this initiative overlaps with MAC
implementation. This demonstration will run through mid-2008 and will
affect California, New York, and Florida. MACs will not perform any
postpay medical reviews for prior fiscal years for claims paid to
providers in these states, but must coordinate with the contractors
tasked with this assignment. MACs processing claims for these three
states must also complete some additional administrative work related
to debt collection.
Source: GAO analysis of CMS documents.
[End of table]
HIGLAS, in particular, provides an example of why effective integration
is essential. Most outgoing contractors will not be utilizing HIGLAS at
the time their workloads are transferred to MACs. Therefore, CMS will
have to coordinate HIGLAS transition activities, including data
preparation and data conversion testing, between the MACs that will be
using HIGLAS and the outgoing contractors that have been using the
existing financial management systems. Given that the HIGLAS
implementation strategy calls for "just in time" data conversion to
HIGLAS format by outgoing contractors at the time the work is
transferred to the MACs, problems or delays in this conversion could
delay MAC transitions. Therefore, the scheduling for HIGLAS will have
to be carefully managed to allow sufficient time for the data
conversion.
Although CMS has begun initial efforts to integrate the planning and
scheduling of several major initiatives that will affect contractors,
an agency official told us that there are no planning documents to
provide a detailed integration framework and that he did not know when
such documents would be available.[Footnote 38] He said that CMS is
attempting to determine the appropriate sequencing and
interdependencies of the multiple initiatives occurring in the agency.
To focus its sequencing efforts, CMS has designated the contracting
reform implementation schedule as the anchor around which it will
schedule the implementation of HIGLAS and other critical initiatives.
For example, since CMS plans call for MACs moving to HIGLAS either
before or with MAC claims workload transitions, the MAC implementation
plan will be pivotal in determining when the HIGLAS transitions will be
accomplished. CMS is also examining each project's resource
requirements to help ensure that the agency is able to fund the
initiatives in the sequence planned.
Delays in the implementation of MAC-related initiatives could
potentially have a significant impact on the timing, scope of work,
costs, and ultimate success of MAC implementation. For example, CMS has
already begun to experience schedule slippage for its initiative to
consolidate the contractors' data centers. These data centers, which
are provided by current carriers and fiscal intermediaries, conduct the
physical processing of Medicare claims and as a result, play a crucial
role in efficient and accurate claims administration. The agency had
intended to award contracts for four data centers that would
consolidate the work of 14 current centers before awarding the DME MAC
contracts, which are anticipated to be awarded in December 2005.
However, it suspended the request for proposals on May 3, 2005, because
it was unable to consider the large number of comments that were
received on its draft request. It reissued its solicitation on June 27,
2005, for two, instead of four, data centers. Delays or other problems
in implementing the consolidation of its data centers could affect the
efficiency and effectiveness of MACs' claims processing transitions.
CMS's Report to Congress stated that having the new data centers would
be critical to achieving the greatest efficiency from the MAC
transitions, in part because some of the information services and
support to be provided by MACs would depend on the modernized
platform.[Footnote 39] Currently, CMS expects that one of the new DME
MACs will be managing a data center for all of the DME MACs as a
stopgap measure and plans to award the contract for the two data
centers in February 2006. Implementation of the data centers is planned
to coincide with implementation of the first A/B MAC selected.
The data center consolidation effort faces some of the same
complexities that might occur during the transition of the claims
processing contracts. If claims administration contractors operating
data centers opt to leave the program before the conclusion of their
contracts, CMS will have to find other data center contractors to
temporarily take over that workload. Furthermore, because the data
center consolidation is planned to occur during the MAC transition
period, the two data center contractors will have to support claims
administration contractors moving in or out of the program, while also
integrating some of the prior data center contract work into their new
data center responsibilities. CMS generally envisioned multiple data
center transitions overlapping, but the schedule for data center
consolidation is uncertain. CMS has not indicated how it intends to
handle the risks associated with moving data center work at the same
time claims processing workload is being transferred to MACs.
Plan's Cost and Savings Estimates Do Not Provide a Reasonable Basis for
Decision Making:
CMS's plan includes estimated costs and savings for Medicare as a
result of contracting reform, but the estimates are too uncertain to
provide a reasonable basis for making implementation decisions. Because
CMS has never undertaken an effort comparable to full-scale contracting
reform, the plan's cost and savings projections were based on
questionable evidence and assumptions about a contracting environment
that differs considerably from its current one. As a result, the costs
to implement contracting reform and the savings generated from it could
be significantly greater or less than CMS has anticipated.
Cost Estimates Depend on Uncertain Outcomes:
In its plan, CMS estimated that the costs to implement contracting
reform from 2006 to 2011 would total about $666 million.[Footnote 40]
The plan's cost estimate is higher than indicated in the Report to
Congress, which included only the fiscal year 2006 budget request of
$58.8 million to support a single year of contracting reform
implementation costs. CMS opted not to include its estimates for funds
that would likely be requested in its budgets for fiscal years 2007
through 2011. The Report to Congress indicated that contracting reform
would require "substantial additional investment in subsequent
years."[Footnote 41] The costs CMS anticipates incurring each year are
shown in figure 3.
Figure 3: Estimated Costs of Medicare Contracting Reform, Fiscal Years
2006-2011, as of February 2005:
[See PDF for image]
Note: The costs for each year are adjusted for inflation, using 2004 as
the base year.
[End of figure]
The estimated $666 million in costs is divided into four categories, as
noted in table 3.[Footnote 42] The largest cost component is for the
termination and transition of the current Medicare contractors, which
CMS has estimated at $331.5 million. When a Medicare contract is
terminated, contractors can have costs for items such as lease
termination, equipment depreciation, and severance pay for contractors'
employees. The current Medicare contracts may require CMS to pay many
of these termination costs when contractors leave the Medicare program.
Similarly, when a Medicare contract workload is transferred from an
outgoing contractor to another one, transition costs are incurred. Such
transition costs include expenses related to transferring Medicare
records and updating records related to Medicare benefit payments,
including overpayments and other accounts receivable, so they are ready
for the incoming contractor to use.
Table 3: CMS's Estimates of Administrative Costs for Medicare
Contracting Reform, Fiscal Years 2006-2011, as of February 2005:
Dollars in millions:
Type of cost: Termination and transition costs;
Estimated cost: $331.5.
Type of cost: Performance incentives;
Estimated cost: $190.6.
Type of cost: IT and other costs[A];
Estimated cost: $132.5.
Type of cost: Provider satisfaction surveys;
Estimated cost: $11.7.
Type of cost: Total;
Estimated cost: $666.3.
Source: GAO analysis of CMS cost estimates.
[A] CMS informed us on July 29, 2005, that it had updated this cost
estimate, but the updated estimate was not available to be included in
this report.
[End of table]
Although CMS's estimate for termination and transition costs is based
on cost data from prior years, it is impossible to predict with
certainty the termination or transition costs that will be incurred
through implementing contracting reform. CMS's estimate for termination
and transition costs is based on the agency's experience with both
types of costs from 1995 to 2001. The estimate assumes that current
contractors will win the majority of the MAC contracts and retain about
60 percent of their current workload. However, CMS officials do not
know how many of the existing contractors will win MAC contracts for
particular jurisdictions, so this assumption is speculative.
Additionally, some of CMS's prior contractor transitions were "turnkey"
operations, in which an incoming contractor simply assumed the prior
contractor's business arrangement and staff without needing to incur
some of the usual start-up costs, such as equipment purchases.
Likewise, in turnkey transitions, CMS did not have to cover severance
pay, because the outgoing contractor's existing staff could be employed
by the incoming contractor. As a result, the prior transitions may have
cost less than the transitions that will occur during contracting
reform because CMS is not requiring MACs to retain outgoing
contractors' work sites or staff.
Contracting reform will allow CMS to pay performance incentives that
are designed to reward MACs with exceptional performance. However, it
is impossible to know the amount of incentive fees contractors will
earn in the full-scale MAC environment until the contracts are awarded
and CMS has more experience with contractor performance. These
performance incentives are projected to cost 5.5 percent of the total
estimated costs of the MAC contracts, or $190.6 million for fiscal
years 2006 through 2011. CMS based this estimate on its prior
experience in managing contractor incentive programs on a much smaller
scale.
Several IT modernization projects designed to support MACs by
facilitating electronic claims processing are included in CMS's
estimate of contracting reform costs.[Footnote 43] These IT project
costs include CMS's planned consolidation of its current data centers.
However, delays in the data consolidation initiative may affect the
amount of these costs.[Footnote 44] The IT modernization costs also
include plans to standardize the front end, or the way that electronic
claims enter the DME MACs' automated processing systems. CMS did not
include similar costs for A/B MACs, because the agency had not made a
decision to standardize the A/B MAC front ends at the time these
estimates were made.[Footnote 45] CMS's $132.5 million estimate for IT
and other costs included $78.7 million in IT costs needed to support
Medicare contracting reform, primarily the cost of data center
consolidations.[Footnote 46]
The final type of costs CMS estimated was for surveys of providers to
assess their opinions about MAC performance. The MMA required that MAC
performance be assessed in part based on provider satisfaction. CMS
plans to begin surveying providers to measure their satisfaction with
their MAC's performance after MACs begin operating. The cost estimate
for these surveys is $11.7 million and was based on an internal CMS
analysis.
A potential operational cost not part of CMS's implementation estimate
is funding for MAC contract modifications. Under the current contract
arrangements, CMS is able to develop new tasks for contractors to
complete. The agency may pay more for these tasks to be completed,
regardless of the initial requirements set for the year, or may direct
the contractor to do the work within its existing budget, if CMS's
review of the contractor's spending pattern indicates that new funding
is not needed to complete the new tasks. In the MAC environment, unless
they become part of the statement of work, CMS will not be able to add
new tasks to the MAC contracts without negotiating payment for them.
Because contractors will submit proposals based on the tasks described
in the original statement of work, work required after the contract is
awarded could require CMS to negotiate with MACs. This could be the
case, for example, if new legislation requires CMS to implement a major
program change that was not anticipated in the established MAC contract
costs. For example, in 2001, we reported that the Department of Defense
(DOD) was not including contract adjustments when budgeting for its
contracts with the insurers delivering health care to DOD
employees.[Footnote 47] We warned that this approach could become quite
costly, because in fiscal year 2001, it led to a $500 million shortfall
in the DOD budget. When an agency is negotiating changes with an
existing contractor, the competitive aspect of the negotiations is
lost. As a result, the federal government may not always receive the
best price. If CMS has to negotiate new tasks with the MACs for greater
payment, contracting costs could rise above the agency's estimates. To
address this concern, CMS has instructed companies interested in
becoming DME MACs to assume a level of effort for a specific number of
changes. As long as the extra work to implement program changes does
not exceed the level of effort in the statement of work, the Medicare
program would not incur additional operational expenses.
Savings Estimates Depend on Contractor Performance in Reducing Improper
Payments:
Based on estimates generated both internally and by a consultant, CMS
expects that contracting reform will generate significant savings to
Medicare's administrative budget and to the Medicare trust funds. While
it is rational to assume some level of savings, these estimates are
highly uncertain because they project the outcome of contracting
processes and protocols that CMS has not used before. Furthermore, the
consultant's estimates relied on questionable evidence and were not
reviewed by CMS program staff with the expertise to confirm whether the
assumptions upon which they are based are realistic.
CMS's estimate of savings from 2006 to 2011 for the administrative
budget totals $459.5 million, as shown in table 4. These savings are
estimated to come from two sources. First, CMS anticipates that the
competed MAC contracts will cost less than the current agreements and
encourage more innovative efforts among contractors, which will allow
them to operate at lower cost. CMS estimates that the introduction of
competition will lower the contractor budget for awarded MAC contracts
by 6 percent in the first year and 12 percent in each succeeding year.
Second, CMS anticipates that the consolidation of its 14 Medicare data
centers will lower operating costs.[Footnote 48] Both of the savings
estimates shown in table 4 will be highly dependent upon contractor
performance and the outcome of the competitive process. For instance,
any savings CMS incurs from competing the MAC contracts will
substantially depend on their final costs.
Table 4: CMS's Estimates of Administrative Savings from Medicare
Contracting Reform, Fiscal Years 2006-2011, as of February 2005:
Dollars in millions:
Source of savings: Competition for MAC contracts;
Estimated savings: $376.3.
Source of savings: Consolidation of Medicare data centers[A];
Estimated savings: $83.2.
Source of savings: Total;
Estimated savings: $459.5.
Source: GAO analysis of CMS savings estimates.
[A] CMS informed us on July 29, 2005, that it had updated this savings
estimate and it is now higher, but the updated estimate was not
available to be included in this report.
[End of table]
CMS's annual estimates of savings for the administrative budget
increase significantly from fiscal year 2006 to fiscal year 2011. As
shown in figure 4, these estimated savings would begin to outpace CMS's
estimated administrative costs in 2009, and by 2011, they would exceed
estimated costs by $100 million.
Figure 4: CMS's Annual Estimates of Administrative Costs and Savings
from Medicare Contracting Reform, Fiscal Years 2006-2011, as of
February 2005:
[See PDF for image]
[End of figure]
CMS anticipates that the bulk of the savings from Medicare contracting
reform will occur through funds it can avoid spending from the Medicare
trust funds, but the basis for this estimate is uncertain. CMS's
consultant estimated the total projected savings to the trust funds
through fiscal year 2011 to be over $1.4 billion.[Footnote 49] The
savings to the trust funds are expected to come from the three main
sources shown in table 5. The consultant who created these savings
estimates explained that while it is logical to assume some level of
savings to the Medicare program, there are "enormous uncertainties" at
this stage of the implementation process, which make it difficult to
project the savings with much accuracy. Ultimately, each of these
sources of savings assumes that contracting reform will lead to a lower
rate of improperly paid claims. Further, while the estimate for each of
the three sources is based on a different methodology and formula, the
basis for each is similar enough that the savings accrued through each
may overlap, resulting in possible double counting. Therefore, whether
contracting reform will actually achieve the $1.4 billion savings is
highly uncertain.
Table 5: CMS's Consultant's Estimates of Savings to the Trust Funds
from Medicare Contracting Reform, Fiscal Years 2006-2011:
Dollars in millions.
Source of savings: Combining Medicare contracts for Part A and Part B,
resulting in more comprehensive medical reviews of claims;
Fiscal year 2006-2010 estimated savings: $350;
Fiscal year 2011 estimated savings: $220;
Total fiscal years 2006-2011 estimated savings: $570.
Source of savings: Higher claims denial rates, because MACs will
perform more effective medical reviews, to remain competitive[A];
Fiscal year 2006-2010 estimated savings: $160;
Fiscal year 2011 estimated savings: $100;
Total fiscal years 2006-2011 estimated savings: $260.
Source of savings: Greater incentive for MACs to operate efficiently
and adopt industry innovations in automated review of claims to remain
competitive;
Fiscal year 2006-2010 estimated savings: $390;
Fiscal year 2011 estimated savings: $260;
Total fiscal years 2006-2011 estimated savings: $650.
Total estimated savings;
Fiscal year 2006-2010 estimated savings: $900;
Fiscal year 2011 estimated savings: $580;
Total fiscal years 2006-2011 estimated savings: $1,480.
Source: GAO analysis of CMS's consultant's savings estimates.
Note: The Report to Congress stated savings for 2006 through 2010, but
the consultant's complete estimates were calculated through 2011.
[A] The consultant assumed that a portion of claims denial rates can be
associated with contractor performance and that contractors would have
an incentive for higher performance in the new competitive contracting
environment. As a result, the savings estimate includes projected
savings from higher claims denial rates.
[End of table]
The consultant's estimate anticipates that MACs could detect a larger
amount of improper payments because they will be examining both Part A
and Part B claims, but there is little evidence to support the amount
of savings assumed. Currently, Part A and Part B medical reviews are
generally conducted by different contractors, which lessens their focus
on problematic billing that spans both parts. The consultant estimated
that having MACs conduct joint Part A and Part B medical reviews would
lower the amount of improperly paid Medicare claims by 0.08 percent.
However, CMS's senior medical review staff indicated that they had no
prior knowledge of this actuarial estimate until we showed it to them.
The staff told us that there is no evidence to realistically estimate
the amount of savings that may result from consolidating the medical
review responsibility for both parts. Furthermore, according to CMS
staff, the greatest savings would likely come through computerizing
medical reviews to automatically examine and compare Part A and Part B
claims before they are paid. However, this capability is not currently
possible, because Part A and Part B claims are processed on different
payment systems, and developing a combined Part A and Part B claims
processing system that could automatically compare Part A and Part B
claims before payment would take years to complete.[Footnote 50]
Potential savings from improved fraud detection are also impossible to
quantify, based on current information. The PSCs currently conduct
fraud detection activities for both Part A and Part B in 40 states, the
District of Columbia, Puerto Rico, and the Virgin Islands. As CMS
implements contracting reform, the jurisdictions in which PSCs will
conduct fraud detection for both parts may change. While CMS considers
having a single PSC handling both Part A and Part B fraud detection a
way to make its contractors more efficient, a senior official
acknowledged that the agency had no evidence with which to determine
whether having the PSCs conduct combined fraud reviews has been more
effective in detecting fraud than having these reviews conducted by
separate contractors for Part A and Part B.
The consultant's estimate also anticipated that MACs will be able to
pay claims more accurately than the current Medicare contractors, due
to more effective medical review of claims, thus increasing claims
denial rates. While noting that some elements of claim denials are not
associated with contractor performance, the consultant assumed that
better contractor performance could be equated with increased claims
denial rates. The calculation for this assumption was based on the
projection that contractor denial rates would increase[Footnote 51] and
that half of these increased denials would lead to program savings.
However, CMS program staff told us that they do not consider denial
rates in their evaluation of contractor performance but instead
evaluate claims administration contractors' rates of paying claims
properly. The CMS program staff told us that they were not sure of the
basis for the consultant's calculations, and one senior official stated
that it was unclear whether more denials would occur with new MACs.
Finally, the consultant projected that if CMS awards contracts
competitively, contractors will have an incentive to operate more
efficiently and to adopt the leading industry innovations that improve
performance. The consultant expected these efforts to result in lower
levels of improperly paid claims. This projection was based on a 1995
GAO report that estimated that if Medicare contractors adopted the
technology and capabilities used by private insurers to detect improper
payments through automated claims reviews, Medicare payments for
physicians' services and supplies could be reduced by 1.8 percent.
Since that report was issued, CMS has made additional efforts to reduce
improper payments. In addition, CMS was not certain that GAO's assumed
savings were achievable. Recognizing this, the consultant reduced this
portion of the savings estimate to a 0.09 percent reduction in Medicare
fee-for-service payments. In the consultant's opinion, this adjusted
for current error rates and CMS's opinion that the initial 1995 GAO
estimate was too high. However, when we followed up with CMS in April
2005, a senior official stated that while it would be realistic to
expect some level of savings in the new competitive contracting
environment, she did not know how the amount could be accurately
quantified.
Conclusions:
The millions of dollars in savings that CMS envisions achieving through
contracting reform in the early years of implementation are largely
based on questionable estimates. However, these anticipated savings
have been the driving force behind the agency's decision to accelerate
its schedule for contracting with MACs. The agency has opted to
transfer the entire current contractor workload to MACs 2 years ahead
of the MMA time frame, in the hope of garnering savings to Medicare as
quickly as possible. The accelerated schedule raises concerns for a
number of reasons. First, CMS has never before undertaken a project of
this scope and magnitude--one that affects more than 35 million
beneficiaries and 1 million health care providers. If transitions do
not run smoothly, operational disruptions could lead to delayed
payments to providers and increased improper payments by contractors.
With Medicare net improper payments estimated to be almost $20 billion
annually, any potential increase is cause for concern. Second, while
CMS's plan provides detailed information in some areas, other critical
areas of the agency's plan are still being developed. Although the
agency is employing a start-up cycle that will provide an opportunity
to gain valuable FAR contracting experience, the ambitious schedule for
the subsequent two cycles leaves little time for the agency to learn
from the experience and resolve problems that might arise. Finally,
attempting complex transitions of almost all of the claims
administration workload in less than 2 years, in conjunction with
changes in the data centers and financial management systems,
significantly increases the risk that providers' claims will be paid
improperly or not be paid at all. As CMS undertakes this important
challenge, it is critical that the agency proceed at a prudent pace in
order to apply lessons learned from early implementation experiences to
future contracting cycles.
Recommendation for Executive Action:
To better ensure the effective implementation of Medicare contracting
reform, we recommend that CMS extend its implementation schedule to
complete its workload transitions by October 2011, so that the agency
can be better prepared to manage this initiative.
Agency Comments and Our Evaluation:
In its written comments on a draft of this report, CMS noted that
implementing Medicare contracting reform would enable the agency to
improve the efficiency of the services delivered to Medicare
beneficiaries and providers. CMS agreed that implementing contracting
reform was a significant undertaking, but did not concur with our
recommendation to extend its implementation schedule. CMS stated that
by fully implementing MAC contracting 2 years earlier than required, it
would achieve savings to the trust funds and operational efficiencies
more quickly. In addition, CMS stated that extending the transition
schedule would increase the risk of current contractors leaving the
program before MAC contracts are awarded and eliminate the agency's
flexibility to adjust its schedule in response to unforeseen changes
and still meet the mandated implementation date. We believe that by
accelerating its implementation schedule to transfer the entire
Medicare claims processing workload to MACs by July 2009, CMS is
assuming an unnecessary risk. While it is true that lengthening the
implementation schedule could increase the possibility that one or more
contractors might withdraw from Medicare prematurely, we see greater
risk in attempting complex transitions without sufficient time for
adequate planning and midcourse adjustments. When the considerable risk
associated with accelerated implementation is considered in light of
uncertain savings, a more prudent approach would be to use the time
frame established in the MMA to fully develop implementation plans,
evaluate lessons learned, and apply them to future acquisition cycles.
In recommending that CMS extend its implementation schedule, we assume
that the agency would allow sufficient time at the end of the final
transition to adjust for problems and unforeseen circumstances and
still meet the mandated implementation date of October 1, 2011. CMS
agreed that it would need sufficient time for this kind of adjustment
and has not developed plans for all contingencies. For example, CMS
responded to a relatively short schedule slippage for its enterprise
data center implementation by including in contract language the option
for one of the DME MACs to run a data center on an interim basis.
However, CMS will still have to develop the details of the contract and
choose the most appropriate company to perform this work. This is one
example of the many adjustments that will undoubtedly have to be made
before all of the transitions are finished.
CMS also stated that it disagreed with our conclusion about its
readiness to conduct transitions to MACs. Our report did not conclude
that CMS would not be ready to conduct transitions according to its
proposed schedule. However, having a fully developed plan in place
would assist CMS in conducting these transitions as smoothly as
possible. As we stated in the report, CMS has recognized that it needs
to develop certain critical areas in its plan and is taking steps to
address them. For example, it is clear from its comments that the
agency is very concerned about the risks involved in the complex
transitions of claims workload and is planning mitigation actions--such
as hiring a contractor to help manage the effort. CMS's comments
provide additional information on other steps that it is taking to
reduce or mitigate significant risks, coordinate the schedule for MAC
implementation with other agency fee-for-service initiatives, develop
detailed integrated implementation schedules, and address other GAO
concerns. Nevertheless, the additional information provided by the
agency generally reinforces our point that the agency's implementation
plan, which was due to the Congress and to us in October 2004, is still
a work in progress. For example, as we pointed out in the report, CMS's
comments indicate that it has not completed its integrated
implementation schedule and that it is leaving details concerning
contractor coordination to MACs and other contractors. In addition, CMS
has not finalized important implementation information, such as key
performance measures or its MAC evaluation strategy and evaluation
criteria for A/B MACs, or completed its proposal for a new
organizational structure to oversee and manage the MACs. While CMS does
have a risk management process, its current identification of risks and
mitigation strategies lacks specificity and the agency has not
completed a comprehensive risk mitigation plan.
CMS also disagreed with our assessment of the quality of its cost and
savings estimates. CMS said that its estimates of implementation costs
were well informed by program experience and were the best available
predictions of future costs. As we reported, CMS used information from
previous transitions of contractor workload to help estimate its
administrative costs. This grounded the estimate in the agency's past
experience. However, CMS had to make assumptions about the amount of
claims workload to be transferred and transition costs to be paid,
which might turn out to be inaccurate. Unlike previous workload
transitions, CMS is not requiring MACs to maintain staff and facilities
from the former contractors. This should allow the MACs to gain
efficiencies in operations, but CMS may end up paying more in severance
pay or for start-up costs than estimated. Similarly, CMS's experience
informed its estimate of administrative savings, but the estimate
depends on assumptions about the efficiencies MACs will achieve that
are difficult to predict with certainty. While CMS's assumptions about
administrative costs and savings might appear reasonable, if the
assumptions are inaccurate, the estimates will not reflect the real
costs and savings over time. In addition, CMS indicated that because
the costs of contract modifications were for operations after the
transfer of claims workload, they should not be included in the
implementation cost estimate. As CMS noted, its DME statement of work
includes a provision for implementing a specific number of programmatic
changes after the contract is awarded, to reduce the possibility that
CMS would have to negotiate contract modifications that incurred
additional costs. We modified our draft to clarify our discussion of
the potential costs of contract modifications.
Our greatest concern relates to CMS's consultant's estimate of savings
to the trust funds. As we indicated in our report, the estimate of
savings to the trust funds is generally based on little evidence and
its underlying assumptions may not be reasonable, yet it played a
significant role in CMS's decision to compress its implementation
schedule. While CMS suggested that the savings estimate is
conservative, the consultant who generated this estimate indicated that
there were "enormous uncertainties" in estimating savings at this point
in the implementation process. In its comments, CMS noted that our
report highlighted the lack of direct evidence to support the amount of
estimated savings. In response, CMS stated that the savings estimate
was the best available, given that the changes proposed are
unprecedented. CMS indicated that each of the three elements of the
estimate of savings to the trust funds addresses a different aspect of
the claims process. However, each of the three elements actually
addresses the same aspect--MACs improving their medical and other
claims review to increase denials of improper claims. CMS's comments
indicate that its technical staff agree that the assumptions underlying
this estimate are reasonable. We discussed these estimates with CMS
officials most knowledgeable about medical and other claims review and
they did not agree that the assumptions were based on evidence and were
reasonable. Further, because each element in the savings estimate
assumes improvement in claims review and improper claims denial, we
think it is likely that CMS is double counting its potential savings.
For example, the consultant estimated that the MACs would have higher
claims denial rates, but also separately estimated savings from other
aspects of claims review that--if conducted more efficiently--would
lead back to higher claims denial rates.
We are sending copies of this report to the Secretary of HHS, the
Administrator of CMS, appropriate congressional committees, and other
interested parties. We will also make copies available to others upon
request. This report is also available at no charge on GAO's Web site
at http://www.gao.gov.
If you or your staff have any questions about this report, please
contact me at (312) 220-7600 or aronovitzl@gao.gov. Contact points for
our Offices of Congressional Relations and Public Affairs may be found
on the last page of this report. GAO staff who made major contributions
to this report are Sheila K. Avruch, Assistant Director; Sandra D.
Gove; Joy L. Kraybill; Kenneth Patton; and Craig Winslow.
Signed by:
Leslie G. Aronovitz:
Director, Health Care:
[End of section]
Appendix I: Documents CMS Officials Have Identified as Constituting the
Agency's Plan for Implementing Contracting Reform:
The Centers for Medicare & Medicaid Services (CMS) has designated its
report, entitled Report to Congress: Medicare Contracting Reform: A
Blueprint for a Better Medicare, and the documents underlying this
report as its plan for implementing Medicare fee-for-service
contracting reform. Documents include the following:[Footnote 52]
* maps of jurisdictions for A/B Medicare administrative contractors
(MAC), durable medical equipment (DME) MACs, and home health and
hospice MACs;
* CMS's estimates for savings to the Medicare trust funds,
administrative costs and savings, provider and beneficiary savings, and
supporting narrative and information;
* MAC transition timelines;
* DME and A/B MAC project schedules;
* requests for information for A/B MACs and DME MACs, as published on
FedBizOpps, including concepts of operations, draft statements of work,
draft performance standards, and workload implementation handbooks;
* DME MAC request for proposals and related documents, including the
final statement of work, as published on FedBizOpps;
* materials on beneficiary and provider customer service;
* materials concerning work on reengineering Medicare fee-for-service
contract management processes;
* BearingPoint, Inc., Health Services Research & Management Group,
Contractor Evaluation Improvement Project (CEIP) Strategy Paper, Final
Report (McLean, Va.: Mar. 18, 2005);
* Centers for Medicare & Medicaid Services, Medicare Contracting
Reform: Acquisition Strategy for Medicare Administrative Contractors,
draft (Baltimore, Md.: Feb. 28, 2005);
* Centers for Medicare & Medicaid Services, MAC Implementation Project,
Risk and Issue Management Process, Schematic (Baltimore, Md.: Jan. 24,
2005);
* Centers for Medicare & Medicaid Service, MCMG Risk Management Plan
for the Medicare Administrative Contractor Implementation Project,
draft (Baltimore, Md.: Dec. 7, 2004);
* Centers for Medicare & Medicaid Services, Medicare Contracting
Reform, Communication Plan (Baltimore, Md.: Nov. 10, 2004);
* LMI Government Consulting, Medicare FFS Contracting Reform: Level
Five Work Breakdown Structure and Master Project Plan (McLean, Va.:
October 2004);
* LMI Government Consulting, Medicare Fee-for-Service Contracting
Reform: Assessment of Planning Needs (McLean, Va.: August 2004);
* Centers for Medicare & Medicaid Services, Report to the Medicare
Contractor Oversight Board: Integration Issues in Modernizing Medicare,
Final Report, submitted by CMS's fee-for-service project integration
team (Baltimore, Md.: July 2, 2004), and related briefing documents;
and:
* Logistics Management Institute, Sensitive Assessment Center, Medicare
Fee-for-Service Contracting Reform: Key Challenges (McLean, Va.:
December 2003).
Also see documents found at the following Web sites:
http://www.cms.hhs.gov/medicarereform/contractingreform/ and
http://www.cms.hhs.gov/medicarereform/contractingreform/whats_new/
[End of section]
Appendix II: Documents Used by GAO to Develop Criteria for Reviewing
CMS's Plan for Contracting Reform:
Selected provisions of section 1874A of the Social Security Act, added
by section 911 of the Medicare Prescription Drug, Improvement, and
Modernization Act of 2003 (MMA), Pub. L. No. 108-173, 117 Stat. 2066,
2378--2386 (to be codified at 42 U.S.C. § 1395kk-1).
Centers for Medicare & Medicaid Services, Contractor Reform--Update,
September 22, 2004.
Medicare fee-for-service contractor (unnamed), Contractor Suggestions
Regarding Implementation of Medicare Administrative Contracts. Comments
submitted to CMS by a current Medicare fee-for-service contractor.
December 22, 2004.
GAO, Business Process Reengineering Assessment Guide, GAO/AIMD-10.1.15
(Washington, D.C.: May 1997).
GAO, An Evaluation Framework for Improving the Procurement Function: A
Guide for Assessing Strengths and Weaknesses of Federal Agencies'
Procurement (Exposure Draft), (Washington, D.C.: October 2003).
LMI Government Consulting, Medicare Fee-for-Service Contracting Reform:
Assessment of Planning Needs (McLean, Va.: August 2004).
[End of section]
Appendix III: GAO's Criteria for Evaluating CMS's Contracting Reform
Plan:
Element: Contracting reform planning and implementation;
Subelement: Contracting reform objectives; Criteria: Does the plan
explain contracting reform objectives, such as promoting competition
and establishing better communication between contractors and
beneficiaries?
Element: Contracting reform planning and implementation;
Subelement: Scope;
Criteria: Does the plan present an overview of how MAC implementation
fits into broader agency plans?
Element: Contracting reform planning and implementation;
Subelement: Schedule;
Criteria: Does the plan state when major events will take place,
including announcing MAC jurisdictions, issuing proposed performance
measures for inclusion in A/B MAC contracts and requests for proposals,
selecting DME MACs and A/B MACs, and completing the transition to MAC
contracting?
Element: Contracting reform planning and implementation;
Subelement: Budget;
Criteria: Does the plan provide key information on budget and costs for
contracting reform, such as estimated termination costs for current
contractors, MAC operational costs, and performance incentives?
Element: Contracting reform planning and implementation;
Subelement: Performance measures for contracting reform;
Criteria: Does the plan provide high-level information on performance
measures--that is, what constitutes success in contracting reform and
how will progress be measured?
Element: Contracting reform management and oversight;
Subelement: Risk management;
Criteria: Does the plan identify a contingency or risk mitigation
strategy for potential problems as contracting reform is being
implemented?
Element: Contracting reform management and oversight;
Subelement: Transition planning;
Criteria: Does the plan address transition concerns and contingency
planning for the transitions?
Element: Contracting reform management and oversight;
Subelement: CMS staffing;
Criteria: Does the plan explain how CMS staff will be organized and who
will have specific roles and responsibilities in managing contracting
reform?
Element: Contracting reform management and oversight;
Subelement: Management and oversight structure;
Criteria: Does the plan provide information on CMS's intended
contractor management and oversight structure for MACs?
Element: Contracting reform management and oversight;
Subelement: Human capital;
Criteria: Does the plan provide an approach for ensuring that the
agency has the right staff in the right numbers with the right skills
in the right places to accomplish its mission effectively? This
approach requires that an agency devote adequate resources to provide
its acquisition workforce with the training and knowledge necessary to
perform their jobs. It also requires long-range planning, including
succession planning, to ensure the workforce has the necessary skills
and qualifications to perform the procurement function into the future.
Element: Implementation of MAC contracting;
Subelement: Jurisdictions;
Criteria: Does the plan provide information on MAC jurisdictions,
including number and geographic areas?
Element: Implementation of MAC contracting;
Subelement: Rollout plan;
Criteria: Does the plan provide information on the jurisdictional
rollout plan, and how this timeline might be affected by voluntary
contractor withdrawals?
Element: Implementation of MAC contracting;
Subelement: A/B strategy;
Criteria: Does the plan discuss the strategy for combining Part A and
Part B and associated implications or risks?
Element: Implementation of MAC contracting;
Subelement: Contract acquisition;
Criteria: Does the plan address the acquisition process for new
contracts?
Element: Implementation of MAC contracting;
Subelement: Eligibility of contractors;
Criteria: Does the plan describe the eligibility criteria expected of
MACs?
Element: Implementation of MAC contracting;
Subelement: MAC functions;
Criteria: Does the plan describe the functions that MACs will perform,
such as developing local coverage decisions, determining payment
amounts, making payments, educating beneficiaries, and communicating
with providers?
Element: Implementation of MAC contracting;
Subelement: Non-MAC functions;
Criteria: Does the plan provide information on functions that will be
assigned to non-MAC contracts?
Element: Implementation of MAC contracting;
Subelement: Coordination concerning program integrity functions;
Criteria: Is the plan clear in defining the roles of MACs and other
contractors that conduct program integrity functions, so that program
integrity efforts are not duplicative? Does the plan explain how MACs
and other contractors will interface and coordinate their different
program integrity activities?
Element: Implementation of MAC contracting;
Subelement: Chains;
Criteria: Does the plan provide information on how MACs will deal with
chain providers, which is a concern for those with establishments in
multiple MAC jurisdictions?
Element: Implementation of MAC contracting;
Subelement: Performance requirements;
Criteria: Does the plan address the establishment and definition of
performance measures for MACs?
Element: Implementation of MAC contracting;
Subelement: Policies and processes;
Criteria: Does the plan provide clear, transparent, and consistent
policies and processes that provide a basis for the planning, award,
administration, and oversight of procurement efforts?
Source: GAO analysis of documents used to develop criteria for
reviewing CMS's plan for contracting reform.
Note: Documents used to develop criteria are listed in app. II.
[End of table]
[End of section]
Appendix IV: Scope and Methodology:
To conduct this evaluation, we consulted CMS to determine the documents
included in its plan for contracting reform. Appendix I lists the
documents that were identified by agency officials as included in CMS's
contracting reform plan, including its Report to Congress, that were
provided to us through June 3, 2005. We developed evaluation criteria
to assess the extent to which CMS's plan provides an appropriate
framework to implement Medicare contracting reform. To develop these
criteria, we analyzed the statutory provisions added by section 911 of
the MMA, documents and related information prepared to help CMS plan
for contracting reform, and GAO guidance on assessing federal agencies'
procurement functions. We also reviewed GAO's guidance on changing the
approach through which mission-critical work is accomplished. These
documents are listed in appendix II. The evaluation criteria we
developed address contracting reform planning and implementation,
contracting reform management and oversight, and CMS's contracting
strategy for MACs and are listed in appendix III. We used these
criteria to evaluate CMS's plan. In addition to this assessment, we
also conducted interviews with officials at CMS headquarters and
regional offices concerning the process for developing the plan, the
implementation schedule, the challenges that CMS faces in implementing
contracting reform, lessons learned that have prepared CMS for moving
to the MAC environment, and the risks and benefits involved in the
transition to MAC contracting. We also interviewed officials from four
current Medicare contractors to obtain their views on CMS's contracting
reform plan and the challenges, risks, and benefits involved in
undertaking this effort.
To assess the extent to which the plan's cost and savings estimates
were sound enough to support decision making on implementation, we
reviewed CMS's estimates for administrative costs and savings, savings
to the Medicare trust funds, and supporting documentation. We evaluated
the assumptions associated with the estimates. We conducted interviews
with CMS officials who have been involved in developing estimates for
the costs and savings related to Medicare contracting reform in order
to understand the rationale upon which the estimates were based. We
interviewed other CMS officials who work in program areas that will be
affected by contracting reform to learn how they expect contracting
reform to generate costs or savings in their program areas. We also
interviewed a representative of CMS's actuarial contractor, which
developed the savings estimates for the Medicare trust funds. We did
not verify the reliability of CMS's data that were used to generate
financial estimates. We performed our work from November 2004 through
July 2005 in accordance with generally accepted government auditing
standards.
[End of section]
Appendix V: Comments from the Department of Health and Human Services:
DEPARTMENT OF HEALTH & HUMAN SERVICES:
Office of Inspector General:
Washington, D.C. 20201:
JUL 29 2005:
Ms. Leslie G. Aronovitz:
Director, Health Care:
U.S. Government Accountability Office:
Washington, DC 20548:
Dear Ms. Aronovitz:
Enclosed are the Department's comments on the U.S. Government
Accountability Office's (GAO's) draft report entitled, "MEDICARE
CONTRACTING REFORM: CMS's Plan Has Gaps and Its Anticipated Savings Are
Uncertain" (GAO-05-873). These comments represent the tentative
position of the Department and are subject to reevaluation when the
final version of this report is received.
The Department provided several technical comments directly to your
staff.
The Department appreciates the opportunity to comment on this draft
report before its publication.
Sincerely,
Signed by:
Daniel R. Levinson:
Inspector General:
Enclosure:
The Office of Inspector General (OIG) is transmitting the Department's
response to this draft report in our capacity as the Department's
designated focal point and coordinator for U.S. Government
Accountability Office reports. OIG has not conducted an independent
assessment of these comments and therefore expresses no opinion on
them.
HHS COMMENTS ON THE U.S. GOVERNMENT ACCOUNTABILITY OFFICE'S DRAFT
REPORT ENTITLED, "MEDICARE CONTRACTING REFORM: CMS'S PLAN HAS GAPS AND
ITS ANTICIPATED SAVINGS ARE UNCERTAIN" (GAO-05-873):
The Department of Health and Human Services (HHS) appreciates the
opportunity to comment on the U.S. Government Accountability Office's
(GAO) draft report.
General Comments:
The improvement of services for Medicare program beneficiaries and
providers and the efficient delivery of these services is a primary
objective for HHS, Centers for Medicare & Medicaid Services (CMS). The
Medicare contracting reform provisions outlined in Section 911 of the
Medicare Prescription Drug, Improvement, and Modernization Act of 2003
(MMA) allow us to make these improvements through changes to the
Medicare claims administration contracting practices. CMS agrees with
GAO on a fundamental point achieving these envisioned improvements is
not a trivial undertaking. However, CMS does not concur with GAO's
recommendation and differs in conclusions regarding three broad areas
addressed in its report: schedule suitability, transition readiness,
and cost/savings estimate quality.
Regarding the implementation schedule, while CMS has never before
undertaken a project of this scope and magnitude, it believes that the
potential savings to the Medicare Trust Fund and the envisioned
benefits to beneficiaries and providers compel us to maintain our
implementation schedule. As discussed further below, CMS has adopted
and are implementing a number of strategies to effectively manage this
project while sustaining the continuity of Medicare Fee-for-Service
(FFS) administrative operations.
All aspects of planning the details of the transition to the new
environment are not yet final, and CMS is aggressively addressing the
areas of concern noted in the report. Currently CMS is: (1) identifying
and mitigating risks that may result from the transition to the new
processes; (2) developing guidance on how the new Medicare
administrative contractors (MACS) will coordinate with other
contractors who are involved with ensuring that benefits and claims are
paid; and (3) integrating and coordinating other CMS modernization
initiatives that are being implemented concurrently with our
contracting reform efforts. Addressing the areas of concern not only
allows us to finalize the remaining transition planning details, but
also provides us with a means by which to adjust quickly to any issues
or situations that might force us to modify our plans.
Finally, with respect to cost/savings estimates for contracting reform,
while CMS agrees that its current plan is based partly on predicted
future cost and savings estimates, CMS contends that these estimates
and planning factors represent the best possible information.
CMS appreciates GAO's acknowledgment of the elements of CMS's current
implementation strategy that you believe CMS has fully addressed. In
those cases in which CMS disagrees with the findings of the report, it
has provided comments to address those concerns. Be assured that CMS is
strongly committed to ensuring a transition to the new contracting
environment for Medicare that is transparent to Medicare's
beneficiaries and providers and confident that its current
implementation strategy is fundamentally sound.
GAO Recommendation:
To better ensure the effective implementation of Medicare contracting
reform, we recommend that CMS extend its implementation schedule to
complete its workload transitions by October 2011, so that the agency
can be better prepared to manage this initiative.
HHS Response:
While CMS acknowledges some of the points raised in this report, we do
not concur with the GAO's recommendation. Since it is in the best
interest of Medicare beneficiaries and providers, as well as the
Government, to assertively procure and transition workload to the new
MACs, CMS is taking the necessary steps to reduce or mitigate
significant risks, align MAC implementation with other agency FFS
initiatives, and create detailed baseline implementation schedules.
By achieving full MAC implementation in 2009, CMS will realize the-
benefits, both in terms of Trust Fund savings and operational
efficiencies, more quickly than if the schedule were extended. The
continuing development of modernized Information Technology (IT)
systems will improve overall processing of claims, and implementing
consolidated data centers will provide the necessary infrastructure to
improve data collection and analysis while reducing costs.
CMS believes that extending the transition schedule past 2009 will
increase the risk of current fiscal intermediaries (FIs) and carriers
leaving the program before competitions are finalized. A number of
contractors only intend to stay in the program until their jurisdiction
is completed. An extension of the schedule could cause them to
reevaluate theirs plans and leave sooner. This, in turn, would lead to
the deterioration of Medicare services, as contractor staff attrition
over any extended period may increase, leaving the existing contractor
short-staffed in terms of experienced employees. In addition, it would
be difficult to replace these departures with capable staff, as that
contractor's remaining time in the program would be of short duration.
The promise of short-term employment would likely not encourage the
acquisition of the most capable personnel.
The schedule published in the 2005 report to Congress, Medicare
Contracting Reform: A Blueprint for a Better Medicare, with a 2009
completion date, provides CMS the flexibility to adjust in response to
any unforeseen changes in the marketplace or legislative environment
and still meet the statutory implementation date. CMS would not have
this flexibility should it extend its baseline plan to finish
implementation on or near October 1, 2011.
GAO Concern:
"For example, CMS has already begun to experience schedule slippage for
its initiative to consolidate the contractors' data centers." (p. 25)
HHS Response:
CMS still plans to begin consolidating the data centers in fiscal year
(FY) 2006. The enterprise data center (EDC) procurement was moved by
two months, while the implementation strategy was reviewed within CMS
based on questions posed by industry to our draft request for proposal
(RFP). The February 2006 award of EDC contracts will allow preliminary
infrastructure work to be completed by June 2006, enabling the first
EDC to be ready to coordinate with a Pilot A/B MAC contractor upon
award. The EDC FFS Transition schedule is being fully integrated with
the A/B MAC Cycle 1 and Cycle 2 procurement schedules.
CMS has determined that the most efficient and effective approach will
include implementing two data centers instead of four. This will
increase savings and improve standardization of the future data center
environment. The only impact of the additional review at CMS was the
potential availability of EDCs for durable medical equipment (DME)
MACs. CMS had already recognized this risk and a data center option was
included in the DME MAC RFP, which provides CMS the flexibility to
consolidate DME MAC claims processing into one data center run by a DME
MAC contractor if cost effective.
GAO Concern:
"For example, the plan lacks a detailed schedule to coordinate reform
issues with other major initiatives CMS intends to implement at the
same time period." (Highlights)
HHS Response:
CMS is completing an integrated project schedule for the major
initiatives it plans to accomplish during the same timeframe as
implementation of section 911 of the MMA and will have a more detailed
schedule soon. Most recently, CMS's FFS project integration team has
worked to align assumptions, schedules, and resource competitions among
all projects for the first two MAC procurement rounds (DME and A/B
start-up cycle). CMS has defined MAC implementation as the "anchor"
project for integration purposes. While CMS components are working
together to align projects, CMS believes the MAC implementation
timeframe should be firmly anchored first, followed by alignment and
coordination of other initiatives. These efforts have resulted in
project plan modifications for some FFS functional activities, such as
consolidated EDCs, the Standard Front-End, Qualified Independent
Contractors (QICs), and Beneficiary Contact Centers (BCCs).
As CMS continues to refine its more near-term schedules, it continues
to work to ensure integrated schedules for the first and second cycles
of AB MAC procurements and transitions. In addition, CMS is employing a
commercial off-the-shelf software tool to more easily track its project
schedules and information; CMS launched this tool for major projects in
mid-July, 2005. These efforts will help CMS closely monitor its
established schedules for changes and impacts to dependent projects.
GAO Concern:
"However, CMS has yet to develop many details, including information on
the specific steps that will be used to facilitate contractor
coordination." (p. 20)
HHS Response:
It is clear that the roles played by the FFS functional contractors are
inherently interwoven into the work of the MAC. Coordination among
these entities is essential to the overall claims administration
process, and it is CMS's intent to closely oversee the functioning of
these relationships in the context of monitoring the overall
performance of each contract.
To facilitate this coordination, the A/B MAC statement of work (SOW)
requires joint operating agreements (JOAs) between the MAC and key
functional contractors that will interface with the MAC. These
functional contractors include program safeguard contractors (PSCs),
QICs, quality improvement organizations (QIOs), recovery audit
contractors (RACs), and BCCs.
In the MAC SOW, it is recommended that MACs include the following
topics in their JOAs with these functional contractors:
* Confidentiality;
* Definitions;
* Contract Roles and Responsibilities;
* Dispute Resolution;
* Connectivity;
* Communication.
CMS's approach to the establishment of JOAs is nonprescriptive. CMS
believes that the key parties to the JOA (the MAC and functional
contractor) will best identify and agree on the specifics of their
operational interactions if the responsibility for doing so is
delegated to those entities. Each MAC and functional contractor must
share responsibility for establishing, negotiating, and maintaining
agreement in accord with achieving the expectations of their respective
SOWS. At the same time, as part of performance-based contracting, CMS
is working to create incentives that will motivate both MAC and
functional contractors to operate effectively by ensuring that they
coordinate among themselves.
GAO Concern:
".. CMS' plan does not comprehensively detail steps to address
potential risks during the transition of claims workload from current
contractors .. " (Highlights):
HHS Response:
CMS agrees that contracting reform is a project that poses certain
inherent risks and, as such, is fully aware of the need for a
comprehensive risk management program. CMS staff have been building an
ongoing risk management program, complete with a risk database that
captures and manages risks as they are identified. Under the process of
continuous risk management, risks will continue to be identified
throughout the life of this project, and strategies to prioritize and
mitigate high risks will continue to be developed and implemented. Risk
owners are assigned to develop and implement risk responses, including
mitigation plans, where appropriate. CMS is committed to successfully
expanding and enhancing its MAC implementation risk management program
and coordinating that with the risk management programs for the other
segments of FFS contracting reform. For example, CMS staff is now
combining the various risk responses into a comprehensive mitigation
plan both for MAC implementation and for the larger integrated FFS
contracting reform.
GAO Concern:
The GAO has identified concerns with a few specific risks of the
contracting reform project. (P. 9):
HHS Response:
CMS agrees with GAO that continuity of payment operations for health
care providers is one of CMS' primary concerns (especially in a project
such as this one), as is the assurance that those payments are made
properly.
The number and scale of the proposed workload transitions under
contracting reform is significantly greater than the numerous
individual transitions CMS has successfully completed over the past
decades. As such, this risk will be given appropriate attention by CMS
leadership and contractors alike. CMS has extensive experience in
managing transitions and the tasks required for a successful
transition. These transition tasks for the movement of Medicare
workload and operations have not changed because of contracting reform.
However, to assist us in managing concurrent jurisdiction transitions,
CMS will hire an experienced project management support contractor with
Medicare-knowledgeable staff. This contractor will monitor individual
segment transition activities and assist us in our integration and
coordination efforts with multiple jurisdiction transitions.
CMS agrees that voluntary contractor withdrawals could have a
significant impact on contracting reform implementation, and has
developed a set of strategies for mitigating this risk. In fact, a
recent contractor withdrawal was addressed using the plans CMS had
prepared.
Inherent risks are associated with any transition, and the complexity
of multiple data center transitions at one time may increase these
risks. CMS staff have successfully moved data centers before in
conjunction with contractor transitions. Additionally, CMS will gain
lessons learned as it conducts the Start-up A/B MAC transitions. The
hands-on experience with transitioning multiple workloads and data
centers into the EDC environment will also provide a strong foundation
for the oversight required for implementing MAC Cycle 1 and Cycle 2
transitions. Completion of transitions to EDCs will reduce future risk
in MAC procurements, since data centers will not have to change at the
same time.
CMS will leverage the expertise of a transition support contractor to
provide separate teams for the overlapping Medicare data center
transitions while employing an integrated schedule. CMS's intent is to
ensure that current data centers leaving the program are transitioned
within one year from the start of their transition. CMS has also fully
included requirements for transition planning in the EDC RFP. This
approach will allow CMS the opportunity to evaluate the expertise of
the potential EDC vendors and ensure that the relevant transition
expertise is available to further mitigate these risks.
GAO Concern:
"Although CMS has done extensive work toward developing a strategy that
outlines how it intends to implement MAC contracting, the agency's plan
lacks important implementation information in some areas." (p.19):
HHS Response:
CMS is making every effort to assure that stakeholders have received
all appropriate information related to the MAC procurements and their
implementation and will continue to do so. Requests for Information
(RFIs) were released on www.fedbizopos.com for both the DME and A/B MAC
procurements. CMS released its performance measures for the A/B MAC in
an RFI on April 11, 2005, and received 630 comments. Key performance
measures will be incorporated in the incentive structure as defined in
a mutually' agreed upon award fee plan, with the winning offer (an
initial award fee plan will be released in September with the RFP). In
addition, the evaluation criteria for the A/B MAC were released in an
RFI on June 3, 2005. CMS is currently reviewing the comments received
on this RFI.
GAO Concern:
"For example, the plan does not fully explain CMS' strategy for
monitoring MACs' performance." (pp. 3-4):
HHS Response:
CMS has continuously worked to improve the oversight and evaluation of
Medicare contractors under Title 18. While the structure for oversight
under MAC contracting is not currently in place, CMS is implementing a
new oversight methodology that it plans to have fully in place when
MACS are operational.
Under the Title 18 authority, CMS implemented Contractor Performance
Evaluations using national teams that conducted periodic onsite
evaluations based on risk assessments. Under MAC implementation, CMS
will begin a shift from inspections to surveillance by developing
currently available data sources and new reporting capabilities. With
Medicare contracting reform, CMS will transition to a new oversight the
model based on a centralized approach and real-time surveillance. This
approach, labeled the Contractor. Surveillance and Assessment Program,
is built upon four elements of effective contractor oversight:
* Real-time surveillance of contractor operations using a performance
dashboard,
* Data validation by CMS of contractor self-reported information,
* Analysis of contract deliverables, and:
* Continued use of periodic onsite evaluations predicated upon risk
assessments and legislative mandates.
These elements will support the development of contractor specific
performance scorecards and will be integrated with oversight of
contractor quality management systems.
GAO Concern:
"CMS has not completed its plan for organizational changes .. " (p. 22)
HHS Response:
CMS understands the criticality of having an organizational structure
that will support contracting reform and has been working to develop
such a structure. CMS has reorganized the two internal FFS governing
bodies (the FFS Governance Council and the FFS Operations Board) to
better function in the MAC environment. CMS also has engaged both
central and regional office staff to develop a detailed structure and
process that will oversee the new MAC contractors.
The organization of MAC oversight is addressed in an initial draft of
the future MAC Administration and Contract Management structure that
CMS has developed. This document outlines the reporting lines for an
effective management team in the matrix-oriented organization. To
control the number of "touch points" to the Project Officer (PO), this
model establishes a limited number of PO contacts, while maintaining a
flow of information from all critical functional areas and locations.
Additionally, CMS has developed a draft process flow diagram and
supporting documents depicting the communication flow needed to monitor
the new MAC contracts. The process shows the three most critical
oversight areas: deliverables, invoices, and contractor performance.
The model displays the interrelation among the various forms of
contract monitoring and follows the same communication lines
established in the previously mentioned administration and contract
management, structure.
GAO Concern:
The plan's savings estimates are too uncertain to support decisions on
contracting reform implementation because they are based on future
developments that are difficult to predict. (p. 4):
HHS Response:
CMS's Office of the Actuary (OACT) recognizes that the estimates of
Trust Fund savings for activities such as this are uncertain. However,
the estimated savings were intended to be somewhat conservative (low)
because of the uncertainty involved. The Actuarial Research Corporation
report points out that the Office of Inspector General estimates a
Medicare claims processing error rate of 6 percent in 2002, although
the financial loss is undoubtedly smaller than this since many of the
errors do -not result in permanent denial of the claim but require only
technical corrections from the provider submitting the claim. The
combined savings claimed for the three provisions is about 0.2 percent
of program costs after being fully phased in after several years.
[NOTE]
NOTE:
The estimates for:
(a) requiring contractors serving as fiscal intermediaries to process
both part A and part B claims is .08% for both Part A and Part B,
(b) reducing the number of contractors to 15 plus the specialty
contractors for DME and HHA claims is .05% for Part A and .02% for part
B, and:
(c) selecting contractors by competitive bidding is .09% for both Part
A and Part B.
Probably due to a typo in the consultant's report, this last figure has
been incorrectly quoted as 0.9% (.009 instead of.0009) but the
derivation shown in the report and the value used and shown in the
tables accompanying report are correct.
The GAO draft report refers to the possibility of double counting of
savings because similar methods were used in the three estimates. The
OACT does not concur that there is double counting as the estimates
apply to different parts of the claims process. The GAO report also
calls attention to the lack of direct evidence that the proposed
activities will result in savings of the order of magnitude claimed.
Because the changes proposed are unprecedented, CMS has submitted
estimates, which it believes are the best available, with appropriate
caveats.
GAO Concern:
In its draft, GAO argues that it is "difficult," even "impossible, "to
accurately predict how much contracting reform implementation will
cost. GAO further argues that the new contracting environment will
differ considerably from the current one and that CMS' estimates are
based on certain questionable evidence and assumptions. (pp. 27-32):
HHS Response:
While any predictions of future costs will be uncertain, CMS maintains
that its estimates of implementation costs are both well informed by
program experience and the best available. CMS used statistical
analysis of the historic relationship between workload size and
transition/termination costs and its assumptions as to the probable
general success rate of incumbent contractors, as well as the effects
of the transition schedule. The GAO report gives the impression that
the assumptions CMS used to develop its cost estimates are no more or
less plausible than alternative assumptions that could have been
applied. On the contrary, CMS formulated the assumptions used in its
administrative costing model based on considerable analysis using
historical data from actual Medicare operational workload conditions.
Similarly, CMS's assumptions relating to contractor incentives and
administrative efficiencies (savings) were developed based on extensive
analysis and historic CMS experience. CMS believes that its estimating
efforts have been very reasonable, but will improve them as this
initiative unfolds and better data (including actual experience)
becomes available.
GAO Concern:
The savings estimates were developed by an external consultant. (p. 32)
HHS Response:
OACT has reviewed the estimates and concurs with them. Estimates for
these activities are inherently uncertain; however, the OACT consultant
has provided the best, unbiased estimates possible. The estimates are
intended to be somewhat conservative because of the uncertainty
involved. The consultant, the Actuarial Research Corporation, has
extensive experience in doing cost estimates for the Medicare program
and has provided assistance to the OACT for many years. The OACT is
confident these are the best estimates available.
The draft report suggests that the estimates did not receive as much
internal CMS review as would be desirable. While individual CMS
operating components, such as medical review, were not directly
involved in the development of these cost estimates, CMS technical
staff in this area agree that the contractor used reasonable
assumptions in developing its cost savings estimates. For example,
consolidating Part A and Part B operations claims processing functions,
as well as medical review functions, will presumably lead to
significant overall cost savings because of a more integrated data
structure for Parts A and B.
GAO Concern:
"A potential cost omitted from CMS's estimates is funding for MAC
contract modifications." (p. 30)
HHS Response:
CMS does not agree with GAO's discussion on pages 30 and 31 about the
potential cost of MAC contract modifications being omitted from its
cost estimates. The cost of contract modifications is ongoing (i.e.
operational) cost and it should not have been included in
implementation cost estimates. Operational costs are those incurred by
the MACs in performing the work specified in the SOW. The instructions
issued to potential bidders for DME MAC work directed them to assume,
for proposal purposes only, a level of effort for implementing a
specified number of changes. Thus, the potential cost of routine work
required after the contracts are awarded has been considered.
[End of section]
Appendix VI: CMS's MAC Procurement and Transition Schedule:
Figure 5 shows CMS's procurement and transition schedule for MACs, as
of June 2005. During one start-up cycle and two additional transition
cycles, CMS will conduct competitions to select a total of 23 MACs. In
the first phase of the start-up cycle, CMS will select four MACs that
will be administering claims for DME, prosthetics, orthotics, and
supplies--called DME MACs. In the second phase of the start-up cycle,
CMS will select one of the MACs that will be responsible for paying
Part A and Part B claims--called A/B MACs. During cycle one, CMS will
select seven A/B MACs. During cycle two, CMS will select seven A/B MACs
and four MACs that will be responsible for administering claims for
home health and hospice (HH) care, called HH MACs.
Figure 5: CMS's MAC Procurement and Transition Schedule:
[See PDF for image]
Notes: Based on information from CMS. The request for proposals (RFP)
announces CMS's intent to award a contract and specifies the service or
product to be delivered, the criteria to be used, applicant
qualifications, deadline, and other relevant information. In this
figure, the date under RFP indicates when it was, or will be, first
issued. The date under award indicates when CMS intends to announce
publicly that the contract has been awarded. Cutover occurs when all
work has been transferred to the MAC from the prior claims
administration contractors. The date under cutoff indicates when CMS
anticipates the transfer of work for these contracts to be completed.
[End of figure]
[End of section]
Appendix VII: Jurisdictional Map of the Current Fiscal Intermediaries:
[See PDF for image]
Notes: Fiscal intermediaries administer Part A and Part B claims paid
to hospitals and other institutions, such as home health agencies. The
figure indicates jurisdictions of companies that serve as fiscal
intermediaries. Mutual of Omaha also serves as a fiscal intermediary to
providers in all states except New York and Puerto Rico.
[End of figure]
[End of section]
Appendix VIII: Jurisdictional Map of the Current Carriers:
[See PDF for image]
Note: Carriers administer the majority of Part B claims for the
services of physicians and other providers.
[End of figure]
[End of section]
Appendix IX: Jurisdictional Map of the Current Regional Home Health
Intermediaries:
[See PDF for image]
Note: Regional home health intermediaries process Medicare home health
and hospice claims.
[End of figure]
[End of section]
Appendix X: Jurisdictional Map of the Current Durable Medical Equipment
Regional Carriers:
[See PDF for image]
Note: DME regional carriers pay claims for DME, prosthetics, orthotics,
and supplies.
[End of figure]
[End of section]
Appendix XI: Jurisdictional Map of the 15 New Medicare Administrative
Contractors:
[See PDF for image]
Notes: This map shows the jurisdictions for the MACs that will pay Part
A and Part B claims, other than claims for HH care and for DME,
prosthetics, orthotics, and supplies. These MACs will be called A/B
MACs.
[End of figure]
[End of section]
Appendix XII: Jurisdictional Map of the Four DME MACs and the Four HH
MACs:
[See PDF for image]
Note: This figure indicates the jurisdictions for MACs that will pay
some specific types of claims. The DME MACs will pay claims for DME,
prosthetics, orthotics, and supplies. The HH MACs will pay claims for
HH care.
[End of figure]
[End of section]
FOOTNOTES
[1] Pub. L. No. 108-173, § 911, 117 Stat. 2066, 2378--2386 (to be
codified at 42 U.S.C. § 1395kk-1).
[2] Until July 1, 2001, CMS was called the Health Care Financing
Administration. We use the name CMS throughout this report.
[3] 48 C.F.R. ch. 1 (2004).
[4] Department of Health and Human Services, Report to Congress:
Medicare Contracting Reform: A Blueprint for a Better Medicare
(Washington, D.C.: Feb. 7, 2005).
[5] We reviewed the Report to Congress and additional documents that
CMS designated as part of its contracting reform plan that the agency
provided to us by June 3, 2005.
[6] Medicare Part A covers inpatient hospital care, skilled nursing
facility care, some home health care services, and hospice care. Part B
services include physician and outpatient hospital services, diagnostic
tests, mental health services, outpatient physical and occupational
therapy, ambulance services, some home health services, and medical
equipment and supplies.
[7] For example, from 1977 through 1986, eight competitive contracts,
which were designed to consolidate the workload of two or more small
contractors, were established on an experimental basis. More recently,
in 2004, CMS conducted a competitive procurement to replace the fiscal
intermediary for Washington and Alaska. However, the competition was
limited to Medicare fiscal intermediaries and carriers.
[8] The Social Security Act generally provided that Medicare use cost-
based reimbursement contracts, under which contractors are reimbursed
for necessary and proper costs of carrying out program activities.
These contracts did not expressly provide for profit. Nevertheless,
since the 1980s, CMS has had some limited authority to build financial
incentives into contracts. See 42 U.S.C. § 1395h note (2000).
[9] Workload is the total work performed by a Medicare claims
administration contractor, with the amount usually expressed as the
number of claims processed annually.
[10] After the MAC contracts are awarded, the work performed by the
outgoing Medicare claims administration contractors will be transferred
to MACs. These transition activities include transferring data,
records, and other functions to MACs.
[11] Beneficiaries and Medicare providers, on behalf of their
beneficiaries, can appeal denied claims for services. At the first
appeal level, the Medicare claims administration contactor reexamines
the claim along with any additional documentation provided by the
appellant. If the contractor upholds the decision to deny the claim,
the appellant may appeal the decision further.
[12] CMS contracted for the PSCs as part of the Medicare Integrity
Program, created by the Health Insurance Portability and Accountability
Act of 1996. In addition to the activities cited above, PSCs conduct
cost report audits and provider education related to program safeguard
activities.
[13] Medical reviews of submitted claims are conducted either before or
after payment to determine if the claims should be, or should have
been, paid. Claims are reviewed to see if the beneficiaries' conditions
meet the Medicare coverage criteria. If medical reviews identify claims
that should not have been paid, the Medicare claims administration
contractor that paid the claim is responsible for collecting
overpayments.
[14] Investigation of suspected fraud can involve conducting a more
detailed analysis of claims and other investigative steps. Once a case
has been developed, it is referred to HHS's Office of Inspector General
or to other law enforcement agencies for investigation or prosecution.
[15] One PSC currently conducts medical reviews and benefit integrity
activities for the claims processed by the remaining DME regional
carrier.
[16] PSCs currently conduct medical reviews of claims processed by 2
fiscal intermediaries and 2 carriers. The remaining 23 fiscal
intermediaries and 16 carriers conduct their own medical reviews of the
claims they process.
[17] As of October 1, 2004, different contractors processed Part A and
Part B claims in 39 states and the District of Columbia, and the same
contractor processed both Part A and Part B claims in 11 states.
[18] Department of Health and Human Services, Report to Congress, I-2.
[19] CMS aligned the jurisdictions so that the 15 A/B MAC jurisdictions
fit within the boundaries of the 4 DME MACs and the 4 HH MACs.
Jurisdictions are identical for the DME MACs and the HH MACs.
[20] According to CMS, the new MAC jurisdictions will include from 1.1
million to 3.4 million beneficiaries and from 21,000 to 76,000
physicians.
[21] The Web site's address is
www.cms.hhs.gov/medicarereform/contractingreform/. It was established
on March 15, 2004.
[22] A statement of work is the portion of a contract that describes
the actual work to be done by the contractor by means of
specifications, performance dates, and quality requirements.
[23] The MMA required that CMS consult with providers, beneficiary
organizations, and others on the development of performance
requirements and standards for MACs.
[24] The Web site's address is http://www.fedbizopps.gov/. It provides
information on federal government procurement opportunities over
$25,000.
[25] Department of Health and Human Services, Report to Congress, III-
3.
[26] Each acquisition cycle begins with the issuance of the request for
proposals, which announces CMS's intent to award a contract. The cycle
also includes a transition period, which begins with the award of the
contract and ends when all work has been transferred to the MAC from
the prior claims administration contractor.
[27] The first acquisition cycle will affect about 44 percent of the
claims processing workload and the second acquisition cycle will affect
about 47 percent. However, a smaller percentage of the claims workload
may need to be transferred, since some of the current contractors may
become MACs for jurisdictions that include part of their current
service areas.
[28] For example, lack of staff resources dedicated to transition
efforts contributed to a slow implementation of updated
telecommunications services to federal agencies, which led to increased
costs and difficulties in holding service contractors accountable for
their performance. See GAO, FTS2001: Contract Transition Delays and
Their Impact on Program Goals, GAO-01-544T (Washington, D.C.: Apr. 26,
2001).
[29] Subsequent transitions in the next two cycles will transfer
workload to the new MACs from two to as many as seven current fiscal
intermediaries and carriers. Furthermore, transitions may involve
transferring some work to functional contractors, such as the
contractor that will be responsible for handling beneficiary inquiries.
[30] The request for proposals announces CMS's intent to award a
contract and specifies the service or product to be delivered, the
criteria to be used, applicant qualifications, deadline, and other
relevant information.
[31] GAO, Medicare: HCFA Oversight Allows Contractor Improprieties to
Continue Undetected, GAO/T-HEHS/OSI-99-174 (Washington, D.C.: Sept. 9,
1999); Medicare: HCFA Should Exercise Greater Oversight of Claims
Administration Contractors, GAO/T-HEHS/OSI-99-167 (Washington, D.C.:
July 14, 1999); Medicare: Improprieties by Contractors Compromised
Medicare Program Integrity, GAO/OSI-99-7 (Washington, D.C.: July 14,
1999); and Medicare Contractors: Despite its Efforts, HCFA Cannot
Ensure Their Effectiveness or Integrity, GAO/HEHS-99-115 (Washington,
D.C.: July 14, 1999).
[32] CMS's Medicare fee-for-service contractor evaluation work group
was established to compile an inventory of all internal and external
contractor assessments and to research alternative frameworks to
integrate contractor evaluation, reporting, and follow-up activities.
[33] We found similar problems in 1999. We reported that CMS's
headquarters office had not set contractor oversight priorities,
leaving such decisions almost entirely to regional office reviewers.
This led to inconsistent contractor evaluations by regional reviewers,
which made it more difficult for CMS to determine which contractors
were performing effectively. See GAO/HEHS-99-115.
[34] CMS's contracts that are governed by the FAR include those with
quality improvement organizations and PSCs and for Medicare systems
maintenance and data centers.
[35] We reported in 2000 that while responsibility for overseeing
contractor performance was dispersed among central office components
and the agency's 10 regional offices, lines of accountability had not
been clearly established. The regional office staff who were
responsible for overseeing contractors were not directly accountable to
the central office group responsible for contractor oversight
activities. GAO, Medicare Contractors: Further Improvement Needed in
Headquarters and Regional Office Oversight, GAO/HEHS-00-46 (Washington,
D.C.: Mar. 23, 2000). CMS took steps to address this issue. While the
agency was reviewing a draft version of our report, it announced that
it was making organizational changes to improve regional
accountability.
[36] For example, while the Center for Medicare Management's Medicare
Contractor Management Group has overall responsibility for managing
claims administration contractors, the Office of Financial Management
has significant responsibilities for the contractors' financial and
program integrity activities, and the Office of Information Systems is
responsible for oversight and security of the information systems used
to pay claims. In addition, regional staff are currently responsible
for monitoring the claims administration contractors' activities and
helping to evaluate their performance.
[37] GAO, Business Systems Modernization: Internal Revenue Service
Needs to Further Strengthen Program Management, GAO-04-438T
(Washington, D.C.: Feb. 12, 2004), and Information Technology: DOD's
Acquisition Policies and Guidance Need to Incorporate Additional Best
Practices and Controls, GAO-04-722 (Washington, D.C.: July 30, 2004).
[38] The official told us that the agency's integration planning
efforts had been delayed until the agency's Report to Congress was
issued in February 2005, in part because of the concern that
procurement-sensitive information might be prematurely made public.
[39] Department of Health and Human Services, Report to Congress, III-
7 and III-8.
[40] To be able to negotiate yearly costs with the MACs prior to the
beginning of the contract period, CMS plans to request adjustments to
its budget authority to change the period of performance for MACs to
coincide with the calendar year, instead of the current fiscal year
basis. Changing the period of performance will not increase or decrease
overall or net administrative outlays and is not included in the
administrative cost estimate.
[41] Department of Health and Human Services, Report to Congress, IV-3.
[42] The MMA mandates that contracting reform be completed before
October 1, 2011, the first day of fiscal year 2012. Although all of the
transitions to MACs are planned to be completed by July 2009, some of
the costs--such as IT enhancement and oversight--will be incurred
through fiscal year 2011.
[43] CMS is simultaneously implementing other IT-related initiatives,
which are not considered to be part of contracting reform and are not
included in the contracting reform costs.
[44] CMS had planned to begin consolidating the data centers in fiscal
year 2006, so this cost is reflected in its estimated costs for
contracting reform. However, in May 2005, the data center consolidation
initiative was postponed for about 2 months. CMS anticipates awarding
the data center contracts in February 2006, about 5 months later than
originally planned.
[45] CMS currently plans to consolidate the A/B MACs' front ends, to
coincide with the beginning of the cycle one A/B MAC implementation.
The agency is developing requirements for the A/B MAC standardized
front end. It plans to award a contract in early fiscal 2007 and be
ready to implement the standardized front end by the fall of 2007.
[46] In its technical comments on a draft of this report, CMS stated
that it has updated its IT cost estimate to reflect the adjustments to
the data center consolidation initiative and to include the standard
front end initiative. This updated estimate is somewhat higher than
CMS's original estimate and was not available as of July 29, 2005. CMS
plans to make its estimate final and public through the official budget
process.
[47] GAO, Defense Health Care: Continued Management Focus Key to
Settling TRICARE Change Orders Quickly, GAO-01-513 (Washington, D.C.:
Apr. 30, 2001).
[48] In its technical comments on a draft of this report, CMS stated
that it has updated its IT savings estimate to reflect the adjustments
to the data center consolidation initiative and to include the standard
front end initiative. This updated estimate is somewhat higher than
CMS's original estimate and was not available as of July 29, 2005. CMS
plans to make its estimate final and public through the official budget
process.
[49] The Report to Congress noted an estimated savings of $900 million
to the Medicare trust funds by the end of fiscal year 2010.
[50] CMS's goal is to have a unified claims processing system in 2011,
but the consultant's estimate assumes that savings will be generated
from combined medical reviews much sooner.
[51] The consultant calculated this expected increase in denials by
dividing all current carriers and fiscal intermediaries into quartiles,
based on their current claims denial rate. Then, the consultant assumed
that the denial rate for the bottom half of contractors in each
quartile could be expected to increase to the median denial rate for
that quartile.
[52] Where documents were prepared by support services contractors and
contain recommendations, CMS may have chosen not to adopt all
recommendations or not to adopt them in full.
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